1
U S WEST
--------------------
Making
the
RIGHT
Connections
--------------------
Annual Report
1994
2
1
Financial Highlights
2
Letter to Shareowners
6
Financial Index
7
Management's Discussion and Analysis of
Financial Condition and Results of Operations
32
Reports of Management and Independent Accountants
33
Consolidated Financial Statements
55
Board of Directors
56
Executive and Subsidiary Officers
57
Shareowner Information
- --------------------------------------------------------------------------------
CORPORATE PROFILE: U S WEST Inc. is in the connections business, helping
customers share communications, entertainment and information services in local
markets worldwide. U S WEST is headquartered in Englewood, Colo., a suburb of
Denver.
The company's major subsidiary, U S WEST Communications, provides
services to more than 25 million residential and business customers in 14
western and midwestern states. U S WEST Communications was created from three
former Bell telephone companies: Mountain Bell, Northwestern Bell and Pacific
Northwest Bell.
CORPORATE MISSION: U S WEST's mission is to be a leading provider of integrated
communications, entertainment and information services over wired broadband and
wireless networks in selected local markets worldwide.
CORPORATE VISION: By the year 2000, U S WEST will be the finest company in the
world at connecting people with their world.
3
1994
FINANCIAL HIGHLIGHTS
Dollars in millions (except per share amounts)
- -----------------------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990
----------------------------------------------------------------
Financial Data
Sales and other revenues $10,953 $10,294 $ 9,823 $ 9,528 $ 9,369
Income from continuing operations (Note 1) 1,426 476 1,076 840 1,145
Net income (loss) 1,426 (2,806) (614) 553 1,199
----------------------------------------------------------------
Total assets $23,204 $20,680 $23,461 $ 23,375 $22,160
Total debt (Note 2) 7,938 7,199 5,430 5,969 5,147
Shareowners' equity 7,382 5,861 8,268 9,587 9,240
----------------------------------------------------------------
Earnings per common share (continuing
operations) (Note 1) $ 3.14 $ 1.13 $ 2.61 $ 2.09 $ 2.97
Earnings (loss) per common share 3.14 (6.69) (1.49) 1.38 3.11
Dividends per common share 2.14 2.14 2.12 2.08 2.00
Book value per common share 15.73 13.29 19.95 23.39 23.48
Return on common shareowners' equity (Note 3) 21.6% -- 14.4% 5.7% 13.7%
Debt-to-capital ratio (Note 2) 51.8% 55.1% 39.6% 38.4% 35.8%
----------------------------------------------------------------
Capital expenditures (Note 2) $ 2,820 $ 2,441 $ 2,554 $ 2,425 $ 2,217
OTHER SELECTED DATA
(WHOLLY OWNED DOMESTIC OPERATIONS )
Telephone network access lines in
service (thousands) 14,336 13,843 13,345 12,935 12,562
Billed access minutes of use (millions) 52,275 48,123 44,369 41,701 38,832
Cellular subscribers 968,000 601,000 415,000 300,000 219,000
Cable television basic subscribers served 486,000 -- -- -- --
----------------------------------------------------------------
Employees 61,505 60,778 63,707 65,829 65,469
Number of common shareowners 816,099 836,328 867,773 899,082 935,530
Weighted average common shares
outstanding (thousands) 453,316 419,365 412,518 401,332 386,012
- -----------------------------------------------------------------------------------------------------------------
Note 1 - 1994 income from continuing operations includes a gain of $105 ($.23
per share) on the sale of 24.4 percent of U S WEST's joint venture interest in
cable television/telephone operations in the United Kingdom (TeleWest
Communications plc), a gain of $41 ($.09 per share) on the sale of the
company's paging unit and a gain of $51 ($.11 per share) on the sale of certain
rural telephone exchanges. 1993 income from continuing operations was reduced
by a restructuring charge of $610 ($1.46 per share) and $54 ($.13 per share)
for the cumulative effect on deferred taxes of the 1993 federally mandated
increase in income tax rates. 1991 income from continuing operations was
reduced by a restructuring charge of $230 ($.57 per share).
Note 2 - Capital expenditures, debt and the debt-to-capital ratio exclude
discontinued operations.
Note 3 - 1993 return on shareowners' equity is not presented. Return on
shareowners' equity for fourth quarter 1993 was 19.9 percent based on income
from continuing operations. 1992 return on shareowners' equity is based on
income before the cumulative effect of change in accounting principles.
NORMALIZED INCOME FROM
REVENUES CONTINUING OPERATIONS
(Dollars in Millions) (Dollars in Millions)
===================== ======================
[GRAPH] [GRAPH]
Excludes one-time items
described in Note 1 above.
1
4
L E T T E R T O S H A R E O W N E R S
--------------------
An exciting year of
MAKING THE
RIGHT
CONNECTIONS
Chairman and Chief Executive Officer
Richard D. McCormick looks back on the
highlights and challenges of 1994,
and ahead to a larger, more exciting role for
the company in "connecting people
with their world."
[PICTURE]
When you think of peoples' need to talk to each other...to exchange
business information...to shop...to choose entertainment...and to
learn...you're thinking about the exciting new world of telecommunications
we're creating at U S WEST.
It's a world as familiar as a telephone call; as novel as a video store
inside your remote control. And USWEST is "making the right connections" to
bring that world to our customers.
1994 was a year of solid growth and earnings in our basic businesses:
local telephone service and telephone directories. We also made great strides
in revitalizing those businesses - and building new businesses - for the
future.
I'm especially excited about those new opportunities - such as
customer-controlled video services and "personal" wireless phone service - that
we'll bring to millions more customers than we serve today.
U S WEST
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5
U S W E S T I N C.
--------------------
U S WEST INC.
COMMUNICATIONS
ACCESS LINES
(In millions)
[GRAPH]
Annual Growth
* Excludes the effects of 1994 rural exchange sales
My only disappointments last year were in two areas.
First: Our stock performance. Rising interest rates and other concerns
caused investors to focus more on short-term earnings than long-term
opportunities. As a result, the price of U S WEST shares declined.
Second: Temporary delays in installing new phone lines. In a period of
extraordinary growth, these delays caused customer dissatisfaction in some
areas. To address the problems, we temporarily slowed the streamlining of our
customer-service operations. (We've fixed most service problems and are back
on track with our service-improvement program.)
Strong '94 results.
Despite those concerns, I feel very good about 1994. We set out to
increase sales, sustain healthy profits in our basic businesses and boost the
earning-power of our new businesses. And we did:
o At U S WEST Communications, which provides local telephone services in
14 western and midwestern states, we were second among the regional Bell
companies in growth-increasing lines by 4.0 percent over 1993. Minutes of
use, reflecting the volume of traffic we carry for long-distance companies,
were up 8.6 percent. Earnings grew 9.9 percent (excluding one-time items).
Earnings before interest, taxes, depreciation and amortization (EBITDA) were up
7.4 percent (excluding one-time items).
o U S WEST Direct, which publishes 300 telephone directories, increased
sales 6.5 percent, almost double the industry average. Earnings climbed 4.0
percent.
o U S WEST Cellular, which provides wireless telephone services in 50
markets, added an unprecedented 367,000 customers, a 61-percent increase.
o Our TeleWest partnership, the largest provider of combined
cable-television and telephone service in the United Kingdom, reported growth
rates of 42 percent and 94 percent in those businesses, respectively.
Underscoring this company's value: In a recent stock offering, U S WEST's $300
million net investment in TeleWest was valued by the market at $1.1 billion.
o Our wireless communications businesses in Europe served more than
367,000 customers-nearly three times more than in the previous year. The
leader was our Mercury One-2-One partnership in the U.K., which provided the
new "personal communications service" to 205,000 customers. We reached this
number in slightly more than a year by emphasizing convenience and low price
per call, proving that wireless communication is indeed a mass-market service.
U S WEST CELLULAR
SUBSCRIBERS
(In thousands)
[GRAPH]
Annual Growth
U S WEST
3
6
L E T T E R T O S H A R E O W N E R S
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EBITDA*
(Dollars in millions)
[GRAPH]
Annual Growth
* Earnings before interest, taxes, depreciation and amortization.
Excludes equity losses, other income and one-time items.
Revenues, earnings up
o Companywide, total revenues for the year were $10.95 billion, up 6.4
percent.
o We achieved a 7.8-percent increase in total-company EBITDA.
o 1994 net income was $1.229 billion, a 7.8-percent increase from 1993
(after both years were adjusted for one-time items). But earnings per share
remained about the same as in 1993, because net income was spread over 34
million additional shares of stock we issued largely to fund major long-term
investments.
o We continued to pay a healthy dividend: $2.14 per share.
So, we have the strength to carry us into the future. We also have a
strategy we believe will assure our success in this dramatically changing world
of telecommunications.
In previous reports, I've told you that our business is being
transformed by two technologies: digital communications (the language of
computers and CD players), and high-capacity networks. They will change not
only the ways we carry information, but-more important-the services we can
deliver to our customers.
The world at your fingertips
Today, customers press a few digits to reach another person. Tomorrow,
they'll still do that-but they may be pressing a remote control and seeing
the other person on a TV screen. Or selecting the movie or TV show they want,
whenever they want it. Or connecting with the store of their choice to see the
item they want-and ordering it. Or calling the bank to look at their balance.
The possibilities are tremendous-both in the variety of services and
their potential to save people time, money and hassle. The key to success is
making these new services as easy to use as our Voice Messaging and Caller ID.
To deliver these services, we'll need networks that are capable of
two-way, or interactive, video, as well as voice and data communications. So
will our competitors.
Cable-TV companies have networks that excel in carrying the same one-way
video signals to everyone. Telephone companies are best at connecting specific
locations for two-way messages.
Both industries face a dilemma: either they upgrade their networks and
seize these opportunities, or sit back and become victims of change.
U S WEST has chosen to benefit from change-on two fronts. We're
upgrading our network in our 14-state service territory. And we've invested in
cable-TV networks outside our region.
The point: to increase volume-and value-by carrying more messages,
more kinds of messages, to more customers, in more markets. And that's what
we're doing.
U S WEST
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7
U S W E S T I N C.
--------------------
"The Point:
to increase volume-
and value - by
carrying more
messages, more kinds of
messages, to
more customers, in
more markets.
And that's what
we're doing."
Building tomorrow's networks today
U S WEST Communications was the first telephone company to announce
plans to build and operate multimedia networks in its region. Begun in 1994,
this mammoth project will continue past the year 2000.
The first of these networks, in Omaha, is almost finished, and we've
begun technical trials. This year, we'll learn, firsthand, how customers prefer
to use the services these networks make possible.
Looking ahead, we've announced plans for similar networks in Denver and
Colorado Springs; Minneapolis-St. Paul; Salt Lake City; Boise, Idaho; Portland,
Ore.; Albuquerque, N.M.; Des Moines and Cedar Rapids, Iowa.
And we're not stopping at the borders of our home territory. We're
investing to reach new customers outside our region. In Atlanta - one of the
top U. S. markets-we acquired two major cable-TV systems that serve nearly a
half-million customers.
Meanwhile, our partner Time Warner has added to its cable holdings.
Including those recently announced acquisitions, U S WEST and Time Warner will
serve customers in 37 of the nation's top 50 markets.
Combined, the in-and out-of-region networks will make U S WEST a leading
provider of exciting new multimedia services. In an early demonstration to
reporters in Orlando, Fla., the consensus reaction was most positive.
Doing it right
But will customers use these services? If they're easy to use, the
answer is "yes." So we're working with partners and developing our own
user-friendly menus and new on-screen services, such as our "GOtv"
entertainment guide and our "U S Avenue" shopping service.
Beyond these "wired" network opportunities, U S WEST established two
strategic alliances to capture a larger share of the nation's "wireless"
markets. First, we reached an agreement to combine our domestic cellular
telephone business with that of AirTouch Communications. Second, the two
companies agreed to join with Bell Atlantic and NYNEX to seek licenses for, and
operate, personal communications networks in several major U.S. markets.
Connecting the world
1994 was the foundation for our future. We're building on that
foundation to make the most of the tremendous opportunities in meeting peoples'
needs for communications, entertainment and information.
Our goal is simple: making the right connections for our customers, our
employees and our shareowners. And that's what we're doing.
Sincerely,
/s/RICHARD D. MCCORMICK
Richard D. McCormick
Chairman and Chief Executive Officer
U S WEST
5
8
FINANCIAL INDEX
7
Management's Discussion and Analysis
Results of Operations - 1994 Compared with 1993
8
Income from Continuing Operations
11
Sales and Other Revenues
13
Costs and Expenses
17
Competitive Environment
23
Liquidity and Capital Resources
26
Results of Operations - 1993 Compared with 1992
32
Reports of Management and Independent Accountants
33
Consolidated Financial Statements
37
Notes to Consolidated Financial Statements
9
U S W E S T I N C.
--------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in millions, except per share amounts)
RESULTS OF OPERATIONS - 1994 COMPARED WITH 1993
- ----------------------------------------------------------------------------------------------------
1994 (1) 1993 (2) Increase
----------------------------------------------
Income from continuing operations $1,426 $ 476 $ 950
Loss from discontinued operations - (82) 82
Extraordinary items:
Discontinuance of SFAS No. 71, net of tax - (3,123) 3,123
Early extinguishment of debt, net of tax - (77) 77
----------------------------------------------
Net income (loss) $1,426 $(2,806) $4,232
- ----------------------------------------------------------------------------------------------------
Earnings per common share from continuing
operations $ 3.14 $ 1.13 $2.01
Loss per common share from discontinued
operations - (.19) .19
Extraordinary items:
Discontinuance of SFAS No. 71 - (7.45) 7.45
Early extinguishment of debt - (.18) .18
----------------------------------------------
Income (loss) per common share $ 3.14 $ (6.69) $9.83
- ----------------------------------------------------------------------------------------------------
(1) 1994 income from continuing operations includes a gain of $105, or $.23 per
share, from the sale of 24.4 percent of U S WEST's joint venture interest in
cable television/telephone operations in the United Kingdom (TeleWest
Communications plc), a gain of $41, or $.09 per share, on the sale of the
company's paging operations and a gain of $51, or $.11 per share, on the sale
of certain rural telephone exchanges.
(2) 1993 income from continuing operations was reduced by $610, or $1.46 per
share, for a restructuring charge and $54, or $.13 per share, for the
cumulative effect on deferred taxes of the 1993 federally mandated increase in
income tax rates.
In 1994, U S WEST Inc. ("U S WEST" or "company") income from continuing
operations and related earnings per common share ("earnings per share") were
$1,426 and $3.14, respectively. Included in 1994 results are one-time,
after-tax gains described in note (1) to the table above. Excluding these
gains, income from continuing operations and related earnings per share were
$1,229 and $2.71, respectively. In 1993, income from continuing operations was
$476, or $1.13 per share, including the effects of one-time charges described
in note (2) to the table above. Excluding the one-time effects, 1993 income
from continuing operations and related earnings per share were $1,140 and
$2.72, respectively. As normalized for one-time effects, 1994 income from
continuing operations increased $89, or 7.8 percent, and related earnings per
share decreased $.01 on an 8.1 percent increase in average shares outstanding.
The increase in normalized income from continuing operations is primarily
attributable to increased demand for telecommunications and domestic wireless
services, partially offset by increased start-up losses associated with
developing businesses.
In 1993, U S WEST discontinued the operations of its Capital Assets
segment. Also in 1993, the company incurred extraordinary charges for the
discontinuance of Statement of Financial Accounting Standards ("SFAS") No. 71,
"Accounting for the Effects of Certain Types of Regulation," and the early
extinguishment of debt. See further discussion in "Results of Operations - 1993
Compared with 1992," starting on page 26.
Revenue growth, partially offset by higher operating expenses,
provided a 7.8 percent increase in the company's earnings before interest,
taxes, depreciation and amortization ("EBITDA"). EBITDA also excludes equity
losses in unconsolidated ventures, gains on sales of assets, restructuring
charges and other income. The company considers EBITDA an important indicator
of the operational strength of its businesses.
U S WEST
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10
U S W E S T I N C.
--------------------
INCOME FROM CONTINUING OPERATIONS - BASE AND DEVELOPING BUSINESSES
- ---------------------------------------------------------------------------------------------------------
Percent Increase
Ownership 1994 (1) 1993 (2) (Decrease)
---------------------------------------------------
BASE BUSINESSES:
U S WEST Communications Inc. 100 $1,175 $435 $ 740
Publishing and other 100 232 180 52
--------------------------------------
Total base 1,407 615 792
--------------------------------------
DEVELOPING BUSINESSES:
Consolidated:
Domestic wireless 100 67 (46) 113
Domestic cable 100 (2) - (2)
Unconsolidated equity investments:
Time Warner Entertainment L.P.(3) 25.5 (30) (19) (11)
TeleWest Communications plc 37.8 76 (21) 97
Mercury One-2-One 50.0 (58) (22) (36)
Other(4) (34) (31) (3)
--------------------------------------
Total developing 19 (139) 158
--------------------------------------
Income from continuing operations $1,426 $476 $ 950
- ---------------------------------------------------------------------------------------------------------
(1) 1994 income from continuing operations includes a gain of $105 from the
sale of 24.4 percent of U S WEST's joint venture interest in TeleWest
Communications plc, a gain of $41 for the sale of the company's paging
operations and a gain of $51 for the sale of certain rural telephone exchanges.
(2) 1993 income from continuing operations was reduced by $610 for a
restructuring charge and $54 for the cumulative effect on deferred taxes of the
1993 federally mandated increase in income tax rates.
(3) Percent ownership represents pro-rata priority capital and residual equity
interests.
(4) Includes divisional expenses associated with developing businesses.
U S WEST's operations consist of "base" businesses that have moderate, though
consistent, growth and generate substantial income and cash flows, and
"developing" businesses. Most of the company's developing businesses are in a
stage of rapid customer and network expansion, which will result in near-term
earnings dilution.
U S WEST
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1 9 9 4
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BASE BUSINESSES The major component of U S WEST's base businesses is U S WEST
Communications Inc. ("USWC"), which provides telecommunications services in 14
western and mid-western states, serving approximately 80 percent of the
region's population and approximately 40 percent of its geographic area. USWC
offers local, exchange access and long-distance network services. About 28
percent of the company's access lines are devoted to providing services to
business customers. The access line growth rate for business customers, who
tend to be heavier users of the telephone network, has consistently exceeded
the growth rate for residential customers. During 1994, business access lines
grew by 4.6 percent compared with 3.1 percent for consumer lines. Total access
line growth in 1994 was 3.6 percent. Excluding the effects of the sale of
certain rural telephone exchanges, total access lines grew by 4.0 percent in
1994.
USWC Serves Seven of the
Ten Fastest-growing States
1994 Percentage Population Growth
==================================
[GRAPH]
in USWC Region
Source: U. S. Census Bureau (12/31/94)
The majority of USWC's revenues are derived from traditional telephone
services. USWC will incur future capital and operating expenditures for
deployment of a broadband or "multimedia" network. The company expects this
network to generate new revenues through a variety of new product and service
offerings. However, the amount and timing of future revenues related to
multimedia service offerings are difficult to predict. The company believes the
multimedia network also will improve the quality of customer service and result
in greater network efficiency and lower maintenance costs.
Summary of USWC 1994 Revenues
(Dollars in millions)
==================================
[GRAPH]
USWC 1994 Revenues: $8,998
Base businesses also include the publishing of approximately 300 White
and Yellow Pages directories in the western United States and the provision of
database marketing and interactive multimedia information services.
During 1994, income from the company's base operations increased to
$1,356, excluding the gain on the sale of certain rural telephone exchanges.
This represents a 1994 increase of $119, or 9.6 percent, also excluding the
effects of the 1993 restructuring charge and the cumulative effect in 1993 of
higher income tax rates. As normalized, the increase is attributable to higher
demand for telephone services, including the effects of strong growth in access
lines, and increased publishing revenue, partially offset by lower telephone
rates and higher costs for developing new products in the publishing
operations.
Funding of new products and other growth initiatives in publishing and
other marketing services operations offset growth in core Yellow Pages
operations. Income related to Yellow Pages operations continues to grow due to
increased business volume and higher prices. The company anticipates that
accelerated investments in new products and services in 1995 will more than
offset expected income growth related to the Yellow Pages business.
U S WEST
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U S W E S T I N C.
--------------------
DEVELOPING BUSINESSES Developing businesses include both domestic and
international wholly owned subsidiaries and equity investments. Domestic
businesses include cable television and wireless operations. International
businesses include cable television/telephone, wireless communications
(including personal communications services), international networks and
directory publishing. Significant recent investments include the December 1994
purchase of Wometco Cable Corp. and subsidiaries and the assets of Georgia
Cable Holdings (the "Atlanta Cable Properties") for $1.2 billion, and the
September 1993 $2.5 billion investment in Time Warner Entertainment Company
L.P. ("TWE"). While the company's Central European wireless ventures generate
positive net income and cash flow, most of the company's international equity
investments are in start-up phases and will not show positive net income or
cash flow until they mature.
