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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-8611
U S WEST, Inc.
A Colorado Corporation IRS Employer No. 84-0926774
7800 East Orchard Road, Englewood, Colorado 80111-2526
Telephone Number 303-793-6500
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No__
At July 31, 1994, 454,427,703 shares were outstanding.
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<PAGE> 2
U S WEST, Inc.
Form 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Page
PART I - FINANCIAL INFORMATION
<S> <C>
1. Financial Statements
Consolidated Statements of Operations -
Three and six months ended June 30, 1994 and 1993 . .3
Consolidated Balance Sheets -
June 30, 1994 and December 31, 1993 . . . . . . .4
Consolidated Statements of Cash Flows -
Six months ended June 30, 1994 and 1993 . . . . . 6
Notes to Consolidated Financial Statements . . . . . 7
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . 11
PART II - OTHER INFORMATION
1. Legal Proceedings . . . . . . . . . . . . . 21
4. Submission of Matters to a Vote of Security Holders . . 21
6. Exhibits and Reports on Form 8-K . . . . . . . . .22
</TABLE>
2
<PAGE> 3
Form 10-Q - Part I
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) U S WEST, Inc.
<CAPTION>
- ----------------------------------------------------------------------
Three Months Ended Six Months Ended
Dollars in millions June 30, June 30,
(except per share amounts) 1994 1993 1994 1993
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales and other revenues $2,708 $2,541 $5,349 $5,051
Employee-related costs 943 883 1,854 1,753
Other operating expenses 518 495 995 967
Taxes other than income taxes 105 105 213 210
Depreciation and amortization 507 498 1,010 988
Interest expense 110 107 219 213
Other income (expense) - net 84 (17) 73 (35)
------- ------- ------ -------
Income from continuing
operations before income
taxes and extraordinary item 609 436 1,131 885
Provision for income taxes 234 145 432 298
------- ------- ------ -------
Income from continuing
operations before
extraordinary item 375 291 699 587
Discontinued operations:
Income to June 1, 1993,
net of tax - 18 - 38
Estimated loss from June 1, 1993
through disposal, net of tax - (100) - (100)
------- ------- ------ -------
Income before extraordinary
item 375 209 699 525
Extraordinary item:
Early extinguishment of debt,
net of tax - (50) - (50)
------- ------- ------ -------
NET INCOME $375 $159 $699 $475
======= ======= ====== =======
Earnings (loss) per share:
Continuing operations $0.83 $0.70 $1.56 $1.41
Discontinued operations:
Income to June 1, 1993 - 0.04 - 0.09
Estimated loss from June 1,
1993 through disposal - (0.24) - (0.24)
------- ------- ------ -------
Income before extraordinary
item 0.83 0.50 1.56 1.26
Extraordinary item:
Early extinguishment of
debt, net of tax - (0.12) - (0.12)
------- ------- ------ -------
EARNINGS PER SHARE $0.83 $0.38 $1.56 $1.14
======= ======= ====== =======
DIVIDENDS PER SHARE $0.535 $0.535 $1.07 $1.07
======= ======= ====== =======
See Notes to Consolidated Financial Statements.
</TABLE>
3
<PAGE> 4
Form 10-Q - Part I
<TABLE>
CONSOLIDATED BALANCE SHEETS (Unaudited) U S WEST, Inc.
<CAPTION>
- ----------------------------------------------------------------------
June 30, December 31,
Dollars in millions 1994 1993
- ----------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $229 $128
Accounts and notes receivable 1,768 1,570
Inventories and supplies 224 193
Other 671 609
-------- --------
Total current assets 2,892 2,500
-------- --------
Gross property, plant and
equipment 29,697 29,161
Accumulated depreciation 16,481 15,929
--------- --------
Property, plant and equipment -
net 13,216 13,232
Investment in Time Warner
Entertainment 2,535 2,552
Net assets of discontinued
operations 336 554
Other assets 2,214 1,842
--------- --------
Total assets $21,193 $20,680
========= ========
See Notes to Consolidated Financial Statements.
</TABLE>
4
<PAGE> 5
Form 10-Q - Part I
<TABLE>
CONSOLIDATED BALANCE SHEETS (Unaudited), Continued U S WEST, Inc.
<CAPTION>
- ---------------------------------------------------------------------
June 30, December 31,
Dollars in millions 1994 1993
- ---------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities
Short-term debt $1,981 $1,776
Accounts payable 700 977
Current portion of restructuring
charges 428 456
Other 1,933 1,772
-------- --------
Total current liabilities 5,042 4,981
-------- --------
Long-term debt 5,250 5,423
Postretirement and other
postemployment benefit obligations 2,464 2,699
Deferred taxes, credits and other 1,840 1,716
Shareowners' equity
Common shares - no par,
2,000,000,000 authorized,
454,299,067 and 441,139,829
outstanding, respectively 7,514 6,996
Retained earnings (deficit) (701) (892)
LESOP guarantee (216) (243)
-------- --------
Total shareowners' equity 6,597 5,861
-------- --------
Total liabilities and shareowners'
equity $21,193 $20,680
======== ========
See Notes to Consolidated Financial Statements.
</TABLE>
5
<PAGE> 6
Form 10-Q - Part I
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) U S WEST, Inc.
