<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993
OR
/ / TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 1-8611
U S WEST, INC.
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<S> <C>
A COLORADO I.R.S. EMPLOYER IDENTIFICATION
CORPORATION NO. 84-0926774
</TABLE>
7800 EAST ORCHARD ROAD, ENGLEWOOD, COLORADO 80111
TELEPHONE NUMBER (303) 793-6500
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED*
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<S> <C>
Common Stock (without par value) New York Stock Exchange
Pacific Stock Exchange
Liquid Yield Option Notes, due 2011 New York Stock Exchange
(convertible to common stock under certain circumstances)
<FN>
- ------------------------
*Common Stock was delisted from Boston Stock Exchange, Midwest Stock Exchange
and Philadelphia Stock Exchange effective January 14, 1992.
</TABLE>
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
At January 31, 1994, 441,391,370 shares of common stock were outstanding.
At January 31, 1994, the aggregate market value of the voting stock held by
non-affiliates was approximately $19,394,736,798.
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 / /.
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the Registrant's 1993 Annual Report to Shareowners are
incorporated by reference into Parts I, II and IV.
Portions of the Registrant's definitive Proxy Statement dated March 17,
1994, to be issued in connection with the 1994 Annual Meeting of Shareowners are
incorporated by reference into Parts II and III.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K /X/.
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<PAGE>
TABLE OF CONTENTS
PART I
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ITEM PAGE
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1. Business............................................................................................ 3
2. Properties.......................................................................................... 8
3. Legal Proceedings................................................................................... 8
4. Submission of Matters to a Vote of Security Holders................................................. 8
PART II
5. Market for the Registrant's Common Equity and Related Stockholder Matters........................... 10
6. Selected Financial Data............................................................................. 10
7. Management's Discussion and Analysis of Financial Condition and Results of Operations............... 10
8. Consolidated Financial Statements and Supplementary Data............................................ 10
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................ 10
PART III
10. Directors and Executive Officers of the Registrant.................................................. 10
11. Executive Compensation.............................................................................. 10
12. Security Ownership of Certain Beneficial Owners and Management...................................... 10
13. Certain Relationships and Related Transactions...................................................... 10
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................................... 11
Independent Accountants' Report..................................................................... 16
</TABLE>
2
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
U S WEST, Inc. ("U S WEST") was incorporated under the laws of the State of
Colorado and has its principal executive offices at 7800 East Orchard Road,
Englewood, Colorado 80111, telephone number (303) 793-6500. U S WEST is a
diversified global communications company engaged in the telecommunications,
directory publishing, marketing and, most recently, entertainment services
businesses. Telecommunications services are provided by U S WEST's principal
subsidiary, U S WEST Communications, Inc., to more than 25 million residential
and business customers in the states of Arizona, Colorado, Idaho, Iowa,
Minnesota, Montana, Nebraska, New Mexico, North Dakota, Oregon, South Dakota,
Utah, Washington and Wyoming (collectively, the "U S WEST Region"). Directory
publishing, marketing and entertainment services as well as cellular mobile
communications services are provided by other U S WEST subsidiaries to customers
both inside and outside the U S WEST Region. (Financial information concerning U
S WEST's operations is set forth in the Consolidated Financial Statements and
Notes thereto in the U S WEST 1993 Annual Report to Shareowners (the "1993
Annual Report") and is incorporated herein by reference.) U S WEST and its
subsidiaries had 60,778 employees at December 31, 1993.
RECENT DEVELOPMENTS
U S WEST COMMUNICATIONS
DEVELOPMENT OF BROADBAND NETWORK. In February, 1993, U S WEST announced its
intention to build a broadband telecommunications network (the "Broadband
Network") capable of providing voice, data and video services to customers
within the U S WEST Region. When completed, the Broadband Network will carry
multimedia signals over a mix of optical fiber, coaxial cable and copper wire. U
S WEST expects that it will ultimately deliver a variety of integrated
communications, entertainment and information services and other high speed
digital services, including data applications, through the Broadband Network in
selected areas of the U S WEST Region. These integrated services, including
video-on-demand, targeted advertising, home shopping, interactive games, high-
definition broadcast television and two-way, video telephony are expected to
become available over time as the Broadband Network develops. The Broadband
Network architecture is currently being installed and technical trials are
beginning in Omaha, Nebraska. U S WEST is seeking approval from the Federal
Communications Commission (the "FCC") to install Broadband Network architecture
in Denver, Minneapolis-St. Paul, Portland, and Boise. U S WEST expects to put
the Broadband Network into commercial use in selected areas by 1995, subject to
a number of competitive and other factors, some of which are beyond its control,
including the receipt of necessary regulatory approvals and the availability of
suitable technology.
