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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 1-14087
U S WEST, Inc.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
A Delaware Corporation 84-0953188
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
of organization)
</TABLE>
1801 California Street, Denver, Colorado 80202
Telephone Number (303) 672-2700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
At April 22, 1999, 503,593,778 shares of common stock were outstanding.
===============================================================================
<PAGE>
U S WEST, Inc.
Form 10-Q
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Item Page
PART I - FINANCIAL INFORMATION
<S> <C>
1. Financial Statements
Consolidated Statements of Income -
Three months ended March 31, 1999 and 1998 3
Consolidated Balance Sheets -
March 31, 1999 and December 31, 1998 4
Consolidated Statements of Cash Flows -
Three months ended March 31, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
3. Quantitative and Qualitative Disclosures
About Market Risk 20
</TABLE>
PART II - OTHER INFORMATION
<TABLE>
<CAPTION>
<S> <C>
1. Legal Proceedings 26
6. Exhibits and Reports on Form 8-K 26
</TABLE>
2
<PAGE>
U S WEST, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
Quarter Ended March 31,
1999 1998
---- ----
(dollars in millions, except
per share amounts)
<S> <C> <C>
Operating revenues:
Local services $1,867 $1,730
Access services 681 665
Long-distance services 174 204
Directory services 326 306
Other services 134 104
--------------- ---------------
Total operating revenues 3,182 3,009
Operating expenses:
Employee-related expenses 1,125 1,006
Other operating expenses 662 656
Depreciation and amortization 602 532
--------------- ---------------
Total operating expenses 2,389 2,194
--------------- ---------------
Operating income 793 815
Other expense:
Interest expense (153) (97)
Other expense-net (1) (25)
--------------- ---------------
Total other expense-net (154) (122)
--------------- ---------------
Income before income taxes 639 693
Provision for income taxes 242 259
--------------- ---------------
Net income $397 $434
=============== ===============
Basic earnings per share $0.79 $0.89
=============== ===============
Basic average shares outstanding (in 000's) 503,306 484,964
=============== ===============
Diluted earnings per share $0.78 $0.89
=============== ===============
Diluted average shares outstanding (in 000's) 508,121 489,113
=============== ===============
Dividends per share $0.535 $0.535
=============== ===============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
U S WEST, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
(unaudited)
(dollars in millions,
except share amounts)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $36 $49
Accounts receivable, less allowance
for uncollectibles of
$70 and $69, respectively 1,700 1,743
Inventories and supplies 236 197
Deferred directory costs 276 274
Deferred tax assets 161 151
Prepaid and other 127 78
--------------- ----------------
Total current assets 2,536 2,492
Property, plant and equipment-net 15,098 14,908
Other assets-net 1,075 1,007
--------------- ----------------
Total assets $18,709 $18,407
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $1,393 $1,277
Accounts payable 1,326 1,347
Accrued expenses 1,753 1,702
Advanced billings and customer deposits 377 370
--------------- ----------------
Total current liabilities 4,849 4,696
Long-term debt 8,642 8,642
Postretirement and other postemployment benefit obligations 2,632 2,643
Deferred income taxes 811 786
Unamortized investment tax credits 159 159
Deferred credits and other 696 726
Commitments and Contingencies
Stockholders' equity:
Preferred stock - $1.00 par value,
19,000,000 shares authorized, none issued and
outstanding - -
Series A junior preferred stock-$1.00 par value,
10,000,000 shares authorized, none issued and
outstanding - -
Common stock-$0.01 par value, 2,000,000,000 shares
authorized, 503,797,638 and 503,207,058 issued,
503,493,635 and 502,903,055 outstanding. 553 532
Retained earnings 352 223
Accumulated other comprehensive income 15 -
--------------- ----------------
Total stockholders' equity 920 755
--------------- ----------------
Total liabilities and stockholders' equity $18,709 $18,407
=============== ================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
U S WEST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Quarter Ended March 31,
1999 1998
---- ----
(dollars in millions)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $397 $434
Adjustments to net income:
Depreciation and amortization 602 532
Deferred income taxes and amortization of investment tax credits 14 65
Changes in operating assets and liabilities:
Accounts receivable 43 101
Inventories, supplies and other current assets (109) (41)
Accounts payable, accrued expenses and advanced billings 51 124
Other (61) (6)
-------------- --------------
Cash provided by operating activities 937 1,209
-------------- --------------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment (753) (563)
Proceeds from (payments on) disposals of property, plant and equipment (8) 19
Other (11) (18)
-------------- --------------
Cash used for investing activities (772) (562)
-------------- --------------
FINANCING ACTIVITIES
Net proceeds from short-term debt 256 119
Net repayments of Old U S WEST debt - (44)
Repayments of long-term debt (181) (23)
Proceeds from issuance of common stock 16 17
Dividends paid on common stock (269) (259)
Dividends paid to Old U S WEST - (90)
Purchases of treasury stock - (21)
-------------- --------------
Cash used for financing activities (178) (301)
-------------- --------------
CASH AND CASH EQUIVALENTS
Increase (decrease) (13) 346
Beginning balance 49 27
-------------- --------------
Ending balance $36 $373
============== ==============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
U S WEST, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended March 31, 1999
(unaudited)
(dollars in millions, except per share amounts)
NOTE 1: U S WEST SEPARATION
On June 12, 1998, our former parent company, herein referred to as "Old
U S WEST," separated into two independent companies (the "Separation"). Old U S
WEST had conducted its businesses through two groups: (i) the U S WEST
Communications Group (the "Communications Group"), which included the
communications businesses of Old U S WEST, and (ii) the U S WEST Media Group
(the "Media Group"), which included the multimedia and directories businesses of
Old U S WEST. As part of the Separation, Old U S WEST contributed to us the
businesses of the Communications Group and the domestic directories business of
the Media Group known as U S WEST Dex, Inc. ("Dex"). The alignment of Dex with
our Company is referred to in this document as the "Dex Alignment." Old U S WEST
has continued as an independent public company comprised of the businesses of
Media Group other than Dex and has been renamed MediaOne Group, Inc.
In connection with the Dex Alignment, (i) Old U S WEST distributed, as
the Dex dividend to holders of Media Group common stock, approximately
16,341,000 shares of our common stock (net of the redemption of approximately
305,000 fractional shares) with an aggregate of $850 in value (the "Dex
Dividend") and (ii) we refinanced $3,900 of Old U S WEST debt (the "Dex
Indebtedness"), formerly allocated to Media Group.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The consolidated financial statements include
the consolidated results of operations, financial position and cash flows of the
businesses that comprise the Communications Group and Dex, as if such businesses
operated as a separate entity for all periods and as of all dates presented.
However, certain financial effects of the Separation and the Dex Alignment,
including interest expense associated with refinancing the Dex Indebtedness and
the dilutive effect of the Dex Dividend, are not reflected in the accompanying
consolidated statements of income prior to the Separation.
For periods prior to the Separation, the consolidated financial
statements include an allocation of certain costs, expenses, assets and
liabilities from Old U S WEST. We believe the allocations were reasonable;
however the amount of costs allocated to us were not necessarily indicative of
the costs that would have been incurred if we had operated as a stand-alone
company. The consolidated financial statements may not necessarily reflect the
financial position, results of operations or cash flows in the future or what
they would have been had we been a separate, stand-alone company during such
periods.
6
<PAGE>
The consolidated interim financial statements are unaudited. The
financial statements have been prepared in accordance with the instructions for
Form 10-Q and, therefore, do not necessarily include all information and
footnotes required by generally accepted accounting principles. In our opinion,
all adjustments (consisting only of normal recurring adjustments) necessary to
present fairly our consolidated financial position, results of operations and
cash flows as of March 31, 1999 and for all periods presented have been made.
The statements are subject to year-end audit adjustment. A description of our
accounting policies and other financial information are included in the audited
consolidated financial statements filed with the Securities and Exchange
Commission in our Form 10-K/A for the year ended December 31, 1998. The
consolidated results of operations for the quarter ended March 31, 1999 are not
necessarily indicative of the results expected for the full year.
Certain reclassifications of prior period revenue amounts have been
made to conform to the current year presentation. For a description of the
reclassifications, see the Form 8-K filed April 21, 1999.
On January 1, 1999, we adopted the accounting provisions required by
the American Institute of Certified Public Accountants' Statement of Position
("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." SOP 98-1, among other things, requires that certain
costs of internal use software, whether purchased or developed internally, be
capitalized and amortized over the estimated useful life of the software.
Adoption of the SOP resulted in an increase in net income for the quarter ended
March 31, 1999 of $47 or $0.09 per diluted share.
NOTE 3: EARNINGS PER SHARE
The following presents a reconciliation of basic weighted average
shares to diluted weighted average shares:
<TABLE>
<CAPTION>
Quarter Ended March 31
------------------------------------
<S> <C> <C>
1999 1998
---- ----
Basic weighted average shares outstanding 503,306 484,964
Dilutive effect of stock options 4,815 4,149
---------------- ----------------
Diluted weighted average shares outstanding 508,121 489,113
================ ================
</TABLE>
Certain of the financial effects of the Separation and the Dex
Alignment, including interest expense associated with the refinancing of the Dex
Indebtedness and the dilutive effects of the Dex Dividend, are not reflected in
the historical consolidated statements of income prior to the Separation. The
following presents earnings per share for the quarter ended March 31, 1998 on a
pro forma basis. The pro forma earnings per share amounts give effect to the Dex
Indebtedness and issuance of approximately 16,341,000 shares (net of the
redemption of 305,000 fractional shares) of common stock in connection with the
Dex Alignment as if such transactions had been consummated as of January 1, 1998
(shares in thousands).