<CAPTION>
- ---------------------------------------------------------------------
Six Months Ended
June 30,
Dollars in millions 1994 1993
- ---------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $699 $475
Adjustments to net income:
Depreciation and amortization 1,010 988
Discontinued operations - 62
Deferred income taxes and amortization
of investment tax credits 90 6
Changes in operating assets and
liabilities:
Accounts and notes receivable (53) (38)
Inventories, supplies and other (101) (87)
Accounts payable and accrued
liabilities (20) 39
Other adjustments - net (87) (124)
------- -------
Cash provided by operating activities 1,538 1,321
------- -------
INVESTING ACTIVITIES
Expenditures for property, plant
and equipment (1,282) (1,185)
Proceeds from disposals of property,
plant and equipment 47 17
Other - net (241) (93)
------- -------
Cash (used) for investing activities (1,476) (1,261)
------- -------
FINANCING ACTIVITIES
Net proceeds from short-term debt 212 201
Proceeds from issuance of
long-term debt 251 587
Repayments of long-term debt (327) (232)
Dividends paid (440) (404)
Proceeds from issuance of common stock 295 42
------- -------
Cash provided by (used for)
financing activities (9) 194
------- -------
Cash provided by continuing operations 53 254
------- -------
Cash provided by (used for)
discontinued operations 48 (134)
------- -------
CASH AND CASH EQUIVALENTS
Increase 101 120
Beginning balance 128 159
------- -------
Ending balance $229 $279
======= =======
See Notes to Consolidated Financial Statements.
</TABLE>
6
<PAGE> 7
Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
A. Summary of Significant Accounting Policies
Consolidated Financial Statements
The consolidated financial statements have been prepared by
U S WEST, Inc. ("U S WEST" or "Company"), pursuant to the rules and
regulations of the SEC (Securities and Exchange Commission). Certain
information and footnote disclosures normally accompanying financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such SEC rules
and regulations. In the opinion of the Company's management, the
consolidated financial statements include all adjustments, consisting
of only normal recurring adjustments, necessary to present fairly the
financial information set forth therein. It is suggested that these
consolidated financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's
Annual Report for the year ended December 31, 1993.
Certain reclassifications within the consolidated financial
statements have been made to conform to the current year
presentation.
Computer Software
The cost of computer software, whether purchased or developed
internally, is charged to expense with two exceptions. Initial
operating system software is capitalized and amortized over the life
of the related hardware, and initial network applications software is
capitalized and amortized over three years. Subsequent upgrades to
capitalized software are expensed.
Research and Development
The Company has recognized $47, $61, and $60 for research and
development expense in 1993, 1992 and 1991, respectively.
Approximately half of this activity was conducted at Bell
Communications Research, Inc. ("Bellcore"), one-seventh of which is
owned by U S WEST Communications, Inc. ("USWC").
7
<PAGE> 8
Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(Dollars in millions)
(Unaudited)
B. Investment in Time Warner Entertainment
On September 15, 1993, U S WEST acquired 25.51 percent pro-rata
priority capital and residual equity interests in Time Warner
Entertainment Company L.P. ("TWE"). Summarized operating results for
TWE follow:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1994 1994
---- ----
<S> <C> <C>
Revenues $2,055 $3,974
Operating expenses* 1,828 3,544
Interest and other - net** 159 310
----- -----
Income before income taxes $68 $120
===== =====
Net Income $56 $104
===== =====
<FN>
* Includes depreciation and amortization of $240 and $453 for
the three and six months ended, respectively.
** Includes corporate services of $15 and $30 for the three and
six months ended, respectively.
</TABLE>
The Company accounts for its investment in TWE under the equity
method of accounting. U S WEST's recorded share of TWE's
operating results is based on (1) TWE allocated net income or
loss adjusted for the amortization of the excess of fair market
value over the book value of the partnership assets; and (2)
special income allocations as defined in the TWE Partnership
Agreement.
C. Contingencies
At USWC, there are pending regulatory actions in local regulatory
jurisdictions that call for price decreases, refunds or both. In one
such instance, the Utah Supreme Court has remanded a Utah Public
Service Commission ("PSC") order to the PSC for reconsideration,
thereby establishing two exceptions to the rule against retroactive
ratemaking: 1) unforeseen and extraordinary events, and 2)
misconduct. The Commission's initial order denied a refund request
from interexchange carriers and other parties related to the
Tax Reform Act of 1986. If the Commission finds that either of the
exceptions apply, the Company could be liable for refunds, although
at this time any such amount is not reasonably estimable since the
case is still in the discovery process.
D. Extraordinary Item - Debt Refinancing
In the second quarter of 1993, USWC called for early redemption
11 long-term debt issues totaling $1.5 billion in par value. These
early redemptions allowed the Company to take advantage of favorable
interest rates. One-time costs associated with the redemptions
reduced second quarter 1993 net income by $50, net of income tax
benefits of $31.
8
<PAGE> 9
Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(Dollars in millions)
(Unaudited)
E. Discontinued Operations
During second quarter 1993, the U S WEST Board of Directors
approved a plan to dispose of the Capital Assets segment.
Discontinued operations includes activities related to real estate,
financial services and the financial guarantee insurance operations.
The Company's consolidated financial statements reflect the operating
results of the Capital Assets segment separately from continuing
operations. As a result of the discontinued operations, in second
quarter 1993, the Company recorded a provision for estimated loss on
disposal of $100, net of $61 in income taxes. Income from
discontinued operations to June 1, 1993 was $38, net of $15 in income
taxes.