DEVELOPING BUSINESSES - CONSOLIDATED Domestic wireless income increased by
$30 over 1993, excluding the gain on the sale of the company's paging
operations and a $42 restructuring charge in 1993. The increase is due to the
addition of 367,000 subscribers in 1994, a 61 percent increase over 1993.
Additionally, cellular service operating cash flow increased by $57, or 46.1
percent, over 1993. U S WEST anticipates continued growth in income and cash
flows from domestic wireless operations as the customer base expands.
The December 1994 acquisition of the Atlanta Cable Properties did not
have a material impact on 1994 income. The company anticipates that the
acquisition will dilute 1995 earnings per share by approximately 5 to 6
percent.
DEVELOPING BUSINESSES - UNCONSOLIDATED EQUITY INVESTMENTS The majority of U S
WEST's international equity investments relate to ventures in the United
Kingdom ("U.K."). These include TeleWest Communications plc ("TeleWest"), a
cable television/telephone business, and Mercury One-2-One, a personal
communications service ("PCS") joint venture. These businesses are experiencing
rapid growth, and will continue to incur near-term start-up losses related to
expansion of the customer base at Mercury One-2-One and build out of the
network at TeleWest.
Cable television subscribers of TeleWest and its affiliates increased
42 percent to 320,000 at year-end 1994, and telephone access lines increased 94
percent to 271,000. Subscribers to U S WEST's inter-national wireless joint
venture operations in the U.K., Hungary, the Czech Republic, Slovakia and
Russia grew to 367,000 in 1994, nearly three times the customer base of the
prior year. Subscribers to other European cable television ventures totaled
586,000 at December 31, 1994.
International
Customers*
(In thousands)
====================
[GRAPH]
* Includes wireless customers, directory contracts sold and customer
equivalents for gateway switches and cable TV/telephone services.
TWE partnership losses increased over the previous year primarily due
to the full-year impact (including financing costs) of the company's
investment, as compared with three months in 1993. The effects of lower prices
for cable services also contributed to the higher loss in 1994.
In early 1995, Time Warner Inc. announced its intention to simplify
its corporate structure by establishing a separate, self-financing enterprise
to house its cable and telecommunications properties. Any change in the
structure of TWE would require the approval of U S WEST and its TWE partners.
U S WEST
10
13
1 9 9 4
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SALES AND OTHER REVENUES
- ----------------------------------------------------------------------------------------------------
Increase (Decrease)
------------------------
1994 1993 $ %
------------------------------------------------------
BASE BUSINESSES:
USWC operations:
Local service $ 4,067 $ 3,829 $ 238 6.2
Access charges - interstate 2,269 2,147 122 5.7
Access charges - intrastate 729 682 47 6.9
Long-distance network
service 1,329 1,442 (113) (7.8)
Other services 604 556 48 8.6
------------------------------------------------------
Total USWC 8,998 8,656 342 4.0
Publishing and other 1,077 1,070 7 0.7
------------------------------------------------------
Total base 10,075 9,726 349 3.6
------------------------------------------------------
DEVELOPING BUSINESSES: (1)
Domestic wireless 781 561 220 39.2
International directories 79 7 72 -
Domestic cable 18 - 18 -
------------------------------------------------------
Total developing 878 568 310 54.6
------------------------------------------------------
Total revenues $10,953 $10,294 $ 659 6.4
- ----------------------------------------------------------------------------------------------------
(1) Includes consolidated subsidiaries. All other developing businesses are
accounted for using the equity method.
BASE BUSINESSES USWC comprises approximately 89 percent of base businesses
revenues and 82 percent of the total revenues of U S WEST. Approximately 58
percent of USWC's revenues are derived in the states of Arizona, Colorado,
Minnesota and Washington. The primary factors that influence changes in
revenues at USWC are customer demand for products and services (through access
line growth and new service offerings), and regulatory proceedings, including
price changes and customer refunds. An analysis of the change in USWC's
revenues follows:
LOCAL SERVICE
- ---------------------------------------------------------------------------------------------------------
Increase
Price Refund -----------------
Changes Activity Demand Other $ %
- ---------------------------------------------------------------------------------------------------------
($12) $30 $216 $4 $238 6.2
- ---------------------------------------------------------------------------------------------------------
Local service revenues include local telephone exchange, local private
line and public telephone services. The increase in local service revenues was
primarily attributable to access line growth, which exceeded 5 percent in the
states of Arizona, Colorado, Idaho and Utah.
ACCESS CHARGES Access charges are collected primarily from the interexchange
carriers for their use of the local exchange network. For interstate access
services, there is also a fee collected directly from telephone customers.
Approximately 35 percent of USWC's access revenues and 13 percent of its total
revenues are derived from providing access service to AT&T.
INTERSTATE ACCESS CHARGES
- ---------------------------------------------------------------------------------------------------------
Increase
Price Refund ---------------
Changes Activity Demand Other $ %
- ---------------------------------------------------------------------------------------------------------
($39) $18 $148 ($5) $122 5.7
- ---------------------------------------------------------------------------------------------------------
An increase of 7.8 percent in interstate billed access minutes of use
more than offset the effects of price decreases. Interstate price reductions
have been phased in by the Federal Communications Commission ("FCC") over a
number of years. In response to competitive pressure and FCC orders, USWC
reduced its annual interstate access prices by approximately $40 during 1994,
in addition to $60, effective July 1, 1993. The company believes access prices
will continue to decline, whether mandated by the FCC or as a result of an
increasingly competitive market for access services.
INTRASTATE ACCESS CHARGES
- ----------------------------------------------------------------------------------------------------------
Increase
Price Refund -----------------
Changes Activity Demand Other $ %
- ----------------------------------------------------------------------------------------------------------
($10) ($4) $51 $10 $47 6.9
- ----------------------------------------------------------------------------------------------------------
Intrastate access charges increased primarily as a result of higher
demand. Intrastate minutes of use grew by 13 percent in 1994. Demand for
private line services, for which revenues are generally not usage-sensitive,
also increased.
U S WEST
11
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U S W E S T I N C.
--------------------
LONG-DISTANCE NETWORK SERVICE
- ------------------------------------------------------------------------------------------------------------
Decrease
Price Refund ---------------
Changes Activity Demand Other $ %
- ------------------------------------------------------------------------------------------------------------
($8) $1 ($43) ($63) ($113) (7.8)
- ------------------------------------------------------------------------------------------------------------
Long-distance network service ("long-distance") revenues are derived
from calls made within the service area boundaries of USWC, commonly referred
to as "LATAs." Long-distance revenues decreased principally due to the effects
of multiple toll carrier plans implemented in Oregon and Washington in May and
July 1994, respectively. These regulatory arrangements allow independent
telephone companies to act as toll carriers. The impact on USWC in 1994 was a
loss of $68 in long-distance revenue, partially offset by a decrease of $48 in
other operating expenses (i.e. access expense otherwise paid to
independent companies) and an increase of $10 in intrastate access revenue.
These regulatory arrangements decreased net income by approximately $6 in 1994
and will decrease 1995 income by $10 to $12.
Competition from interexchange carriers continues to erode USWC's
market share of intraLATA long-distance services such as WATS and "800." These
revenues have declined over the last several years as customers have migrated
to interexchange carriers that have the ability to offer these services on both
an intraLATA and interLATA basis. U S WEST and its affiliates are prohibited
from providing interLATA long-distance services.
OTHER SERVICES Other services revenues are derived from billing and
collection services provided to interexchange carriers, and new services such
as voice messaging. Other services revenues increased 8.6 percent in 1994 due
to higher revenue from these billing and collection services and continued
market penetration of new service offerings. Voice messaging, for example, is
now four years old with an installed customer base of approximately 885,000,
compared with 690,000 in 1993.
PUBLISHING AND OTHER
- ----------------------------------------------------------------------------------------------------
Increase (Decrease)
----------------------
1994 1993 $ %
-----------------------------------------------
Domestic publishing $ 997 $ 949 $ 48 5.1
Other - net 80 121 (41) (33.9)
-----------------------------------------------
Total $1,077 $1,070 $ 7 0.7
- ----------------------------------------------------------------------------------------------------
Revenue from domestic publishing operations increased 7.4 percent in
1994, excluding the sales of certain publishing, and software development and
marketing operations. The increase is attributable to both price and volume
increases. Other revenues decreased principally due to the 1993 sale of
telephone equipment distribution operations and completion of large telephone
network installation contracts.
DEVELOPING BUSINESSES - CONSOLIDATED
DOMESTIC WIRELESS
- ----------------------------------------------------------------------------------------------------
Increase
-----------------------
1994 1993 $ %
------------------------------------------------
Domestic wireless $781 $561 $220 39.2
- ----------------------------------------------------------------------------------------------------
Domestic wireless revenues increased as a result of the 61 percent
growth in the cellular customer base, partially offset by the effects of the
1994 sale of the paging operations that reduced revenues by $26. The customer
growth reflects increased penetration and a strengthening of the retail
distribution network. The cellular customer base is expected to continue its
rapid growth, though rates of growth will be affected by consumer demand,
market positioning by the company and increased competition in coming years.
Average cellular revenues declined by approximately 8 percent during 1994 to
approximately $70 per subscriber, per month.
OTHER DEVELOPING BUSINESSES
- -------------------------------------------------------------------------------------------------------
Increase
-------------------------
1994 1993 $ %
-----------------------------------------------------
International directories $79 $7 $72 -
Domestic cable 18 - 18 -
- -------------------------------------------------------------------------------------------------------
The increase in international directories revenue is attributable to
the company's May 1994 purchase of Thomson Directories in the U.K. Thomson
Directories revenues are expected to approximate $100 in 1995. Domestic cable
revenues reflect the December 1994 acquisition of the Atlanta Cable Properties.
These revenues are expected to exceed $200 in 1995.
U S WEST
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COSTS AND EXPENSES
- ----------------------------------------------------------------------------------------------------
Increase (Decrease)
-------------------------
1994 1993 $ %
------------------------------------------------------
Employee-related expenses $3,779 $3,584 $ 195 5.4
Other operating expenses 2,203 2,065 138 6.7
Taxes other than income taxes 412 417 (5) (1.2)
Depreciation and amortization 2,052 1,955 97 5.0
Restructuring charge - 1,000 (1,000) -
Interest expense 442 439 3 0.7
Equity losses in
unconsolidated ventures 121 74 47 63.5
Other income (expense) - net 25 (15) 40 -
- ----------------------------------------------------------------------------------------------------
Employee-related expenses include basic salaries and wages, overtime,
contract labor, benefits (including pension and health care) and payroll taxes.
A reduction in the pension credit of approximately $80 contributed to the
increase in employee-related expenses. Actuarial assumptions, which include
decreases in the discount rate and the expected long-term rate of return on
plan assets, contributed to the pension credit reduction. Approximately $150
for overtime payments, contract labor and basic salaries and wages, all related
to the implementation of major customer service and streamlining initiatives at
USWC, also contributed to the increase. Additionally, employee-related expenses
at the company's publishing operations increased in connection with new product
initiatives. Partially offsetting these increases were the effects of employees
leaving the company under the restructuring program, lower health-care benefit
costs, including a reduction in the accrual for postretirement benefits, and
lower incentive compensation payments to employees.
During the summer of 1994, increased customer demand at USWC put
additional stress on current processes and systems, and affected the quality of
customer service in certain markets. The pace of USWC's restructuring program
also contributed to quality of service issues. However, the issues pertaining
to quality of service underscore the need to re-engineer the business. The
company achieved target levels of service at year end by implementing customer
service initiatives and slowing the pace of its restructuring program. To
continue improving upon the level of service quality achieved by year-end
1994, the company will incur additional near-term costs for temporary
employees, overtime and contract labor. The company also will stretch out its
1993 restructuring plan an additional year, to 1997. As a result of these
actions, the annual benefits related to restructuring will not be fully
realized until 1998. (See "Restructuring Charges.")
Other operating expenses include access charges (incurred by USWC for
the routing of its long-distance traffic through the facilities of independent
companies), network software expenses, wireless marketing and operating costs,
and marketing and related costs associated with publishing activities. Selling
and other operating costs related to growth in the cellular subscriber base
increased approximately $166 in 1994. Partially offsetting this increase was
the $48 decrease in access expense related to the effects of the new multiple
toll carrier plan arrangements. (See "Long-Distance Network Service.")
The increase in depreciation and amortization expense was primarily a
result of a higher depreciable asset base and increased rates of depreciation
at USWC. The company's discontinuance of SFAS No. 71 in September 1993 has
resulted in the use of shorter asset lives (for financial reporting purposes)
to more closely reflect the economic lives of telephone plant. USWC continues
to pursue improved capital recovery within the regulated environment.
Interest expense in 1994 was essentially unchanged from 1993.
Incremental financing costs associated with the September 1993 TWE investment
were offset by the effects of refinancing debt at lower rates in 1993 at USWC,
and a reclassification of capitalized interest in 1994. Since the
discontinuance of SFAS No. 71, interest capitalized as a component of telephone
plant construction is recorded as an offset to interest expense, rather than to
other income (expense). U S WEST's average borrowing cost decreased to 6.6
percent, from 6.7 percent in 1993.
Equity losses related to developing businesses increased over 1993,
primarily due to the build out of the network and the expansion of the customer
base at Mercury One-2-One.
Other income increased over 1993 primarily due to an increase in the
management fee associated with the company's TWE investment and a gain on the
sale of certain publishing operations, partially offset by the reclassification
of capitalized interest to interest expense.
U S WEST
13
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U S W E S T I N C.
--------------------
PROVISION FOR INCOME TAXES
- ----------------------------------------------------------------------------------------------------
Increase
----------------------
1994 1993 $ %
----------------------------------------------------
Provision for income taxes $ 857 $ 269 $ 588 -
Effective tax rate 37.5% 36.1% - -
- ----------------------------------------------------------------------------------------------------
The increase in the effective tax rate resulted primarily from the
effects of discontinuing SFAS No. 71, an increase in 1994 income before income
taxes and the 1993 restructuring charge, partially offset by the cumulative
effect on deferred income taxes of the 1993 federally mandated increase in
income tax rates.
RESTRUCTURING CHARGES The company's 1993 results reflect a $1 billion
restructuring charge (pretax). The related restructuring plan (the "Plan") is
designed to provide faster, more responsive customer services while reducing
the costs of providing these services. As part of the Plan, the company is
developing new systems that will enable it to monitor networks to reduce the
risk of service interruptions, activate telephone service on demand, provide
automated inventory systems and centralize its service centers so that
customers can have their telecommunications needs resolved with one phone call.
The company is consolidating its existing 560 customer service centers into 26
centers in 10 cities and reducing its total work force by approximately 9,000
employees (including the remaining employee reductions associated with the
restructuring plan announced in 1991).
Implementation of the Plan is expected to extend into 1997, rather
than being completed in 1996 as originally scheduled. Implementation schedules
are driven by customer demand and related service issues, concerns with system
stability as major customer impacting systems are integrated, and staffing
agreements negotiated with the company's unions. These changes do not alter the
company's plan to fundamentally re-engineer the way it conducts business in the
emerging competitive environment. The total cash expenditures of $935 under the
Plan remain unchanged.
Following is a schedule of the costs included in the Plan:
- ----------------------------------------------------------------------------------------------------------
Actual Estimate
------------ -----------------------------
1993 1994 1995 1996 1997 Total
-------------------------------------------------------------
Cash expenditures:
Employee separation $ - $ 19 $ 62 $ 75 $ 74 $ 230
Systems development - 127 144 129 - 400
Real estate - 50 80 - - 130
Relocation - 21 54 4 31 110
Retraining and other - 16 19 10 20 65
-------------------------------------------------------------
Total cash expenditures - 233 359 218 125 935
Asset write-down 65 - - - - 65
-------------------------------------------------------------
Total Plan 65 233 359 218 125 1,000
-------------------------------------------------------------
Remaining 1991 plan employee costs - 56 - - - 56
-------------------------------------------------------------
Total (1) $65 $289 $359 $218 $125 $1,056
- ----------------------------------------------------------------------------------------------------------
(1) The Plan also provides for capital expenditures of $490 over the life of
the restructuring plan. In 1994, capital expenditures related to restructuring
were $265.
U S WEST
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--------------------
Employee separation costs include severance payments, healthcare
coverage and postemployment education benefits. Systems development costs
include the replacement of existing, single-purpose systems with new systems
designed to provide integrated, end-to-end customer service. The work-force
reductions would not be possible without the development and installation of
the new systems, which will eliminate the current, labor-intensive interfaces
between existing processes. Real estate costs include preparation costs for the
new service centers. The relocation and retraining costs are related to moving
employees to the new service centers and retraining employees on the methods
and systems required in the new, restructured mode of operation.
The company estimates that full implementation of the Plan will reduce
employee-related expenses by approximately $400 per year. These savings are
expected to be offset by the effects of inflation.
EMPLOYEE SEPARATION The following estimates of employee separations and
related amounts reflect the extension of employee reductions into 1997.
- ---------------------------------------------------------------------------------------------------------
Estimate Actual Estimate
--------- -------- -------------------------------
1994 1994(2) 1995 1996 1997 Total
-----------------------------------------------------------------
Employee separations (1)
Managerial 1,061 497 814 580 559 2,450
Occupational 1,887 1,683 1,136 1,845 1,886 6,550
-----------------------------------------------------------------
Total 2,948 2,180 1,950 2,425 2,445 9,000
- ---------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Estimate Actual Estimate
-------- ------ ------------------------------
1994 1994(2) 1995 1996 1997 Total
------------------------------------------------------------------
Employee separation amounts (1)
Managerial $25 $ 5 $30 $24 $21 $ 80
Occupational 15 14 32 51 53 150
------------------------------------------------------------------
Total 40 19 62 75 74 230
Remaining 1991 reserve 56 56 - - - 56
------------------------------------------------------------------
Total $96 $75 $62 $75 $74 $286
- -----------------------------------------------------------------------------------------------------------
(1) The "network" and "all other" categories previously displayed are no longer
used in this schedule due to the changes in organizational boundaries occurring
as a result of re-engineering. The new consolidated service centers consist of
employees grouped by processes rather than by organization.
(2) Includes the remaining employees and the separation amounts associated with
the balance of the 1991 restructuring reserve at December 31, 1993.
As a result of extending the Plan into 1997, employee separations and
separation amounts shown above have been reduced by 1,519 and $41 in 1995, and
175 and $12 in 1996, respectively, and increased by 2,445 and $74,
respectively, in 1997.
U S WEST
15
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U S W E S T I N C.
--------------------
SYSTEMS DEVELOPMENT USWC's existing information management systems
were largely developed to support analog technology in a monopoly environment.
These systems are increasingly inadequate due to the effects of increased
competition, new forms of regulation and changing technology that have driven
consumer demand for new services that can be delivered quickly, reliably and
economically. The sequential systems currently in place are slow,
labor-intensive and costly to maintain, and often cannot be adapted to support
new product and service offerings, including future multimedia services
envisioned by U S WEST.
The systems re-engineering program in place involves development of
new systems for the following core processes:
Service delivery - to support service on demand for all products and
services, including repair. These systems will permit one customer service
representative to handle all facets of a customer's requirements as contrasted
to the numerous points of customer interface required today.
Service assurance - for performance monitoring from one location and
remote testing in the new environment, including identification and resolution
of faults prior to customer impact, and one-system dispatch environment.
Capacity provisioning - for integrated planning of future network
capacity, including the installation of software controllable service
components.
The direct, incremental and non-recurring systems development costs
contained in the Plan follow:
- ------------------------------------------------------------------------------------------------
Estimate Actual Estimate
-------- ------ ------------------
1994 1994 1995 1996 Total
-------------------------------------------------------
Service delivery $35 $21 $15 $37 $73
Service assurance 45 12 17 35 64
Capacity provisioning 17 57 92 30 179
All other 28 37 20 27 84
-------------------------------------------------------
Total $125 $127 $144 $129 $400
- ------------------------------------------------------------------------------------------------
Original estimates of system expenditures in 1995 and 1996 were $150
and $125, respectively. Though current estimates in total are not materially
different, the timing and amount of expenditures by category has changed.
The majority of systems development labor will be supplied through the
use of temporary employees, contractors and new employees with special skills.
While it is likely that a small number of the new employees will be retained
after completion of the Plan due to their specialized skills, it is planned
that any related increase in headcount will be offset through other employee
reductions.