7
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Basic Earnings Per Share
Net income $434
Pro forma adjustment(1) (41)
---------------
Pro forma net income $393
===============
Basic weighted average shares(2) 484,964
Pro forma adjustment(3) 16,341
---------------
Pro forma basic weighted average shares 501,305
---------------
Pro forma basic earnings per share $0.78
===============
Diluted Earnings Per Share
Net income $434
Pro forma adjustment(1) (41)
---------------
Pro forma net income $393
===============
Diluted weighted average shares(2) 489,113
Pro forma adjustment(3) 16,341
---------------
Pro forma diluted weighted average shares 505,454
---------------
Pro forma diluted earnings per share $0.78
===============
<FN>
<F1>
(1) Reflects incremental (after-tax) interest expense associated with the Dex
Indebtedness.
<F2>
(2) Historical average shares assume a one-for-one conversion of historical
Communications stock outstanding into shares of U S WEST as of the
Separation.
<F3>
(3) Reflects the issuance of approximately 16,341,000 shares of common
stock (net of the redemption of approximately 305,000 fractional
shares) issued in connection with the Dex Alignment as if the shares
had been issued at the beginning of the period.
</FN>
</TABLE>
NOTE 4: SEGMENT INFORMATION
We operate in four segments: retail services, wholesale services,
network services and directory services. The retail services segment provides
local telephone services, including wireless, data and long-distance services.
The wholesale services segment provides access services that connect customers
to the facilities of interexchange carriers and interconnection to our
telecommunications network to competitive local exchange carriers. Our network
services segment provides access to our telecommunications network, including
our information technologies, primarily to our retail services and wholesale
services segments. The directory services segment publishes White and Yellow
Pages telephone directories and provides electronic directory and other
information services. We provide our services to more than 25 million
residential and business customers in Arizona, Colorado, Idaho, Iowa, Minnesota,
Montana, Nebraska, New Mexico, North Dakota, Oregon, South Dakota, Utah,
Washington and Wyoming.
8
<PAGE>
Following is a breakout of our segments. Because significant expenses
of operating the retail services and wholesale services segments are not
allocated to the segments for decision-making purposes, management does not
believe the segment margins are representative of the actual operating results
of the segments. The margin for the retail services and wholesale services
segments excludes network and corporate expenses. The margin for the network
services segment and directory services segment excludes corporate expense. The
"other" category includes our corporate expenses. The communications and related
services column represents a total of the retail services, wholesale services
and network services segments.
<TABLE>
<CAPTION>
Total
Communications
and
Retail Wholesale Network Related Directory Reconciling Consolidated
Services Services Services Services Services Other Items Total
-------- -------- -------- -------- -------- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999
Operating
revenues $2,169 $691 $50 $2,910 $329 $- $(57)(1) $3,182
Margin 1,505 530 (685) 1,350 170 (35) (846) 639(2)
Assets -(3) -(3) -(3) -(3) 549 -(3) 18,160(3) 18,709
Capital
expenditures 111(4) 31 638 780 7 - - 787
1998
Operating
revenues 2,067 635 45 2,747 307 - (45)(1) 3,009
Margin 1,564 510 (676) 1,398 158 (108) (755) 693(2)
Assets -(3) -(3) -(3) -(3) 496 -(3) 17,356(3) 17,852
Capital
expenditures 118(4) - 391 509 6 7 - 522
<FN>
<F1>
(1) Represents primarily intersegment charges.
<F2>
(2) Represents income before income taxes. Adjustments that are made to the
total of the segments' margin to arrive at income before income taxes
include the following:
</FN>
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended March 31,
------------------------------------------
1999 1998
------------------- -------------------
<S> <C> <C>
Costs and adjustments excluded from segment data but
included in the consolidated total:
Taxes other than income taxes $90 $101
Depreciation and amortization 602 532
Interest expense 153 97
Other expense-net 1 25
=================== ===================
$846 $755
=================== ===================
9
<PAGE>
<CAPTION>
<FN>
<F1>
(3) A breakout of assets for all segments is not provided to our chief
operating decision-maker. The reconciling items column represents the
amount to reconcile to the consolidated total.
<F2>
(4) Capital expenditures reported for the retail services segment include
only expenditures for wireless services and certain data services.
Additional capital expenditures relating to those services are included
in network services capital expenditures.
</FN>
</TABLE>
In addition to the operating revenues disclosed above, intersegment
operating revenues of the retail services segment were $6 and $6 for the
quarters ended March 31, 1999 and 1998, respectively. Intersegment operating
revenues of the network services segment were $17 and $18 for the quarters ended
March 31, 1999 and 1998, respectively. Intersegment operating revenues of the
directory services segment were $3 and $1 for the quarters ended March 31, 1999
and 1998, respectively.
NOTE 5: COMPREHENSIVE INCOME
Other comprehensive income consists of $15 of unrealized gains on
securities, which are net of deferred taxes of $10.
Total comprehensive income for the quarter ended March 31, 1999 is as
follows:
<TABLE>
<CAPTION>
<S> <C>
Net income $397
Other comprehensive income 15
===================
Comprehensive income $412
===================
</TABLE>
NOTE 6: COMMITMENTS AND CONTINGENCIES
Commitments
We have entered into an agreement with Olympic Properties of the United
States to sponsor the 2002 Salt Lake City Winter Olympics and the U.S. Olympic
Teams through 2004. As of March 31, 1999, we have a remaining commitment of $49
to be paid in a combination of cash and services through 2004.
Contingencies
U S WEST Communications, Inc. ("USWC"), our wholly owned subsidiary,
has the following pending regulatory actions:
Oregon. On May 1, 1996, the Oregon Public Utilities Commission ("OPUC")
approved a stipulation terminating prematurely USWC's alternative form of
regulation ("AFOR") plan and it then undertook a review of USWC's earnings. In
May 1997, the OPUC ordered USWC to reduce its annual revenues by $97, effective
May 1, 1997, and to issue a one-time refund, including interest, of
approximately $102 to reflect the revenue reduction for the period May 1, 1996
through April 30, 1997. This one-time refund for interim rates became subject to
refund when USWC's AFOR plan was terminated on May 1, 1996.
10
<PAGE>
USWC filed an appeal of the order and asked for an immediate stay of
the refund with the Oregon Circuit Court which granted USWC's request for a
stay, pending a full review of the OPUC's order. On February 19, 1998, the
Oregon Circuit Court entered a judgment in USWC's favor on most of the appealed
issues. The OPUC appealed to the Oregon Court of Appeals on March 19, 1998, and
the appeal remains pending. USWC continues to charge interim rates, subject to
refund, during the pendency of that appeal. The potential exposure, including
interest, at March 31, 1999, is not expected to exceed $350.
Utah. The Utah Supreme Court has remanded a Utah Public Service
Commission ("UPSC") order to the UPSC for hearing, thereby establishing two
exceptions to the rule against retroactive ratemaking: i) unforeseen and
extraordinary events, and ii) misconduct. The UPSC's initial order denied a
refund request from interexchange carriers and other parties related to the Tax
Reform Act of 1986. On April 19, 1999, the UPSC approved a settlement whereby
USWC will refund $43 to its Utah basic exchange service customers. In addition,
the UPSC approved a settlement between USWC and certain exchange carriers
settling those carriers' claims for $3.
State Regulatory Accruals. USWC has accrued $253 at March 31, 1999,
which represents its estimated liabilities for all state regulatory proceedings.
It is possible that the ultimate liabilities could exceed the amounts accrued by
approximately $175. USWC will continue to monitor and evaluate the risks
associated with its regulatory jurisdictions and will adjust estimates as new
information becomes available.
Other Contingencies. In December 1998, we were informed of the
possibility of a claim by a purported class challenging the transfer of
approximately $54 from the U S WEST pension trust to the U S WEST health care
trust to pay retiree medical expenses pursuant to Section 420 of the Internal
Revenue Code of 1986, as amended. We believe that this transfer complied with
the applicable law and the associated plan documents. We plan to vigorously
defend any such claim if and when it is asserted.
We are subject to other legal proceedings and claims that arise in the
ordinary course of business. Although there can be no assurance of the ultimate
disposition of these matters, it is management's opinion, based upon the
information available at this time, that the expected outcome, individually or
in the aggregate, will not have a material adverse effect on our results of
operations and financial position.
11
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (dollars in millions)
Special Note Regarding Forward-Looking Statements
Some of the information presented in this Form 10-Q constitutes
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Although U S WEST, Inc. (the "Company," which may
also be referred to as "we," "us" or "our") believes that its expectations are
based on reasonable assumptions within the bounds of its knowledge of its
businesses and operations, there can be no assurance that actual results will
not differ materially from our expectations. Factors that could cause actual
results to differ from expectations include:
o greater than anticipated competition from new entrants into the local
exchange, intraLATA (local access transport area) toll, wireless, data and
directories markets, causing loss of customers and increased price
competition;
o changes in demand for our products and services, including optional custom
calling features;
o higher than anticipated employee levels, capital expenditures and operating
expenses (such as costs associated with interconnection and Year 2000
remediation);
o the loss of significant customers;
o pending and future state and federal regulatory changes affecting the
telecommunications industry, including changes that could have an impact on
the competitive environment in the local exchange market;
o a change in economic conditions in the various markets served by our
operations;
o higher than anticipated start-up costs associated with new business
opportunities;
o delays in our ability to begin offering interLATA long-distance services;
o consumer acceptance of broadband services, including telephony, data, video
and wireless services; and
o delays in the development of anticipated technologies, or the failure of
such technologies to perform according to expectations.
