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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 September 30, 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 1-3040
U S WEST Communications, Inc.
A Colorado Corporation 84-0273800
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation of organization)
1801 California Street, Denver, Colorado 80202
Telephone Number (303) 672-2700
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THE REGISTRANT, A WHOLLY-OWNED SUBSIDIARY OF U S WEST, INC., MEETS THE
CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1) (a) AND (b) OF FORM 10-Q AND IS
THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL
INSTRUCTION H(2).
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 __
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<PAGE>
U S WEST Communications, 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 and nine months ended September 30, 1999 and 1998................. 3
Consolidated Balance Sheets -
September 30, 1999 and December 31, 1998...................................... 4
Consolidated Statements of Cash Flows -
Nine months ended September 30, 1999 and 1998................................. 5
Notes to Consolidated Financial Statements............................................ 6
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................................... 11
3. Quantitative and Qualitative Disclosures
About Market Risk...................................................................... 18
</TABLE>
<TABLE>
<CAPTION>
PART II - OTHER INFORMATION
<S> <C>
1. Legal Proceedings............................................................................. 25
2. Changes in Securities and Use of Proceeds..................................................... 25
6. Exhibits and Reports on Form 8-K.............................................................. 25
</TABLE>
<PAGE>
U S WEST Communications, Inc.
CONSOLIDATED STATEMENTS OF INCOME
(dollars in millions)
(unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Operating revenues:
Local services.......................................... $1,979 $1,805 $5,779 $5,291
Access services......................................... 688 660 2,057 1,996
Long-distance services.................................. 138 199 459 595
Other services.......................................... 110 75 262 221
------------- ------------ ------------- ------------
Total operating revenues............................. 2,915 2,739 8,557 8,103
------------- ------------ ------------- ------------
------------- ------------ ------------- ------------
Operating expenses:
Employee-related expenses............................... 935 868 2,719 2,550
Other operating expenses................................ 636 625 1,923 1,969
Depreciation and amortization........................... 571 544 1,713 1,580
------------- ------------ ------------- ------------
Total operating expenses............................. 2,142 2,037 6,355 6,099
------------- ------------ ------------- ------------
Operating income.............................................. 773 702 2,202 2,004
------------- ------------ ------------- ------------
------------- ------------ ------------- ------------
Other expense:
Interest expense........................................ 102 103 289 288
Other expense-net....................................... 9 20 33 76
-------------- ------------- -------------- -------------
Total other expense-net.............................. 111 123 322 364
-------------- ------------- -------------- -------------
Income before income taxes.................................... 662 579 1,880 1,640
Provision for income taxes.................................... 251 219 713 630
-------------- ------------- -------------- -------------
Net income.................................................... $411 $360 $1,167 $1,010
============== ============= ============== =============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE>
U S WEST Communications, Inc.
CONSOLIDATED BALANCE SHEETS
(dollars in millions)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents....................................................... $66 $68
Accounts receivable, less allowance for uncollectibles of
$51 and $48, respectively....................................................... 1,703 1,619
Inventories and supplies........................................................ 187 154
Deferred tax assets............................................................. 121 113
Prepaid and other............................................................... 98 61
---------------- -------------
Total current assets.................................................................. 2,175 2,015
Property, plant and equipment-net..................................................... 15,423 14,681
Other assets-net...................................................................... 1,303 882
---------------- -------------
Total assets.......................................................................... $18,901 $17,578
================ =============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Short-term debt................................................................. $1,767 $789
Accounts payable................................................................ 1,489 1,411
Accrued expenses................................................................ 1,677 1,383
Advance billings and customer deposits.......................................... 341 326
---------------- -------------
Total current liabilities............................................................. 5,274 3,909
Long-term debt........................................................................ 4,976 5,154
Postretirement and other postemployment benefit obligations........................... 2,426 2,458
Deferred income taxes................................................................. 1,045 898
Unamortized investment tax credits.................................................... 158 159
Deferred credits and other............................................................ 558 537
Commitments and Contingencies
Stockholder's equity:
Common stock-one share without par value, owned by parent....................... 8,081 8,080
Cumulative deficit.............................................................. (3,617) (3,617)
---------------- -------------
Total stockholder's equity............................................................ 4,464 4,463