Systems expenses charged to current operations at USWC consist of all
costs associated with the information management function, including planning,
developing, testing and maintaining databases for general purpose computers, in
addition to systems costs related to maintenance of telephone network
applications. The key related administrative (i.e. general purpose) systems
include customer service, order entry, billing and collection, accounts
payable, payroll, human resources and property records. Ongoing systems costs
comprised approximately six percent of total operating expenses at USWC in
1994, 1993 and 1992. USWC expects systems costs charged to current operations
as a percent of total operating expenses to approximate the current level
throughout the life of the Plan. However, systems costs could increase relative
to other operating costs as the business becomes more technology dependent.
U S WEST
16
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--------------------
Progress under the Plan Following is a schedule of progress achieved under the
Plan in 1994:
- ------------------------------------------------------------
Expenditures
--------------------
Estimate Actual
--------------------
Employee separation $ 96 $ 75
Systems development 125 127
Real estate 119 50
Relocation 70 21
Retraining and other 36 16
--------------------
Total $446 $289
- ------------------------------------------------------------
The company anticipated Plan expenditures of approximately $446 in
1994. However, the company slowed the pace of its restructuring implementation
to address issues pertaining to the quality of service.
The company's 1991 restructuring plan included a pretax charge of $364
due to planned work-force reductions and the write-off of certain intangible
and other assets. The portion of the 1991 restructuring charge related to
work-force reductions was $240, and covered approximately 6,000 employees. All
expenditures and work-force reductions associated with the 1991 plan were
completed by the end of 1994.
COMPETITIVE ENVIRONMENT Rapid technological and regulatory changes continue to
bring about actual and projected competition in the company's markets including
local, access and long-distance. Current and potential competitors include
local telephone companies, interexchange companies, competitive access
providers ("CAPs"), cable television companies and future providers of PCS, the
next generation of wireless communications.
USWC's principal current competitors are CAPs. Competition from CAPs
is largely limited to providing large business customers (with high traffic
volume) private line access to the facilities of interexchange carriers. In
coming years, CAPs also could become significant competitors for other local
exchange services. Teleport Communications Group Inc., for example, has
announced its intention to offer competitive local services. AT&T's entrance
into the cellular communications market through its acquisition of McCaw
Cellular Communications Inc. also has the potential to create increased
competition in local exchange as well as wireless services. The company
believes that competitors will target business customers in densely populated,
urban areas in offering local exchange services. The loss of local exchange
customers to competitors will affect multiple revenue streams of the company
and could have a material, adverse effect on the company's operations.
The actions of public policymakers play an important role in
determining how increased competition affects U S WEST. The company is working
with regulators and legislators to help ensure that public policies keep pace
with the rapidly changing industry -- and allow the company to bring new
services to the marketplace.
U S WEST
17
20
U S W E S T I N C.
--------------------
U S WEST COMPETITIVE STRATEGY U S WEST's corporate mission is to be
a leading provider of interactive communications, entertainment and information
services over wired multimedia and wireless networks in selected local markets
worldwide. U S WEST will deploy its own and others' wired and wireless
communications, entertainment and information services in packages tailored to
customer needs. The company will implement its competitive strategy both
domestically and internationally by focusing on three key objectives, or "value
drivers": 1) growth through the development of multimedia networks and a
broadened wireless presence; 2) customer loyalty through continuous improvement
in customer service; and 3) improved productivity through systems re-
engineering and other cost controls.
NEW CUSTOMER COST CASH FLOW
REVENUE RETENTION REDUCTION IMPROVEMENT
U S WEST "VALUE DRIVERS"
BASE BUSINESSES In 1993, the company announced its intention to build a high
speed, interactive multimedia network in major metropolitan markets in the U S
WEST region. This network will position USWC to compete with other providers of
communications, entertainment and information services. USWC began limited
testing of its multimedia network in Omaha, Neb., in December 1994. A market
trial will begin in 1995 in an area that will cover up to 50,000 homes. The
market trial will offer consumers a variety of integrated services in addition
to traditional cable television and telephone services. These include
video-on-demand, video games, interactive shopping and other services. The
results of the technical and market trials will be incorporated in the network
configuration and future service offerings.
The 1993 re-engineering program supports U S WEST's objective to
improve customer service, increase productivity and continue to narrow its cost
of service disadvantage with current and potential competitors.
Employee-related costs comprise approximately 45 percent of the total operating
costs of U S WEST. The company will continue its efforts to control these
costs, primarily through systems improvements and reductions in staffing. At
USWC, the number of employees per 10,000 access lines decreased by 7.7 percent
in 1994, to 33.1, and has dropped 24 percent since 1990.
USWC Employees
Per 10,000 Access Lines
========================
[GRAPH]
U S WEST
18
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--------------------
DEVELOPING BUSINESSES U S WEST continues to expand its customer base and
strengthen its national out-of-region presence by acquiring or forming
alliances with other communications, entertainment and information services
companies.
DOMESTIC CABLE On December 6, 1994, U S WEST purchased the Atlanta Cable
Properties that serve approximately 486,000 subscribers, including 275,000
premium service subscribers. The Atlanta Cable Properties serve about 65
percent of the cable customers in the metropolitan Atlanta area. U S WEST plans
to eventually offer local exchange telecommunications in addition to multimedia
services in Atlanta.
U S WEST and TWE have begun a five-year project to upgrade a
substantial portion of TWE's cable systems to "Full Service Network" ("FSN")
capacity. U S WEST and TWE are designating the systems to be upgraded and
sharing management control over those systems. The partnership encountered
initial delays on the market trial of the FSN in Orlando in order to make
additional refinements to the underlying systems software and set-top
terminals. In December 1994, TWE introduced the FSN trial in Orlando, Fla. TWE
expects to link 4,000 homes by the end of 1995. U S WEST believes that each
FSN, when completed, will provide consumers a wide variety of services,
including video-on-demand, interactive games, distance learning, full-motion
video, interactive shopping, alternative access and local telephone service.
The FSN trial will allow TWE to refine the technology, and determine the level
and nature of customer demand for services. This knowledge will assist in
lowering the cost of the technology and the roll-out of interactive services
across the country.
DOMESTIC WIRELESS On July 25, 1994, AirTouch Communications ("AirTouch") and U
S WEST announced an agreement to combine their domestic cellular operations.
The joint venture will have a presence in nine of the top 20 cellular markets
in the country. The initial equity ownership of the wireless joint venture will
be approximately 70 percent AirTouch and 30 percent U S WEST. However, the
companies will share governance responsibilities. This joint venture will
provide U S WEST with an expanded wireless presence and economies of scale. The
transaction is expected to close in second quarter 1995 after obtaining federal
and state regulatory approvals. Each company's cellular operations initially
will continue operating as separate entities owned by the individual partners,
but will receive support services on a contract basis from a joint wireless
management company.
The merger of the two companies' domestic cellular operations will
take place upon the earlier of four years from July 25, 1994, the lifting of
certain MFJ restrictions, or at AirTouch's option. The agreement gives U S WEST
strategic flexibility, including the right to exchange its interest in the
joint venture for up to 19.9 percent of AirTouch common stock, with any excess
amounts to be received in the form of AirTouch non-voting preferred stock. A
partnership committee, led by the president and chief operating officer of
AirTouch and three other AirTouch representatives, three U S WEST
representatives and one mutually agreed upon independent representative will
oversee the companies' combined domestic cellular operations.
U S WEST
19
22
U S W E S T I N C.
--------------------
On December 5, 1994, a partnership formed by the AirTouch/U S WEST
joint venture and the Bell Atlantic/NYNEX partnership began bidding on PCS
licenses being auctioned by the FCC. The combined companies own cellular
licenses in 15 of the 20 largest U.S. cities and serve over five million
customers. The partnership, known as PCS PrimeCo, is eligible to bid for PCS
licenses in 26 markets, representing more than 100 million potential customers.
This entity will be governed by a board made up of three members from the Bell
Atlantic/NYNEX partnership and three members from the AirTouch/U S WEST joint
venture. A second partnership will develop a national branding and marketing
strategy and a common "look and feel" - for both cellular and PCS customers.
This entity will be governed by a board made up of three members from the Bell
Atlantic/NYNEX partnership, three from the AirTouch/U S WEST joint venture and
one independent board member. The cellular properties of Bell Atlantic/NYNEX
will not be merged with those of AirTouch/U S WEST.
PCS will triple the spectrum available for wireless services,
including new services such as two-way messaging from pocket pagers and
wireless transfers of large computer files from laptop computers. The new
spectrum also will help cellular operators create seamless networks.
INTERNATIONAL In the international arena, U S WEST is focusing on certain
strategic businesses, primarily in wireless communications, and combined cable
television and telephone networks. The company's net investment in
international ventures is approximately $988 (inclusive of consolidated
entities), 68 percent of which is invested in the U.K. The U.K. market is
attractive because of high population density, the opportunity to provide
multiple services over one network and a low rate of cable television
penetration.
TeleWest, a venture with Tele-Communications Inc. in the U.K., is the
largest provider of combined cable television and telephone service in the
world. TeleWest owns all or part of 23 franchises, encompassing 3.6 million
homes. The combined services are provided over a multimedia network that has
been designed to provide a wide range of interactive and integrated
communications, entertainment and information services as they become
available. Through TeleWest, U S WEST has gained experience in packaging video
and telephone services that it utilizes in other parts of the world. In
November 1994, TeleWest sold a 24.4 percent interest to the public, which
resulted in U S WEST's 37.8 percent ownership interest. Based on the offering
price, U S WEST's share of TeleWest was valued at $1.1 billion, compared with U
S WEST's net investment prior to the offering of approximately $300.
In the U.K., Mercury One-2-One, a 50-50 joint venture between U S WEST
and Cable & Wireless plc, launched the world's first PCS in 1993. Mercury
One-2-One's PCS is a digital cellular communications service designed to offer
consumers higher quality service, increased privacy and more features at lower
prices than existing, analog cellular communications systems. To meet growing
customer demand, Mercury One-2-One has expanded its coverage to reach 30
percent of the U.K. population.
During 1994, the company expanded its international investments. The
company purchased 100 percent of Thomson Directories for $94. Thomson
Directories publishes 155 telephone directories that reach 80 percent of the
households in Great Britain. The company acquired 49 percent of Listel, a
Brazilian company that publishes telephone directories, and acquired a 20
percent interest in Binariang Sdn Bhd, a Malaysian telecommunications company
that holds four licenses that enable it to become a second-network operator in
Malaysia. The company also became a 25-percent partner in Mobiltel, a
consortium awarded the 900 GSM license in Bulgaria. In early 1995, U S WEST,
Time Warner Inc., TWE Japan, Itochu Corporation and Toshiba Corporation formed
a venture to build cable systems in Japan. U S WEST will own 17 percent of the
new venture.
The company's 1995 commitment to existing international ventures is
approximately $400. The company will continue to pursue opportunities in
attractive local markets around the world that fit its strategic objectives. U
S WEST is concentrating on opportunities where it can attain at least a
number-one or -two market share in each market the company targets.
U S WEST
20
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--------------------
FEDERAL REGULATORY ISSUES U S WEST supports regulatory reform at all levels.
While certain federal courts have recently ruled as unconstitutional some laws
governing local exchange carrier activities, the legal and regulatory framework
under which the company operates limits both competition and consumer choice.
The limitations include restrictions on equipment manufacturing, the
provisioning of cable television programming content, and restrictions on the
transport of communications, entertainment and information across LATA
boundaries. U S WEST believes that national telecommunications regulatory
reform may be the only effective way to resolve the related issues and satisfy
competing interests.
Congress failed to pass telecommunications reform legislation in 1994.
It is expected that new telecommunications legislation will be introduced in
1995. However, there is uncertainty concerning the scope and direction of that
legislation. U S WEST believes it is in the public interest to lift all
competitive restrictions, placing all competitors under the same rules. Such
action would lead to wider consumer choices, and ensure the industry's
technological development and long-term financial health.
During 1994 and early 1995, a number of federal regulatory issues were
ruled on in the courts:
- - In January 1995, the 9th U.S. Circuit Court of Appeals in San
Francisco upheld the June 15, 1994, Seattle Federal District Court ruling that
affirmed U S WEST's challenge to the constitutionality of the telephone company
video programming restriction in the 1984 Cable Act. The act prevents telephone
companies from providing video programming within their regions. U S WEST
argued, and the courts agreed, that the restriction violates its First
Amendment right to free speech. The decision would allow the company to provide
video programming directly to its regional telephone subscribers. The Federal
Government can appeal to the U.S. Supreme Court. The company is evaluating its
options in light of this ruling. In January 1995, the FCC instituted a
proceeding to modify and promulgate rules on the provision of video
programming.
- - In January 1995, the U.S. Circuit Court of Appeals for the District of
Columbia overruled the FCC's "range-of-rates" decision. This FCC decision
permitted non-dominant carriers to file ranges for rates, rather than specific
price points. The Court of Appeals held that the Communications Act requires
all carriers to specify prices on their tariffs. The effect of this decision
will be to require non-dominant carriers (like MCI, or Time Warner's Full
Service Network) to file tariffs with considerably more price detail.
- - In October 1994, the 9th U.S. Circuit Court of Appeals overruled the
FCC's Computer III non-structural separation decision for the provision of
enhanced services on an integrated basis. The effect of the decision is to
return to the provision of such service through a separate subsidiary, which
could make it more difficult for local exchange carriers to offer enhanced
services. In January 1995, the FCC granted a waiver allowing for the continued
provision of enhanced services, pending further proceedings by the FCC.
- - In August 1994, the U.S. Circuit Court of Appeals for the District of
Columbia upheld an FCC ruling that neither telephone companies nor customer
programmers need to obtain a franchise from local governments to provide Video
Dial Tone ("VDT") service. The decision means that local telephone companies
will avoid additional franchise fees related to the provisioning of VDT
services.
- - In June 1994, the U.S. Circuit Court of Appeals for the District of
Columbia overturned the FCC's requirement that local telephone companies allow
physical collocation by third parties (competitive access providers), within
their central offices, for the installation and operation of equipment that
connects to the local telephone network. The decision essentially affirms the
private-property rights of corporations. The court also ordered the FCC to
reconsider its requirement that allows competitors to interconnect equipment to
the local network from a point outside a central office. In light of the
rulings the company is evaluating how it can provide future interconnection
services.
U S WEST
21
24
U S W E S T I N C.
--------------------
In September 1994, the Department of Justice ("DOJ") granted U S
WEST's request for two MFJ waivers relating to TWE and the Atlanta Cable
Properties. The waivers will allow U S WEST to provide video and information
services across LATA boundaries in the Atlanta Cable Properties and TWE service
areas. The waivers also will allow U S WEST to participate in limited
manufacturing and to provide equipment through its partnership in TWE.
On June 20, 1994, the seven regional Bell operating companies
("RBOCs") asked the divestiture court for a waiver of the Court's restriction
on the RBOCs' provision of wireless long-distance services. The consent decree
restricts the RBOCs from providing long-distance services as well as
manufacturing. The request for a waiver closely follows a recommendation by the
DOJ that the RBOCs be allowed to provide wireless long-distance services.
The FCC has adopted a regulatory structure known as "Open Network
Architecture" ("ONA"), under which USWC is required to unbundle its telephone
network services in a manner that will accommodate the service needs of the
growing number of information service providers. Under ONA, the number of local
exchange service competitors could increase significantly.
U S WEST's interstate services have been subject to price cap
regulation since January 1991. Price caps are a form of incentive regulation
designed to limit prices rather than profits. The price cap plan is currently
under review by the FCC.
STATE REGULATORY ISSUES USWC has sought alternative forms of regulation
("AFOR") plans that provide for competitive parity, enhanced pricing
flexibility and improved capability in bringing to market new products and
services. In a number of states where AFOR plans have been adopted, such
actions have been accompanied by agreements to refund revenues, reduce existing
rates or upgrade service, any of which could have adverse short-term effects on
earnings. Similar results may have occurred under traditional rate- of-return
regulation. In addition to the FCC price cap plan, USWC has AFOR plans in the
states of Minnesota, Colorado, Oregon, Idaho, Nebraska, North Dakota and South
Dakota.
At USWC, there are pending regulatory actions in local regulatory jurisdictions
that call for price decreases, refunds or both. In one such instance, the Utah
Supreme Court has remanded a Utah Public Service Commission ("PSC") order to
the PSC for reconsideration, thereby establishing certain 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 an
interexchange carrier and other parties that relates to the Tax Reform Act of
1986. This case is still in the discovery process. If a formal filing - made in
accordance with the remand from the Supreme Court - alleges that the exceptions
apply, the range of possible risk is $0 to $140.
USWEST Communications'
14-State Region
[MAP]
U S WEST
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DISCONTINUED OPERATIONS In 1994, U S WEST continued to make progress in
disposing of its Capital Assets segment in accordance with its plan of
disposition announced in June 1993. (Further details on the discontinued
operations are provided in "Results Of Operations - 1993 Compared with 1992"
and in Note 17 to the Consolidated Financial Statements.)
During 1994, U S WEST reduced its ownership interest in Financial
Security Assurance ("FSA"), a member of the Capital Assets segment, to 60.9
percent, and its voting interest to 49.8 percent through a series of
transactions. In May and June 1994, U S WEST sold 8.1 million shares of FSA,
including 2.0 million shares sold to Fund American Enterprises ("FFC"), in an
initial public offering of FSA common stock at $20 per share. U S WEST received
$154 in net proceeds from the offering. On September 2, 1994, U S WEST issued
to FFC 50,000 shares of cumulative redeemable preferred stock for a total of
$50. FFC's voting interest in FSA is 21.0 percent, achieved through a
combination of direct share ownership of common and preferred FSA shares, and a
voting trust agreement with U S WEST.
FFC has a right of first offer and a call right to purchase from U S
WEST up to 9.0 million shares, or approximately 57 percent, of outstanding FSA
stock held by U S WEST. U S WEST anticipates its ownership will be further
reduced by 1996.
During 1994, U S WEST Real Estate sold 12 buildings, six parcels of
land and other assets for approximately $327. In January 1995, U S WEST Real
Estate sold one property for approximately $37. The sales were in line with
company estimates. U S WEST has completed all construction of existing
buildings in the commercial real estate portfolio and expects to substantially
complete the liquidation of its portfolio by 1998. The remaining balance of
assets subject to sale is approximately $607, net of reserves.
The company believes its reserves related to discontinued operations
are adequate.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES Cash provided by operating activities of approximately
$3.2 billion was essentially unchanged as compared with 1993. Improvement in
operations in 1994 was largely offset by cash payments for restructuring
activities of $289, compared with $120 in 1993. Growth in cash from operations
will be limited in the near term as the company continues to implement its
restructuring plan. Cash from operations is the primary source by which U S
WEST funds its capital expenditures and shareholder dividends. Further details
of cash provided by operating activities are provided in the Consolidated
Statements of Cash Flows.
The company expects that cash from operations will fund a significant
share of expected future requirements for existing businesses. U S WEST will
continue to employ strategic alliances and also will make direct investments in
assets or businesses that are consistent with the company's business
strategies. Financing for new investments will primarily come from a
combination of new debt and equity. In the event of a new investment of
substantial magnitude, the company also may reevaluate its use of internally
generated cash, the feasibility of further acquisitions, the possibility of
sales of assets and the capital structure.
USWEST consists of many different parts having different financial
characteristics. For this and other reasons, U S WEST believes that its stock
price has been undervalued. Consequently, the company is evaluating a range of
actions it might take with regard to its capital structure to make the value of
its assets more apparent.
U S WEST
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U S W E S T I N C.
--------------------
INVESTING ACTIVITIES Total capital expenditures were $2,820 in 1994 and $2,441
in 1993. Capital expenditures at USWC were $2,454 in 1994 and $2,182 in 1993.
the 1994 capital expenditures of USWC were devoted substantially to the
continued modernization of telephone plant, including investments in fiber
optic cable, in order to improve customer service and network productivity. In
1995, capital expenditures are expected to approximate $2.6 billion, including
$2.1 billion at USWC.
Capital Expenditures
Actual and Projected
(Dollars in millions)
=====================
[GRAPH]
U S WEST's cash investment related to the December 1994 acquisition of
the Atlanta Cable Properties was $745, obtained through short-term borrowing.
U S WEST also invested approximately $444 in developing international
businesses in 1994, including the acquisition of Thomson Directories. The
company anticipates investments in international ventures to approximate $400
in 1995.
In 1994, U S WEST received cash proceeds of $143 from the sale of its
paging operations and $93 from the sale of certain rural telephone exchanges.