These cautionary statements should not be construed as an exhaustive
list or as any admission by us regarding the adequacy of the disclosures. We
cannot always predict or determine after the fact what factors would cause
actual results to differ materially from those indicated by our forward-looking
statements or other statements. In addition, consider statements that include
the terms "believes," "belief," "expects," "plans," "objectives," "anticipates,"
"intends," or the like to be uncertain and forward-looking. All cautionary
statements should be read as being applicable to all forward-looking statements
wherever they appear.
12
<PAGE>
We do not undertake any obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks, uncertainties and assumptions, the
forward-looking events discussed herein might not occur.
General
On June 12, 1998, our former parent company, herein referred to as "Old
U S WEST," separated into two independent companies (the "Separation"). Old U S
WEST had conducted its businesses through two groups: (i) the U S WEST
Communications Group (the "Communications Group"), which included the
communications businesses of Old U S WEST, and (ii) the U S WEST Media Group
(the "Media Group"), which included the multimedia and directories businesses of
Old U S WEST. As part of the Separation, Old U S WEST contributed to us the
businesses of the Communications Group and the domestic directories business of
the Media Group known as U S WEST Dex, Inc. ("Dex"). The alignment of Dex with
our Company is referred to in this document as the "Dex Alignment." Old U S WEST
has continued as an independent public company comprised of the businesses of
Media Group other than Dex and has been renamed MediaOne Group, Inc.
In connection with the Dex Alignment, (i) Old U S WEST distributed, as
the Dex dividend to holders of Media Group common stock, approximately
16,341,000 shares of our common stock (net of the redemption of approximately
305,000 fractional shares) with an aggregate of $850 in value (the "Dex
Dividend") and (ii) we refinanced $3,900 of Old U S WEST debt (the "Dex
Indebtedness"), formerly allocated to Media Group.
The consolidated financial statements include the consolidated results
of operations, financial position and cash flows of the businesses that comprise
the Communications Group and Dex, as if such businesses operated as a separate
entity for all periods and as of all dates presented. However, certain financial
effects of the Separation and the Dex Alignment, including interest expense
associated with the refinancing of the Dex Indebtedness and the dilutive effect
of the Dex Dividend, are not reflected in the consolidated statements of income
prior to the Separation.
Results of Operations
Quarter Ended March 31, 1999 Compared with Quarter Ended March 31, 1998
Net income for the quarter ended March 31, 1999, was $397 or $0.78 per
diluted share, compared to pro forma net income, adjusted for the Dex
Indebtedness and Dex Dividend, of $393 or $0.78 per diluted share, for the
quarter ended March 31, 1998. While the Company experienced a 5.7% increase in
revenues, the increase was substantially offset by increases in expenses to
support our growth initiatives, enhanced customer service and greater network
and interconnection costs.
13
<PAGE>
The following sections provide a more detailed discussion of the
changes in revenues and expenses.
Operating Revenues
<TABLE>
<CAPTION>
Quarter Ended
March 31,
1999 1998 Increase
---- ---- --------
<S> <C> <C> <C> <C>
Local services revenues $1,867 $1,730 $137 7.9%
</TABLE>
Local services revenues. Local services revenues include basic monthly service
fees, fees for calling services, such as voice messaging and caller
identification, wireless revenues, subscriber access line charges, MegaBit
[Trademark] data services, public phone revenues, and installation and
connection charges. State public service commissions regulate most local service
rates.
Local services revenues increased in 1999 due largely to access line
growth, increased sales of calling services and increased wireless revenues.
Second line additions by residential and small business customers contributed to
access line growth due to continuing demand for Internet access and data
transport capabilities. As of the end of the first quarter of 1999, we had added
569,000 additional access lines, an increase of 3.5% over the first quarter of
1998. Of this increase, second line installations accounted for 251,000 lines,
an increase of 17.8% compared with the first quarter of 1998. Offsetting these
increases were net regulatory rate adjustments and related accruals of $6.
While the number of access lines, sales of calling services and
associated revenues increased in 1999, the growth rate has declined from 1998.
The decline in the growth rate was primarily attributable to increased
competition as well as our customer retention strategy of offering bundles of
services to customers at lower prices in return for entering into longer-term
contracts. Additionally, some business customers have opted to migrate from
multiple single lines to high capacity lines, which decreases local services
revenues but increases access services revenues. We believe we will continue to
experience declining growth rates as the level of customer demand slows and
competition increases. Additionally, we are planning the sale of approximately
500,000 access lines that accounted for 3.8% of fiscal 1998 local services
revenues. While the sale is expected to provide us with a one-time gain in 1999
or 2000, the sale will negatively impact future revenue growth.
<TABLE>
<CAPTION>
Quarter Ended
March 31,
1999 1998 Increase
<S> <C> <C> <C> <C>
Access services revenues $681 $665 $16 2.4%
</TABLE>
Access services revenues. Access services revenues are derived primarily from
charging interexchange carriers, such as AT&T and MCI WorldCom, for use of our
local network to connect customers to their long-distance networks. These
revenues are generated from both interstate and intrastate services.
14
<PAGE>
Access services revenues increased due to greater demand for both
interstate and intrastate access services. The volume of interstate and
intrastate access minutes billed increased 6.6% and 5.2%, respectively, in the
first quarter of 1999 compared to the first quarter of 1998. Rate decreases of
$14 and $17 for interstate and intrastate access services, respectively, offset
increases in demand. The net impact of increased demand, offset by rate
reductions, was to increase interstate access services revenues by $41 or 5.9%
over the comparable quarter in 1998, while the intrastate access services
revenues decreased by $9 or 4.4% over the comparable quarter in 1998. While we
anticipate increased demand for access services will continue, the effect of
rate reductions is anticipated to continue to cause a decline in intrastate
access services revenues. Revenues from local number portability, which we began
billing in February 1999, accounted for an additional $5 increase. Additionally,
1998 revenues were favorably impacted by a $20 regulatory rate adjustment.
<TABLE>
<CAPTION>
Quarter Ended
March 31,
1999 1998 Decrease
<S> <C> <C> <C> <C>
Long-distance services revenues $174 $204 $(30) (14.7)%
</TABLE>
Long-distance services revenues. Long-distance services revenues are derived
from customer calls to locations outside of their local calling area but within
the same LATA. The decrease in long-distance services revenues was primarily
attributable to greater competition, resulting in a $20 revenue decline and rate
reductions accounted for the remainder of the revenue loss. As of March 31,
1999, in ten of the 14 states in which we operate, customers are able to choose
an alternative provider for intraLATA calls without dialing a special access
code when placing the call.
We believe we will continue to experience further declines in long-distance
services revenues as regulatory actions provide for increased levels of
competition. We are responding to competition through competitive pricing of
intraLATA long-distance services and increased promotional efforts to retain
customers. See "Special Note Regarding Forward-Looking Statements" on page 12.
<TABLE>
<CAPTION>
Quarter Ended
March 31,
1999 1998 Increase
---- ---- --------
<S> <C> <C> <C> <C>
Directory services $326 $306 $20 6.5%
</TABLE>
Directory services. Directory services revenues are primarily derived from
selling advertising in our published directories. The increase in directory
services revenues was primarily attributable to price increases and increased
sales of premium features.
15
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended
March 31,
1999 1998 Increase
<S> <C> <C> <C> <C>
Other services revenues $134 $104 $30 28.8%
</TABLE>
Other services revenues. Other services revenues include billings and
collections for interexchange carriers, customer equipment sales and sales of
other unregulated products, such as U S WEST.net [Registered Trademark], our
Internet service. Other services revenues increased primarily as a result of
increased sales of other unregulated products.
Operating Expenses
<TABLE>
<CAPTION>
Quarter Ended
March 31,
1999 1998 Increase
<S> <C> <C> <C> <C>
Employee-related expenses $1,125 $1,006 $119 11.8%
</TABLE>
Employee-related expenses. Employee-related expenses include salaries and wages,
benefits, payroll taxes and contract labor.
Employee-related expenses increased because of growth in several
sectors of the business, primarily wireless and data communications, resulting
in increased employee levels. Additionally, increased commitments towards
improving customer service, including meeting requests for installation and
repair services, resulted in higher labor costs. Across-the-board wage increases
also contributed to the increase in employee-related expenses. Additionally,
included in employee-related expenses are the salary and benefit costs for
employees who were transferred from Old U S WEST as part of the Separation.
Prior to the Separation, these costs were allocated to us and included in other
operating expenses. Partially offsetting these increases was a $25 pension
credit in 1999 compared to a $12 pension credit in 1998. In addition, $13 of
employee-related expenses associated with developing internal use software were
capitalized in 1999 due to the adoption of AICPA Statement of Position ("SOP")
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use", effective January 1, 1999.
16
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended
March 31,
1999 1998 Increase
<S> <C> <C> <C> <C>
Other operating expenses $662 $656 $6 0.9%
</TABLE>
Other operating expenses. Other operating expenses include access charges paid
to independent local exchange carriers for the routing of long-distance traffic
through their facilities, paper, printing, delivery and distribution costs
associated with publishing activities and other selling, general and
administrative costs.