---------------- -------------
Total liabilities and stockholder's equity............................................ $18,901 $17,578
================ =============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE>
U S WEST Communications, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in millions)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income................................................................................ $1,167 $1,010
Adjustments to net income:
Depreciation and amortization....................................................... 1,713 1,580
Deferred income taxes and amortization of investment tax credits.................... 134 90
Changes in operating assets and liabilities:
Accounts receivable................................................................. (84) (38)
Inventories, supplies and other current assets...................................... (58) (19)
Accounts payable, accrued expenses and advance billings............................. 294 16
Other............................................................................... (160) 43
-------------- --------------
Cash provided by operating activities............................................... 3,006 2,682
-------------- --------------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment......................................... (2,590) (1,880)
Payments on disposals of property, plant and equipment................................. (30) (14)
Other.................................................................................. - (24)
-------------- --------------
Cash used for investing activities..................................................... (2,620) (1,918)
-------------- --------------
FINANCING ACTIVITIES
Net proceeds from short-term debt...................................................... 986 457
Proceeds from issuance of long-term debt............................................... 17 -
Repayments of long-term debt........................................................... (307) (411)
Dividends paid on common stock......................................................... (1,084) (842)
Equity infusions from U S WEST......................................................... - 63
-------------- --------------
Cash used for financing activities..................................................... (388) (733)
-------------- --------------
CASH AND CASH EQUIVALENTS
Increase (decrease).................................................................... (2) 31
Beginning balance...................................................................... 68 26
-------------- --------------
Ending balance......................................................................... $66 $57
============== ==============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE>
U S WEST Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 30, 1999
(dollars in millions)
(unaudited)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The consolidated financial statements include the
accounts of U S WEST Communications, Inc. (the "Company") and its wholly owned
subsidiaries. We are a wholly owned subsidiary of U S WEST, Inc. ("U S WEST").
The consolidated interim financial statements are unaudited. We
prepared the financial statements in accordance with the instructions for Form
10-Q and, therefore, did not include all information and footnotes required by
generally accepted accounting principles. In our opinion, we made all the
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly our consolidated results of operations, financial position and
cash flows as of September 30, 1999 and for all periods presented. 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 three and nine months ended September
30, 1999 are not necessarily indicative of the results expected for the full
year.
We reclassified prior period revenue amounts to conform to the current year
presentation. For a description of the reclassifications, see U S WEST's 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 three months
ended September 30, 1999 of $40 and $124 for the nine months ended September 30,
1999.
<PAGE>
NOTE 2: SEGMENT INFORMATION
We operate in three segments: retail services, wholesale services and
network 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.
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.
Following is a breakout of our segments, which has been extracted from the
financial statements of U S WEST. Separate segment data is not provided to our
chief operating decision-maker for the Company. Certain revenues and expenses of
U S WEST are included in the segment data, which have been eliminated in the
reconciling items column. Additionally, because significant operating expenses
of 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 excludes
corporate expense. The "other" category includes our corporate expenses and
intersegment eliminations. Asset information by segment is not provided to our
chief operating decision-maker. The total 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 Reconciling Consolidated
Services Services Services Services Other Items Total
-------- -------- -------- -------- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Three Months Ended
September 30,
1999
----
Operating
revenues......... $2,270 $725 $63 $3,058 $- ($143) $2,915
Margin........... 1,560 549 (699) 1,410 (34) (714)(1) 662
Capital
expenditures..... 144(2) 25 877 $1,046 (5) (26) 1,015
1998
----
Operating
revenues......... $2,157 $643 $51 $2,851 $- ($112) 2,739
Margin........... 1,554 464 (726) 1,292 (11) (702) (1) 579
Capital
expenditures..... 49(2) - 507 556 27 (10) 573
</TABLE>
<PAGE>
- --------------------
(1) Adjustments made to arrive at consolidated income before income taxes
include the following:
<TABLE>
<CAPTION>
Three Months Ended September 30,
------------------------------------------
1999 1998
------------------- -------------------
<S> <C> <C>
Taxes other than income taxes................................... $99 $79
Depreciation and amortization................................... 571 544
Interest expense................................................ 102 103
Other amounts applicable to U S WEST, Inc....................... (67) (44)
Other expense-net............................................... 9 20
------------------- -------------------
$714 $702
=================== ===================
</TABLE>
(2) 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.