On May 6, 1994, Financial Security Assurance ("FSA") sold 7.5
million shares, including 2 million shares sold to Fund American
Enterprises Holdings, Inc. ("FFC"), in an initial public offering
of its common stock at $20 per share. In June 1994, an additional
.6 million shares were issued at $20 per share in connection with
an over-allotment option. U S WEST received $154 in proceeds from
the offering. Pursuant to the sale and offering, U S WEST reduced
its ownership interest in FSA to 60.5 percent.
<TABLE>
Sales and other revenues of discontinued operations follow:
<CAPTION>
1994 1993
----- -----
<S> <C> <C>
Sales and other revenues:
Second quarter $57 $139
Six months 361 281
</TABLE>
Sales and other revenues of discontinued operations include the
sale of two properties for approximately $230 during the first
quarter of 1994. The sales were in line with Company estimates.
Revenues and operating expenses of discontinued operations subsequent
to June 1, 1993, are being deferred and charged against the related
reserves.
9
<PAGE> 10
Form 10-Q - Part I
<TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(Dollars in millions)
(Unaudited)
The assets and liabilities of the Capital Assets segment have
been separately classified on the balance sheet as net assets of
discontinued operations. Following is a summary of the net assets of
discontinued operations:
<CAPTION>
- ---------------------------------------------------------------------
June 30, December 31,
Dollars in millions 1994 1993
- ----------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $28 $24
Finance receivables - net 1,103 1,131
Investment in real estate - net 545 711
Bonds, at market value 871 894
Other assets 660 600
------- -------
Total assets $3,207 $3,360
======= =======
LIABILITIES
Debt $1,423 $1,496
Deferred income taxes 681 681
Unearned premiums 400 346
Accounts payable and accrued liabilities 139 243
Minority interests 228 40
------- -------
Total liabilities $2,871 $2,806
======= =======
Net assets of discontinued operations $336 $554
======= =======
<CAPTION>
Selected Financial Data
Selected financial data for U S WEST Financial Services, Inc.,
a wholly-owned subsidiary of U S WEST, follows.
Three Months Ended Six Months Ended
June 30, June 30,
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating revenues $13 $73 $30 $143
<CAPTION>
As of
June 30, December 31,
1994 1993
---- ----
<S> <C> <C>
Net finance receivables $1,003 $1,020
Total assets 1,521 1,784
Total debt 750 957
Total liabilities 1,472 1,735
Shareowner's equity 49 49
</TABLE>
10
<PAGE> 11
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Dollars in millions, except per share
amounts)
<TABLE>
Results of Operations
<CAPTION>
Comparative details of continuing operations for the three and
six months ended June 30 follow:
Three Six
Months Ended Months Ended
Dollars in millions June 30, % June 30, %
(except per share
amounts) 1994 1993 Change 1994 1993 Change
- ------------------------------------------------------------- ------
<S> <C> <C> <C> <C> <C> <C>
Sales and other
revenues $2,708 $2,541 6.6 $5,349 $5,051 5.9
Employee-related costs 943 883 6.8 1,854 1,753 5.8
Other operating
expenses 518 495 4.6 995 967 2.9
Taxes other than income
taxes 105 105 0.0 213 210 1.4
------ ------ ------ ------
Earnings before
interest, taxes,
depreciation,
amortization and
other (EBITDA) $1,142 $1,058 7.9 $2,287 $2,121 7.8
====== ====== ====== ======
Income from continuing
operations $375 $291 28.9 $699 $587 19.1
====== ====== ====== ======
Earnings per share
from continuing
operations $0.83 $0.70 18.6 $1.56 $1.41 10.6
====== ====== ====== ======
</TABLE>
U S WEST's second quarter income from continuing operations
increased by $84, or 28.9 percent, compared to the same period last
year. Excluding the sale of certain rural telephone exchanges by USWC
and the sale of U S WEST's paging unit, resulting in gains of $17 and
$41, respectively, income from continuing operations increased by
$26, or 8.9 percent. Income from continuing operations excludes
results from U S WEST's Capital Assets segment, which is a
discontinued operation as discussed in Note E to the Consolidated
Financial Statements. During the second quarter of 1993, U S WEST
recorded an after-tax charge of $100 or $.24 per share, to cover the
estimated loss on disposition of the Capital Assets segment. The
extraordinary item of $50 or $.12 per share in second quarter 1993
related to the refinancing of debt at USWC.
For the six months ended June 30, income from continuing
operations increased by $39, or 6.6 percent, excluding the one-time
items mentioned above and an additional first quarter 1994 gain of $15
on the sale of certain rural telephone exchanges.
Increased demand for the Company's services resulted in growth in
earnings before interest, taxes, depreciation, amortization and other
("EBITDA") of 7.9 and 7.8 percent for the second quarter and six
months, respectively.