U S WEST did not receive cash from the partial sale of its joint venture
interest in TeleWest. All proceeds from the sale will be used by TeleWest for
general business purposes, including financing construction and operations
costs, and repaying debt.
FINANCING ACTIVITIES Debt increased by $739 compared to the prior year,
primarily due to the acquisition of the Atlanta Cable Properties. U S WEST's
year-end 1994 debt-to-capital ratio was 51.8 compared with 55.1 at December 31,
1993. Including debt related to discontinued operations, the debt-to-capital
ratio was 55.5 and 59.7 at December 31, 1994 and 1993, respectively. The
decrease in the debt-to-capital ratio is primarily attributable to higher net
income and the effects of an increase in common shares outstanding.
In conjunction with the acquisition of the Atlanta Cable Properties,
on December 6, 1994, 12,779,206 shares of U S WEST common stock valued at $459
were issued to, or in the name of, the holders of Wometco Cable Corp.
Subsequent to the acquisition, the company announced its intention to purchase
U S WEST common shares in the open market up to an amount equal to those issued
in conjunction with the acquisition, subject to market conditions. In December
1994, the company purchased 550,400 shares of U S WEST common stock for
approximately $20.
In March 1994, the company issued approximately 5.5 million shares of
U S WEST common stock for proceeds of $210 in conjunction with the settlement of
shareowner litigation. The company also contributed 4.6 million shares of
U S WEST common stock to the company's postretirement benefit fund in 1994.
The company maintains short-term lines of credit aggregating
approximately $1.9 billion, all of which were available at December 31, 1994.
Under registration statements filed with the Securities and Exchange
Commission, as of December 31, 1994, U S WEST companies are permitted to issue
up to approximately $1.8 billion of new debt securities. U S WEST also
maintains a commercial paper program to finance short-term cash flow
requirements, as well as to maintain a presence in the short-term debt market.
U S WEST
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DISCONTINUED OPERATIONS Cash to discontinued operations primarily reflects the
payment of debt, net of $154 in proceeds from the sale of 8.1 million shares of
FSA stock. Debt related to discontinued operations decreased by approximately
$200 in 1994. (See Note 17 to the Consolidated Financial Statements.) For
financial reporting purposes this debt is netted against the related assets of
discontinued operations.
RISK MANAGEMENT The company is exposed to market risks arising from changes in
interest rates and foreign exchange rates. Derivative financial instruments
are used by the company to manage these risks.
INTEREST RATE RISK MANAGEMENT The objective of the company's interest rate
risk management program is to minimize the total cost of debt. To meet this
objective the company uses risk-reducing and risk-adjusting strategies.
Interest rate forward contracts were used in 1993 to reduce the debt issuance
risks associated with interest rate fluctuations. Interest rate swaps are used
to adjust the risks of the debt portfolio on a consolidated basis by varying
the ratio of fixed- to floating-rate debt. The market value of the debt
portfolio and its risk-adjusting derivative instruments are monitored and
compared to predetermined benchmarks to evaluate the effectiveness of the risk
management program.
In 1993, the company refinanced $2.7 billion of callable debt with
new, lower-cost fixed-rate debt. The company achieved an annual interest
expense reduction of approximately $35 as a result of this refinancing. In
conjunction with the refinancing, the company executed forward contracts to
sell U.S. Treasury securities to reduce debt issuance risks and to lock in the
cost of $1.5 billion of the future debt issue. At December 31, 1994, deferred
credits of $8 and deferred charges of $51 on closed interest rate forward
contracts are included as part of the carrying value of the underlying debt.
The deferred credits and charges are being recognized as a yield adjustment
over the life of the debt, which matures at various dates through 2043. The net
deferred charge is directly offset by the lower coupon rate achieved on the new
debt.
Notional amounts on interest rate swaps outstanding at December 31,
1994, were $1.6 billion with various maturities that extend to 2004. The
estimated effect of the company's interest rate derivative transactions was to
adjust the level of fixed-rate debt from 73.1 percent to 81.5 percent of the
total debt portfolio (including continuing and discontinued operations).
FOREIGN EXCHANGE RISK MANAGEMENT The company has entered into forward and
combination option contracts to manage the market risks associated with
fluctuations in foreign exchange rates after considering offsetting foreign
exposures among international operations. The use of forward and option
contracts allows the company to fix or cap the cost of firm foreign investment
commitments in countries with freely convertible currencies. The market values
of the foreign exchange positions, including the hedging instruments, are
continuously monitored and compared to predetermined levels of acceptable risk.
Notional amounts of forward and combination option contracts in
British pounds outstanding at December 31, 1994, were $170, with maturities
within one year. Cumulative deferred credits and charges associated with
forward and option contracts of $7 and $25, respectively, are recorded in
common shareowners' equity at December 31, 1994.
At December 31, 1994, the company also had a British pound-denominated
receivable from a wholly owned subsidiary in the translated principal amount of
$48 that is subject to foreign exchange risk. This position is hedged in 1995.
U S WEST
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U S W E S T I N C.
--------------------
RESULTS OF OPERATIONS - 1993 COMPARED WITH 1992
- ----------------------------------------------------------------------------------------------------
Increase
1993(1) 1992 (Decrease)
--------------------------------------
Income from continuing operations $ 476 $ 1,076 $ (600)
Income (loss) from discontinued operations (82) 103 (185)
Extraordinary items:
Discontinuance of SFAS No. 71, net
of tax (3,123) - (3,123)
Early extinguishment of debt, net of tax (77) - (77)
Cumulative effect of change in accounting principles - (1,793) 1,793
--------------------------------------
Net loss $ (2,806) $ (614) $ (2,192)
- ----------------------------------------------------------------------------------------------------
Earnings per common share from continuing
operations $1.13 $ 2.61 $ (1.48)
Earnings (loss) per common share from
discontinued operations (.19) .25 (.44)
Extraordinary items:
Discontinuance of SFAS No. 71 (7.45) - (7.45)
Early extinguishment of debt (.18) - (.18)
Cumulative effect of change in accounting principles - (4.35) 4.35
--------------------------------------
Loss per common share $ (6.69) $ (1.49) $ (5.20)
- ----------------------------------------------------------------------------------------------------
(1) 1993 income from continuing operations was reduced by $610, or $1.46 per
share, for a restructuring charge, and $54, or $.13 per share, for the
cumulative effect on deferred taxes of the 1993 federally mandated increase in
income tax rates.
In 1993, income from continuing operations was $476, including the
items in note (1) to the table above. Excluding these one-time effects, 1993
income from continuing operations and related earnings per share were $1,140
and $2.72, respectively. As normalized, 1993 income from continuing operations
increased $64, or 6.0 percent, over 1992 and related earnings per share
increased $.11, or 4.2 percent. The increase was primarily attributable to
improvements in telephone, domestic cellular and publishing operations, and
lower financing costs, partially offset by increased losses associated with
developing businesses.
During 1993, the U S WEST board of directors approved a plan to
dispose of the Capital Assets segment, which includes activities related to
financial services, financial guarantee insurance operations and real estate.
The Capital Assets segment has been accounted for as discontinued operations in
accordance with Accounting Principles Board Opinion No. 30, which provides for
the reporting of the operating results of discontinued operations separately
from continuing operations. The company recorded a provision of $100 (after
tax), or $.24 per share, for the estimated loss on disposal of the discontinued
operations and an additional provision of $20 to reflect the cumulative effect
on deferred taxes of the 1993 federally mandated increase in income tax rates.
Income from discontinued operations to June 1, 1993, was $38, net of $15 in
income taxes. Income from discontinued operations subsequent to June 1, 1993,
is being deferred and was included within the provision for loss on disposal of
the Capital Assets segment.
U S WEST
26
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An extraordinary, non-cash charge of $3.1 billion (after tax) was
incurred in conjunction with U S WEST's decision to discontinue accounting for
the operations of USWC in accordance with SFAS No. 71. SFAS No. 71 generally
applies to regulated companies that meet certain requirements, including a
requirement that a company be able to recover its costs, competition
notwithstanding, by charging its customers at prices established by its
regulators. U S WEST's decision to discontinue the application of SFAS No. 71
was based on the belief that competition, market conditions and technological
advances, more than prices established by regulators, will determine the future
cost recovery by USWC. As a result of this change, the remaining asset lives of
USWC's telephone plant were shortened to more closely reflect the useful
(economic) lives of such plant. USWC's accounting and reporting for regulatory
purposes were not affected by the change.
During 1993, USWC refinanced long-term debt issues aggregating $2.7
billion in principal amount. These refinancings allowed the company to take
advantage of favorable interest rates. Extraordinary costs associated with the
redemptions reduced 1993 income by $77 (after tax).
The accounting change in 1992 relates to two accounting standards
issued by the Financial Accounting Standards Board. The first is SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other than Pensions," which
mandates that employers reflect in their current expenses an accrual for the
cost of providing retirement medical and life insurance benefits to current and
future retirees. Prior to 1992, U S WEST, like most corporations, recognized
these costs as they were paid. U S WEST also adopted SFAS No. 112, "Employers'
Accounting for Postemployment Benefits." SFAS No. 112 requires that employers
accrue for the estimated costs of benefits, such as workers' compensation and
disability, provided to former or inactive employees who are not eligible for
retirement. Adoption of SFAS Nos. 106 and 112 resulted in a one-time, non-cash
charge against 1992 earnings of $1,793, net of tax, including $53 related to
SFAS No. 112.
Revenue growth and continued cost controls in 1993 resulted in a 6.7
percent increase in EBITDA, excluding the effects of the 1993 restructuring
charge.
U S WEST
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U S W E S T I N C.
--------------------
Income from Continuing Operations - Base and Developing Businesses
- --------------------------------------------------------------------------------------------------------------
Percent Increase
Ownership 1993 (1) 1992 (2) (Decrease)
------------------------------------------------------
BASE BUSINESSES:
U S WEST Communications Inc. 100 $ 435 $950 $ (515)
Publishing and other 100 180 207 (27)
---------------------------------------
Total base 615 1,157 (542)
---------------------------------------
DEVELOPING BUSINESSES:
Consolidated:
Domestic wireless 100 (46) (17) (29)
Unconsolidated equity investments:
Time Warner Entertainment L.P. (2) 25.5 (19) - (19)
TeleWest Communications plc 50.0 (21) (13) (8)
Mercury One-2-One 50.0 (22) (9) (13)
Other (3) (31) (42) 11
---------------------------------------
Total developing (139) (81) (58)
---------------------------------------
Income from continuing operations $ 476 $1,076 $ (600)
- --------------------------------------------------------------------------------------------------------------
(1) 1993 income from continuing operations was reduced by $610 for a
restructuring charge, and $54 for the cumulative effect on deferred taxes of
the 1993 federally mandated increase in income tax rates.
(2) Percent ownership represents pro-rata priority capital and residual equity
interests.
(3) Includes divisional expenses associated with developing businesses.
During 1993, income from the company's base operations increased to
$1,237, excluding the effects of the 1993 restructuring charge and the
cumulative effect in 1993 of the increase in income tax rates. This represents
an increase of $80, or 6.9 percent, over 1992. The increase is attributable to
higher demand for telephone services, including the effects of growth in access
lines, and continued cost controls, partially offset by lower prices.
The loss from developing businesses increased as a result of the
company's 1993 TWE investment and higher losses associated with international
ventures.
U S WEST
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SALES AND OTHER REVENUES
- ---------------------------------------------------------------------------------------------------------------------
Increase (Decrease)
------------------------
1993 1992 $ %
---------------------------------------------------------------
BASE BUSINESSES:
USWC operations:
Local service $3,829 $3,674 $155 4.2
Access charges - interstate 2,147 2,047 100 4.9
Access charges - intrastate 682 673 9 1.3
Long-distance network
service 1,442 1,420 22 1.5
Other services 556 510 46 9.0
---------------------------------------------------------------
Total USWC 8,656 8,324 332 4.0
Publishing and other 1,070 1,092 (22) (2.0)
---------------------------------------------------------------
Total base 9,726 9,416 310 3.3
---------------------------------------------------------------
DEVELOPING BUSINESSES: (1)
Domestic wireless 561 407 154 37.8
International directories 7 - 7 -
---------------------------------------------------------------
Total developing 568 407 161 39.6
---------------------------------------------------------------
Total revenues $10,294 $9,823 $471 4.8
- ---------------------------------------------------------------------------------------------------------------------
(1) Includes consolidated subsidiaries. All other developing businesses are
accounted for using the equity method.
An analysis of the change in USWC's revenues follows:
LOCAL SERVICE
- ----------------------------------------------------------------------------------------------------------------------
Increase
Price Refund --------------
Changes Activity Demand Other $ %
- ----------------------------------------------------------------------------------------------------------------------
$(6) $(11) $176 $(4) $155 4.2
- ----------------------------------------------------------------------------------------------------------------------
The increase in local service revenues was primarily attributable to
access line growth of 3.7 percent in 1993.
INTERSTATE ACCESS CHARGES
- ----------------------------------------------------------------------------------------------------------------------
Increase
Price Refund ---------------
Changes Activity Demand Other $ %
- ----------------------------------------------------------------------------------------------------------------------
$(71) $6 $175 $(10) $100 4.9
- ----------------------------------------------------------------------------------------------------------------------
Increased demand for interstate services, as evidenced by an increase
of 8.5 percent in interstate billed access minutes of use, more than offset the
effects of price decreases. USWC reduced its annual interstate access prices by
approximately $60, effective July 1, 1993, in addition to $90, effective July
1, 1992, primarily due to FCC-mandated changes that resulted in a cost shift to
intrastate jurisdictions.
INTRASTATE ACCESS CHARGES
- ----------------------------------------------------------------------------------------------------------------------
Increase
Price Refund -------------
Changes Activity Demand Other $ %
- ----------------------------------------------------------------------------------------------------------------------
$(18) $8 $19 - $9 1.3
- ----------------------------------------------------------------------------------------------------------------------
Intrastate access charges increased primarily as a result of increased
demand and lower refunds, largely offset by the effects of price decreases.
U S WEST
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U S W E S T I N C.
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LONG-DISTANCE NETWORK SERVICE
- ----------------------------------------------------------------------------------------------------------------------
Increase
Price Refund --------------
Changes Activity Demand Other $ %
- ----------------------------------------------------------------------------------------------------------------------
$(7) $(1) $31 $(1) $22 1.5
- ----------------------------------------------------------------------------------------------------------------------
The increase in long-distance network service revenues reflects
business growth, partially offset by the impacts of competition, particularly
in Wide Area Telephone Service and "800" services, and price decreases.
OTHER SERVICES Other services revenues increased 9.0 percent in 1993 due to
increased revenue from billing and collection services and continued market
penetration in voice messaging services.
PUBLISHING AND OTHER
- -----------------------------------------------------------------------------------------------------------
Decrease
--------------------
1993 1992 $ %
---------------------------------------------------
Publishing $949 $949 - -
Other - net 121 143 $(22) (15.4)
---------------------------------------------------
Total $1,070 $1,092 $(22) (2.0)
- -----------------------------------------------------------------------------------------------------------
Revenue for the entire publishing and other group was reduced by
approximately $86 in 1993 due to the sale of certain publishing and telephone
equipment distribution operations. Revenues from ongoing operations increased
$64, or 5.9 percent, primarily as a result of price increases related to
publishing activities. Volume of Yellow Pages directory advertising was
essentially flat in 1993.
DEVELOPING BUSINESSES
- -------------------------------------------------------------------------------------------------------------
Increase
---------------------
1993 1992 $ %
---------------------------------------------------
Domestic wireless $561 $407 $154 37.8
International directories 7 - 7 -
- -------------------------------------------------------------------------------------------------------------
Domestic wireless revenues increased as a result of an expanded
cellular customer base, which grew by 45 percent during 1993. This growth
reflects increased penetration and a migration to the retail distribution
channel. Average cellular revenue declined by 5.6 percent to approximately $76
per customer, per month. Revenue from international directories reflects the
1993 start up of U S WEST Polska, a publisher of directories in Poland.
COSTS AND EXPENSES
- ----------------------------------------------------------------------------------------------------------------
Increase (Decrease)
-------------------------
1993 1992 $ %
--------------------------------------------------------
Employee-related expenses $3,584 $3,487 $97 2.8
Other operating expenses 2,065 1,995 70 3.5
Taxes other than income taxes 417 378 39 10.3
Depreciation and amortization 1,955 1,881 74 3.9
Restructuring charge 1,000 - 1,000 -
Interest expense 439 453 (14) (3.1)
Equity losses in
unconsolidated ventures 74 43 31 72.1
Other income (expense) - net (15) (17) (2) (11.8)
- ----------------------------------------------------------------------------------------------------------------
Employee-related expenses at USWC increased by $41, or 1.4 percent, over 1992.
This increase was attributable to basic wage increases, increased overtime
costs (affected by flood damage in the midwestern states) and costs incurred
for temporary employees in conjunction with customer service initiatives. These
factors were partially offset by the effects of work-force reductions,
primarily in conjunction with the company's 1991 restructuring plan. During
1993, USWC reduced its employee level by 2,755 employees. The work-force
reductions and the company's emphasis on health-care cost containment through
managed care and other programs, and earnings on the amounts funded for
postretirement benefit costs, resulted in a decline in health-care costs of
approximately $25 in 1993. Growth in the company's domestic wireless business
also contributed to the increase in employee-related expenses.
Other operating expenses increased by $56, or 3.5 percent, at USWC as
a result of higher network software costs and increased advertising expenses.
Higher marketing costs related to an expanding domestic cellular subscriber
base also contributed to the increase in other operating expenses, partially
offset by lower expenses due to the sale of certain publishing and telephone
equipment distribution operations.
U S WEST
30
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Taxes other than income taxes increased due in part to adjustments
made in 1992 for resolution of certain longstanding appeals.
Depreciation and amortization expense increased $71, or 4.1 percent,
at USWC as a result of a higher depreciable asset base and increased rates of
depreciation. These effects were partially offset by the completion of
depreciation reserve deficiency amortization programs in several jurisdictions.
Interest expense decreased principally due to the effects of lower
interest rates, partially offset by increased debt of approximately $1.8
billion used to fund new initiatives, including the investment in TWE. U S
WEST's average borrowing cost decreased to 6.7 percent in 1993, from 7.7
percent in 1992.
Equity losses associated with developing businesses increased to $74,
compared with $43 in 1992. The increase in these losses is primarily due to new
investments in 1993, including the company's investment in Mercury One-2-One.
PROVISION FOR INCOME TAXES
- -----------------------------------------------------------------------------------------------------------------
Decrease
--------------------------
1993 1992 $ %
--------------------------------------------------------
Provision for income taxes $269 $493 $(224) (45.4)
Effective tax rate 36.1% 31.4% - -
- -----------------------------------------------------------------------------------------------------------------
The increase in the effective tax rate resulted primarily from the $54
cumulative effect on deferred taxes of the 1993 federally mandated increase in
income tax rates and the effects of discontinuing SFAS No. 71, partially offset
by the tax effects of the restructuring charge.
Please refer to "Results of Operations - 1994 Compared with 1993" for
a discussion of the 1993 restructuring charge.
DISCONTINUED OPERATIONS During 1993, U S WEST sold $2.0 billion of finance
receivables and the business of US WEST Financial Services to NationsBank
Corporation. The sales price was in line with the company's estimate. Proceeds
from the sale of $2.1 billion were used to repay related debt.
During 1993, U S WEST Real Estate Inc. sold five properties for
proceeds of approximately $66.
LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities
decreased by $35 over 1992, primarily due to a $200 increase in postretirement
benefit funding, partially offset by an income tax refund in 1992 of
approximately $125, and growth in base businesses.
Debt increased by approximately $1.8 billion compared with 1992
(including $1.2 billion of short-term debt), principally as a result of the
company's investment in TWE. During 1993, U S WEST refinanced debt issues
aggregating $2.7 billion in principal amount. This refinancing has reduced
interest expense by approximately $35 annually. During 1992, U S WEST called
for early redemption of six debt issues aggregating $747 in principal amount.
Debt related to discontinued operations decreased by approximately
$1.9 billion in 1993. The decrease was related to the 1993 sale of the assets
and the business of U S WEST Financial Services to NationsBank.
Total capital expenditures associated with continuing operations were
$2,441 in 1993 and $2,554 in 1992. Capital expenditures at USWC were $2,182 in
1993 and $2,357 in 1992. The 1993 capital expenditures of USWC were
substantially devoted to the continued modernization of telephone plant.
During fourth quarter 1993, proceeds of $1,020 resulting from the sale
of 22 million shares of common stock were used to reduce short-term
indebtedness, including indebtedness incurred in conjunction with the TWE
investment, and for general corporate purposes.
U S WEST
31
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U S W E S T I N C.