RESTRUCTURING. On September 17, 1993, U S WEST announced that U S WEST
Communications would implement a plan (the "Restructuring Plan") designed to
provide faster, more responsive customer services while reducing the costs of
providing these services. Pursuant to the Restructuring Plan, U S WEST
Communications will develop 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. U S WEST Communications will also gradually reduce its work force by
approximately 8,000 employees by the end of 1996 (in addition to a remaining
reduction of 1,000 employees pursuant to a restructuring plan announced in 1991)
and consolidate the operations of its existing 560 customer centers into 26
customer centers in ten cities. U S WEST expects cost reductions will be
realized as these components of the Restructuring Plan are implemented. In
connection with the Restructuring Plan, U S WEST recognized a pretax
restructuring charge of
3
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$1 billion, the components of which are described under "Costs and Expenses" in
Management's Discussion and Analysis of Financial Condition and Results of
Operations on page 17 of the 1993 Annual Report, which is incorporated by
reference herein.
DISCONTINUANCE OF SFAS 71 ACCOUNTING. In the third quarter of 1993, U S
WEST incurred a $3.1 billion non-cash, extraordinary charge, net of an income
tax benefit of $2.3 billion, against its earnings in conjunction with its
decision to discontinue accounting for the operations of U S WEST Communications
in accordance with Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of Regulation" ("SFAS 71"). SFAS 71
generally applies to regulated companies that meet certain requirements,
including a requirement that a company be able to recover its costs,
notwithstanding competition, by charging its customers at prices established by
its regulators. U S WEST's decision to discontinue accounting for the operations
of U S WEST Communications in accordance with SFAS 71 was based on the belief
that the development of competition, market conditions, and broadband
technology, more than prices established by regulators, will determine the
future revenues of U S WEST Communications. As a result of this change, the
remaining asset lives of U S WEST Communications' telephone plant have been
shortened to more closely reflect the useful (economic) lives of such plant. U S
WEST Communications' accounting and reporting for regulatory purposes will not
be affected by the change. U S WEST Communications expects that it will continue
to work with regulators to set appropriate prices that reflect changing market
conditions, including shorter depreciation lives.
TWE INVESTMENT
On September 15, 1993, U S WEST acquired a 25.51% pro rata priority capital
and residual equity interests in Time Warner Entertainment Company, L.P. ("TWE")
for an aggregate purchase price of $2.553 billion, consisting of $1.532 billion
in cash and $1.021 billion in the form of a four-year promissory note bearing
interest at a rate of 4.391% per annum (the "TWE Investment"). TWE owns and
operates substantially all of the filmed entertainment (including Warner Bros.),
programming (including HBO and Cinemax) and cable operations previously owned
and operated by Time Warner Inc. TWE is the second-largest domestic multiple
system cable operator, owning or operating 22 of the top 100 cable systems in
the United States.
U S WEST and TWE intend to upgrade a substantial portion of TWE's cable
systems to "Full Service Network-TM-" capacity over the next five years. U S
WEST and TWE will jointly designate the systems to be upgraded, and after any
required approvals are obtained, U S WEST will share management control with TWE
over those systems. U S WEST believes that each Full Service Network-TM-, when
completed, will utilize fiber optics, digital compression, digital switching and
storage services to provide consumers with video-on-demand, interactive games,
distance learning, full motion video, interactive shopping and alternative
access and local telephone service. In January, 1993, TWE announced that its
first Full Service Network-TM- was being built in Orlando, Florida. This Full
Service Network-TM- is expected to be available to 10,000 residential customers
in that area in 1994. Full implementation of the Full Service Network-TM- will
require the receipt of certain regulatory approvals.
U S WEST has an option to increase its pro rata priority capital and
residual equity interests in TWE from 25.51% to 31.84%. The option is
exercisable, in whole or in part, between January 1, 1999 and May 31, 2005 upon
the attainment of certain earnings thresholds for an aggregate cash exercise
price of $1.25 billion to $1.8 billion (depending on the year of exercise). At
the election of U S WEST or TWE, the exercise price will be payable by
surrendering a portion of the limited partnership interest receivable upon
exercise of such option. In connection with the TWE Investment, U S WEST
acquired 12.75% of the common stock of Time Warner Entertainment Japan Inc., a
joint venture company established to expand and develop the market for
entertainment services in Japan.
PERSONAL COMMUNICATIONS SERVICES
In September, 1993, Mercury One-2-One, a 50-50 joint venture between U S
WEST and Cable & Wireless PLC, launched the world's first commercial Personal
Communications Services ("PCS") in
4
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the United Kingdom. Mercury One-2-One's PCS is a form of digital cellular
communications designed to offer consumer users both a higher quality of service
and more features at lower prices than existing cellular communications systems.