11
<PAGE> 12
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Dollars in millions, except per share
amounts), Continued
<TABLE>
Sales and Other Revenues
<CAPTION>
An analysis of the change in revenues follows:
Lower
Price (Higher) Inc(Dec)
Decreases Refunds Demand Other $ %
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
USWC:
Local service
Second quarter ($ 4) $5 $ 52 - $ 53 5.5
Six months ( 3) - 104 - 101 5.3
Interstate access
Second quarter ( 7) 6 32 (2) 29 5.5
Six months ( 22) 4 75 (4) 53 5.0
Intrastate access
Second quarter - (2) 11 - 9 5.3
Six months ( 3) (4) 20 - 13 3.8
Long distance
Second quarter ( 2) 0 (8) - (10) (2.8)
Six months ( 3) 1 (13) - (15) (2.1)
Other services
Second quarter 11 11 8.1
Six months 17 17 6.2
- ---------------------------------------------------------------------
USWC Total
Second quarter ($13) $9 $ 87 $ 9 $ 92 4.3
Six months ( 31) 1 186 13 169 3.9
Cellular
Second quarter 63 46.9
Six months 114 45.4
Publishing
Second quarter 8 3.2
Six months 17 3.7
Other
Second quarter 4 -
Six months (2) -
- ---------------------------------------------------------------------
U S WEST Consolidated
Second quarter $167 6.6
Six months 298 5.9
- ---------------------------------------------------------------------
</TABLE>
The increase in revenues for the second quarter and six months
was largely due to increased demand for services at USWC. Continued
subscriber growth in the Company's cellular business also
contributed to revenue growth. The Company increased its cellular
subscriber base by 55 percent, to approximately 738,000, during the
last 12 months.
Local service revenues at USWC increased principally as a result
of higher demand for services, as evidenced by an increase of
478,000 access lines, or 3.5 percent, during the last 12 months.
Access line growth was 3.8 percent as adjusted for the sale of
approximately 38,000 rural telephone access lines.
12
<PAGE> 13
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Dollars in millions, except per share
amounts), Continued
Increased demand for access services more than offset the
effects of rate reductions. Billed access minutes of use increased
by 8.3 and 8.7 percent over the second quarter and six months of last
year, respectively. Long distance network revenues decreased
principally due to the continuing effects of competition. Revenues
from other services increased primarily as a result of continued
market penetration in voice messaging services.
Costs and Expenses
Consolidated employee-related costs increased by $60, or 6.8
percent, for the second quarter and $101, or 5.8 percent, for the
six months as compared to the same periods last year. The increases
are primarily the result of a reduction in the pension credit (due to
changes in actuarial assumptions) and additional costs associated with
customer service initiatives in the current year. Partially
offsetting these increases was a reduction in postretirement benefits
expense.
Consolidated other operating expenses increased by $23, or 4.6
percent, for the second quarter and $28, or 2.9 percent, for the six
months as compared to the same periods last year. Selling costs
related to growth in the cellular subscriber base largely contributed
to the increase.
Increased depreciation and amortization expense was attributable
to the aggregrate effects of a higher depreciable asset base and the
discontinuance of Statement of Financial Accounting Standards
("SFAS") No. 71, "Accounting for the Effects of Certain Types of
Regulation."
Interest expense increased, primarily as a result of the
financing costs associated with the TWE investment. This increase
was largely offset by USWC's refinancing of debt in the prior year to
take advantage of lower interest rates, in addition to the effects of
this year's reclassification of capitalized interest from other
income. Pursuant to the discontinuance of SFAS No. 71, interest
capitalized as a component of plant construction is being offset
against interest expense.
Other income increased during the second quarter and six months
primarily due to pretax gains of $26 and $50, respectively, on the
sale of certain rural telephone exchanges by USWC. Second quarter
results also include a pretax gain of $68 for the sale of U S WEST's
paging unit. Partially offseting these gains was the reclassifica-
tion of capitalized interest and higher losses associated with
developing businesses.
The effective tax rate was 38.2 percent for the six months ended
June 30, 1994 compared to 33.7 percent in the same period last year.
This increase is primarily a result of the effects of discontinuing
SFAS No. 71, the 1993 federally-mandated increase in income tax rates,
and an increase in income before income taxes.
13
<PAGE> 14
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Dollars in millions, except per share
amounts), Continued
Restructuring Charges
The Company's 1993 third-quarter results included a $1 billion
restructuring charge (pretax). The related restructuring plan is
designed to provide faster, more responsive customer services while
reducing the costs of providing these services. As part of the plan,
the Company is developing new systems that will enable it to monitor
networks to reduce the risk of service interruptions, activate
telephone service on demand, provide automated inventory systems and
centralize its service centers so that customers can have their
telecommunications needs resolved with one phone call. The Company
will also reduce its work force by approximately 9,000 employees
(including the remaining employee reductions pursuant to the
restructuring plan announced in 1991) by the end of 1996.
<TABLE>
Following is a schedule of the costs included in the
restructuring charge:
<CAPTION>
<S> <C>
Employee separation $230
Real estate 130
Relocation 110
Retraining and other 65
Systems development 400
Asset write-downs 65
----------
Total $1,000
==========
</TABLE>
Employee separation costs include severance payments, health
care coverage and postemployment education benefits. Real estate
costs include preparation costs for the new service centers. The
relocation and retraining costs are related to moving employees to
the sites of the new service centers and retraining employees on the
new methods and systems required in the new, restructured mode of
operation. Systems development costs include the replacement of
existing, single-purpose systems with new systems designed to provide
integrated, end-to-end customer service. The work-force reductions
would not be possible without the development and installation of the
new systems, which will eliminate the current, labor-intensive
interfaces between existing systems.