The increase in other operating expenses was primarily attributable to
the following:
o increased costs of product sales associated with growth initiatives,
including wireless handset costs and costs applicable to our data
communications services,
o higher marketing and advertising costs for wireless, data communications
services and calling services, such as caller identification,
o higher interconnection, local number portability and Year 2000 remediation
costs, and
o higher access charge expenses resulting from rulings that require us to pay
reciprocal compensation to other local exchange carriers for calls that
originate on our network and terminate on other local exchange carriers'
networks.
Partially offsetting the increase in other operating expenses was the
effect of capitalizing $62 of expenses associated with developing internal use
software in accordance with SOP 98-1. Additionally, the transfer of employees
from Old U S WEST as part of the Separation has resulted in the reclassification
of this cost to employee-related expenses. Lastly, we incurred lower property
taxes due to favorable settlement of outstanding assessments.
<TABLE>
<CAPTION>
Quarter Ended
March 31,
1999 1998 Increase
<S> <C> <C> <C> <C>
Depreciation and amortization expense $602 $532 $70 13.2%
</TABLE>
Depreciation and amortization expense. Depreciation and amortization expense
increased primarily due to higher overall property, plant and equipment balances
resulting from continued investment in our network. Additionally, the asset
lives of certain assets were reduced, reflecting changes in technology, causing
greater depreciation expense.
17
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended
March 31,
1999 1998 Increase
<S> <C> <C> <C> <C>
Other expense-net $154 $122 $32 26.2%
</TABLE>
Other expense-net. Interest expense was $153 in 1999 compared to $97 in 1998.
The increase in interest expense was attributable to $3,900 of debt assumed in
the Separation as part of the Dex Alignment. Interest expense was $153 in 1999
compared to pro forma interest expense of $163 in 1998, assuming the Dex
Indebtedness had occurred at the beginning of 1998. The decline in interest
expense was primarily attributable to less interest incurred on capital lease
obligations.
Also included in other expense-net, were other expenses of $1 in 1999
compared to $25 in 1998. The reduction in 1999 was primarily attributable to a
$16 reduction in interest expense attributable to an anticipated settlement of
federal income tax liabilities for tax years still under audit.
<TABLE>
<CAPTION>
Quarter Ended
March 31, Increase
1999 1998 (Decrease)
<S> <C> <C> <C> <C>
Segment margin results:
Retail segment $1,505 $1,564 $(59) (3.8)%
Wholesale segment 530 510 20 3.9%
Network segment (685) (676) (9) (1.3)%
Directory segment 170 158 12 7.6%
</TABLE>
Segment results. For segment reporting purposes, segment margins exclude certain
costs and expenses, including depreciation and amortization, corporate expenses
and taxes other than income. See Note 4 to the consolidated financial
statements.
Margin from the retail services segment decreased due to operating
expenses increasing at a greater rate than revenue growth. Revenue from the
retail services segment increased 4.9% for the first quarter of 1999 over the
comparable 1998 period, primarily due to growth in local services revenue. The
revenue increase was more than offset by the higher operating expenses driven by
growth initiatives and increased customer service costs. Margin from the
wholesale services segment increased as a result of greater demand for access
services, partially offset by price reductions as mandated by both federal and
state regulatory authorities and higher operating costs, including greater
interconnection costs and additional access charge expenses. Margin from the
network services segment decreased as a result of expenditures to support growth
in both the retail and wholesale services segments. Margin from the directory
services segment increased due to growth in directory services revenue partially
offset by increased printing, paper and sales support costs.
18
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended
March 31,
1999 1998 Decrease
<S> <C> <C> <C> <C>
Provision for income taxes $242 $259 $(17) (6.6)%
</TABLE>
Provision for income taxes. The effective tax rate was 37.9% for 1999 compared
to 37.3% for 1998. The 1998 rate is computed on a pro forma basis assuming the
Dex Indebtedness had occurred at the beginning of 1998. The increase in the
effective tax rate is due to a higher effective state income tax rate.
19
<PAGE>
Liquidity and Capital Resources
Operating Activities. Cash provided by operations was $937 in 1999 compared to
$1,209 in 1998. The decrease in operating cash flow in 1999 resulted from a
reduction in working capital.
Investing Activities. Total capital expenditures, on a cash basis, were $753 in
1999 and $563 in 1998. Capital expenditures have primarily been, and continue to
be, focused on expanding access line growth, modernization of the
telecommunications network and meeting the requirements of the
Telecommunications Act of 1996 ("the Act"), including interconnection and local
number portability. We are also continuing to expand our investment to compete
in the wireless, data communications and video markets.
For 1999, we anticipate total capital expenditures will approximate
$3,500 to $3,800, including software capitalization, which includes the
acceleration of the next generation of the network, launch of personal
communication services in additional markets, expansion of the Internet data
business and greater emphasis on our e-commerce efforts. Additionally, we will
continue our expenditures on interconnection and local number portability to
enable competition in compliance with federal regulations. See "Special Note
Regarding Forward-Looking Statements" on page 12.
Financing Activities. Cash used for financing activities was $178 in 1999 and
$301 in 1998. We paid dividends on our common shares totaling $269 in 1999 and
$259 in 1998. Additionally, prior to the Separation, Dex paid dividends to Old U
S WEST equal to its net income, adjusted for the amortization of intangibles,
totaling $90 in 1998. Net proceeds from short-term financing increased from $119
in 1998 to $256 in 1999, however, repayments of long-term debt also increased
from $23 in 1998 to $181 in 1999.
We maintain commercial paper programs to finance short-term cash flow
requirements, as well as to maintain a presence in the short-term debt market.
As of March 31, 1999, we had lines of credit with a total borrowing capacity of
$2,360.
In May of 1999, U S WEST Capital Funding, Inc., a wholly owned
subsidiary of U S WEST, anticipates that it will amend and extend its current
364-day credit facility for approximately $750, which supports its commercial
paper program. Also in May, USWC anticipates that it will enter into a
replacement 364-day credit facility for approximately $800 to support its
commercial paper program.
Future cash needs could increase with the pursuit of new business
opportunities and be impacted by continued implementation of the requirements of
the Act. Interconnection, local number portability, universal service and access
charge reform will negatively impact cash flows to the extent recovery
mechanisms provided for by the Federal Communications Commission ("FCC") and
state commissions are inadequate. From time to time, we may consider the
acquisition or disposition of assets or businesses that may be material to our
financial condition, and therefore, our cash needs. We expect that such cash
needs will be funded through operations and, when necessary, the issuance of
debt securities.
20
<PAGE>
Risk Management
Over time, we are exposed to market risks arising from changes in
interest rates. The objective of our interest rate risk management program is to
manage the level and volatility of our interest expense. We may employ
derivative financial instruments to manage our interest rate risk exposure. We
have also employed financial derivatives to hedge interest rate and foreign
currency exposures associated with particular debt issues to synthetically
obtain below market interest rates. We do not use derivative financial
instruments for trading purposes.
As of March 31, 1999 and December 31, 1998, approximately $1,200 and
$950, respectively, of floating-rate debt was exposed to changes in interest
rates. This exposure is primarily linked to commercial paper rates. A
hypothetical 10% change in commercial paper rates would not have had a material
effect on our earnings. As of March 31, 1999 and December 31, 1998, we also had
$74 and $228, respectively, of long-term fixed rate debt obligations maturing in
the following 12 months. Any new debt obtained to refinance this debt would be
exposed to changes in interest rates. A hypothetical 10% change in the interest
rates on this debt would not have had a material effect on our earnings.
As of December 31, 1998, we had interest rate swaps with notional amounts
of $155. The swaps synthetically transformed certain of the Company's floating
rate issues into fixed rate obligations. The swaps and associated debt issues
were indexed to two- and 10-year constant maturity U.S. Treasury rates. Any
gains (losses) on the swaps were offset by losses (gains) on the associated debt
instruments. As of March 31, 1999, all outstanding interest rate swaps and the
associated debt instruments have matured.
As of March 31, 1999 and December 31, 1998, we had also entered into
cross-currency swaps with notional amounts of $204. The cross-currency swaps
synthetically transform $169 and $182 of Swiss Franc borrowings at March 31,
1999 and December 31, 1998, respectively, into U.S. dollar obligations. Any
gains (losses) on the cross-currency swaps would be offset by losses (gains) on
the Swiss Franc debt obligations.
Other assets at March 31, 1999 included marketable equity securities
that are recorded at a fair value of $26, including unrealized gains of $25.
Those securities have exposure to price risk. The estimated potential loss in
fair value resulting from a hypothetical 10% decrease in prices quoted by stock
exchanges would not have had a material effect on our earnings.
Recent Regulatory Developments
Interconnection. The FCC issued an order (the "Order") in 1996 relating to the
Act that established interconnection costing and pricing rules which, from our
perspective, significantly impeded negotiations with new entrants to the local
exchange market, state public utility commission interconnection rulemakings and
interconnection arbitration proceedings.