--------------------
REPORT OF
MANAGEMENT
The Consolidated Financial Statements of U S WEST have been prepared in
conformity with generally accepted accounting principles applied on a
consistent basis. The integrity and objectivity of information in these
financial statements, including estimates and judgments, are the responsibility
of management, as is all other financial information included in this report.
U S WEST maintains a system of internal accounting controls designed
to provide a reasonable assurance as to the integrity and reliability of
financial statements, the safeguarding of assets and the prevention and
detection of material errors or fraudulent financial reporting. Monitoring of
such systems includes an internal audit program designed to assess objectively
the effectiveness of internal controls and recommend improvements therein.
Limitations exist in any system of internal accounting controls based
on the recognition that the cost of the system should not exceed the benefits
derived. U S WEST believes that the company's system provides reasonable
assurance that transactions are executed in accordance with management's
general or specific authorizations and is adequate to accomplish the stated
objectives.
The independent certified public accountants, whose report is included
herein, are engaged to express an opinion on our Consolidated Financial
Statements. Their opinion is based on procedures performed in accordance with
generally accepted auditing standards, including examining, on a test basis,
evidence supporting the amounts and disclosures in the Consolidated Financial
Statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation.
In an attempt to assure objectivity, the financial information
contained in this report is subject to review by the Audit Committee of the
board of directors. The Audit Committee is composed of outside directors who
meet regularly with management, internal auditors and independent auditors to
review financial reporting matters, the scope of audit activities and the
resolution of audit findings.
Richard D. McCormick
Chairman and Chief Executive Officer
James M. Osterhoff
Executive Vice President and Chief Financial Officer
January 18, 1995
REPORT OF
INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREOWNERS OF U S WEST INC.:
We have audited the accompanying consolidated balance sheets of U S WEST Inc.
as of December 31, 1994 and 1993 and the related consolidated statements of
operations, cash flows and shareowners' equity for each of the three years in
the period ended December 31, 1994. These financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of U S
WEST Inc. as of December 31, 1994 and 1993, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1994, in conformity with generally accepted accounting principles.
As discussed in Note 5 to the Consolidated Financial Statements, the
company discontinued accounting for the operations of U S WEST Communications
Inc. in accordance with Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of Regulation," in 1993. As
discussed in Note 14 to the Consolidated Financial Statements, the company
changed its method of accounting for postretirement benefits other than
pensions and other postemployment benefits in 1992.
Coopers & Lybrand L.L.P.
Denver, Colorado
January 18, 1995
U S WEST
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U S WEST INC.
1994
CONSOLIDATED STATEMENTS OF OPERATIONS
DOLLARS IN MILLIONS (EXCEPT PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1994 1993 1992
---------------------------------------------
Sales and other revenues $ 10,953 $ 10,294 $ 9,823
Employee-related expenses 3,779 3,584 3,487
Other operating expenses 2,203 2,065 1,995
Taxes other than income taxes 412 417 378
Depreciation and amortization 2,052 1,955 1,881
Restructuring charge -- 1,000 --
Interest expense 442 439 453
Equity losses in unconsolidated ventures 121 74 43
Gains on sales of assets:
Partial sale of joint venture interest 164 -- --
Rural telephone exchanges 82 -- --
Paging assets 68 -- --
Other income (expense) - net 25 (15) (17)
---------------------------------------------
Income from continuing operations before income taxes 2,283 745 1,569
Provision for income taxes 857 269 493
---------------------------------------------
Income from continuing operations 1,426 476 1,076
Discontinued operations:
Estimated loss from June 1, 1993 through disposal, net of tax -- (100) --
Income tax rate change -- (20) --
Income, net of tax (to June 1, 1993) -- 38 103
---------------------------------------------
Income before extraordinary items and cumulative
effect of change in accounting principles 1,426 394 1,179
Extraordinary items:
Discontinuance of SFAS No. 71, net of tax -- (3,123) --
Early extinguishment of debt, net of tax -- (77) --
Cumulative effect of change in accounting principles:
Transition effect of change in accounting for
postretirement benefits other than pensions
and other postemployment benefits, net of tax -- -- (1,793)
---------------------------------------------
Net income (loss) $ 1,426 $ (2,806) $ (614)
---------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per common share:
Continuing operations $ 3.14 $ 1.13 $ 2.61
Discontinued operations:
Estimated loss from June 1, 1993 through disposal -- (0.24) --
Income tax rate change -- (0.04) --
Income (to June 1, 1993) -- 0.09 0.25
Extraordinary items:
Discontinuance of SFAS No. 71 -- (7.45) --
Early extinguishment of debt -- (0.18) --
Cumulative effect of change in accounting principles -- -- (4.35)
---------------------------------------------
Earnings (loss) per common share $ 3.14 $ (6.69) $ (1.49)
---------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Average common shares outstanding (thousands) 453,316 419,365 412,518
The accompanying notes are an integral part of the Consolidated Financial
Statements.
U S WEST
33
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U S W E S T I N C.
--------------------
CONSOLIDATED BALANCE SHEETS
Dollars in millions
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1994 1993
----------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 209 $ 128
Accounts and notes receivable, less allowance for
credit losses of $62 and $54, respectively 1,693 1,570
Inventories and supplies 189 193
Deferred tax asset 352 336
Prepaid and other 323 273
----------------------------
Total current assets 2,766 2,500
Property, plant and equipment - net 13,997 13,232
Investment in Time Warner Entertainment 2,522 2,552
Intangible assets - net 1,858 514
Investment in international ventures 881 477
Net assets of discontinued operations 302 554
Other assets 878 851
----------------------------
Total assets $ 23,204 $20,680
----------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Short-term debt $ 2,837 $ 1,776
Accounts payable 944 977
Employee compensation 367 386
Dividends payable 251 236
Current portion of restructuring charges 337 456
Other 1,278 1,150
----------------------------
Total current liabilities 6,014 4,981
Long-term debt 5,101 5,423
Postretirement and postemployment benefit obligations 2,502 2,699
Deferred income taxes 890 201
Unamortized investment tax credits 231 280
Deferred credits and other 1,033 1,235
Preferred stock subject to mandatory redemption 51 --
Common shareowners' equity:
Common shares - no par, 2,000,000,000 authorized; 476,880,420
and 448,126,801 issued; 469,343,048 and 441,139,829
outstanding, respectively 8,056 6,996
Cumulative deficit (458) (857)
LESOP guarantee (187) (243)
Foreign currency translation adjustments (29) (35)
----------------------------
Total common shareowners' equity 7,382 5,861
----------------------------
Total liabilities and shareowners' equity $ 23,204 $20,680
----------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Contingencies (see Note 16 to the Consolidated Financial Statements)
- ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the Consolidated Financial
Statements.
U S WEST
34
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--------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in millions
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1994 1993 1992
---------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $ 1,426 $ (2,806) $ (614)
Adjustments to net income (loss):
Discontinuance of SFAS No. 71 -- 3,123 --
Cumulative effect of change in accounting principles -- -- 1,793
Restructuring charge -- 1,000 --
Depreciation and amortization 2,052 1,955 1,881
Gains on sales of assets:
Partial sale of joint venture interest (164) -- --
Rural telephone exchanges (82) -- --
Paging assets (68) -- --
Equity losses in unconsolidated ventures 121 74 43
Discontinued operations -- 82 (103)
Deferred income taxes and amortization of investment tax credits 373 (225) 4
Changes in operating assets and liabilities:
Restructuring payments (289) (120) (98)
Accounts and notes receivable (104) (90) 44
Inventories, supplies and other (81) (56) (24)
Accounts payable and accrued liabilities (10) 238 133
Other - net 67 47 198
---------------------------------------------
Cash provided by operating activities 3,241 3,222 3,257
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment (2,597) (2,449) (2,250)
Investment in Time Warner Entertainment -- (1,557) --
Investment in Atlanta Cable Properties (745) -- --
Investment in international ventures (350) (230) (173)
Proceeds from disposals of property, plant and equipment 96 45 75
Proceeds from sale of paging assets 143 -- --
Other - net (119) (10) 91
---------------------------------------------
Cash (used for) investing activities (3,572) (4,201) (2,257)
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net proceeds from short-term debt 1,280 687 25
Proceeds from issuance of long-term debt 251 2,282 344
Repayments of long-term debt (526) (2,969) (770)
Dividends paid on common stock (886) (812) (796)
Proceeds from issuance of common stock 364 1,150 92
Proceeds from issuance of preferred stock 50 -- --
Purchase of treasury stock (20) -- --
---------------------------------------------
Cash provided by (used for) financing activities 513 338 (1,105)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash provided by (used for) continuing operations 182 (641) (105)
Cash (to) from discontinued operations (101) 610 (237)
- ------------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
Increase (decrease) 81 (31) (342)
Beginning balance 128 159 501
---------------------------------------------
Ending balance $ 209 $ 128 $ 159
---------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the Consolidated Financial
Statements.
U S WEST
35
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U S W E S T I N C.
--------------------
CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
Dollars in millions
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1994 1993 1992
--------------------------------------------
COMMON SHARES
Beginning balance $ 6,996 $ 5,770 $ 5,607
Issuance of common stock 694 1,224 144
Settlement of litigation 210 -- --
Benefit trust contribution (OPEB) 185 -- -
(Purchase) issuance of treasury stock (20) 6 20
Other (9) (4) (1)
--------------------------------------------
Ending balance 8,056 6,996 5,770
- ------------------------------------------------------------------------------------------------------------------------------------
(CUMULATIVE DEFICIT) RETAINED EARNINGS
Beginning balance (857) 2,826 4,316
Net income (loss) 1,426 (2,806) (614)
Dividends declared ($2.14, $2.14 and $2.12 per share, respectively) (980) (905) (876)
Market value adjustment for securities (64) 35 --
Other 17 (7) --
--------------------------------------------
Ending balance (458) (857) 2,826
- ------------------------------------------------------------------------------------------------------------------------------------
LESOP GUARANTEE
Beginning balance (243) (294) (342)
Activity 56 51 48
Ending balance (187) (243) (294)
- ------------------------------------------------------------------------------------------------------------------------------------
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS
Beginning balance (35) (34) 7
Activity 6 (1) (41)
--------------------------------------------
Ending balance (29) (35) (34)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON SHAREOWNERS' EQUITY $ 7,382 $ 5,861 $ 8,268
============================================
COMMON SHARES AUTHORIZED AT DECEMBER 31 (THOUSANDS) 2,000,000 2,000,000 2,000,000
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON SHARES OUTSTANDING (THOUSANDS)
Beginning balance 441,140 414,462 409,936
Issuance of common stock 18,647 26,516 3,948
Settlement of litigation 5,506 -- --
Benefit trust contribution (OPEB) 4,600 -- --
(Purchase) issuance of treasury stock (550) 162 578
--------------------------------------------
Ending balance 469,343 441,140 414,462
--------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the Consolidated Financial
Statements.
U S WEST
36
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--------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 (DOLLARS IN MILLIONS,
EXCEPT PER SHARE AMOUNTS)
1
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
BASIS OF PRESENTATION: The Consolidated Financial Statements include the
accounts of U S WEST Inc. ("U S WEST" or "company") and its majority-owned
subsidiaries, except for discontinued operations as discussed in Note 17 to the
Consolidated Financial Statements. All significant intercompany amounts and
transactions have been eliminated. Investments in less than majority-owned
ventures are accounted for using the equity method.
In the third quarter of 1993, U S WEST discontinued accounting for its
regulated telephone operations, hereafter referred to as U S WEST
Communications ("USWC"), under Statement of Financial Accounting Standards
("SFAS") No. 71, "Accounting for the Effects of Certain Types of Regulation."
(See Note 5 to the Consolidated Financial Statements.)
U S WEST operates in one industry segment (Communications and Related
Services) as defined in SFAS No. 14, "Financial Reporting for Segments of a
Business Enterprise." The company's Capital Assets segment has been
discontinued.
The largest volume of the company's services are provided to AT&T.
During 1994, 1993 and 1992, revenues related to those services provided to AT&T
were $1,130, $1,160 and $1,203, respectively. Related accounts receivable at
December 31, 1994 and 1993 totaled $98 and $97, respectively.
Certain reclassifications within the Consolidated Financial Statements
have been made to conform to the current year presentation.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include highly liquid
investments with original maturities of three months or less that are readily
convertible into cash and are not subject to significant risk from fluctuations
in interest rates.
INVENTORIES AND SUPPLIES: New and reusable materials of USWC are carried at
average cost, except for significant individual items that are valued based on
specific costs. Non-reusable material is carried at its estimated salvage
value. Inventories of U S WEST's non-telephone operations are carried at the
lower of cost or market on a first-in, first-out basis.
PROPERTY, PLANT AND EQUIPMENT: The investment in property, plant and equipment
is carried at cost, less accumulated depreciation. Additions, replacements and
substantial betterments are capitalized. Costs for normal repair and
maintenance of property, plant and equipment are charged to expense as
incurred.
USWC's provision for depreciation of property, plant and equipment is
based on various straight-line group methods using remaining useful (economic)
lives based on industrywide studies. Prior to discontinuing SFAS No. 71,
depreciation was based on lives specified by regulators. (See Note 5 to the
Consolidated Financial Statements.) When the depreciable property, plant and
equipment of USWC is retired or sold, the original cost less the net salvage
value is generally charged to accumulated depreciation.
The non-telephone operations of U S WEST provide for depreciation
using the straight-line method. When such depreciable property, plant and
equipment is retired or sold, the resulting gain or loss is recognized
currently as an element of other income.
Depreciation expense was $2,029, $1,941 and $1,857 in 1994, 1993 and
1992, respectively.
Interest related to qualifying construction projects is capitalized
and is reflected as a reduction of interest expense. At USWC, prior to
discontinuing SFAS No. 71, capitalized interest was included as an element of
other income. Amounts capitalized by U S WEST were $44, $20 and $29 in 1994,
1993 and 1992, respectively.
INTANGIBLE ASSETS: The costs of identified intangible assets and goodwill are
amortized by the straight-line method over periods ranging from five to 40
years. These assets are evaluated, with other related assets, for impairment
using a discounted cash flow methodology. Amortization expense was $23, $14 and
$24 in 1994, 1993 and 1992, respectively.
FOREIGN CURRENCY TRANSLATION: For international investments, assets and
liabilities are translated at year-end exchange rates, and income statement
items are translated at average exchange rates for the year. Resulting
translation adjustments are recorded as a separate component of common
shareowners' equity.
U S WEST
37
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U S W E S T I N C.
--------------------
REVENUE RECOGNITION: Local telephone service, cellular access and cable
television revenues are generally billed monthly, in advance, and revenues are
recognized the following month when services are provided. Revenues derived
from other telephone services, including exchange access, long-distance and
cellular airtime usage, are billed and recorded monthly as services are
provided.
Directory advertising revenues and related directory costs are
generally deferred and recognized over the period during which directories are
utilized, normally 12 months. The balance of deferred directory costs included
in prepaid and other is $217 and $197 at December 31, 1994 and 1993,
respectively.
FINANCIAL INSTRUMENTS: Net interest income or expense on interest rate swaps
is recognized over the life of the swaps as an adjustment to interest expense.
Gains and losses on forward contracts, designated as hedges of interest rate
exposure on debt refinancings, are deferred and recognized as an adjustment to
interest expense over the life of the underlying debt. Gains and losses on
foreign exchange forward, option, and combination option contracts, designated
as hedges, are included in common shareowners' equity and recognized in income
on sale of the investment.
COMPUTER SOFTWARE: The cost of computer software, whether purchased or
developed internally, is charged to expense with two exceptions. Initial
operating systems software is capitalized and amortized over the life of the
related hardware, and initial network applications software is capitalized and
amortized over three years. Subsequent upgrades to capitalized software are
expensed. Capitalized computer software of $146 and $148 at December 31, 1994
and 1993, respectively, is recorded in property, plant and equipment. The
company amortized capitalized computer software costs of $86, $51 and $24, in
1994, 1993 and 1992, respectively.
INCOME TAXES: The provision for income taxes consists of an amount for taxes
currently payable and an amount for tax consequences deferred to future periods
in accordance with SFAS No. 109. U S WEST implemented SFAS No. 109, "Accounting
for Income Taxes," in 1993. Adoption of the new standard did not have a
material effect on the financial position or results of operations, primarily
because of the company's earlier adoption of SFAS No. 96.
For financial statement purposes, investment tax credits of USWC are
being amortized over the economic lives of the related property, plant and
equipment in accordance with the deferred method of accounting for such
credits.
EARNINGS (LOSS) PER COMMON SHARE: Earnings (loss) per common share are
computed on the basis of the weighted average number of shares of common stock
outstanding during each year.
2
NOTE 2: ACQUISITION OF ATLANTA CABLE PROPERTIES
- --------------------------------------------------------------------------------
On December 6, 1994, U S WEST acquired the stock of Wometco Cable Corp. and
subsidiaries, and the assets of Georgia Cable Holdings Limited Partnership
and subsidiary partnerships (the "Atlanta Cable Properties"), for cash of
$745 and 12,779,206 U S WEST common shares valued at $459, for a total
purchase price of approximately $1.2 billion. The Atlanta Cable Properties'
results of operations have been included in the consolidated results of
operations since the date of acquisition.
The acquisition was accounted for using the purchase method.
Accordingly, the purchase price was allocated to assets acquired (primarily
identified intangibles) based on their estimated fair values.
The identified intangibles and goodwill are being amortized on a
straight-line basis over 25 years.
Following are summarized, consolidated, unaudited, pro forma results
of operations for U S WEST for the years ended December 31, 1994 and 1993,
assuming the acquisition occurred as of the beginning of the respective
periods:
- --------------------------------------------------------------
Year Ended December 31, 1994 1993
-----------------------
Revenue $11,148 $10,494
Net income (loss) 1,415 (2,817)
Earnings (loss) per common share 3.04 (6.52)
- --------------------------------------------------------------
U S WEST
38
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1 9 9 4
--------------------
3
NOTE 3: INVESTMENT IN TIME WARNER ENTERTAINMENT
- --------------------------------------------------------------------------------
On September 15, 1993, U S WEST acquired 25.51 percent pro-rata priority
capital and residual equity interests ("equity interests") in Time Warner
Entertainment Company L.P. ("TWE") for an aggregate purchase price of $2.553
billion, consisting of $1.532 billion in cash and $1.021 billion in the form of
a four-year promissory note bearing interest at a rate of 4.391 percent per
annum. TWE owns and operates substantially all of the entertainment assets
previously owned by Time Warner Inc., consisting primarily of its filmed
entertainment, programming-HBO and cable businesses. As a result of U S WEST's
admission to the partnership, certain wholly owned subsidiaries of Time Warner
Inc. ("General Partners") and subsidiaries of Toshiba Corporation and ITOCHU
Corporation hold equity interests of 63.27, 5.61 and 5.61 percent,
respectively. In connection with the TWE investment, the company acquired 12.75
percent of the common stock of Time Warner Entertainment Japan Inc., a joint
venture company established to expand and develop the market for entertainment
services in Japan.
The company has an option to increase its equity interests in TWE from
25.51 up to 31.84 percent depending on cable operating performance, as defined
in the TWE Partnership Agreement. The option is exercisable, in whole or part,
between January 1, 1999, and May 31, 2005, for an aggregate cash exercise price
of $1.25 billion to $1.8 billion, depending on the year of exercise. Either TWE
or U S WEST may elect that the exercise price for the option be paid with
partnership interests rather than cash.
Pursuant to the TWE Partnership Agreement and U S WEST Admission
Agreement, there are six levels of capital. From the most to least senior, the
capital accounts are: senior preferred (held by the General Partners); A
preferred (held pro rata by all partners); B, C and D preferreds (all held by
the General Partners); and common (residual equity interests held pro rata by
all partners). Of the $2.553 billion contributed by U S WEST, $1.658 billion
represents A preferred capital and $895 represents common capital. The TWE
Partnership Agreement provides for special allocations of income and
distributions of partnership capital, which are based on the fair value of
assets contributed to the partnership. Partnership income, to the extent
earned, is allocated as follows: (1) to the partners so that the economic
burden of the income tax consequences of partnership operations is borne as
though the partnership was taxed as a corporation ("special tax income"); (2)
to the partners' preferred capital accounts in order of priority shown above,
at various rates of return ranging from 8 percent to 13.25 percent; and (3) to
the partners' common capital according to their residual partnership interests.