The estimated annual cash expenditures related to the
restructuring plan are approximately $390, $315 and $230 in 1994, 1995
and 1996, respectively. In addition to these expenditures, the
Company anticipates incremental capital expenditures related to the
restructuring plan of approximately $490 over the three year life of
the plan.
14
<PAGE> 15
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Dollars in millions, except per share
amounts), Continued
<TABLE>
Employee Separation:
<CAPTION>
The restructuring plan provides for annual employee reductions
and separation amounts as follows:
Employee Reductions: 1994* 1995 1996 Total
----- ---- ---- -----
<S> <C> <C> <C> <C>
Network - managerial 602 1,095 977 2,674
Network - occupational 865 1,227 978 3,070
All other - managerial 459 335 323 1,117
All other - occupational 1,022 812 322 2,156
----- ----- ----- -----
Total 2,948 3,469 2,600 9,017
===== ===== ===== =====
Employee Separation
Amounts: 1994* 1995 1996 Total
----- ---- ---- -----
Network - managerial $22 $42 $40 $104
Network - occupational 14 28 25 67
All other - managerial 3 14 14 31
All other - occupational 1 19 8 28
----- ----- ----- ------
Subtotal 40 103 87 230
----- ----- ----- ------
Remaining 1991 reserve 56 - - 56
----- ----- ----- ------
Total $96 $103 $87 $286
===== ===== ===== ======
<FN>
* 1994 includes the remaining employees and the separation amounts
associated with the balance of the 1991 restructuring reserve at
12/31/93.
</TABLE>
Systems Development:
USWC's existing information management systems were largely
developed with analog technology for a monopoly environment. These
systems are increasingly inadequate due to the effects of increased
competition, new forms of regulation and changing technology which has
driven consumer demand for new services which can be delivered
quickly, reliably and economically. The sequential systems currently
in place are slow, labor intensive and costly to maintain, and often
cannot be adapted to support new product and service offerings,
including future multimedia services envisioned by U S WEST.
The systems rengineering program in place involves development of
new systems around the following core processes:
Service Delivery- to support faster and more accurate delivery of all
products and services, including repair. These systems will permit
one customer service representative to handle all facets of a
customer's requirements as contrasted to the numerous points of
customer interface required today.
Service Assurance- for automation and centralization of the network,
including earlier identification and more rapid resolution of network
problems.
Capacity Provisioning- for integrated planning of future network
capacity, including the installation of software-controllable service
components.
15
<PAGE> 16
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Dollars in millions, except per share
amounts), Continued
<TABLE>
The direct, incremental and nonrecurring systems development
costs contained in the restructuring plan are comprised of the
following amounts:
<CAPTION>
1994 1995 1996 Total
---- ---- ---- -----
<S> <C> <C> <C> <C>
Service delivery systems $35 $45 $20 $100
Service assurance systems 45 40 30 115
All other 45 65 75 185
---- ---- ---- ----
Total $125 $150 $125 $400
==== ==== ==== ====
</TABLE>
The majority of systems development labor will be supplied
through the use of temporary employees and/or contractors.
Additionally, the Company estimates that up to 100 employees with
special skills will be hired in order to develop the software
applications contemplated in the current plan. The labor cost for
these employees included in the restructuring plan is approximately $16
to $18 over the life of the plan. While it is likely that a number of
these employees will be retained after 1996 due to their specialized
skills, it is planned that any related increase in headcount will be
offset through other employee reductions.
Systems expenses charged to current operations at USWC consist of
all costs associated with the information management function,
including planning, developing, testing and maintaining data bases for
general purpose computers, in addition to systems costs related to
maintenance of telephone network applications. Key related
administrative (i.e. general purpose) systems include customer
service, order entry, billing and collection, accounts payable,
payroll, human resources and property records. On-going systems
costs comprised approximately six, six and five percent of total
operating expenses at USWC in 1993, 1992 and 1991, respectively.
USWC expects systems costs charged to current operations as a percent
of total operating expenses to approximate the current level
throughout the life of the restructuring plan. However, systems
costs could increase relative to other operating costs as USWC becomes
more technology-dependent.
16
<PAGE> 17
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Dollars in millions, except per share
amounts), Continued
<TABLE>
Progress Under the Plan:
<CAPTION>
For the second quarter and six months ended June 30, 1994, the
following amounts have been charged against the restructuring reserve:
Second Quarter Six-Months
Employee Separations: Number Amount Number Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Network - managerial 35 $1 55 $2
Network - occupational 212 4 255 5
All other - managerial 63 2 133 6
All other - occupational 155 4 245 9
--- --- --- ---
Total 465 $11 688 $22
=== === === ===
<CAPTION>
Second Quarter Six-Months
------- -------
<S> <C> <C>
Systems Development Costs:
Service delivery systems $5 $5
Service assurance systems 5 9
All other 5 9
------- -------
Total $15 $23
======= =======
</TABLE>
Other charges to the reserve were $14, $2 and $2 for real estate,
relocation, and retraining and other, respectively, for the six months
ended June 30, 1994.
During the first half of the year, the Company was in the
start-up phase of the restructuring plan. The Company expects that
charges will accelerate over the remainder of 1994 as the Company
continues consolidation of the customer service centers and
development of the new systems. The rate of spending for the first
six months of 1994 was slower than anticipated. While the original
estimates for 1994 might not be fully realized, there are no
significant changes to the plan in total. If the original estimates
for 1994 are not fully realized, the impact on the financial
statements will not be material.