On January 25, 1999, the U.S. Supreme Court ("Supreme Court") issued a
ruling on our appeal of the Order. Although the decision stated that the Act was
ambiguous and self-contradictory, the Supreme Court ruled that:
21
<PAGE>
o the FCC has authority to set pricing methodology;
o unbundled network elements must be provided in cases where necessary or
the lack of availability would impair competition;
o Incumbent local exchange companies ("ILECs") must sell on a bundled
basis, at the competitive local exchange carriers' ("CLECs") request,
network elements the ILEC uses itself on a bundled basis; and
o CLECs may pick and choose pricing or other terms and conditions from
multiple contracts within certain bounds.
The impact of the Supreme Court ruling is unclear since state
regulatory commissions generally follow the FCC's pricing and unbundling
requirements in setting unbundled network element prices. On April 16, 1999, the
FCC issued a Further Notice of Proposal Rulemaking ("FNPRM") to address how it
should interpret the "necessary and impair" standard and which specific network
elements the FCC should require ILECs to unbundle. We expect further review of
the legality of the FCC's pricing rules will occur at the Eighth Circuit Court
of Appeals.
InterLATA Long-Distance Entry. Several regional Bell operating companies have
filed for entry into the interLATA long-distance business. Although many of
these applications have been approved by state regulatory commissions, the FCC
has rejected all applications to date.
We view entry into this business as important to our strategy of
providing an integrated bundle of services to our customers. In 1999, we
withdrew our applications to enter the interLATA long-distance business in
Wyoming and Montana but we filed an application in Arizona. In April 1999, the
Nebraska Public Service Commission indicated it needed additional information
before making a recommendation to the FCC. We expect our application to be
forwarded to the FCC for its review later in 1999.
Access Reform. In its access reform order, the FCC mandated a substantial
restructuring of interstate access pricing. A significant portion of the
services that were charged using minutes-of-use pricing are now being charged
using a combination of minutes-of-use rates, flat-rate pre-subscribed
interexchange carrier charges ("PICCs") and subscriber line charges ("SLCs").
Although an increase in the SLC to multi-line business users occurred on July 1,
1997, the bulk of the mandated pricing changes occurred on January 1, 1998.
Additional mandated pricing changes occurred on January 1, 1999 and more will be
implemented on July 1, 1999 and January 1 of 2000 and 2001. The net effect of
these changes will be to decrease minutes-of-use charges and increase flat-rate
charges (i.e., PICCs and SLCs).
The access reform order also continued in place the current rules by
which ILECs may not assess interstate access charges on information service
providers and purchasers of unbundled network elements.
22
<PAGE>
In February 1999, the FCC issued an order declaring that Internet
traffic is interstate and opened a proceeding to determine the appropriate
regulatory structure. The FCC allowed no change in the current agreements for
reciprocal compensation with CLECs until it rules on this matter. A ruling is
expected in the summer of 1999.
Advanced Telecommunications Services. On March 31, 1999, the FCC issued an order
establishing expanded collocation requirements for both conventional voice and
advanced services. The FCC also issued a FNPRM on "line sharing." Line sharing
allows a CLEC to provide advanced services over the same loop that the ILEC uses
to provide analog voice service. We are currently reviewing the legal and
regulatory ramifications of these orders.
Contingencies
We have pending regulatory actions in local regulatory jurisdictions.
See Note 6 to the consolidated financial statements.
Other Items
From time to time, we engage in discussions regarding restructurings,
dispositions, acquisitions and other similar transactions. Any such transaction
could include, among other things, the transfer, sale or acquisition of
significant assets, businesses or interests, including joint ventures, or the
incurrence, assumption or refinancing of indebtedness, and could be material to
our financial condition and results of operations. There is no assurance that
any such discussions will result in the consummation of any such transaction.
23
<PAGE>
Year 2000 Costs
Background. We have conducted a comprehensive review of our computer-based
systems and related software and are taking measures to ensure that such systems
will properly recognize the year 2000 and continue to process beyond December
31, 1999. The systems we evaluated include systems within (i) the Public
Switched Telephone Network (the "Network"), (ii) Information Technologies
("IT"), and (iii) individual Business Units (the "Business Units").
The Network, which processes voice and data information relating to our
core communications business, relies on remote switches, central office
equipment, interoffice equipment and loop transport equipment that is
predominantly provided to us by telecommunications network vendors. IT is
comprised of our internal business systems that employ hardware and software on
an enterprise-wide basis, including operational, financial and administrative
functions. The Business Units, which include internal organizations such as
finance, procurement, directory services, operator services, wireless, data
networks, real estate, etc., employ systems that support desktop and
departmental applications, as well as embedded computer chip technologies, which
relate specifically to each of our Business Unit's functions and generally are
not part of the Network or IT.
We have approached year 2000 remediation activities through five
general phases: (i) inventory/assessment, (ii) planning, (iii) conversion, (iv)
testing/certification and (v) implementation. Additionally, we are continuously
monitoring and improving our year 2000 related activities and progress,
communicating with our customers and vendors, participating in cooperative
testing with others and taking steps to assure that we have contingency plans in
place prior to the end of 1999. These activities will continue throughout 1999.
Network update. With regard to the Network, we are working with our
telecommunications network vendors to obtain and convert to compliant releases
of hardware and software. We also are testing, at our own initiative, in
cooperation with certain of our customers and vendors, and in cooperation with
other major wireline telecommunications companies, network equipment over
multiple configurations involving a broad spectrum of services. Toward this end,
we participate in the Telco Year 2000 Forum (the "Forum"), an organization that
addresses the year 2000 readiness of network elements and network
interoperability. The Forum has contracted with Telcordia (formerly known as
Bellcore), a former affiliate engaged in telecommunications industry research,
development and maintenance activities, to engage in inter-region
interoperability testing and no significant issues have been found to date. We
also participate in the FCC's Network Reliability and Interoperability Council
IV working group, which is tasked to evaluate the year 2000 readiness of the
public telecommunications network, and in the Alliance for Telecommunications
Industry Solutions ("ATIS"), which is testing inter-network interoperability,
and which, in conjunction with the Cellular Telecommunications Industry
Association ("CTIA"), is testing network interoperability with wireless
networks. Our inventory/assessment, planning and conversion phases for the
Network are complete. The network testing/certification phase was approximately
99% complete as of March 31, 1999 and we anticipate that this phase will be
complete during the second quarter of 1999. Cooperative testing with certain
customers, vendors and other telecommunications companies is expected to
continue during 1999. As of March 31, 1999, approximately 93% of our Network
remediation implementation was complete, with completion of the remainder
anticipated by July 1999. We have initiated Network contingency planning
activities and approximately 50% of the anticipated Network contingency planning
activities were complete as of March 31, 1999. We anticipate that the remainder
of our Network contingency planning activities will be complete by mid-1999.
24
<PAGE>
IT update. Within IT, we have identified approximately 570 applications that
support our critical business processes, such as billing and collections,
network monitoring, repair and ordering. The inventory/assessment and planning
phases for such IT applications are complete. As of March 31, 1999,
approximately 97% of IT conversion activities, 92% of IT testing activities and
89% of IT implementation had been completed. We anticipate that each of these
phases for IT will be complete by July 1999. IT contingency planning activities
are approximately 50% complete and we anticipate that the remainder will be
complete by mid-1999.
Business Units update. Within our Business Units, it is estimated that as of
March 31, 1999, approximately 100% of the inventory/assessment activity, 100% of
the planning activity, 80% of the conversion activity and 70% of the testing and
remediation implementation activities were complete. We anticipate that each of
these phases will be complete in the Business Units for major conversions and
upgrades by the end of the third quarter of 1999. We have recently initiated
Business Unit contingency planning activities and we anticipate those will be
complete by mid-1999.
Costs relating to year 2000. We have spent approximately $172 from the beginning
of 1997 through the end of the first quarter of 1999 on year 2000 projects and
activities. We estimate that additional costs for year 2000 related projects and
activities will be approximately $99. Virtually all year 2000 related
expenditures are being funded through operations. Though year 2000 costs will
directly impact the reported level of future net income, we intend to control
our total cost structure, including deferral of non-critical projects to future
years, in an effort to mitigate the impact of year 2000 costs on our historical
rate of earnings growth. The estimates stated above are subject to change. The
timing of our expenses may vary and is not necessarily indicative of readiness
efforts or progress to date.
Contingency plan. We cannot provide assurance that the results of our year 2000
compliance efforts or the costs of such efforts will not differ materially from
estimates. Accordingly, we are developing year 2000 specific business continuity
and contingency plans to address high risk areas as they are identified. Our
year 2000 contingency planning activities will include training of crisis
managers on year 2000 issues and potential business impacts to their particular
process areas, reviewing and modifying existing business continuity plans to
address year 2000 issues and establishing rapid response teams and
communications procedures for each of the major critical operations and
facilities to handle potential post-implementation year 2000 failures. These
year 2000 specific contingency planning activities are to be in place by the
third quarter of 1999. In addition, we have in place our standard overall
business continuity, contingency and disaster recovery plans (such as diesel
generator back-up power supply sources for our Network, Network rerouting
capabilities, computer data and records safe-keeping and back-up and recovery
procedures) which will be verified, and as appropriate, augmented for specific
year 2000 contingencies.
25
<PAGE>
Dependencies. Within Network, we are highly dependent upon our
telecommunications network vendors to provide year 2000 compliant hardware and
software in a timely manner, and on third parties that are assisting us in the
focused testing and implementation phases regarding the Network. Because of
these dependencies, we have developed and implemented a vendor compliance
process whereby we have obtained written assurances of timely year 2000
compliance from most of our critical vendors (not only for Network, but also for
IT and the Business Units). In addition, we monitor and actively participate in
coordinated Network testing activities, as discussed above, with respect to the
Forum, ATIS and Telcordia. Within IT, we depend on the development of software
by experts, both internal and external, and the availability of critical
resources with the requisite skill sets. Because of this dependency, we have
developed detailed timetables, resource plans and standardized year 2000 testing
requirements for identified critical applications (irrespective of whether these
applications are used primarily by IT, the Network or the Business Units).