<TABLE>
<CAPTION>
Total
Communications
and
Retail Wholesale Network Related Reconciling Consolidated
Services Services Services Services Other Items Total
-------- -------- -------- -------- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Nine Months Ended
September 30,
1999
----
Operating
revenues......... $6,660 $2,134 $178 $8,972 $- ($415) $8,557
Margin........... 4,607 1,604 (2,083) 4,128 (70) (2,178)(1) 1,880
Capital
expenditures..... 348(2) 65 2,346 2,759 33 (64) 2,728
1998
Operating
revenues......... $6,337 $1,916 $150 $8,403 $- ($300) $8,103
Margin........... 4,662 1,423 (2,031) 4,054 (199) (2,215) (1) 1,640
Capital
expenditures..... 286(2) - 1,539 1,825 68 (30) 1,863
</TABLE>
- --------------------
(1) Adjustments made to arrive at consolidated income before income taxes
include the following:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------------------
1999 1998
------------------- -------------------
<S> <C> <C>
Restructuring costs............................................. $- $129
Taxes other than income taxes................................... 289 262
Depreciation and amortization................................... 1,713 1,580
Interest expense................................................ 289 288
Other amounts applicable to U S WEST, Inc....................... (146) (120)
Other expense-net............................................... 33 76
------------------- -------------------
$2,178 $2,215
=================== ===================
</TABLE>
(2) 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.
In addition to the operating revenues disclosed above, intersegment
operating revenues of the retail services and network services segment were:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Retail services................................ $13 $7 $34 $22
Network services............................... 15 16 46 48
</TABLE>
NOTE 3: 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 September 30, 1999, we have a remaining commitment of
$49 to be paid in a combination of cash and services through 2004.
Contingencies
On May 1, 1996, the Oregon Public Utilities Commission ("OPUC") approved a
stipulation terminating prematurely our alternative form of regulation ("AFOR")
plan and it then undertook a review of our earnings. In May 1997, the OPUC
ordered us to reduce our 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 our AFOR plan
was terminated on May 1, 1996.
We filed an appeal of the order and asked for an immediate stay of the
refund with the Oregon Circuit Court which granted our 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 our 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. We continue to charge interim rates, subject to refund,
during the pendency of that appeal.
On September 9, 1999, we reached a tentative settlement agreement with the
OPUC staff whereby we would refund approximately $230 and provide ongoing rate
reductions of $63. The agreement is subject to public hearing and final OPUC
approval. We have reserved for the proposed refund.
Other Contingencies. On October 1, 1999, a Fifth Amended Class Action Complaint
was filed in the District Court, Larimer County, Colorado, against U S WEST and
us purportedly on behalf of 220,000 customers in the State of Colorado. The
complaint alleges that from 1993 to the present, we and U S WEST, in violation
of alleged statutory and common law obligations, willfully delayed the provision
of local telephone service to the purported class members. The complaint seeks
compensatory damages for purported class members, disgorgement of profits and
punitive damages. The Company and U S WEST intend to vigorously defend this
action.
The New Mexico Public Regulation Commission is expected shortly to rule on
a petition by its Staff to require us to reduce revenues on an interim basis by
$29. Rates are interim pending the completion of a full rate case during 2000.
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 or financial position.
NOTE 4: SALE OF EXCHANGES
In June 1999, we entered into a series of definitive agreements to sell
local-exchange telephone properties serving approximately 530,000 access lines
in nine states for approximately $1,650 in cash, subject to adjustment. Approval
of the sale is subject to review by federal and state regulatory agencies. The
transfer of ownership, which will occur on a state-by-state basis, is expected
to be completed over the next two years.
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 (the "Reform Act"). Although U S WEST
Communications, 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 and data
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 and service pricing in the local exchange
market;
o acceleration of the deployment of advanced new services to customers, such
as broadband data, wireless and video services, which would require
substantial expenditure of financial and other resources,
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;
o delays in the development of anticipated technologies, or the failure of
such technologies to perform according to expectations; and
o the timing and completion of U S WEST'S recently announced merger with
Qwest Communications International Inc. ("Qwest") and the subsequent
integration of the businesses of the two companies.
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.
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.
Results of Operations
Three and Nine Months Ended September 30, 1999 Compared with 1998
Net income for the quarter ended September 30, 1999, increased by $51, or
14.2% to $411 compared to net income of $360 for the quarter ended September 30,
1998. Net income for the nine months ended September 30, 1999, increased $157 or
15.5% to $1,167, compared to net income of $1,010 for the nine months ended
September 30, 1998. We experienced a 6.4% and 5.6% increase in revenues for the
three and nine months ended September 30, 1999, respectively, over the
comparable 1998 periods. These increases were partially offset by increases in
expenses to support our growth initiatives, enhanced customer service and
greater network costs.
The following sections provide a more detailed discussion of the changes in
revenues and expenses.
Operating Revenues
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 Increase 1999 1998 Increase
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Local services revenues........ $1,979 $1,805 $174 9.6% $5,779 $5,291 $488 9.2%
</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(TM)
data services, local number portability ("LNP") charges, public phone revenues,
and installation and connection charges. State public service commissions
regulate most local service rates.