The Company's 1991 restructuring plan included a pretax charge of
$364 for planned work-force reductions and the write-off of certain
intangible and other assets. The plan reflected a work-force reduction
of approximately 6,000 employees. The portion of the restructuring
charge related to work-force reductions was $240, of which
approximately $34 was unused at June 30, 1994, as compared to $56
remaining at December 31, 1993. The remaining balance of this reserve
will be expended in 1994.
17
<PAGE> 18
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Dollars in millions, except per share
amounts), Continued
Liquidity and Capital Resources
Cash provided by operations increased by $217, or 16 percent,
over the first six months of 1993, primarily due to increased demand
for the Company's services and a decrease in cash funding related to
postretirement benefits during the first quarter of 1994. In the
first quarter of 1994, the funding for postretirement benefits was
$288, of which approximately $185 was in the form of a stock
contribution, compared to cash funding of $246 in the first quarter
last year. Details of cash provided by operating activities are
provided in the Consolidated Statements of Cash Flows.
In March 1994 approximately 5.5 million shares of common stock
were issued in connection with the settlement of shareholder
litigation ("Rosenbaum v. U S WEST Inc. et al.") for proceeds of
approximately $210.
Acquisitions
On July 15, 1994 U S WEST signed an agreement to acquire Wometco
Corp. and the assets of Georgia Cable Television (the "Cable
Properties") for $1.2 billion, of which approximately $490 will be in
newly issued U S WEST common stock and the remainder will be in cash
and assumed debt. The Company's 1995 earnings per share will be
diluted by approximately 5 to 6 percent as a result of this
transaction. The purchase includes Access Telecommunications
Interconnect, which provides competitive telephone services to
business customers in the Atlanta area. The Cable Properties serve
about 65 percent of the cable customers in the Atlanta metropolitan
statistical area.
The acquisition of the Cable Properties will help the Company to
achieve its goal of becoming a leading provider of integrated
communications, entertainment and information services in selected
local markets worldwide. The transaction is expected to close in
the fourth quarter of this year.
Joint Venture
On July 25, 1994, AirTouch Communications ("AirTouch") and
U S WEST announced an agreement to combine their domestic cellular
operations. The initial equity ownership of the cellular joint
venture will be approximately 70 percent AirTouch and approximately
30 percent U S WEST.
To allow AirTouch to continue providing interLATA wireless
services free of Modification of Final Judgment ("MFJ") constraints,
each Company's cellular operations initially will continue operating
as separate entities owned by the individual partners, but will
report to a joint Wireless Management Company, which will provide
support services. U S WEST remains subject to MFJ restrictions and
cannot offer wireless interLATA services.
A merger of the two companies' cellular operations will take
place upon the earlier of four years from July 25, 1994, the lifting
of certain MFJ restrictions, or at AirTouch's option. The agreement
gives U S WEST strategic flexibility, including the right to
exchange its interest in the joint venture for up to 19.9 percent of
AirTouch's common stock, with any excess amounts to be received in
the form of AirTouch non-voting preferred stock.
18
<PAGE> 19
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Dollars in millions, except per share
amounts), Continued
A Partnership Committee, led by the president and chief
operating officer of AirTouch and three other AirTouch
representatives, three U S WEST representatives and one mutually
agreed upon independent representative will oversee the Companies'
combined domestic cellular operations.
The initial joint venture requires certain federal and state
regulatory approvals. The transaction is tax-free and is expected to
close in second quarter 1995. Between closing and the actual merger,
an agreement exists which allows the companies to effectively share
operations based on their relative ownership.
Regulatory Issues
On June 10, 1994, the U.S. Court of Appeals in Washington D.C.
overturned the Federal Communications Commission's ("FCC")
requirement that local telephone companies allow physical collocation
by third parties (competitive access providers), within their central
offices, for the installation and operation of equipment that
connects to the local telephone network. The court also ordered
the FCC to reconsider its requirement that allows competitors to
interconnect equipment to the local network from a point outside a
central office. The Company is evaluating its options with respect
to the provision of interconnection.
On June 15, 1994, a Seattle Federal District Court Judge ruled
in favor of U S WEST's challenge to the constitutionality of the
cable cross-ownership restriction in the 1984 Cable Act. The Act
prevents telephone companies from providing cable TV service within
their regions. U S WEST argued, and the court agreed, that the cable
cross-ownership restriction violates its First Amendment right to
free speech. The Company is evaluating its options in light of this
ruling.
On June 20, 1994, the seven regional Bell operating companies
("RBOC's") asked the divestiture court for a waiver of the Court's
restriction on the RBOC's provision of wireless long-distance
services. The consent decree restricts the RBOCs from providing
long-distance services as well as manufacturing. The request for a
waiver closely follows a recommendation by the Justice Department
that the RBOCs be allowed to provide wireless long-distance services.
On June 30, 1994, the House of Representatives passed two
landmark bills that together would substantially rewrite the 1934
Communications Act and replace the 1982 consent decree that broke up
the "Bell System." The Senate is expected to consider pending
telecommunications legislation, but it is not clear whether it will
act on a bill before the current session of Congress ends.