Within the Business Units, we are dependent on vendor supplied goods and
services and operability of the Network and critical IT and Business Unit
specific applications. Because of these dependencies, we are implementing the
same type of vendor compliance processes and application planning and testing
processes at the Business Units, as discussed above with respect to the Network
and IT. Overall, we have sought compliance assurances from approximately 6,750
vendors concerning approximately 28,900 products and have received assurances
for approximately 91% of those products as of March 31, 1999. During 1999, we
will continue to pursue assurances of timely year 2000 compliance for the
remaining critical vendors.
As with any large-scale computer-related project such as year 2000
remediation, the testing phase may require resources in excess of other project
phases and the other project phases may be affected by and dependent upon the
results of the testing phase.
Summary. In management's view, the most reasonably likely worse case scenario
for year 2000 failure prospects we face is that a limited number of important IT
and/or Business Unit specific applications may unexpectedly fail. In addition,
there may be problems with the Network relating to the year 2000. Our failure or
the failure by certain of our vendors to remediate year 2000 compliance issues
in advance of the year 2000 and to execute appropriate contingency plans in the
event that a critical failure is experienced, could result in disruption of our
operations, possibly impacting the Network and impairing our ability to bill or
collect revenues. However, while no assurance can be given, management believes
that our efforts at remediation and testing, year 2000 specific contingency
planning, and overall business continuity, contingency and disaster recovery
planning will likely be successful, and that the aforementioned "worse case
scenario" is unlikely to develop or significantly disrupt our financial
operations.
The above discussion regarding year 2000 contains many statements that
are "forward-looking" within the meaning of the Reform Act. Although we believe
that our estimates are based on reasonable assumptions, we cannot assure that
actual results will not differ materially from these expectations or estimates.
See "Special Note Regarding Forward-Looking Statements" on page 12.
26
<PAGE>
New Accounting Standards
On June 15, 1998, the Financial Accounting Standards Board issued
Financial Accounting Standards ("FAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. FAS
No. 133 requires, among other things, that all derivative instruments be
recognized at fair value as assets or liabilities on the balance sheet and that
changes in fair value generally be recognized currently in earnings unless
specific criteria are met. The standard is effective for fiscal years beginning
after June 15, 1999, though earlier adoption is permitted. Financial statement
impacts of adopting the new standard depend upon the amount and nature of the
future use of derivative instruments and their relative changes in valuation
over time. Had we adopted FAS No. 133 in 1999, its impact on the financial
statements would not have been material.
27
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Our Company and its subsidiaries are subject to claims and proceedings arising
in the ordinary course of business. At U S WEST Communications, there are
pending certain regulatory actions in local regulatory jurisdictions. For a
discussion of these actions, see "Note 6 - Commitments and Contingencies" - to
the Consolidated Financial Statements.
Item 6. Exhibits and Reports on Form 8-K
<TABLE>
<CAPTION>
(a) Exhibits
<S> <C>
(3-A) Restated Certificate of Incorporation of U S WEST, Inc. (Exhibit 3(I)
to Form 10-Q for the quarter ended September 30, 1998, File No.
1-14087).
(3-B) Bylaws of U S WEST, Inc. (formerly "USW-C, Inc."), effective
as of June 12, 1998 (Exhibit 3(ii) to Form 8-KA dated June 26,
1998, File No. 1-14087).
(4-A) Form of Rights Agreement between U S WEST, Inc. (formerly
"USW-C, Inc.") and State Street Bank and Trust Company, as
Rights Agent (Exhibit 4-A to the Form S-4 Registration
Statement No.
333-45765, filed February 6, 1998, as amended).
(4-B) Form of Indenture among U S WEST Capital Funding, Inc., USW-C
(renamed "U S WEST, Inc.") and First National Bank of Chicago,
as Trustee (Exhibit 4-A to Form S-3 Registration Statement No.
333-51907, filed May 6, 1998, as amended).
(10-A) Separation Agreement between U S WEST, Inc. (renamed "MediaOne
Group, Inc.") and USW-C, Inc. (renamed "U S WEST, Inc."),
dated June 5, 1998 (Exhibit 99.1 to Form 8-K/A dated June 26,
1998, File No. 1-14087).
(10-B) Employee Matters Agreement between U S WEST, Inc. (renamed
"MediaOne Group, Inc.") and USW-C, Inc. (renamed "U S WEST,
Inc."), dated June 5, 1998 (Exhibit 99.2 to Form 8-K/A dated
June 26, 1998, File No. 1-14087).
(10-C) Tax Sharing Agreement between U S WEST, Inc. (renamed
"MediaOne Group, Inc.") and USW-C, Inc. (renamed "U S WEST,
Inc."), dated June 5, 1998 (Exhibit 99.3 to Form 8-K/A dated
June 26, 1998, File No. 1-14087).
(10-D) 364-Day $3.5 Billion Credit Agreement, dated May 8, 1998, with
Morgan Guaranty Trust Company of New York, as Administrative
Agent (Exhibit 10A to Form 10-Q for the quarter ended March
31, 1998, File No. 1-14087).
29
<PAGE>
(10-E) Five-Year $1.0 Billion Credit Agreement, dated May 8, 1998,
with Morgan Guaranty Trust Company of New York, as
Administrative Agent (Exhibit 10B to form 10-Q for the quarter
ended March 31, 1998, File No. 1-14087).
(10-E-1) Amendment No. 1 to Credit Agreements dated as of June 30, 1998
to the 364-Day $3.5 Billion Credit Agreement and the Five-Year
$1.0 Billion Credit Agreement, each dated as of May 8, 1998,
among U S WEST Capital Funding, Inc., U S WEST, Inc., the
Banks listed on the signature pages thereto and Morgan
Guaranty Trust Company of New York (Exhibit 10(e)(1) to Form
10-Q for the quarter ended September 30, 1998, File No.
1-14087).
(10-F) Change of Control Agreement for the President and Chief Executive
Officer (Exhibit 10(f) to Form 10-Q for the quarter ended June 30,
1998, file No. 1-14087).
(10-G) Form of Change of Control Agreement for Tier II Executive (Exhibit
10(g) to Form 10-Q for the quarter ended June 30, 1998, File No.
1-14087).
(10-H) Form of Executive Severance Agreement (Exhibit 10(h) to Form 10-Q
for the quarter ended June 30, 1998, File No. 1-14087).
(10-I) 1998 U S WEST Stock Plan (Exhibit 10-A to the Form S-4
Registration Statement No. 333-45765, filed February 6, 1998,
as amended).
(10-J) U S WEST Long-Term Incentive Plan (Exhibit 10-D to the Form
S-4 Registration Statement No. 333-45765, filed February 6,
1998, as amended).
(10-K) U S WEST Executive Short-Term Incentive Plan (Exhibit 10-E to
the Form S-4 Registration Statement No. 333-45765, filed
February 6, 1998, as amended).
(10-L) U S WEST 1998 Broad Based Stock Option Plan dated June 12, 1998
(Exhibit 10(l) to Form 10-Q for the quarter ended September 30, 1998,
File No. 1-14087).
(10-M) U S WEST Deferred Compensation Plan, amended and restated effective
as of June 12, 1998 (Exhibit 10(m) to Form 10-Q for the quarter
ended September 30, 1998, File No. 1-14087).
(10-N) U S WEST 1998 Stock Plan, as amended June 22, 1998 (Exhibit 10(n)
to Form 10-Q for the quarter ended September 30, 1998, file No.
1-14087).
(10-O) Shareowner Investment Plan dated June 12, 1998 (Form S-3 Registration
Statement No. 333-52781, filed May 15, 1998).
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
(10-P) Amendment to the Separation Agreement, dated June 5, 1998
between U S WEST, Inc. (renamed "MediaOne Group, Inc.") and
USW-C, Inc. (renamed "U S WEST, Inc."), dated June 12, 1998
(Exhibit 10(p) to Form 10-K/A for the year ended December 31,
1998, File No. 1-14087).
10-Q Form of Non-Qualified Stock Option Agreement.
(13) U S WEST 1998 Summary Annual Report to Shareholders (Exhibit 13 to
Form 8-K dated February 24, 1999, File No. 1-14087).
27 Financial Data Schedule.
</TABLE>
- -------------------
( ) Previously filed.
<TABLE>
<CAPTION>
(b) Reports on Form 8-K filed during the First Quarter of 1999
<S> <C>
(i) Form 8-K dated January 12, 1999 providing notification of a press
release entitled "Jerry O. Williams Retires from U S WEST Board of
Directors."
(ii) Form 8-K dated January 15, 1999 providing notification of a press
release entitled "U S WEST To Sell 500,000 Access Lines."
(iii) Form 8-K dated January 22, 1999 providing notification of the release
of 1998 fourth quarter earnings of U S WEST.
(iv) Form 8-K dated February 23, 1999 providing notification of a press
release entitled "U S WEST Commits $300 Million in Added Spending."
(v) Form 8-K dated February 24, 1999 attaching U S WEST Summary Annual
Report to Shareholders.