Local services revenues increased primarily due to greater sales of
wireless and calling services. Wireless services accounted for $44 and $116 of
the revenue increases for the three and nine months ended September 30, 1999,
respectively. Revenues from calling services increased $30 for the quarter ended
September 30, 1999 and $96 for the nine months ended September 30, 1999, over
comparable 1998 periods. Additionally, access line growth contributed to the
rise in 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 third
quarter of 1999, we had added 504,000 access lines, an increase of 3.1% over the
end of the third quarter of 1998. Of this increase, residential second line
installations accounted for 240,000 lines, an increase of 16.0% compared with
the end of the third quarter of 1998. Also contributing to the revenue growth
were greater revenues from inside wire maintenance plans, LNP charges,
interconnection revenues and increases in the subscriber base of our Megabit(TM)
data services. Partially offsetting these increases were net regulatory rate
adjustments and refunds of $2 for the three months ended September 30, 1999 and
$21 for the nine months ended September 30, 1999, over the comparable 1998
periods.
While local services 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 may
continue to experience declining growth rates as the level of customer demand
slows and competition increases. In June 1999, we entered into a series of
definitive agreements to sell 530,000 access lines in nine states for $1,650 in
cash, subject to adjustment. The access lines accounted for 3.8% of fiscal 1998
local services revenues. While the sale is expected to provide us with a
one-time gain, it will negatively impact future local services revenue growth.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 Increase 1999 1998 Increase
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Access services revenues........ $688 $660 $28 4.2% $2,057 $1,996 $61 3.1%
</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. Also
included in access services revenues are special access and private line
revenues from end-users buying dedicated local exchange capacity to support
their private networks.
The growth in access services revenues was attributable to increased demand
for private line and special access services which increased $48 for the quarter
ended September 30, 1999 and $134 for the nine months ended September 30, 1999
over the comparable 1998 periods. Additionally, demand from interexchange
carriers contributed to the revenue increase. Access minutes of use increased
5.3% and 5.2%, respectively, for the three and nine months ended September 30,
1999. The growth in access minutes of use was partially offset by mandated rate
reductions of $52 for the three months ended September 30, 1999 and $113 for the
nine months ended September 30, 1999.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 Decrease 1999 1998 Decrease
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-distance services
revenues...................... $138 $199 ($61) (30.7%) $459 $595 ($136) (22.9%)
</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 for the three and
nine months ended September 30, 1999 was primarily attributable to greater
competition, strategic price reductions, and the expansion in the number and
size of extended area services, resulting in revenue declines of $55 and $118,
respectively. Mandated rate reductions of $8 and $25 for the three and nine
months ended September 30, 1999, respectively, also contributed to the revenue
decreases. As of September 30, 1999, customers in the 14 states in which we
operate were able to choose an alternative provider for intraLATA calls without
dialing a special access code when placing a 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 11.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 Increase 1999 1998 Increase
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Other services revenues......... $110 $75 $35 46.7% $262 $221 $41 18.6%
</TABLE>
Other services revenues. Other services revenues include billing and collection
services for interexchange carriers and sales of customer equipment. The
increases for the three and nine months ended September 30, 1999 were primarily
attributable to billing and collection revenues.
<PAGE>
Operating Expenses
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 Increase 1999 1998 Increase
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Employee-related expenses... $935 $868 $67 7.7% $2,719 $2,550 $169 6.6%
</TABLE>
Employee-related expenses. Employee-related expenses include salaries and wages,
benefits, payroll taxes and contract labor.
Employee related expenses for 1998 include $16 of costs related to the
third quarter 1998 work stoppage. Excluding these costs, employee-related
expenses increased 9.7% and 7.3%, respectively, for the three and nine months
ended September 30, 1999. Employee-related expenses increased because of
increased commitments towards improving customer service, including meeting
requests for installation, repair services and customer services, resulting in
higher labor costs. Additionally, growth in several sectors of the business,
primarily wireless communications, resulted in increased employee levels.