19
<PAGE> 20
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Dollars in millions, except per share
amounts), Continued
Contingencies
At USWC, there are pending regulatory actions in local
regulatory jurisdictions that call for price decreases, refunds or
both. In one such instance, the Utah Supreme Court has remanded a
Utah Public Service Commission ("PSC") order to the PSC for
reconsideration, thereby establishing two exceptions to the rule
against retroactive ratemaking: 1) unforeseen and extraordinary
events, and 2) misconduct. The Commission's initial order denied a
refund request from interexchange carriers and other parties related
to the Tax Reform Act of 1986. If the commission finds that either
of the exceptions apply, the Company could be liable for refunds,
although at this time any such amount is not reasonably estimable
since the case is still in the discovery process.
20
<PAGE> 21
Form 10-Q - Part II
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's annual meeting of shareholders on May 6,
1994, shareholders voted their shares as follows for the purpose of
electing six individuals as directors of the Company:
<TABLE>
<CAPTION>
Director Shares Voted For Shares Withheld
-------- ---------------- ---------------
<S> <C> <C>
Marilyn Carlson Nelson 361,698,642 11,343,937
Allan D. Gilmour 361,940,334 11,102,245
Frank Popoff 361,865,885 11,176,694
Glen L. Ryland 361,111,632 11,930,947
Jerry O. Williams 361,936,985 11,105,594
Daniel Yankelovich 361,509,328 11,533,252
</TABLE>
Coopers & Lybrand was confirmed as the Company's independent auditors
with 362,778,355 shares voting for, 7,064,167 shares voting against and
3,200,055 abstaining. The shareholders approved the following three
plans for the compensation of employees:
<TABLE>
<CAPTION>
Broker
For Against Abstain No Vote
<S> <C> <C> <C> <C>
1994 Stock Plan 265,628,057 59,924,559 8,263,797 39,226,165
Executive Long-
Term Incentive
Plan 273,745,036 52,342,383 7,728,994 39,226,165
Executive Short-
Term Incentive
Plan 286,430,708 78,751,185 7,860,685 -
The shareholders also considered and rejected three shareholder
proposals at the annual meeting as follows:
<CAPTION>
Broker
For Against Abstain No Vote
<S> <C> <C> <C> <C>
Proposal 1 95,413,844 231,374,189 7,713,121 38,541,424
Proposal 2 71,080,974 255,773,889 7,646,291 38,541,424
Proposal 3 49,398,127 276,422,886 8,680,141 38,541,424
</TABLE>
Proposal 1 was to eliminate the classified board of directors;
proposal 2 was to initiate cumulative voting for the election of
directors; and proposal 3 was to limit executive compensation to ten
times the average compensation of all employees.
21
<PAGE> 22
Form 10-Q - Part II
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibits identified in parentheses below, on file with the
Securities and Exchange Commission, are incorporated by
reference as exhibits hereto.
Exhibit No.
11 Statement regarding computation of earnings per share of
U S WEST, Inc.
12 Statement regarding computation of earnings to fixed
charges ratio of U S WEST, Inc.
(b) Reports on Form 8-K filed during the second quarter
(i) report dated April 1, 1994, concerning U S WEST's
announcement with respect to its contribution of 4.6
million shares of its common stock to an employee
benefit trust;
(ii) report dated April 18, 1994, concerning the release of
earnings for the first quarter ended March 31, 1993,
and related exhibits; and
(iii) report dated June 24, 1994, filing a Termination
Agreement and Guarantee, made and entered into June 24,
1994, among U S WEST, Inc., U S WEST Capital
Corporation, and U S WEST Financial Services, Inc.
and a Second Supplemental Indenture dated as of
June 24, 1994, among U S WEST Financial Services,
Inc., U S WEST, Inc., and The Chase Manhattan Bank,
N.A.
22
<PAGE> 23
Form 10-Q U S WEST, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
/s/ James M. Osterhoff
-------------------------
August 12, 1994 U S WEST, Inc.
James M. Osterhoff
Executive Vice President
and Chief Financial Officer
23
<PAGE> 1
EXHIBIT 11
<TABLE>
U S WEST, Inc.
Computation of Earnings Per Share
(In Thousands, Except Per Share Amounts)
<CAPTION>
EARNINGS PER SHARE:
1994 1993
2nd Quarter YTD 2nd Quarter YTD
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Income from continuing
operations $374,832 $698,555 $291,177 $586,890
Discontinued operations
Income to June 1, 1993,
net of tax - - 18,131 38,526
Estimated loss from
June 1, 1993
through disposal,
net of tax - - (100,000) (100,000)
-------- -------- --------- ---------
Income before
extraordinary item 374,832 698,555 209,308 525,416
Extraordinary item -
early extinguishment
of debt, net of tax - - (50,222) (50,222)
-------- -------- --------- ---------
Net income for per share
calculation $374,832 $698,555 $159,086 $475,194
======== ======== ======== =========
Weighted average shares
outstanding 453,618 449,024 415,971 415,529
======== ======== ======== =========
Income from continuing
operations $0.83 $1.56 $0.70 $1.41
Discontinued operations
Income to June 1, 1993,
net of tax - - 0.04 0.09
Estimated loss from
June 1, 1993
through disposal,
net of tax - - (0.24) (0.24)
-------- -------- --------- ---------
Income before
extraordinary item 0.83 1.56 0.50 1.26
Extraordinary item -
early extinguishment
of debt, net of tax - - (0.12) (0.12)
-------- -------- --------- ---------
Net income for per
share calculation $0.83 $1.56 $0.38 $1.14
======== ======== ========= =========
</TABLE>
<PAGE> 2
EXHIBIT 11
<TABLE>
U S WEST, Inc.