(vi) Form 8-K dated February 25, 1999 providing notification of a press
release entitled "U S WEST Holds Third Annual Investor Conference."
(vii) Form 8-K dated April 6, 1999 providing notification of a press release
entitled "Chairman of Gartner Group Elected to U S WEST Board of
Directors."
(viii) Form 8-K dated April 21, 1999 providing notification of the release of 1999 first quarter earnings of U
S WEST.
</TABLE>
30
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
U S WEST, Inc.
/s/ ALLAN R. SPIES
By:___________________________________
Allan R. Spies
Executive Vice President and
Chief Financial Officer
May 6, 1999
31
U S WEST, INC.
FORM OF NON-QUALIFIED STOCK OPTION AGREEMENT
THIS AGREEMENT is made between U S WEST, Inc. (the "Company" or "U S
WEST") and the Optionee ("Optionee") named in the schedule attached to and made
part of this Agreement (the "Schedule"), as of the date set forth in the
Schedule.
Pursuant to the 1998 U S WEST Stock Plan, as amended, (the "Plan"), the
Human Resources Committee of the Company's Board of Directors (the "Committee")
has approved the granting to Optionee of an option to purchase shares of Common
Stock (the "Option"), without par value on the terms and conditions set forth in
this Agreement, as a matter of separate inducement in connection with Optionee's
engagement with the Company or a Related Entity, and not in lieu of salary or
other compensation for Optionee's services. The Option shall not be treated as
an incentive stock option.
In consideration of the foregoing and of the mutual covenants set forth
herein, and other good and valuable consideration, the Company and Optionee
agree as follows:
1. Incorporation of Plan and Defined Terms. The Option is granted
pursuant to the Plan, the terms of which are incorporated by reference and apply
to this Agreement as if they were fully set forth herein. Terms used in this
Agreement and not otherwise defined shall have the meanings set forth in the
Plan.
2. Shares Optioned; Option Price. Optionee may purchase all or any part
(in whole shares) of an aggregate of the number of shares of Common Stock, at a
purchase price per share (which is not less than the Fair Market Value on the
date of this Agreement) as specified in the Schedule, on the terms and
conditions set forth herein.
3. Option Term; Vesting; Times of Exercise. The Option shall become
Vested in one-third increments upon each of the first three (3) anniversaries
following the date hereof. The vesting on any such increment shall be subject to
the continuous employment of Optionee until the anniversary date on which such
increment is scheduled to vest, and provided further that the Option shall
expire and shall no longer be exercisable following ten (10) years from the date
of this Agreement (the "Expiration Date"). Except as otherwise specifically set
forth below and elsewhere in this Agreement, the Option shall become Vested only
to the extent that the foregoing continuous employment requirement is satisfied,
regardless of the circumstances under which Optionee's employment is terminated.
The exercise of any option or the sale of any stock is subject to the Company's
standard blackout practices as more fully described in the Company's policies
and procedures.
32
<PAGE>
(i) Death. In the event of the death of Optionee, the Option
shall become Vested and the estate of the Optionee shall have the
right, at any time and from time to time consistent with rules
established by the Committee for the administration of the Plan, within
one year after the date of death or such longer period, if any, as the
Committee in its sole discretion shall determine (but not after the
Expiration Date), to exercise all or any portion of the Option.
(ii) Disability. Except as otherwise set forth in this
Agreement, if the employment of Optionee is terminated because of
Disability, the Option shall be retained by Optionee, and the Option,
if not then Vested, shall become Vested as set forth in the vesting
schedule in Paragraph 3 of this Agreement. Upon vesting, Optionee shall
have the right to exercise the Option, at any time and from time to
time, but not after the Expiration Date.
(iii) Retirement. Except as otherwise set forth in this
Agreement, upon Optionee's Retirement, the Option shall be retained by
Optionee, and the Option, if not then Vested, shall become Vested as
set forth in the vesting schedule in Paragraph 3 of this Agreement,
unless the Committee, in its sole discretion, determines otherwise;
provided, however, that the continuation of vesting shall be contingent
upon Optionee's execution and delivery to the Company, on or prior to
the effective date of Optionee's Retirement, of the Company's standard
form of "Waiver & Release" of claims, available from the Human
Resources Department of the Company. Upon vesting, Optionee shall have
the right to exercise the Option, at any time and from time to time,
until the Expiration Date, unless otherwise provided in this Agreement.
(iv) Other Termination. If Optionee's employment with the
Company or a Related Entity is terminated for any reason other than for
death, Disability or Retirement and other than "for cause," as such
term is defined in the Plan, Optionee shall have the right to exercise
all or any portion of the Option, if the Option is then Vested, at any
time and from time to time within ninety (90) days of termination or
such other period, if any, as the Committee in its sole discretion
shall determine (but not after the Expiration Date).
(v) Executive Severance Agreement. If Optionee has executed an
Executive Severance Agreement with the Company, the Option will be
Vested in accordance with the terms of the Executive Severance
Agreement if Optionee becomes entitled to the receipt of "Severance
Benefits," as set forth in that Executive Severance Agreement and
sixteen (16) days have passed following the execution of a standard
form of "Waiver & Release" of claims and compliance with the
"Conditions" by Optionee as set forth in the Company's standard
Executive Severance Agreement.
33
<PAGE>
(vi) Change of Control. Upon the occurrence of a Change of
Control, the Option shall be Vested immediately. For purposes of this
paragraph, "Change of Control" shall have the identical meaning as set
forth in the Change of Control Agreement, if any, that Optionee has
executed with the Company. To ensure parallel application, for purposes
of this paragraph only, defined terms contained in the definition of
"Change of Control" set forth in Optionee's Change of Control Agreement
shall have the same meaning here as set forth in that Change of Control
Agreement. If Optionee has not executed any such Change of Control
Agreement, "Change of Control" shall have the identical meaning as set
forth in the Stock Plan.
(vii) Termination for Cause. Notwithstanding any other
provision in this Agreement, if Optionee's employment is terminated by
the Company or any Related Entity "for cause," as such term is defined
in the Plan, Optionee shall forfeit immediately all rights under the
Option except as to the shares of Common Stock already purchased prior
to such termination.
4. Exercise: Payment for and Delivery of Stock. The Option may be
exercised only by Optionee or his or her transferee(s) by last will and
testament or the laws of descent and distribution. The Option may be exercised
by giving notice of exercise to the Company specifying the number of shares
(minimum of 100, unless the unexercised balance of the Option is less than 100)
to be purchased and the total purchase price. The purchase price shall be
payable (i) in cash or by an equivalent means, (ii) by delivery, constructive or
otherwise, to the Company of shares of Common Stock owned by Optionee, or (iii)
any combination of the foregoing. Any shares of Common Stock so tendered shall
be valued as of the Option exercise date.
5. Non-Transferability of Option. The Option is not transferable
otherwise than by last will and testament or the laws of descent and
distribution. The Option shall not be otherwise transferred or assigned,
pledged, hypothecated or otherwise disposed of in any way, whether by operation
of law or otherwise, and shall not be subject to execution, attachment or
similar process. The Option shall not be assignable or transferable pursuant to
a domestic relations order. During the lifetime of Optionee, the Option shall be
exercisable only by Optionee, or Optionee's guardian or legal representative.
Upon any attempt to transfer the Option otherwise than by last will and
testament or the laws of descent and distribution, or to assign, pledge,
hypothecate or otherwise dispose of the Option, or upon the levy of any
execution, attachment or similar process upon the Option, the Option shall
immediately terminate and become null and void.
34
<PAGE>
6. Performance for Competitors. If at any time following the date of
this Agreement and before the Option is Vested, regardless of whether Optionee
has Retired, Optionee directly or indirectly receives payment for services
rendered to, or is otherwise employed by, any person, firm or corporation that
is in competition with the Company or engaged in providing any goods or services
that are substantially the same as any goods or services provided or under
development by the Company, Optionee immediately shall forfeit all rights under
the Option, unless the Committee in its sole discretion determines otherwise, or
unless Optionee is in full compliance with the Company's Policy on Service on
Outside Boards of Directors, as interpreted solely by the Company's Senior
Management Compliance Committee. If at any time Optionee renders services to or
becomes otherwise employed by any person, firm or corporation that is in
competition with the Company or engaged in providing any goods or services that
are substantially the same as goods or services provided or under development by
the Company, Optionee shall have ninety (90) days after the date of such
employment to exercise any Vested and non-expired Option. Any determination
under this Paragraph 6, including whether a person, firm or corporation is "in
competition with" the Company or providing "substantially the same" goods or
services as the Company provides or is developing, will be subject to the sole
discretion of the Committee. The parties intend that the protection afforded to
the Company under this section shall also benefit a Related Entity of the
Company.
7. Non-solicitation of Employees. Optionee agrees that he or she will
not for a period of one (1) year immediately following the termination of his or
her employment with the Company for any reason, either on Optionee's own account
or in conjunction with or on behalf of any other person or entity whatsoever,
directly or indirectly induce, solicit, or entice away any person who, at any
time during the three (3) months immediately preceding Optionee's termination of
employment, is a managerial level employee of the Company (including, but not
limited to, any Officer, Executive Director or director-level employee, or any
equivalent or successor term for any such employees). If Optionee engages in any
conduct contrary to the provisions of this Paragraph 7, Optionee shall forfeit
the Option to the extent the Option has not Vested, unless the Committee
determines otherwise. Such forfeiture is in addition to any other remedies
available under law. The parties intend that the protection afforded to the
Company under this section shall also benefit a Related Entity of the Company.