Across-the-board wage increases also contributed to the increase in
employee-related expenses. Partially offsetting these increases was the
capitalization in 1999 of employee-related expenses associated with developing
internal use software due to the adoption of the AICPA's Statement of Position
("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." In accordance with the SOP, $22 and $60 were
capitalized for the quarter and nine months ended September 30, 1999,
respectively. An increase in pension credits of $31 also offset the increase in
employee-related expenses for the nine months ended September 30, 1999.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 Increase 1999 1998 Decrease
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Other operating expenses........ $636 $625 $11 1.8% $1,923 $1,969 ($46) (2.3%)
</TABLE>
Other operating expenses. Other operating expenses include access charges paid
to carriers for the routing of local and long-distance traffic through their
facilities, taxes other than income taxes, and other selling, general and
administrative costs. Included in the nine months ended September 30, 1998 were
$129 of separation costs associated with the split from MediaOne Group, Inc. and
asset impairment charges. Excluding these charges, other operating expenses
increased $83, or 4.5% for the nine months ended September 30, 1999. The
increases in other operating expenses for the quarter and nine months ended
September 30, 1999, were primarily attributable to the following:
o increased costs of product sales associated with our growth initiatives,
including wireless handset costs,
o higher access charge expenses resulting from regulatory rulings that
require us to pay access charges to carriers for calls that originate on
our network and terminate on other carriers' networks,
o higher property taxes,
o Year 2000 remediation costs, and
o higher rent expense related to increased computer hardware leasing and
increases in leasing costs associated with telephone poles.
In addition, the increase in other operating expenses for the nine months
ended September 30, 1999, was also due to higher marketing and advertising costs
for wireless communications services and calling services such as caller
identification.
Offsetting the increases in other operating expenses were the effects of
capitalizing $59 and $184 for the quarter and nine months ended September 30,
1999, respectively, of costs associated with developing internal use software in
accordance with SOP 98-1.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 Increase 1999 1998 Increase
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Depreciation and
amortization expense........ $571 $544 $27 5.0% $1,713 $1,580 $133 8.4%
</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 useful
lives of certain assets were reduced, reflecting changes in technology, causing
greater depreciation expense. Partially offsetting the increases was the
cessation of depreciation associated with the 530,000 access lines that are
under definitive sales agreements entered into in the second quarter of 1999.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 Decrease 1999 1998 Decrease
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Other expense-net........... $111 $123 ($12) (9.8%) $322 $364 ($42) (11.5%)
</TABLE>
Other expense-net. Interest expense for the three and nine months ended
September 30, 1999 of $102 and $289, respectively, remained consistent with the
comparable prior periods of $103 and $288, respectively.
Also included in other expense-net was other expense of $9 for the quarter ended
September 30, 1999, compared to $20 for the quarter ended September 30, 1998 and
other expense of $33 for the nine months ended September 30, 1999, compared to
$76 for the prior comparable period. The decreases in other expense were due to
a reduction in regulatory interest expense and gains on sales of real estate.
Additionally, the decrease in other expense-net for the nine months ended
September 30, 1999 was also due to the reduction in interest expense
attributable to an anticipated settlement of federal income tax liabilities for
tax years still under audit.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30, Increase
1999 1998 Increase 1999 1998 (Decrease)
Segment margin results:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Retail segment.................. $1,560 $1,554 $6 0.4% $4,607 $4,662 ($55) (1.2%)
Wholesale segment............... 549 464 85 18.3 1,604 1,423 181 12.7
Network segment................. (699) (726) 27 3.7 (2,083) (2,031) (52) (2.6)
</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 2 to the consolidated financial
statements.
Margin from the retail services segment decreased for the nine months ended
September 30, 1999 from the comparable prior period due to operating expenses
increasing at a greater rate than revenue growth. Revenue from the retail
services segment increased 5.1% for the nine months ended September 30, 1999
over the comparable 1998 period, primarily due to growth in local services
revenue. The revenue increase was more than offset by higher operating expenses
driven by growth initiatives and costs associated with enhancing customer
service. For the quarter ended September 30, 1999, the retail margin was
consistent compared to the prior comparable period. Margins from the wholesale
services segment increased as a result of greater demand for access services and
interconnect services, partially offset by price reductions as mandated by both
federal and state regulatory authorities and higher operating costs associated
with access charge expenses. Margins from the network services increased for
three months ended September 30, 1999, due to higher levels of software
capitalization. Margins from the network services segment decreased for the nine
months ended September 30, 1999 as a result of expenditures to support growth in
both the retail and wholesale services segments.
<TABLE>
<CAPTION>
Three Months Six Months
Ended September 30, Ended September 30,
1999 1998 Increase 1999 1998 Increase
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Provision for income
taxes........................... $251 $219 $32 14.6% $713 $630 $83 13.2
</TABLE>
Provision for income taxes. The effective tax rate for the three months ended
September 30, 1999 of 37.9% remained consistent with the rate for the three
months ended September 30, 1998 of 37.8%. The effective tax rate for the nine
months ended September 30, 1999 of 37.9% remained consistent with the rate for
the nine months ended September 30, 1998 of 38.4%.