To the extent partnership income is insufficient to satisfy all special
allocations in a particular accounting period, the unearned portion is carried
over until satisfied out of future partnership income. Partnership losses
generally will be allocated in reverse order, first to eliminate prior
allocations of partnership income, except senior preferred and special tax
income, next to reduce initial capital amounts, other than senior preferred,
then to reduce the senior preferred account and finally, to eliminate special
tax income. Also, the senior preferred is scheduled to be distributed in three
annual installments beginning July 1, 1997. The value of the C and D preferreds
will be determined at future dates and is dependent on achieving certain
operating targets between 1992 and 2001.
Beginning July 1, 1994, the TWE Partnership Agreement generally
permits cash distributions to the partners to pay applicable taxes on their
allocable taxable income from TWE. In addition, beginning July 1, 1995, and
subject to restricted payment limitations and availability under the applicable
financial ratios contained in the TWE Credit Agreement, distributions other
than tax-related distributions also are permitted. For other than distributions
related to taxes or the senior preferred, the TWE Partnership Agreement
requires certain cash distribution thresholds be met to the limited partners
before the General Partners receive their full share of distributions. No cash
distributions were made to U S WEST in 1994.
The company accounts for its investment in TWE under the equity method
of accounting. The excess of fair market value over the book value of total
partnership net assets implied by the company's investment is $5.7 billion.
This excess is being amortized on a straight-line basis over 25 years. The
company's recorded share of TWE operating results represents allocated TWE net
income or loss adjusted for the amortization of the excess of fair market value
over the book value of the partnership net assets. As a result of this
amortization and the special income allocations described above, U S WEST's
recorded pretax share of TWE's 1994 and 1993 operating results was ($18) and
($20), respectively.
As consideration for its expertise and participation in the cable
operations of TWE, the company earns a management fee of $130 over five years,
which is payable over a four-year period beginning in 1995. Management fees of
$26 and $8 were recorded to other income in 1994 and 1993, respectively.
U S WEST
39
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U S W E S T I N C.
--------------------
Summarized financial information for TWE is presented below:
- --------------------------------------------------------------
Year Ended December 31,
Summarized Operating Results 1994 1993
-----------------------
Revenue $ 8,460 $ 7,946
Operating expenses (1) 7,612 7,063
Interest and other expense, net (2) 647 611
-----------------------
Income before income taxes
and extraordinary item 201 272
Income before extraordinary item 161 208
-----------------------
Net income $ 161 $ 198
-----------------------
- --------------------------------------------------------------
(1) Includes depreciation and amortization of $943 and $902 in 1994 and 1993,
respectively.
(2) Includes corporate services of $60 in 1994 and 1993.
- --------------------------------------------------------------
December 31,
Summarized Financial Position 1994 1993
-----------------------
Current assets $ 3,573 $ 3,745
Non-current assets 15,089 14,218
Current liabilities 2,857 2,265
Non-current liabilities 7,909 8,162
Senior preferred capital 1,663 1,536
Partners' capital 6,233 6,000
- --------------------------------------------------------------
In early 1995, Time Warner Inc. announced its intention to simplify its
corporate structure by establishing a separate, self- financing enterprise to
house its cable and telecommunications properties. Any change in the structure
of TWE would require the approval of U S WEST and its TWE partners.
4
NOTE 4: RESTRUCTURING CHARGES
- --------------------------------------------------------------------------------
The company's 1993 results reflect a $1 billion restructuring charge
(pretax). The restructuring charge includes only the specific, incremental and
direct costs that can be estimated with reasonable accuracy and are clearly
identifiable with the related plan. The related restructuring plan (the "Plan")
is designed to provide faster, more responsive customer services, while
reducing the costs of providing these services. As part of the Plan, the
company is developing new systems that will enable it to monitor networks to
reduce the risk of service interruptions, activate telephone service on demand,
provide automated inventory systems and centralize its service centers so
customers can have their telecommunications needs met with one phone call. The
company is consolidating its existing 560 customer service centers centers into
26 centers in 10 cities and reducing its total work force by approximately
9,000 employees (including the remaining employee reductions associated with
the restructuring plan announced in 1991). The Plan provides for the reduction
of 2,450 management and 6,550 occupational employees.
Following is a schedule of the costs included in the 1993
restructuring charge:
- --------------------------------------------------------------
Employee separation $ 230
Systems development 400
Real estate 130
Relocation 110
Retraining and other 65
Asset write-down 65
---------
Total $ 1,000
- --------------------------------------------------------------
Employee separation costs include severance payments, health-care
coverage and postemployment education benefits. Systems development costs
include the replacement of existing, single-purpose systems with new systems
designed to provide integrated, end-to-end customer service. The work-force
reductions would not be possible without the development and installation of
the new systems, which will eliminate the current, labor-intensive interfaces
between existing processes. Real estate costs include preparation costs for the
new service centers. The relocation and retraining costs are related to moving
employees to the new service centers and retraining employees on the methods
and systems required in the new, restructured mode of operation.
During 1994, 497 management and 1,683 occupational employees left the
company under the Plan. The following table shows amounts charged to the
restructuring reserve:
- --------------------------------------------------------------
Amount
---------
Employee separation (1) $ 75
Systems development 127
Real estate 50
Relocation 21
Retraining and other 16
---------
1994 restructuring reserve activity $ 289
---------
- --------------------------------------------------------------
(1) Includes $56 associated with work-force reductions under the 1991
restructuring plan.
The company's 1991 restructuring plan included a pretax charge of $364
due to planned work-force reductions and the write-off of certain intangible
and other assets. The portion of the 1991 restructuring charge related to
work-force reductions was $240, and covered approximately 6,000 employees. The
balance of the unused reserve associated with work-force reductions at December
31, 1993, was $56. All expenditures and work-force reductions under the 1991
plan were completed by the end of 1994.
U S WEST
40
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--------------------
5
NOTE 5: PROPERTY, PLANT AND EQUIPMENT
- --------------------------------------------------------------------------------
The composition of property, plant and equipment follows:
- --------------------------------------------------------------
December 31, 1994 1993
------------------------
Land and buildings $ 2,604 $ 2,521
Telephone network equipment
and outside plant 23,519 22,479
General purpose computer and other 4,157 3,569
Construction in progress 734 592
------------------------
31,014 29,161
------------------------
Less accumulated depreciation:
Buildings 698 656
Telephone network equipment
and outside plant 14,175 13,389
General purpose computer and other 2,144 1,884
------------------------
17,017 15,929
------------------------
Property, plant and equipment - net $ 13,997 $ 13,232
------------------------
- --------------------------------------------------------------
In 1994, USWC sold certain rural telephone exchanges with a cost basis
of $122. The company received consideration for the sales of $93 in cash and
$81 in replacement property. The company will receive an additional $30 of
replacement property in 1995.
DISCONTINUANCE OF SFAS NO. 71 U S WEST incurred a non-cash, extraordinary
charge of $3.1 billion, net of an income tax benefit of $2.3 billion, in
conjunction with its decision to discontinue accounting for the operations of
USWC in accordance with SFAS No. 71, "Accounting for the Effects of Certain
Types of Regulation," as of September 30, 1993. SFAS No. 71 generally applies
to regulated companies that meet certain requirements, including a requirement
that a company be able to recover its costs, notwithstanding competition, by
charging its customers at prices established by its regulators. U S WEST's
decision to discontinue application of SFAS No. 71 was based on the belief that
competition, market conditions and the development of multimedia technology,
more than prices established by regulators, will determine the future cost
recovery by USWC. As a result of this change, the remaining asset lives of
USWC's plant were shortened to more closely reflect the useful (economic) lives
of such plant.
Following is a list of the major categories of telephone property,
plant and equipment and the manner in which depreciable lives were affected by
the discontinuance of SFAS No. 71:
- --------------------------------------------------------------
Average Life (years)
---------------------------------
Before After
Category Discontinuance Discontinuance
---------------------------------
Digital switch 17-18 10
Digital circuit 11-13 10
Aerial copper cable 18-28 15
Underground copper cable 25-30 15
Buried copper cable 25-28 20
Fiber cable 30 20
Buildings 27-49 27-49
General purpose computers 6 6
- --------------------------------------------------------------
The company employed two methods to determine the amount of the
extraordinary charge. The "economic life" method assumed that a portion of the
plant-related effect is a regulatory asset that was created by the
under-depreciation of plant under regulation. This method yielded the
plant-related adjustment that was confirmed by the second method, a discounted
cash flows analysis.
Following is a schedule of the nature and amounts of the after-tax
charge recognized as a result of the company's discontinuance of SFAS No. 71:
- --------------------------------------------------------------
Plant related $ 3,124
Tax-related regulatory assets and liabilities (208)
Other regulatory assets and liabilities 207
-----------
Total $ 3,123
-----------
- --------------------------------------------------------------
U S WEST
41
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U S W E S T I N C.
--------------------
6
NOTE 6: DEBT
- --------------------------------------------------------------------------------
Short-term Debt The components of short-term debt follow:
- ----------------------------------------------------------------------------------------------------------------
December 31, 1994 1993
------------------------
Notes payable:
Commercial paper $ 2,305 $ 1,029
Current portion of long-term debt,
including $500 and $450 payable to
TWE, in 1994 and 1993, respectively 732 795
Allocated to discontinued operations - net (200) (48)
------------------------
Total $ 2,837 $ 1,776
------------------------
- ----------------------------------------------------------------------------------------------------------------
The weighted average interest rate on commercial paper was 5.97
percent and 2.77 percent at December 31, 1994 and 1993, respectively.
U S WEST is permitted to borrow up to approximately $1.9 billion under
short-term formal lines of credit, all of which was available at December 31,
1994.
Long-term Debt Interest rates and maturities of long-term debt at December 31
follow:
- -------------------------------------------------------------------------------------------------------------------------------
Maturities
---------------------------------------------------------------- Total Total
Interest rates 1996 1997 1998 1999 Thereafter 1994 1993
--------------------------------------------------------------------------------------------
Up to 5% $ 271 $ -- $ 35 $ -- $ 240 $ 546 $ 844
Above 5% to 6% 13 25 300 -- 261 599 561
Above 6% to 7% -- -- -- 226 1,290 1,516 1,383
Above 7% to 8% 670 16 -- -- 2,507 3,193 2,061
Above 8% to 9% 28 -- -- 126 290 444 504
Above 9% to 10% -- 29 -- 15 355 399 399
--------------------------------------------------------------------------------------------
$ 982 $ 70 $ 335 $ 367 $ 4,943 6,697 5,752
================================================================
Capital lease obligations and other 153 139
Unamortized discount - net (1,239) (101)
Allocated to discontinued operations - net (510) (367)
----------------------------
Total $ 5,101 $ 5,423
----------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Long-term debt consists principally of debentures and medium-term notes, debt
associated with the company's Leveraged Employee Stock Ownership Plans (LESOP),
and zero coupon, subordinated notes convertible at any time into U S WEST
common shares. The zero coupon notes have a yield to maturity of approximately
7.3 percent and are recorded at a discounted value of $498. Long-term debt
also includes a note payable to TWE of $271 in 1994 and $555 in 1993.
During 1993, U S WEST refinanced debt issues aggregating $2.7 billion
in principal amount. Expenses associated with the refinancing resulted in an
extraordinary charge to income of $77, net of a tax benefit of $48. The
refinancing allowed the company to take advantage of favorable interest rates.
Interest payments, net of amounts capitalized, were $534, $680 and
$704 for 1994, 1993 and 1992, respectively, of which $103, $212 and $220,
respectively, relate to discontinued operations.
U S WEST
42
45
1 9 9 4
--------------------
7
NOTE 7: LEASING ARRANGEMENTS
- --------------------------------------------------------------------------------
U S WEST has entered into operating leases for office facilities,
equipment and real estate. Rent expense under operating leases was $288, $275
and $274 in 1994, 1993 and 1992, respectively.
Minimum future lease payments as of December 31, 1994, under
non-cancellable operating leases, follow:
- -------------------------------------------------------------
Year
- -------------------------------------------------------------
1995 $ 153
1996 140
1997 128
1998 123
1999 109
Thereafter 853
--------
Total $ 1,506
--------
- -------------------------------------------------------------
8
NOTE 8: DERIVATIVE FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
The company is exposed to market risks arising from changes in
interest rates and foreign exchange rates. Derivative financial instruments are
used by the company to manage these risks.
INTEREST RATE RISK MANAGEMENT The company enters into interest rate swap
agreements to manage its market exposure to fluctuations in interest rates.
Swap agreements are primarily used to effectively convert existing commercial
paper to fixed-rate debt. This allows the company to achieve interest savings
over issuing fixed-rate debt directly. Additionally, the company has entered
into interest rate swaps to effectively terminate existing swaps.
Under an interest rate swap, the company agrees with another party to
exchange interest payments at specified intervals over a defined term. Interest
payments are calculated by reference to the notional amount based on the fixed-
and variable-rate terms of the swap agreements. The net interest received or
paid as part of the interest rate swap is accounted for as an adjustment to
interest expense.
The company also entered into a currency swap to convert Swiss
franc-denominated debt to dollar-denominated debt. This allowed the company to
achieve interest savings over issuing fixed-rate, dollar-denominated debt.
Under the currency swap, the company agreed with another party to exchange
dollars for francs within the terms of the loan, which include periodic
interest payments and principal upon origination and maturity. The currency
swap and foreign currency debt are combined and accounted for as if fixed-rate,
dollar-denominated debt were issued directly.
The following table summarizes terms of swaps pertaining to continuing
operations as of December 31, 1994. Variable rates are primarily indexed to the
30-day commercial paper rate.
- -----------------------------------------------------------------------------------
Weighted Average Rate
--------------------------
Continuing operations Notional Amount Maturities Receive Pay
- -----------------------------------------------------------------------------------
Variable to fixed $ 785 1995 - 2004 6.14 6.47
Fixed to variable 5 1995 6.61 5.87
Currency 71 1999 -- 6.53
- -----------------------------------------------------------------------------------
U S WEST
43
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U S W E S T I N C.
--------------------
The following table summarizes terms of swaps pertaining to
discontinued operations as of December 31, 1994. Variable rates are indexed to
three- and six-month LIBOR.
- -----------------------------------------------------------------------------------
Weighted Average Rate
--------------------------
Discontinued operations Notional Amount Maturities Receive Pay
- -----------------------------------------------------------------------------------
Variable to fixed (1) $ 380 1996 - 1997 5.69 9.03
Fixed to variable (1) 380 1996 - 1997 7.29 5.80
Variable rate basis
adjustment (2) 10 1997 5.89 7.04
- -----------------------------------------------------------------------------------
(1) The fixed to variable swap has the same terms as the variable to fixed swap
and was entered into to terminate the variable to fixed swap. The net
interest cost on the swaps is a cost of discontinued operations and is
included in the discontinued operations loss provision.
(2) Variable rate debt based on U. S. Treasury securities is swapped to a
LIBOR-based interest rate.
In 1993, the company executed forward contracts to sell U. S. Treasury
securities to reduce debt issuance risks by allowing the company to lock in the
Treasury rate component of the future debt issue. At December 31, 1994,
deferred credits of $8 and deferred charges of $51 on closed interest rate
forward contracts are included as part of the carrying value of the underlying
debt. The deferred credits and charges are being recognized as a yield
adjustment over the life of the debt, which matures at various dates through
2043. The net deferred charge is directly offset by the lower coupon rate
achieved on the debt issuance. At December 31, 1994, there were no open forward
contracts on interest rates.
The counterparties to these derivative contracts are major financial
institutions. The company is exposed to credit loss in the event of
non-performance by these counterparties. The company manages this exposure by
monitoring the credit standing of the counterparty and establishing dollar and
term limitations that correspond to the respective credit rating of each
counterparty. The company does not have significant exposure to an individual
counterparty and does not anticipate non-performance by any counterparty.
FOREIGN EXCHANGE RISK MANAGEMENT The company enters into forward and option
contracts to manage the market risks associated with fluctuations in foreign
exchange rates after considering offsetting foreign exposures among
international operations.
The company enters into forward contracts to exchange foreign
currencies at agreed rates on specified future dates. This allows the company
to fix the cost of firm foreign commitments. The commitments and the forward
contracts are for periods up to one year. The gain or loss on forward contracts
designated as hedges of firm foreign investment commitments are included in
common shareowners' equity and are recognized in income on sale of the
investment.
The company also enters into foreign exchange combination option
contracts to protect against adverse changes in foreign exchange rates. These
option contracts combine purchased options to cap the foreign exchange rate and
written options to finance the premium of the purchased options. The
commitments and combination option contracts are for periods up to one year.
Gains or losses on the contracts, designated as hedges of firm investment
commitments, are included in common shareowners' equity and are recognized in
income on sale of the investment.
The counterparties to these contracts are major financial
institutions. The company is exposed to credit loss in the event of
non-performance by these counterparties. The company does not have significant
exposure to an individual counterparty and does not anticipate non-performance
by any counterparty.
At December 31, 1994, the company has outstanding forward and
combination option contracts to purchase British pounds in the notional amounts
of $135 and $35, respectively. All contracts mature within one year.
Cumulative deferred credits on foreign exchange contracts of $7 and
deferred charges of $25, and deferred taxes (benefits) of $3 and ($10),
respectively, are included in common shareowners' equity at December 31, 1994.
U S WEST
44
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1 9 9 4
--------------------
9
NOTE 9: FAIR VALUES OF FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
Fair values of cash equivalents, other current amounts receivable and
payable, and short-term debt, including discontinued operations, approximate
carrying values due to their short-term nature.
The fair values of mandatorily redeemable preferred stock, foreign
exchange forward and combination option contracts approximate the carrying
values.
The fair values of interest rate swaps are based on estimated amounts
the company would receive or pay to terminate such agreements, taking into
account current interest rates and creditworthiness of the counterparties.
The fair value of long-term debt, including discontinued operations,
is based on quoted market prices where available or, if not available, is based
on discounting future cash flows using current interest rates.
- -------------------------------------------------------------------------
December 31, 1994 1993
---------------------------------------
Continuing and Carrying Fair Carrying Fair
discontinued operations Value Value Value Value
---------------------------------------
Debt (includes
short-term portion) $ 9,221 $ 8,700 $ 8,695 $ 8,940
Interest rate swap
agreements - assets -- (15) -- (29)
Interest rate swap
agreements - liabilities -- 20 -- 89
---------------------------------------
Debt-net $ 9,221 $ 8,705 $ 8,695 $ 9,000
---------------------------------------
- -------------------------------------------------------------------------
10
NOTE 10: PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION
- --------------------------------------------------------------------------------
U S WEST has 50,000,000 authorized shares of preferred stock. On
September 2, 1994, U S WEST issued to Fund American Enterprises Holdings Inc.
("FFC") 50,000 shares of a class of newly created 7 percent Series B Cumulative
Redeemable Preferred Stock for a total of $50. (See Note 17 to the Consolidated
Financial Statements.) The preferred stock was recorded at fair market value of
$51.
U S WEST has the right, commencing five years from September 2, 1994, to redeem
the shares for one thousand dollars per share plus unpaid dividends and a
redemption premium. The shares are mandatorily redeemable in year 10 at face
value plus unpaid dividends. At the option of FFC, the preferred stock also can
be redeemed for common shares of Financial Security Assurance, a member of the
Capital Assets segment.
U S WEST
45
48
U S W E S T I N C.
--------------------
11
NOTE 11: SHAREOWNERS' EQUITY
- --------------------------------------------------------------------------------
COMMON STOCK At December 31, 1994, the company held 7,537,372 treasury shares
with a cost basis of $163, or $21.63 per share.
On December 6, 1994, 12,779,206 shares of U S WEST common stock were
issued to, or in the name of, the holders of Wometco Cable Corp. in accordance
with a merger agreement. (See Note 2 to the Consolidated Financial Statements.)
In connection with the settlement of shareowner litigation ("Rosenbaum
v. U S WEST Inc. et al."), the company issued approximately 5.5 million shares
of U S WEST common stock in March 1994 to class members connected with this
litigation.
U S WEST issued, to certified class members, non-transferable rights
to purchase shares of common stock directly from U S WEST, on a commission-free
basis, at a 3 percent discount from the average of the high and low trading
prices of such stock on the New York Stock Exchange on February 23, 1994, the
pricing date designated in accordance with the settlement. U S WEST received
net proceeds of $210 from the offering.
During fourth quarter 1993, the company issued 22 million additional
shares of U S WEST common stock for net cash proceeds of $1,020. The company
used the net proceeds to reduce short-term indebtedness, including indebtedness
incurred from the TWE investment, and for general corporate purposes.
LEVERAGED EMPLOYEE STOCK OWNERSHIP PLANS (LESOP) U S WEST maintains employee
savings plans for management and occupational employees under which the company
matches a certain percentage of eligible contributions made by the employees
with shares of company stock. The company established two LESOPs in 1989 to
provide the company stock used for matching contributions to the savings plans.