8. Intellectual Property Ownership and Protection. Optionee agrees that
any inventions, discoveries, creations (including without limitation software,
writings, drawings and other works), improvements, confidential information or
other intellectual property that he or she may develop or create, or assist in
developing or creating, during his or her employment with the Company, whether
or not patentable or eligible for copyright, that relate to the actual, planned,
or foreseeable business or other activities of the Company, or that result from
his or her work for the Company, are the exclusive property of the Company.
Optionee agrees to disclose promptly such property to the Company and will, both
during and after his or her employment, and without additional compensation,
execute all assignments and other documents and do all things reasonably
necessary to secure and enforce U.S. and foreign intellectual property rights
for the Company, including patents and copyrights.
35
<PAGE>
Optionee is not obligated to assign any intellectual property to
Company that Optionee created prior to Optionee's employment with the Company.
To avoid any confusion, Optionee must identify in writing on Attachment A [make
sure appropriate attachment is referenced] any such intellectual property that
has not been patented or published and forward it along with this letter.
Optionee agrees that Optionee will hold in confidence and will not,
during or after his or her employment, disclose or use for the benefit of any
person or entity other than Company, any Company confidential information that
was developed or received during his or her employment. "Company confidential
information" shall include all trade secrets, research and development
information, product and marketing plans, business or legal strategies,
personnel or financial data, product and service specifications, prototypes,
software, customer lists and other confidential information or materials of
Company or of others with whom Company has a confidential relationship. Optionee
will promptly return all such information and materials to Company when his or
her employment ends.
[Use as needed, could remove depending on the circumstance i.e., no stock in the
offer]. If Optionee fails to comply with the provisions of this paragraph 8,
Optionee shall forfeit the Option to the extent the Option has not vested,
unless the Committee determines otherwise. Such forfeiture is in addition to any
other remedies available to the Company. The parties intend that the protection
afforded to the Company under this section shall also benefit a Related Entity
of the Company.
9. Decisions of Committee. Any decision, interpretation or other action
made or taken in good faith by the Committee arising out of or in connection
with the Plan or the Option shall be final, binding and conclusive on the
Company and Optionee and any respective heir, executor, administrator, successor
or assign.
36
<PAGE>
10. Arbitration. Optionee agrees that any claim, controversy or dispute
that may arise directly or indirectly in connection with Optionee's employment
or termination of employment with U S WEST, and/or any associated or related
disputes arising therefrom involving U S WEST and/or any employee(s),
Director(s), officer(s), or agent(s) of U S WEST, whether arising in contract,
statute, tort, fraud, misrepresentation, discrimination, common law or any other
legal theory, including, but not limited to, disputes relating to the making,
performance or interpretation of this Agreement; and claims or other disputes
arising under Title VII of the Civil Rights Act of 1964, as amended; the Civil
Rights Act of 1991; the Age Discrimination in Employment Act of 1967, as
amended; 42 U.S.C. ss. 1981, ss. 1981a, ss. 1983, ss. 1985, or ss. 1988; the
Family and Medical Leave Act of 1993; the Americans with Disabilities Act of
1990, as amended; the Rehabilitation Act of 1973, as amended; the Fair Labor
Standards Act of 1938, as amended; the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"); the Colorado Anti-Discrimination Act; or any
other similar federal, state or local law or regulation, whenever brought, shall
be resolved by arbitration. If, however, Optionee would otherwise be legally
required to exhaust administrative remedies to obtain legal relief, Optionee can
and must exhaust such administrative remedies prior to pursuing arbitration. The
only legal claims between Optionee and U S WEST that are not included for
arbitration within this Agreement are claims for workers' compensation or
unemployment compensation benefits. By signing this Agreement, Optionee
voluntarily, knowingly and intelligently waives any right Optionee may otherwise
have to seek remedies in court or other forums, including the right to a jury
trial. U S WEST also hereby voluntarily, knowingly, and intelligently waives any
right it might otherwise have to seek remedies against Optionee in court or
other forums, including the right to a jury trial. The Federal Arbitration Act,
9 U.S.C. ss.ss. 1-16 ("FAA") shall govern the arbitrability of all claims,
provided that they are enforceable under the FAA, as it may be amended from time
to time. In the event the FAA does not govern, the Colorado Uniform Arbitration
Act shall apply. Additionally, the substantive law of Colorado, to the extent it
is consistent with the terms stated in this Agreement for arbitration, shall
apply to any common law claims. This Agreement for arbitration supersedes any
prior arbitration agreement between Optionee and U S WEST to the extent they are
inconsistent.
37
<PAGE>
A single arbitrator engaged in the practice of law shall conduct the
arbitration under the applicable rules and procedures of the American
Arbitration Association ("AAA"), unless otherwise agreed to by the parties. Any
dispute, that relates directly or indirectly to Optionee's employment with U S
WEST or to the termination of Optionee's employment will be conducted under the
AAA National Rules for the Resolution of Employment Disputes, effective June 1,
1997. The arbitrator shall be chosen from a state other than Optionee's state of
residence and other than Colorado. Other than as set forth herein, the
arbitrator shall have no authority to add to, detract from, change, amend, or
modify existing law. The arbitrator shall have the authority to order such
discovery as is necessary for a fair resolution of the dispute. The arbitrator
may award punitive damages, as allowed by Title VII of the Civil Rights Act of
1964, as amended; the Civil Rights Act of 1991; the Age Discrimination in
Employment Act of 1967, as amended; and the Americans with Disabilities Act of
1990, as amended, regardless of any limitations imposed by federal, state, or
local laws regarding amounts that may be awarded in arbitration proceedings. All
arbitration proceedings, including without limitation, settlements under this
Agreement, will be confidential. Optionee shall not be required to pay more than
One Hundred Fifty Dollars ($150.00) of the arbitrator's hourly fees and
expenses. The prevailing party in any arbitration shall be entitled to receive
reasonable attorneys' fees as provided by law. The arbitrator's decision and
award shall be final and binding, as to all claims that were, or could have
been, raised in the arbitration, and judgment upon the award rendered by the
arbitrator may be entered to any court having jurisdiction thereof. If any party
hereto files a judicial or administrative action asserting claims subject to
this arbitration provision, and another party successfully stays such action
and/or compels arbitration of such claims, the party filing said action shall
pay the other party's costs and expenses incurred in seeking such stay and/or
compelling arbitration, including reasonable attorneys' fees not to exceed Two
Thousand Five Hundred Dollars ($2,500.00).
38
<PAGE>
11. Miscellaneous.
(i) Notices. Any notice to be given to the Company shall be
personally delivered to or addressed to its Senior Vice President - Law
and Human Resources and Assistant Secretary, and any notice to be given
to Optionee shall be addressed to him or her at the address given
beneath his or her signature below or such other address as the Company
reasonably believes to be his or her most current address. Any notice
to the Company is deemed given when received on behalf of the Company
by the Senior Vice President - Law and Human Resources and Assistant
Secretary, of the Company at 1801 California Street, Suite 5200,
Denver, CO 80202. Any notice to Optionee is deemed given when
personally delivered or enclosed in a properly sealed envelope
addressed as aforesaid and deposited, postage prepaid, in a post office
or branch post office regularly maintained by the United States Postal
Service.
(ii) Employment. The Company may terminate Optionee's
employment at any time, with or without cause, unless the term of
employment is covered by separate conditions contained in another
authorized written agreement signed by the Company and the Optionee.
Nothing contained in this Agreement creates or implies an employment
contract or term of employment or any promise of specific treatment
upon which the Optionee may rely.
(iii) Governing Law. This Agreement shall be construed and
enforced in accordance with the laws of the State of Colorado.
(iv) Amendments. The Company may at any time propose to amend
this Agreement, but any such alteration or amendment shall be effective
only if in writing, signed by a duly authorized officer of the Company
and by Optionee.
U S WEST, Inc. OPTIONEE
By: /S/ CEO & PRESIDENT
CEO & President __________________________
Full Name
--------------------------
Street Address
--------------------------
City, State and Zip Code
--------------------------
Social Security Number
39
<PAGE>
INTELLECTUAL PROPERTY THAT HAS NOT BEEN PATENTED OR PUBLISHED
1.
2.
3.
40
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001054522
<NAME> U S WEST, INC.
<MULTIPLIER> 1,000,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> MAR-31-1999 MAR-31-1998
<CASH> 36 373
<SECURITIES> 0 0
<RECEIVABLES> 1,700 1,616
<ALLOWANCES> 0 0
<INVENTORY> 236 179
<CURRENT-ASSETS> 2,536 2,751
<PP&E> 36,031 33,930
<DEPRECIATION> 20,933 19,679
<TOTAL-ASSETS> 18,709 17,851
<CURRENT-LIABILITIES> 4,849 4,350
<BONDS> 8,642 4,931
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 920 4,450
<TOTAL-LIABILITY-AND-EQUITY> 18,709 17,851
<SALES> 3,182 3,009
<TOTAL-REVENUES> 3,182 3,009
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 2,389 2,194
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 153 163
<INCOME-PRETAX> 639 627
<INCOME-TAX> 242 234
<INCOME-CONTINUING> 397 393
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 397 393
<EPS-PRIMARY> .79 .78
<EPS-DILUTED> .78 .78
</TABLE>