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 September 30, 1999 and December 31, 1998, approximately $761 and
$123, respectively, of floating-rate debt was exposed to changes in interest
rates. This exposure is primarily linked to commercial paper rates and changes
in 3-month LIBOR. A hypothetical increase of 1% in commercial paper rates and
3-month LIBOR would not have had a material effect on our earnings. As of
September 30, 1999 and December 31, 1998, we also had $222 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 September 30, 1999, all outstanding interest rate swaps and the
associated debt instrument have matured. 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.
As of September 30, 1999 and December 31, 1998, we had also entered into
cross-currency swaps with notional amounts of $133 and $204, respectively. The
cross-currency swaps synthetically transform $100 and $182 of Swiss Franc
borrowings at September 30, 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.
<PAGE>
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 regulatory 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. The Supreme Court affirmed in part and
reversed in part the FCC Order. Although the decision stated that the Act was
ambiguous and self-contradictory, the Supreme Court ruled that:
o the FCC has authority to set pricing methodology;
o unbundled network elements ("UNEs") must be provided in cases where
necessary or the lack of availability would impair competition;
o Incumbent local exchange carriers ("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 UNE prices. Further review of the legality of the FCC's
pricing rules has been argued at the Eighth Circuit Court of Appeals. On
November 5, 1999, the FCC released its order addressing the Supreme Court
directives regarding unbundling and Interconnection. The full impact of this
order is presently unclear. However, it largely reaffirms, and in some instances
expands, the FCC's earlier unbundling decisions and may create significant risks
of arbitrage for private line, special access and local business revenues.
Appeals of this order are likely. See "Special Note Regarding Forward Looking
Statements" on page 11.
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
previously filed applications to enter the interLATA long-distance business in
Wyoming and Montana. We filed an application to enter the interLATA
long-distance business in Arizona in 1999. In April 1999, the Nebraska Public
Service Commission indicated it needed additional information before making a
recommendation to the FCC. We expect to file our first interLATA entry
application with the FCC for its review in 2000. See "Special Note Regarding
Forward-Looking Statements" on page 11.
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 presubscribed
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 July 1, 1999
and further changes will be implemented on January 1, 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 under
which ILECs may not assess interstate access charges on information service
providers and purchasers of UNEs.
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 required no change in the current agreements for reciprocal
compensation with CLECs until it rules on this matter.
Pending before the FCC are several areas of access reform including the
reduction of interstate rates to reflect the receipt of universal service
support, changing the rate structure for switched access to a flat rated
structure, an industry proposal for changing the general access structure
including the removal of the productivity factor and a court remanded review of
the productivity factor. Action on these items is expected by mid-2000 but some
items may be decided in 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 expect the FCC to issue an order on line
sharing in the fourth quarter of 1999.
Long-Term Number Portability Tariffs. In July 1999, the FCC issued an order on
our LNP tariff that was originally effective in February 1999. The FCC's order
reduced our tariff from $0.54 per access line to $0.43 per access line. The FCC
also required that the difference between $0.54 and $0.43, previously collected
by the Company, be refunded to customers. We expect to pay the refund in the
fourth quarter of 1999.
Court Remand of 6.5% Productivity Factor. On May 21, 1999, the District of
Columbia U.S. Court of Appeals issued a ruling reversing and remanding back to
the FCC its order requiring ILECs to retroactively increase the productivity
offset to price caps to 6.5% in their annual price cap filings. The Court found
that the FCC's order did not justify the increase. The FCC must revise and
reissue its order by April 2000.
Universal Service Fees. On October 8, 1999, the FCC issued orders in response to
the Fifth Circuit Court of Appeals mandate on Universal Service. These orders
were effective on November 1, 1999. The FCC will allow the fees the ILECs pay to
support Universal Service to be recovered in access indefinitely. ILECs that
wish to do so may remove the fees from access and establish a separate end user
charge. The FCC also changed the rules to remove the intrastate end user
revenues from the base for calculating the fees. A tariff filing, effective
November 1, 1999, will reduce the access rates which recover these fees.
Access Pricing Flexibility. The FCC issued an order on pricing flexibility on
August 27, 1999. The FCC removes many vestiges of regulation including price
caps for intraLATA interstate toll because long distance parity has been
achieved for all 14 states. Various levels of pricing flexibility up to and
including the removal of Price Cap regulation are possible when competitive
triggers are reached by geographic areas for special access and switched access
transport. Some pricing flexibility is granted for switched access and
subscriber line charges when certain levels of competition are demonstrated by
geographical area.
Contingencies
We have pending regulatory actions in local regulatory jurisdictions. See
Note 3 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.