Computation of Earnings Per Share
(In Thousands, Except Per Share Amounts)
<CAPTION>
EARNINGS PER COMMON
AND COMMON
EQUIVALENT SHARE: 1994 1993
2nd Quarter YTD 2nd Quarter YTD
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Income from continuing
operations $374,832 $698,555 $291,177 $586,890
Discontinued operations
Income to June 1, 1993,
net of tax - - 18,131 38,526
Estimated loss from
June 1, 1993
through disposal,
net of tax - - (100,000) (100,000)
-------- -------- --------- ---------
Income before
extraordinary item $374,832 $698,555 209,308 525,416
Extraordinary item -
early extinguishment
of debt, net of tax - - (50,222) (50,222)
-------- -------- ---------- ---------
Net income for per share
calculation $374,832 $698,555 $159,086 $475,194
======== ======== ========= ========
Weighted average shares
outstanding 453,618 449,024 415,971 415,529
Incremental shares from
assumed exercise of
stock options 482 490 380 341
-------- -------- --------- --------
Total shares 454,100 449,514 416,351 415,870
======== ======== ========= ========
Income from continuing
operations $0.83 $1.55 $0.70 $1.41
Discontinued operations
Income to June 1, 1993,
net of tax - - 0.04 0.09
Estimated loss from
June 1, 1993
through disposal,
net of tax - - (0.24) (0.24)
-------- -------- --------- --------
Income before
extraordinary item 0.83 1.55 0.50 1.26
Extraordinary item - early
extinguishment of debt,
net of tax - - (0.12) (0.12)
-------- -------- --------- --------
Earnings per common and
common $0.83 $1.55 $0.38 $1.14
equivalent share ======== ======== ======== ========
</TABLE>
<PAGE> 3
EXHIBIT 11
<TABLE>
U S WEST, Inc.
Computation of Earnings Per Share
(In Thousands, Except Per Share Amounts)
<CAPTION>
EARNINGS PER SHARE -
ASSUMING FULL DILUTION: 1994 1993
2nd Quarter YTD 2nd Quarter YTD
---------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Income from continuing
operations $374,832 $698,555 $291,177 $586,890
Interest on Convertible
Liquid Yield Option
Notes (LYONS) 5,342 10,779 5,066 10,133
-------- -------- -------- ---------
Adjusted income from
continuing 380,174 709,334 296,243 597,023
operations for per share
calculations
Discontinued operations
Income to June 1, 1993,
net of tax - - 18,131 38,526
Estimated loss from
June 1, 1993
through disposal,
net of tax - - (100,000) (100,000)
-------- -------- --------- ---------
Adjusted income before 380,174 709,334 214,374 535,549
extraordinary item
Extraordinary item -
early extinguishment of
debt, net of tax - - (50,222) (50,222)
-------- -------- --------- ---------
Adjusted net income for
per share $380,174 $709,334 $164,152 $485,327
calculation ======== ======== ======== =========
Weighted average shares
outstanding 453,618 449,024 415,971 415,529
Incremental shares from
assumed exercise of
stock options 562 534 481 472
Shares issued upon
conversion of LYONS 10,216 10,223 10,237 10,238
-------- -------- --------- ---------
Total shares 464,396 459,781 426,689 426,239
======== ======== ========= =========
Adjusted income from
continuing operations $0.82 $1.54 $0.69 $1.40
Discontinued operations
Income to June 1, 1993,
net of tax - - 0.04 0.09
Estimated loss from
June 1, 1993
through disposal,
net of tax - - (0.23) (0.23)
Adjusted income before
extraordinary -------- -------- --------- ---------
item 0.82 1.54 0.50 1.26
Extraordinary item - early
extinguishment of debt,
net of tax - - (0.12) (0.12)
Earnings per share -
assuming -------- ------- -------- ---------
full dilution $0.82 $1.54 $0.38 $1.14
======== ======= ======== =========
</TABLE>
<PAGE>
EXHIBIT 12
<TABLE>
U S WEST, Inc.
RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Millions)
<CAPTION>
Quarter Ended
6/30/94 6/30/93
- ------------------------------------------- --------- ---------
<S> <C> <C>
Income from continuing operations before
income taxes and extraordinary item $609 $436
Interest expense (net of amounts capitalized) 110 107
Interest factor on rentals (1/3) 25 26
--------- -------
Earnings $744 $569
Interest expense 117 107
Interest factor on rentals (1/3) 25 26
--------- -------
Fixed charges $142 $133
Ratio of earnings to fixed charges 5.24 4.28
- ----------------------------------------------------------- -------
<CAPTION>
Year-to-Date
6/30/94 6/30/93
- ------------------------------------------- --------- --------
<S> <C> <C>
Income from continuing operations before
income taxes and extraordinary item $1,131 $885
Interest expense (net of amounts capitalized) 219 213
Interest factor on rentals (1/3) 48 52
--------- ---------
Earnings $1,398 $1,150
Interest expense 233 213
Interest factor on rentals (1/3) 48 52
--------- ---------
Fixed charges $281 $265
Ratio of earnings to fixed charges 4.98 4.34
- ----------------------------------------------------------- ---------
</TABLE>