The long-term debt of the LESOP trusts, which is unconditionally
guaranteed by the company, is included in the accompanying consolidated balance
sheets and corresponding amounts have been recorded as reductions to common
shareowners' equity. The trusts will repay the debt with company contributions
and certain dividends received on shares of the company's common stock held by
the LESOP. Total company contributions to the trusts (excluding dividends) were
$80, $75 and $78 in 1994, 1993 and 1992, respectively, of which $19, $24 and
$28, respectively, have been classified as interest expense. The company
recognizes expense based on the cash payments method. Dividends on unallocated
shares held by the LESOP were $11, $14 and $17 in 1994, 1993 and 1992,
respectively.
SHAREHOLDER RIGHTS PLAN The board of directors of the company has adopted a
shareholder rights plan which, in the event of a takeover attempt, would
entitle existing shareowners to certain preferential rights. The rights expire
on April 6, 1999, and are redeemable by the company at any time prior to the
date they would become effective.
SHARE REPURCHASE Subsequent to the acquisition of the Atlanta Cable Properties
(See Note 2 to the Consolidated Financial Statements), the company announced
its intention to purchase U S WEST common shares in the open market up to an
amount equal to those issued in conjunction with the acquisition, subject to
market conditions. In December 1994, the company purchased 550,400 shares of U
S WEST common stock at an average price per share of $36.30.
U S WEST
46
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--------------------
12
NOTE 12: PARTIAL SALE OF JOINT VENTURE INTEREST
- --------------------------------------------------------------------------------
TeleWest Communications plc ("TeleWest"), the cable television/ telephone joint
venture in the United Kingdom owned by U S WEST and Tele-Communications Inc.,
made an initial public offering of its ordinary shares in November 1994.
Following the offering, in which U S WEST sold 24.4 percent of its joint
venture interest, U S WEST owns approximately 37.8 percent of TeleWest. Net
proceeds of approximately $650 will be used by TeleWest to finance construction
and operations costs, invest in affiliated companies and repay debt. It is the
company's policy to recognize as income any gains or losses related to the sale
of investee stock. U S WEST recognized a gain of $105 in 1994, net of $59 in
deferred taxes, for the partial sale of its joint venture interest in TeleWest.
13
NOTE 13: STOCK INCENTIVE PLANS
- --------------------------------------------------------------------------------
U S WEST maintains stock incentive plans for executives and key employees, and
non-employees. The 1994 Stock Plan was approved by shareowners on May 6, 1994.
The 1994 Stock Plan is a successor plan to the USWEST Inc. Stock Incentive Plan
and the USWEST1991 Stock Incentive Plan (The "Predecessor Plans"). No further
grants of options or restricted stock may be made under the Predecessor Plans.
The plan is administered by the Human Resources Committee of the board of
directors with respect to officers, executive officers and outside directors
and by a special committee with respect to all other eligible employees and
eligible non-employees. The maximum aggregate number of shares of common stock
of the company that may be granted in any calendar year for all purposes under
the plan will be three-quarters of 1 percent of the shares of common stock
outstanding (excluding shares of such common stock held in the company's
treasury) on the first day of such calendar year. In the event that fewer than
the full aggregate number of shares of common stock available for issuance in
any calendar year are issued, the shares not issued will be added to the shares
available for issuance in any subsequent year or years. Options may be
exercised no later than 10 years after the date on which the option was
granted. A total of 8,300,853 shares of U S WEST common stock were reserved for
issuance under the 1994 Stock Plan and the Predecessor Plans at December 31,
1994.
Data for outstanding options under the plan is summarized as follows:
- ----------------------------------------------------------------
Number of Average
Shares* Option Price
---------------------------
Outstanding January 1, 1992 3,420,406 $ 33.97
- ----------------------------------------------------------------
Granted 1,410,311 38.13
Exercised (327,221) 26.15
Canceled or expired (53,346) 36.17
---------------------------
Outstanding December 31, 1992 4,450,150 35.81
- ----------------------------------------------------------------
Granted 1,486,106 48.83
Exercised (412,444) 31.73
Canceled or expired (222,273) 36.87
---------------------------
Outstanding December 31, 1993 5,301,539 39.76
- ----------------------------------------------------------------
Granted 2,438,409 36.15
Exercised (139,762) 33.72
Canceled or expired (214,149) 40.71
---------------------------
Outstanding December 31, 1994 7,386,037 $ 38.66
---------------------------
- ----------------------------------------------------------------
* Includes options granted in tandem with SARs.
Options to purchase 2,374,394 and 1,412,791 shares were exercisable at
December 31, 1994 and 1993, respectively. A total of 914,816 and 8,649,750
shares of U S WEST common stock were available for grant under the plans in
effect at December 31, 1994 and 1993, respectively.
U S WEST
47
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U S W E S T I N C.
--------------------
14
NOTE 14: EMPLOYEE BENEFITS
- --------------------------------------------------------------------------------
PENSION PLAN Effective January 1, 1993, U S WEST merged its two defined
benefit pension plans, covering substantially all management and occupational
employees, in a single plan. Management benefits are based on a final pay
formula, while occupational benefits are based on a flat benefit formula. U S
WEST uses the projected unit credit method for the determination of pension
cost for financial reporting purposes and the aggregate cost method for funding
purposes. No funding was required in 1994, 1993 or 1992.
The composition of the net pension credit and the actuarial
assumptions of the plan follow:
- ----------------------------------------------------------------
Year Ended December 31, 1994 1993 1992
---------------------------------
Details of pension credit:
Service cost -- benefits
earned during the period $ 197 $ 148 $ 141
Interest cost on projected
benefit obligation 561 514 480
Actual return on plan assets 188 (1,320) (411)
Net amortization and deferral (946) 578 (318)
---------------------------------
Net pension credit $ 0 $ (80) $ (108)
---------------------------------
- ----------------------------------------------------------------
The expected long-term rate of return on plan assets used in
determining net pension cost was 8.50 percent for 1994, 9.00 percent for 1993
and 9.25 percent for 1992.
The funded status of the plan follows:
- ----------------------------------------------------------------
December 31, 1994 1993
-------------------------
Accumulated benefit obligation,
including vested benefits of
$5,044 and $5,286, respectively $ 5,616 $ 5,860
-------------------------
- ----------------------------------------------------------------
Plan assets at fair value,
primarily stocks and bonds $ 8,388 $ 8,987
Less: Projected benefit obligation 7,149 7,432
-------------------------
Plan assets in excess of projected
benefit obligation 1,239 1,555
Unrecognized net (gain) loss 161 (70)
Prior service cost not yet recognized in
net periodic pension cost (67) (72)
Balance of unrecognized net asset
at January 1, 1987 (785) (865)
-------------------------
Prepaid pension asset $ 548 $ 548
-------------------------
- ----------------------------------------------------------------
The actuarial assumptions used to calculate the projected
benefit obligation follow:
- ----------------------------------------------------------------
December 31, 1994 1993
-------------------------
Discount rate 8.00 7.25
Average rate of increase in future
compensation levels 5.50 5.50
- ----------------------------------------------------------------
Anticipated future benefit changes have been reflected in the above
calculations.
U S WEST
48
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1 9 9 4
--------------------
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS U S WEST and most of its
subsidiaries provide certain health care and life insurance benefits to retired
employees. Effective January 1, 1992, U S WEST adopted SFAS No. 106 "Employers'
Accounting for Postretirement Benefits Other Than Pensions," which mandates
that employers reflect in their current expenses the cost of providing
retirement medical and life insurance benefits to current and future retirees.
Prior to 1992, U S WEST recognized these costs as they were paid. Adoption of
SFAS No. 106 resulted in a one-time, non-cash charge against 1992 earnings of
$1,741 net of a deferred income tax benefit of $1,038, for the prior service of
active and retired employees. The effect on 1992 income from continuing
operations of adopting SFAS No. 106 was approximately $47, or $.11 per share.
In conjunction with the adoption of SFAS No. 106, for financial
reporting purposes, the company elected to immediately recognize the
accumulated postretirement benefit obligation for current and future retirees,
net of the fair value of plan assets. However, the Federal Communications
Commission and certain state jurisdictions permit amortization of the
transition obligation over the average remaining service period of active
employees for regulatory accounting purposes.
U S WEST uses the projected unit credit method for the determination
of postretirement medical costs for financial reporting purposes. The
composition of net postretirement benefit costs and actuarial assumptions
underlying plan benefits follow:
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1994 1993 1992
---------------------------------------------------------------------------------------
Medical Life Total Medical Life Total Medical Life Total
---------------------------------------------------------------------------------------
Service cost -- benefits earned during
the period $ 62 $ 13 $ 75 $ 60 $ 11 $ 71 $ 57 $ 10 $ 67
Interest on accumulated benefit obligation 221 39 260 235 36 271 223 33 256
Actual return on plan assets 3 1 4 (73) (52) (125) (19) (29) (48)
Net amortization and deferral (68) (31) (99) 27 22 49 -- -- --
---------------------------------------------------------------------------------------
Net postretirement benefit costs $ 218 $ 22 $ 240 $ 249 $ 17 $ 266 $261 $ 14 $ 275
---------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
The expected long-term rate of return on plan assets used in
determining net postretirement benefit costs was 8.50 percent for 1994 and 9.00
percent in 1993 and 1992.
The funded status of the plan follows:
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1994 1993
--------------------------------------------------------------
Medical Life Total Medical Life Total
--------------------------------------------------------------
Accumulated postretirement benefit obligation attributable to:
Retirees $ 1,733 $248 $ 1,981 $1,795 $ 311 $ 2,106
Fully eligible plan participants 264 38 302 274 48 322
Other active plan participants 940 135 1,075 983 170 1,153
--------------------------------------------------------------
Total accumulated postretirement benefit obligation 2,937 421 3,358 3,052 529 3,581
Unrecognized net gain (loss) 243 90 333 65 (25) 40
Fair value of plan assets, primarily stocks, bonds and
life insurance (1) (894) (374) (1,268) (613) (388) (1,001)
--------------------------------------------------------------
Accrued postretirement benefit obligation $ 2,286 $137 $ 2,423 $2,504 $ 116 $ 2,620
--------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Medical plan assets include U S WEST common stock of $164 in 1994.
The actuarial assumptions used to calculate the accumulated postretirement
benefit obligation follow:
- --------------------------------------------------------------
December 31, 1994 1993
--------------------
Discount rate 8.00 7.25
Medical trend* 9.70 10.30
- --------------------------------------------------------------
* Medical cost trend rate gradually declines to an ultimate rate of 6 percent in
2006.
A 1-percent increase in the assumed health care cost trend rate for
each future year would have increased the aggregate of the service and interest
cost components of 1994 net postretirement benefit cost by approximately $50
and increased the 1994 accumulated postretirement benefit obligation by
approximately $450.
For USWC, the annual amount funded will generally follow the amount of
expense allowed in regulatory jurisdictions.
Anticipated future benefit changes have been reflected in these
postretirement benefit calculations.
OTHER POSTEMPLOYMENT BENEFITS U S WEST adopted, effective January 1, 1992,
SFAS No. 112, "Employers' Accounting for Postemployment Benefits." SFAS No. 112
requires that employers accrue for the estimated costs of benefits, such as
workers' compensation and disability, provided to former or inactive employees
who are not eligible for retirement. Adoption of SFAS No. 112 resulted in a
one-time, non-cash charge against 1992 earnings of $53, net of a deferred
income tax benefit of $32.
U S WEST
49
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U S W E S T I N C.
--------------------
15
NOTE 15: INCOME TAXES
- --------------------------------------------------------------------------------
The components of the provision for income taxes follow:
- --------------------------------------------------------------
Year Ended December 31, 1994 1993 1992
------------------------------
Federal:
Current $ 418 $ 422 $ 427
Deferred 351 (145) 46
Investment tax credits - net (47) (56) (63)
------------------------------
722 221 410
------------------------------
State and local:
Current 52 71 62
Deferred 83 (23) 21
------------------------------
135 48 83
------------------------------
Provision for income taxes $ 857 $ 269 $ 493
------------------------------
- --------------------------------------------------------------
Amounts paid for income taxes were $313, $391 and $459 in 1994, 1993
and 1992, respectively, inclusive of discontinued operations.
The effective tax rate differs from the statutory tax rate as follows:
- --------------------------------------------------------------
Year Ended December 31,
In percent 1994 1993 1992
------------------------------
Federal statutory tax rate 35.0 35.0 34.0
Investment tax credit amortization (1.3) (3.0) (4.2)
State income taxes -
net of federal effect 3.9 4.0 3.5
Rate differential on reversing
temporary differences -- (2.2) (3.1)
Depreciation on capitalized
overheads - net -- 1.4 2.1
Tax law change - catch-up adjustment -- 3.1 --
Restructuring charge -- (1.5) --
Other (0.1) (0.7) (0.9)
------------------------------
Effective tax rate 37.5 36.1 31.4
------------------------------
- --------------------------------------------------------------
The components of the net deferred tax liability follow:
- --------------------------------------------------------------
December 31, 1994 1993
-----------------------
Property, plant and equipment $ 1,504 $ 1,340
Leases 690 663
State deferred taxes - net of
federal effect 395 277
Intangible assets 164 --
Investment in partnerships 142 46
Other 84 94
-----------------------
Deferred tax liabilities 2,979 2,420
-----------------------
Postemployment benefits, including
pension 718 736
Restructuring, discontinued
operations and other 417 620
Unamortized investment tax credit 79 94
State deferred taxes - net of
federal effect 232 220
Other 317 260
-----------------------
Deferred tax assets 1,763 1,930
-----------------------
Net deferred tax liability $ 1,216 $ 490
-----------------------
- --------------------------------------------------------------
The current portion of the deferred tax asset was $352 and $336 at
December 31, 1994 and 1993, respectively, resulting primarily from
restructuring charges and compensation-related items.
On August 10, 1993, federal legislation was enacted that increased the
corporate tax rate from 34 percent to 35 percent retroactive to January 1,
1993. The cumulative effect on deferred taxes of the 1993 increase in income
tax rates was $74, including $20 for discontinued operations.
The net deferred tax liability includes $678 in 1994 and $607 in 1993
related to discontinued operations.
U S WEST
50
53
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--------------------
16
NOTE 16: COMMITMENTS AND CONTINGENCIES
- --------------------------------------------------------------------------------
At USWC, there are pending regulatory actions in local regulatory jurisdictions
that call for price decreases, refunds or both. In one such instance, the Utah
Supreme Court has remanded a Utah Public Service Commission ("PSC") order to
the PSC for reconsideration, thereby establishing two exceptions to the rule
against retroactive ratemaking: 1) unforeseen and extraordinary events, and 2)
misconduct. The PSC's initial order denied a refund request from interexchange
carriers and other parties related to the Tax Reform Act of 1986. This case is
still in the discovery process. If a formal filing - made in accordance with
the remand from the Supreme Court - alleges that the exceptions apply, the
range of possible risk to USWC is $0 to $140.
U S WEST has issued letters of credit, which expire in July 1995, in
conjunction with its investment in Binariang Sdn Bhd, a Malaysian
telecommunications company, totaling $110.
17
NOTE 17: DISCONTINUED OPERATIONS
- --------------------------------------------------------------------------------
During second quarter 1993, the U S WEST board of directors approved a plan to
dispose of the Capital Assets segment through the sale of segment assets and
businesses. Accordingly, the company recorded an after-tax charge of $100, or
$.24 per share, for the estimated loss on disposition. An additional provision
of $20, or $.04 per share, is related to the effect of the 1993 increase in
federal income tax rates. The Capital Assets segment includes activities
related to financial services and financial guarantee insurance operations.
Also included in the segment is U S WEST Real Estate Inc., for which
disposition was announced in 1991 and a $500 valuation allowance was
established to cover both carrying costs and losses on disposal of related
properties. The entire Capital Assets segment has been accounted for as
discontinued operations in accordance with Accounting Principles Board Opinion
No. 30.
During 1994, U S WEST reduced its ownership interest in Financial
Security Assurance ("FSA"), a member of the Capital Assets segment, to 60.9
percent, and its voting interest to 49.8 percent through a series of
transactions. In May and June 1994, U S WEST sold 8.1 million shares of FSA,
including 2.0 million shares to Fund American Enterprises Holdings Inc.
("FFC"), in an initial public offering of FSA common stock at $20 per share. U
S WEST received $154 in net proceeds from the offering. On September 2, 1994,
U S WEST issued to FFC 50,000 shares of cumulative redeemable preferred stock
for a total of $50. (See Note 10 to the Consolidated Financial Statements.)
FFC's voting interest in FSA is 21.0 percent, achieved through a combination of
direct share ownership of common and preferred FSA shares, and a voting trust
agreement with U S WEST. The company retained certain risks in asset-backed
obligations related to the commercial real estate portfolio.
FFC has a right of first offer and a call right to purchase from U S
WEST up to 9.0 million shares, or approximately 57 percent, of outstanding FSA
stock held by U S WEST. U S WEST anticipates its ownership will be further
reduced by 1996.
During 1994, U S WEST Real Estate sold 12 buildings, six parcels of
land and other assets for approximately $327. An additional property was sold
in January 1995 for approximately $37. During 1993, five properties were sold
for approximately $66. The sales were in line with company estimates. Proceeds
from building sales were primarily used to pay related debt. U S WEST has
completed all construction of existing buildings in the commercial real estate
portfolio and expects to substantially complete the liquidation of its
portfolio by 1998. The remaining balance of assets subject to sale is
approximately $607, net of reserves.
In December 1993, the company sold $2.0 billion of finance receivables
and the business of U S WEST Financial Services to NationsBank Corporation.
Sales proceeds of $ 2.1 billion were used primarily to repay related debt. The
pretax gain on the sale of approximately $100, net of selling expenses, was in
line with management's estimate and was included in the company's estimate of
provision for loss on disposal. The management team that previously operated
the entire Capital Assets segment transferred to NationsBank.
U S WEST
51
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U S W E S T I N C.
--------------------
Building sales and operating revenues of discontinued operations were
$553 in 1994, $710 in 1993 and $672 in 1992. Income from discontinued
operations for 1993 (to June 1) and 1992 totaled $38 and $103, respectively.
Income (loss) from discontinued operations subsequent to June 1, 1993 is being
deferred and was included within the provision for loss on disposal.
NET ASSETS OF DISCONTINUED OPERATIONS
- --------------------------------------------------------------
December 31, 1994 1993
-----------------------
Assets
Cash and cash equivalents $ 7 $ 24
Finance receivables - net 1,073 1,131
Investment in real estate -
net of valuation allowance 465 711
Investments in securities at
market value 155 895
Investment in FSA 329 --
Other assets 362 600
-----------------------
Total assets $ 2,391 $ 3,361
-----------------------
Liabilities
Debt $ 1,283 $ 1,496
Deferred income taxes 693 681
Accounts payable, accrued liabilities
and other 103 244
Unearned premiums -- 346
Minority interests 10 40
-----------------------
Total liabilities 2,089 2,807
-----------------------
Net assets of discontinued operations $ 302 $ 554
-----------------------
- --------------------------------------------------------------
The assets and liabilities of the Capital Assets segment have been
separately classified on the consolidated balance sheets as net assets of
discontinued operations.
Finance receivables primarily consist of contractual obligations under
long-term leases that the company intends to run off. These long-term leases
primarily consist of investments in leveraged leases related to aircraft and
power plants. For leveraged leases, the cost of the assets leased is financed
primarily through non-recourse debt that is netted against the related lease
receivable.
The components of finance receivables follow:
- --------------------------------------------------------------
December 31, 1994 1993
------------------------
Receivables $ 1,095 $ 1,208
Unguaranteed estimated residual values 467 477
------------------------
1,562 1,685
Less: Unearned income 459 490
Credit loss and other allowances 30 64
------------------------
Finance receivables - net $ 1,073 $ 1,131
------------------------
- --------------------------------------------------------------
Investments in securities, which are designated as available for sale,
are carried at market value. Any resulting unrealized gains or losses, net of
applicable deferred income taxes, are reflected as a component of common
shareowners' equity. The 1994 net unrealized loss of $64 (net of a deferred tax
benefit of $34) and the 1993 net unrealized gain of $35 (net of deferred taxes
of $19), are included in common shareowners' equity.
The amortized cost and estimated market value of investments in
securities follow:
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1994 December 31, 1993
------------------------------------------------------------------------------------------------
Gross Gross Gross Gross
Carrying Unrealized Unrealized Fair Carrying Unrealized Unrealized Fair
Marketable Securities Amount Gains Losses (1) Value Amount Gains Losses Value
------------------------------------------------------------------------------------------------
Municipal $113 -- $ 13 $ 100 $ 742 $ 51 $ 1 $ 792
Other 65 -- 10 55 99 4 -- 103
------------------------------------------------------------------------------------------------
Total $178 -- $ 23 $ 155 $ 841 $ 55 $ 1 $ 895
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Common shareowners' equity at December 31, 1994, also includes a net
unrealized loss on marketable securities of $49 (net of a deferred tax
benefit of $26), associated with the company's equity investment in FSA.