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 through the
remainder of 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, vendors and 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. No significant
issues have been found to date. We also participate in (i) 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
(ii) 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,
conversion and network testing/certification phases for the Network are
complete. Cooperative testing with certain customers, vendors and other
telecommunications companies is expected to continue for the rest of the year.
As of September 30, 1999, our Network remediation implementation was complete.
Substantial progress has been made with Network contingency planning activities.
We anticipate that the remainder of the Network contingency planning activities
will be complete by the fourth quarter, 1999.
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, planning
phases and conversion for such IT applications are complete. As of September 30,
1999, approximately 99% of IT testing activities and 99% of IT implementation
had been completed. We anticipate that each of these phases for IT will be
complete by November 1999. Substantial progress has been made with IT
contingency planning activities. We anticipate that the remainder of the IT
contingency planning activities will be complete by the fourth quarter, 1999.
Business Units update. Within our Business Units, it is estimated that as of
September 30, 1999, approximately 100% of the inventory/assessment activity,
100% of the planning activity, 99.8% of the conversion activity and 99% 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 fourth quarter of 1999. We have recently
initiated Business Unit contingency planning activities and we anticipate those
will be complete by the fourth quarter, 1999.
Costs relating to year 2000. We have spent approximately $232 from the beginning
of 1997 through the end of the third quarter of 1999 on year 2000 projects and
activities. Virtually all year 2000 related expenditures are being funded
through operations.
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 or expectations. 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
fourth 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.
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 7,765
vendors concerning approximately 25,769 products and have received assurances
for 99.6% of those products as of September 30, 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 unexpected 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 significant and costly 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 you that
actual results will not differ materially from these expectations, beliefs or
estimates. See "Special Note Regarding Forward-Looking Statements" on page 11.
New Accounting Standards
On June 15, 1998, the Financial Accounting Standards Board issued Statement
of 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 our 2001 fiscal year,
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 consolidated financial statements
would not have been material.
<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. For a discussion of these actions,
see "Note 3: Commitments and Contingencies" - to the Consolidated Financial
Statements.
Item 2. Changes in Securities and Use of Proceeds
The following describes securities issued by us within the past fiscal
quarter and prior to the filing of this Form 10-Q which were privately placed
and not registered under the Securities Act of 1933, as amended (the "Securities
Act"). We believe that the following issuances of securities were exempt from
the registration requirements of the Securities Act, pursuant to the exemptions
set forth in Section 4(2), Rule 144A, and Regulation S thereof.
(a) On November 1, 1999, and in reliance on Rule 144A and Regulation S of
the Securities Act, we issued 7.20% Notes (the "Notes") in the aggregate
principal amount of $750,000,000. The Notes will mature and the principal
amount, together with interest accrued and unpaid thereon, will be payable on
November 1, 2004. The Notes will bear interest from November 1, 1999 at an
interest rate of 7.20% per annum. Interest will be computed on the basis of a
360-day year of twelve 30-day months. Salomon Smith Barney Inc., ABN AMRO
Incorporated, Banc of America Securities LLC, and Chase Securities Inc.
(collectively, the "Initial Purchasers") purchased the Notes for resale to
"qualified institutional buyers" as defined under Rule 144A, and non-U.S.
persons under Regulation S, at 99.81% of their principal amount ($748,575,000
aggregate proceeds to us before deducting commissions and expenses payable by
us). The Initial Purchasers received a commission in the amount of $4,500,000.
We plan to use the net proceeds from the sale of the Notes to repay a portion of
our commercial paper indebtedness and for general corporate purposes. The Notes
are subject to registration rights that require us to offer registered exchange
notes within 225 days of closing.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits filed for the Company through the filing of this Form 10-Q.
Exhibit No.
(2a) Articles of Merger including the Plan of Merger between The
Mountain States Telephone and Telegraph Company (renamed U S
WEST Communications, Inc.) and Northwestern Bell Telephone
Company. (Incorporated herein by this reference to Exhibit
2a to Form SE filed on January 8, 1991, File No. 1-3040).
(2b) Articles of Merger including the Plan of Merger between The
Mountain States Telephone and Telegraph Company (renamed U S
WEST Communications, Inc.) and Pacific Northwest Bell
Telephone Company. (Incorporated herein by this reference to
Exhibit 2b to Form SE filed on January 8, 1991, File No.
1-3040).
(3a) Restated Articles of Incorporation of the Registrant.
(Incorporated herein by this reference to Exhibit 3a to Form
10-K/A filed on April 13, 1998, File No. 1-3040).
(3b) Bylaws of the Registrant, as amended. (Incorporated herein
by this reference to Exhibit 3b to Form 10-K/A filed on
April 13, 1998, File No. 1-3040).
4 No instrument which defines the rights of holders of long
and intermediate term debt of the Registrant is filed
herewith pursuant to Regulation S-K, Item 601(b) (4) (iii)
(A). Pursuant to this regulation, the Registrant hereby
agrees to furnish a copy of any such instrument to the SEC
upon request.
(10a) Reorganization and Divestiture Agreement dated as of
November 1, 1983, between American Telephone and Telegraph
Company, U S WEST Inc., and certain of their affiliated
companies, including The Mountain States Telephone and
Telegraph Company, Northwestern Bell Telephone Company,
Pacific Northwest Bell Telephone Company and NewVector
Communications, Inc. (Exhibit 10a to Form 10-K for the
period ended December 31, 1983, File No. 1-3040).
(10b) Shared Network Facilities Agreement dated as of January 1,
1984, between American Telephone and Telegraph Company, AT&T
Communications of the Midwest, Inc. and The Mountain States
Telephone and Telegraph Company. (Exhibit 10b to Form 10-K
for the period ended December 31, 1983, File No. 1-3040).
(10c) Agreement Concerning Termination of the Standard Supply
Contract effective December 31, 1983, between American
Telephone and Telegraph Company, Western Electric Company,
Incorporated, The Mountain States Telephone and Telegraph
Company and Central Services Organization (Exhibit 10d to
Form 10-K for the period ended December 31, 1983, File No.
1-3040).
(10d) Agreement Concerning Certain Centrally Developed Computer
Systems effective December 31, 1983, between American
Telephone and Telegraph Company, Western Electric Company,
Incorporated, The Mountain States Telephone and Telegraph
Company and Central Services Organization (Exhibit 10e to
Form 10-K for the period ended December 31, 1983, File No.
1-3040).
(10e) Agreement Concerning Patents, Technical Information and
Copyrights effective December 31, 1983, between American
Telephone and Telegraph Company and U S WEST, Inc. (Exhibit
10f to Form 10-K for the period ended December 31, 1983,
File No. 1-3040).
(10f) Agreement Concerning Liabilities, Tax Matters and
Termination of Certain Agreements dated as of November 1,
1983, between American Telephone and Telegraph Company, U S
WEST, Inc., The Mountain States Telephone and Telegraph
Company and certain of their affiliates (Exhibit 10g to Form
10-K for the period ended December 31, 1983, File No.
1-3040).
(10g) Agreement Concerning Trademarks, Trade Names and Service
Marks effective December 31, 1983, between American
Telephone and Telegraph Company, American Information
Technologies Corporation, Bell Atlantic Corporation,
BellSouth Corporation, Cincinnati Bell, Inc., NYNEX
Corporation, Pacific Telesis Group, The Southern New England
Telephone Company, Southwestern Bell Corporation and U S
WEST, Inc. (Exhibit 10i to Form 10-K for the period ended
December 31, 1984, File No.
1-3040).
(10h) Shareholders' Agreement dated as of January 1, 1988, between
Ameritech Services, Inc., Bell Atlantic Management Services,
Inc., BellSouth Services, Incorporated, NYNEX Service
Company, Pacific Bell, Southwestern Bell Telephone Company,
The Mountain States Telephone and Telegraph Company,
Northwestern Bell Telephone Company and Pacific Northwest
Bell Telephone Company (Exhibit 10h to Form SE dated March
5, 1992, File No. 1-3040).
(10i) Form of Agreement for Purchase and Sale of Telephone
Exchanges, dated as of June 16, 1999, between Citizens
Utilities Company and U S WEST Communications, Inc. (Exhibit
99B to Form 8-K dated June 17, 1999, File No. 1-3040).
(10j) 364-Day $800 Million Credit Agreement, dated May 19, 1999,
with The Banks Listed Therein and Morgan Guaranty Trust
Company of New York, as administrative agent.
(10k) Amendment No. 1 to Credit Agreement dated as of June 11,
1999 to the 364-Day $800 Million Credit Agreement, dated as
of May 19, 1998, among U S WEST Communications, Inc., U S
WEST, Inc., the Banks listed on the signature pages thereto
and Morgan Guaranty Trust Company of New York, as
administrative agent.
27 Financial Data Schedule
- -------------------
( ) Previously filed.
<PAGE>
(b) Reports on Form 8-K filed during the Third Quarter of 1999 and through the
filing of this form 10-Q:
(i) Form 8-K dated October 22, 1999 providing unaudited third quarter financial
statements for the Company
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
U S WEST Communications, Inc.
By: /S/ Allan R. Spies
___________________________________
Allan R. Spies
Vice President and Chief Financial Officer
November 10, 1999
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