U S WEST
52
55
1 9 9 4
--------------------
Debt Interest rates and maturities of debt associated with discontinued
operations at December 31 follow:
- ------------------------------------------------------------------------------------------------------------------------------------
Maturities
-------------------------------------------------------- Total Total
Interest rates 1995 1996 1997 1998 1999 Thereafter 1994 1993
--------------------------------------------------------------------------------
Up to 5% $ 50 $ -- $ -- $ -- $ -- $ 5 $ 55 $ 496
Above 5% to 6% 5 -- 10 -- -- -- 15 5
Above 6% to 7% 100 -- 54 -- -- -- 154 54
Above 7% to 8% 7 5 5 -- -- -- 17 26
Above 8% to 9% -- 35 -- -- 150 4 189 264
Above 9% to 10% 61 -- 48 5 -- -- 114 177
Above 10% -- -- -- 29 -- -- 29 29
Commercial paper rates -- -- -- -- -- -- -- 30
========================================================
$ 223 $ 40 $ 117 $ 34 $ 150 $ 9 573 1,081
Allocated from continuing operations - net 710 415
------------------------
Total $ 1,283 $1,496
- ------------------------------------------------------------------------------------------------------------------------------------
Debt of $119 and $124 at December 31, 1994 and 1993, respectively, was
collateralized by first deeds of trust on associated real estate, assignment of
rents from leases, and operating and management agreements.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET CREDIT RISK - FINANCIAL GUARANTEES
The company retained certain risks in asset-backed obligations related to the
commercial real estate portfolio. The principal amounts insured on the
asset-backed and municipal obligations follow. The 1994 amounts do not include
the financial guarantees for FSA, which is now accounted for under the equity
method.
- -------------------------------------------------------------
Asset-Backed (1) Municipal (2)
December 31, December 31,
---------------------------------------
Term to Maturity 1994 1993 1994 1993
---------------------------------------
0 to 5 Years $ 540 $ 5,955 -- $ 1,888
5 to 10 Years 537 2,050 -- 2,771
10 to 15 Years 391 1,286 -- 2,176
15 to 20 Years -- 593 -- 2,346
20 and Above -- 2,501 -- 4,606
---------------------------------------
Total $ 1,468 $ 12,385 -- $ 13,787
---------------------------------------
- -------------------------------------------------------------
(1) Excludes amounts ceded to other insurers of $6,210 in 1993 and includes $25
of assumed obligations in 1993.
(2) Excludes amounts ceded to other insurers of $5,576 in 1993 and includes
$1,218 of assumed obligations in 1993.
The principal amount of insured obligations in the municipal
portfolio, net of amounts ceded, include the following types of issues:
- -------------------------------------------------------------
December 31,
Type of Issue 1994 1993
-----------------------
General obligation $ -- $ 3,487
Tax-backed revenue -- 2,919
Housing revenue -- 1,879
Municipal utility revenue -- 1,783
Health care revenue -- 1,399
Transportation revenue -- 710
Other -- 1,610
-----------------------
Total $ -- $ 13,787
- -------------------------------------------------------------
Concentrations of collateral associated with insured asset-backed
obligations, net of amounts ceded, follow:
- -------------------------------------------------------------
December 31,
Type of Collateral 1994 1993
-----------------------
Residential mortgages $ -- $ 3,874
Consumer receivable -- 1,443
Securities:
Government debt -- 2,039
Non-government securities -- 1,709
Commercial mortgages:
Commercial real estate 530 809
Corporate secured 888 1,018
Investor-owned utility first
mortgage bonds -- 772
Other asset-backed 50 721
-----------------------
Total $ 1,468 $ 12,385
-----------------------
- -------------------------------------------------------------
U S WEST
53
56
U S W E S T I N C.
--------------------
ADDITIONAL FINANCIAL INFORMATION Information for U S WEST Financial Services
Inc., a member of the discontinued segment, follows:
- -------------------------------------------------------------
Year Ended December 31,
Summarized Operating Results 1994 1993 1992
-----------------------------
Revenues $ 54 $ 410 $ 302
Income before parent support
and income taxes * * 83
Income before parent support * * 55
Net income * * 55
- -------------------------------------------------------------
* Results of Financial Services are included in discontinued operations
- -------------------------------------------------------------
December 31,
Summarized Financial Position 1994 1993
----------------------
Net finance receivables $ 981 $ 1,020
Total assets 1,331 1,797
Total debt 533 957
Total liabilities 1,282 1,748
Shareowners' equity 49 49
- -------------------------------------------------------------
18
NOTE 18: QUARTERLY FINANCIAL DATA (UNAUDITED)
- --------------------------------------------------------------------------------
Quarterly financial data, and per share market and dividend data,
follows:
- ------------------------------------------------------------------------------------------------------------------------------------
First Second Third Fourth
Quarterly Financial Data Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------------
1994
Sales and other revenues $2,641 $2,708 $ 2,765 $2,839
Income from continuing operations before income taxes 522 609 514 638
Income from continuing operations and net income 324 375 318 409
Earnings per common share 0.73 0.83 0.70 0.89
- ------------------------------------------------------------------------------------------------------------------------------------
1993
Sales and other revenues $2,510 $2,541 $ 2,577 $2,666
Income (loss) from continuing operations before income taxes 449 436 (534) 394
Income (loss) from continuing operations 296 291 (375) 264
Net income (loss) 316 159 (3,545) 264
Earnings (loss) per common share from continuing operations 0.71 0.70 (0.90) 0.62
Earnings(loss) per common share 0.76 0.38 (8.50) 0.62
- ------------------------------------------------------------------------------------------------------------------------------------
1994 first-quarter income from continuing operations includes $15 ($.03 per
share) for a gain on the sale of certain rural telephone exchanges. 1994
second-quarter net income includes gains of $16 ($.04 per share) and $41 ($.09
per share) for the sales of certain rural telephone exchanges and paging
operations, respectively. 1994 fourth-quarter net income includes gains of $105
($.23 per share) for the partial sale of a joint venture interest and $20 ($.04
per share) for the sale of certain rural telephone exchanges.
1993 second-quarter net income was reduced by $100 ($.24 per share) for a
charge related to discontinued operations and $50 ($.12 per share) for the
early extinguishment of debt. 1993 third-quarter net loss includes a
restructuring charge of $610 ($1.46 per share) and $74 ($.18 per share),
including $20 ($.05 per share) related to discontinued operations, for the
cumulative effect on deferred taxes of the 1993 federally mandated increase in
income tax rates. 1993 third-quarter net loss also includes extraordinary
charges of $3,123 ($7.49 per share) for the discontinuance of SFAS No. 71, and
$27 ($.06 per share) for the early extinguishment of debt.
1993 net income (loss) related to discontinued operations was $20 ($.05 per
share) and ($82) ($.20 per share) for the first and second quarters,
respectively. Income (loss) subsequent to June 1, 1993, is being deferred and
was included within the provision for loss on disposal of the Capital Assets
segment.
- -------------------------------------------------------------
Per share Market and Market Price
Dividend Data --------------------------
(Whole dollars) High Low Close Dividends
- -------------------------------------------------------------
1994
First $46.250 $ 38.500 $40.750 $ 0.535
Second 43.750 38.250 41.875 0.535
Third 43.125 38.250 38.750 0.535
Fourth 38.875 34.625 35.625 0.535
- -------------------------------------------------------------
1993
First $43.875 $ 37.750 $43.625 $ 0.535
Second 46.000 40.625 45.875 0.535
Third 49.375 44.500 49.250 0.535
Fourth 50.750 45.750 45.875 0.535
- -------------------------------------------------------------
U S WEST
54
57
1 9 9 4
--------------------
U S WEST Board of Directors
[PICTURE]
Dick Cheney (54)
A former secretary of Defense in the Bush administration, he is a senior fellow
with the American Enterprise Institute in Washington, D.C. The former five-term
congressman from Wyoming also served as chief of staff for President Ford. Mr.
Cheney joined the U S WEST board in 1993.
[PICTURE]
Remedios Diaz-Oliver (56)
The chief executive officer and president of All American Container Inc., which
sells and distributes glass, plastic and metal containers for a variety of
products worldwide. Ms. Diaz-Oliver joined the U S WEST board in 1988.
[PICTURE]
Grant A. Dove (66)
The managing partner of Technology Strategies and Alliances, a strategic
planning and investment banking firm. Mr. Dove spent nearly 30 years in a
number of executive positions with Texas Instruments. He joined the U S WEST
board in 1988 and chairs the Human Resources Committee.
[PICTURE]
Allan D. Gilmour (60)
The former vice chairman of the Ford Motor Company, Mr. Gilmour held several
executive assignments since joining Ford in 1960. He served as the company's
chief financial officer before taking over leadership of its international
automotive operations and, later, the Ford Automotive Group. He joined the U S
WEST board in 1992.
[PICTURE]
Pierson M. Grieve (67)
The chairman and chief executive officer of Ecolab Inc., a leading worldwide
developer and marketer of premium cleaning, sanitizing and maintenance products
and services for the hospitality, institutional and res-idential markets. He
joined the U S WEST board in 1990, and chairs the Board Affairs Committee.
[PICTURE]
Shirley M. Hufstedler (69)
A partner in the law firm of Hufstedler, Kaus & Ettinger. She served as
secretary of Education during the Carter administration and, for 11 years, as a
judge for the 9th U.S. Circuit Court of Appeals. Ms. Hufstedler joined the U S
WEST board in 1983, and chairs the Public Policy Committee.
[PICTURE]
Allen F. Jacobson (68)
The former chairman and chief executive officer of 3M. Mr. Jacobson has been a
member of the U S WEST board since 1983, and chairs the Corporate Development
and Finance Committee.
[PICTURE]
Richard D. McCormick (54)
Named president and chief executive officer of U S WEST January 1, 1991, and
chairman of the board May 1, 1992. Mr. McCormick was president of Northwestern
Bell Telephone Company before joining U S WEST as executive vice president in
1985. He became a member of the company's board in 1986.
[PICTURE]
Marilyn Carlson Nelson (55)
The vice chair of Carlson Holdings Inc., a group of com-panies involved in
marketing services, travel and hospitality services. Ms. Nelson is also chair
of Citizens State Bank of Waterville, Minn., and Montgomery, Minn. She joined
the U S WEST board in 1993.
[PICTURE]
Frank Popoff (59)
The chairman and chief executive officer of The Dow Chemical Company. Since
joining Dow Chemical in 1959, he also served as the company's president and
chief operating officer and executive vice president for international
operations. Mr. Popoff joined the U S WEST board in 1993.
[PICTURE]
Glen L. Ryland (70)
The president of RYCO Inc. He is former chairman, president and chief executive
officer of Frontier Holdings Inc., and its principal subsidiary, Frontier
Airlines. He joined the U S WEST board in 1983, and chairs the Audit Committee.
[PICTURE]
Jerry O. Williams (56)
The president and chief executive officer of Grand Eagle Enterprises Inc., a
private investment group. Mr. Williams is former president and chief operating
officer of AM International Inc., a manufacturer and seller of design, display,
reproduction and finishing products and supplies in the graphics industry. He
joined the U S WEST board in 1988.
[PICTURE]
Daniel Yankelovich (70)
The founder and chairman of DYG Inc., a leading market research firm. He also
founded Yankelovich, Skelly and White, one of the nation's largest opinion
research organiza-tions. Mr. Yankelovich joined the U S WEST board in 1983, and
chairs the Trust Investment Committee.
In Memoriam
U S WEST lost two valued members
of its family - Mary M. Gates and Jack D. Sparks -
since the 1994 annual meeting.
Ms. Gates, a member of the
U S WEST board since 1992, passed away June 9, 1994.
She also served as a director of the
U S WEST NewVector Group from 1990 to 1991, and
of Pacific Northwest Bell from 1979 to 1988.
Mr. Sparks, who retired from the
U S WEST board in 1993, passed away Dec. 22, 1994.
The former chairman, chief executive officer and
president of the Whirlpool Corporation, he was elected to
the U S WEST board in 1985.
Their experience and insights were invaluable,
and they will be missed.
U S WEST
--------------------
55
58
U S W E S T I N C.
--------------------
Executive and Subsidiary Officers
Richard D. McCormick* James H. Stever*
Chairman, President and Executive Vice President and
Chief Executive Officer Acting Chief Human Resources Officer
A. Gary Ames* James T. Anderson*
President and Chief Executive Officer Vice President and Treasurer
U S WEST Communications Group
Lorne G. Rubis*
Richard J. Callahan* Vice President
Executive Vice President, U S WEST; Quality
President, U S WEST International and
Business Development Group Judith A. Servoss*
Vice President
Charles M. Lillis* Public Relations
Executive Vice President, U S WEST;
President and Chief Executive Officer, H. Laird Walker
U S WEST Diversified Group Vice President
Federal Relations
James M. Osterhoff*
Executive Vice President and Thomas E. Pardun
Chief Financial Officer President and Chief Executive Officer
U S WEST Multimedia Group
Charles P. Russ III*
Executive Vice President, Jan Peters
General Counsel and Secretary Chief Operating Officer
U S WEST NewVector Group
C. Scott McClellan*
Acting Executive Vice President Solomon D. Trujillo
Public Policy President and Chief Executive Officer
U S WEST Marketing Resources Group
Pearre Williams
President
Corporate Development Division
* Executive officer
The U S WEST Foundation
During 1994 the U S WEST Foundation invested more than $25 million in
education,
economic development, arts and community-betterment projects in the 14 states
served by U S WEST Communications.
The Foundation also moved in a new direction: encouraging innovative programs
to meet community needs through information technologies.
For more information on the foundation, please call (800) 843-3383
U S WEST
--------------------
56
59
SHAREOWNER INFORMATION
U S WEST Shareowner Services Expected Dividend
If you have questions about your Record Dates
U S WEST account or need to April 19, 1995
make changes, please write: July 20, 1995
October 20, 1995
For general information, transfers, January 19, 1996
the U S WEST Investor's
Handbook or the company's Expected Dividend
current Form 10-K Report: Payment Dates
U S WEST May 1, 1995
P.O. Box 8935 August 1, 1995
Boston, MA 02266-8935 November 1, 1995
February 1, 1996
For dividend reinvestment:
U S WEST Annual Meeting
P.O. Box 8936
Boston, MA 02266-8936 The annual meeting of share-
owners will be held at 10 a.m.
Shareowner Toll-Free Numbers: Friday, May 5, 1995, at the
For information or inquiries, Boise Centre, 850 West Front Street,
call 1-800-537-0222. For recorded Boise, Idaho 83702.
messages about the company's A signer will be at the meeting to
activities, call 1-800-449-0000. assist the hearing impaired.
Shareowners calling from Alaska, Stock Exchange Listings
Hawaii or outside the United U S WESTcommon stock is listed
States, please call collect: on the New York, Pacific, London,
0-505-989-2004. Zurich, Basel, Geneva, Amsterdam
and Tokyo stock exchanges.
Shareowner Investment Plan USWEST's ticker symbol is
Shareowners can reinvest their "USW," and the company is listed
dividends and/or make optional in newspaper stock tables under
payments for a fee of $1.00 per USWEST.
account, per quarter. Contact
U S WEST Shareowner Services Corporate Headquarters
for enrollment information. U S WEST Inc.
7800 East Orchard Road
P.O. Box 6508
Englewood, CO 80155-6508
303-793-6500
(C) Printed on recycled paper. (C) 1995 U S WEST Inc.
60
USWEST
7800 EAST ORCHARD ROAD
P.O. BOX 6508
ENGLEWOOD, CO 80155-6508
61
APPENDIX TO EXHIBIT 13
Furnished in Accordance With Rule 304 of Regulation S-T
NARRATIVE DESCRIPTION OF
GRAPHIC AND IMAGE INFORMATION IN
U S WEST'S 1994 ANNUAL REPORT TO STOCKHOLDERS
Page of
Annual
Report Description
- --------- --------------
Front Cover Centered on the page, in portrait style, within a border containing a background of numbers 1
through 9 and the words "results, growth, value, cash, yield and performance," is the following
text:
"U S WEST
--------
Making
the
RIGHT
Connections
--------
Annual Report
1994"
1 A bar graph illustrating U S WEST revenues for the years 1990 through 1994, as follows: 1990,
$9,369 million; 1991, $9,528 million; 1992, $9,823 million; 1993, $10,294 million; and 1994,
$10,953 million.
1 A bar graph illustrating normalized income from continuing operations for the years 1990
through 1994 (excluding one-time items described in Note 1), as follows: 1990, $1,145 million;
1991, $1,070 million; 1992, $1,076 million; 1993, $1,140 million; and 1994, $1,229 million.
2 Picture of Richard D. McCormick beneath a caption which reads:
"Chairman and Chief Executive Officer Richard D. McCormick looks back on the highlights and
challenges of 1994, and ahead to a larger, more exciting role for the company in "connecting
people with their world."
62
Page of
Annual
Report Description
- --------- --------------
3 A bar graph illustrating annual percentage growth and year-end access lines (in millions), respectively,
of U S WEST Communications, Inc. for the years 1990 through 1994 (excluding the effects of 1994
rural exchange sales), as follows: 1990, 2.8%/12.6; 1991, 3.0%/12.9; 1992, 3.2%/13.3; 1993, 3.7%/13.8;
and 1994, 4.0%/14.3.
3 A bar graph illustrating annual percentage growth and year-end cellular subscribers (in thousands),
respectively, of U S WEST for 1990 through 1994, as follows: 1990, 55%/219; 1991, 37%/300; 1992,
38%/415; 1993, 45%/601; and 1994, 61%/968.
4 A bar graph illustrating annual percentage growth of earnings before interest, taxes,
depreciation and amortization ("EBITDA") and full year EBITDA (in millions), respectively, for the years
1990 through 1994 (excluding equity losses, other income and one-time items), as follows: 1990,
8.2%/$3,889; 1991, .8%/$3,920; 1992, 1.1%/$3,963, 1993, 6.7%/$4,228; and 1994, 7.8%/$4,559.
9 A bar graph illustrating 1994 percentage population growth for the states of Nevada, 5.4%;
Arizona, 3.3%; Idaho, 3.0%; Utah, 2.6%; Colorado, 2.6%; New Mexico, 2.3%; Georgia, 2.2%; Texas,
2.0%; Montana, 1.8%; and Oregon, 1.7%; and indicating Arizona, Idaho, Utah, Colorado, New
Mexico, Montana and Oregon are in the U S WEST Communications, Inc. 14-state region. Source:
U.S. Census Bureau (12/31/94).
9 A pie chart illustrating a summary of U S WEST Communications, Inc. 1994 revenues by percentage
and amount of total U S WEST Communications, Inc. revenues (in millions), respectively, as follows: local
service, 45%/$4,067; interstate access charges, 25%/$2,269; intrastate access charges, 8%/$729;
long-distance network services, 15%/$1,329; and other services, 7%/$604.
63
Page of
Annual
Report Description
- --------- --------------
10 A bar graph illustrating U S WEST international customers for 1990 through 1994, including
wireless customers, directory contracts sold and customer equivalents for gateway switches and
cable TV/telephone services, as follows: 1990, 400,000; 1991, 600,000; 1992, 900,000; 1993,
1,100,000; and 1994, 1,800,000.
18 A graphic illustration of U S WEST's three key objectives, or "value drivers" for achieving
cash flow improvement: 1) growth through the development of multimedia networks and a
broadened wireless presence (new revenue); 2) customer loyalty through continuous improvement
in customer service (customer retention); and 3) improved productivity through systems re-
engineering and other cost controls (cost reduction), as described under "U S WEST Competitive
Strategy."
18 A bar graph illustrating the number of U S WEST Communications, Inc. employees per access lines
from 1990 through 1994, as follows: 1990, 43.7; 1991, 42.5; 1992, 39.3; 1993, 35.9; 1994,
33.1.
22 A map of the United States highlighting U S WEST Communications, Inc. 14-state region.
24 A bar graph illustrating U S WEST, Inc.'s and U S WEST Communications, Inc.'s actual and
projected capital expenditures (in millions), respectively, for 1991 through 1995, as follows: 1991,
$2,425/$2,168; 1992, $2,554/$2,357; 1993, $2,441/$2,182; 1994, $2,820/$2,454; 1995, $2,600/$2,100.
55 Photographs of U S WEST, Inc. Board of Directors.