DISCONTINUANCE OF CAPITAL ASSETS SEGMENT
In June, 1993, in connection with its decision to concentrate its resources
and efforts on developing its telecommunications business, U S WEST determined
to treat its capital assets business segment (the "Capital Assets Segment") as a
discontinued operation and announced its intention to dispose of the businesses
comprising that segment. U S WEST's remaining business segment, "Communications
and Related Services," comprises the continuing operations of U S WEST.
The Capital Assets Segment includes U S WEST Financial Services, Inc. ("U S
WEST Financial Services"), which provided a variety of financial services to
clients, an approximately 92% interest in Financial Security Assurance Holdings
Ltd. ("FSA"), which provides financial guarantee insurance policies for
corporate and municipal clients and U S WEST Real Estate, Inc., which holds a
portfolio of real estate assets. On December 7, 1993, U S WEST Financial
Services closed a transaction pursuant to which it sold to NationsBank
Corporation assets representing approximately $2.0 billion of U S WEST Financial
Services' business and finance receivables, on a consolidated basis.
On October 12, 1993, FSA filed a registration statement with respect to a
proposed underwritten initial public offering of 12 million shares of its common
stock. In December, 1993, the proposed public offering was postponed
indefinitely. U S WEST is continuing to explore its strategic alternatives with
respect to FSA, which include a public offering or other disposition of the
business.
U S WEST'S CONTINUING OPERATIONS
U S WEST COMMUNICATIONS. U S WEST Communications was formed January 1,
1991, when Northwestern Bell Telephone Company ("Northwestern Bell") and Pacific
Northwest Bell Telephone Company ("Pacific Northwest Bell") were merged into The
Mountain States Telephone and Telegraph Company ("Mountain States"), which
simultaneously changed its name to U S WEST Communications, Inc. U S WEST
acquired ownership of Mountain Bell, Northwestern Bell and Pacific Northwest
Bell on January 1, 1984, when American Telephone and Telegraph Company ("AT&T")
transferred its ownership interests in these three wholly-owned operating
telephone companies to U S WEST. This divestiture was made pursuant to a
court-approved consent decree entitled the "Modification of Final Judgment"
("MFJ") which arose out of an antitrust action brought by the United States
Department of Justice against AT&T.
OPERATIONS OF U S WEST COMMUNICATIONS. U S WEST Communications serves
approximately 80% of the population in the U S WEST Region and approximately 40%
of the land area. At December 31, 1993, U S WEST Communications had
approximately 13,843,000 telephone network access lines in service, a 3.7%
increase over year end 1992.
Under the terms of the MFJ, the U S WEST Region was divided into 29
geographical areas called "Local Access and Transport Areas" ("LATAs") with each
LATA generally centered on a metropolitan area or other identifiable community
of interest. The principal types of telecommunications services offered by U S
WEST Communications are (i) local service, (ii) intraLATA long distance network
service and (iii) exchange access service (which connects customers to the
facilities of interLATA service providers). For the year ended December 31,
1993, local service, exchange access service and intraLATA long distance network
service accounted for 37%, 27% and 14%, respectively, of the sales and other
revenues of U S WEST's continuing operations. In 1993, revenues from a single
customer, AT&T, accounted for approximately 11% of the sales and other revenues
of U S WEST's continuing operations.
U S WEST Communications incurred capital expenditures of approximately $2.2
billion in 1993 and expects to incur approximately $2.3 billion in 1994. The
1993 capital expenditures of U S WEST
5
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Communications were substantially devoted to the continued modernization of
telephone plant, including investments in fiber optic cable and the conversion
of central offices to digital technology, in order to improve customer services
and network productivity.
Central to U S WEST Communications' operations in 1993 were its initial
efforts respecting the Broadband Network and the Restructuring Plan. See "Recent
Developments -- U S WEST Communications."
REGULATION OF U S WEST COMMUNICATIONS. U S WEST Communications is subject
to varying degrees of regulation by state commissions with respect to intrastate
rates and service, and access charge tariffs. Under traditional rate of return
regulation, intrastate rates are generally set on the basis of the amount of
revenues needed to produce an authorized rate of return.
U S WEST Communications has sought alternative forms of regulation ("AFOR")
plans which provide for competitive parity, enhanced pricing flexibility and
improved capability in bringing to market new products and services. In a number
of states where AFOR plans have been adopted, such actions have been accompanied
by requirements to refund revenues, reduce existing rates or upgrade service,
any of which could have adverse short-term effects on earnings. Similar
agreements may have resulted under traditional rate of return regulation. (See
"State Regulatory Issues" under Management's Discussion and Analysis of
Financial Condition and Results of Operations on p. 21 of the 1993 Annual
Report, which is incorporated by reference herein.)
U S WEST Communications is also subject to the jurisdiction of the FCC with
respect to interstate access tariffs (that specify the charges for the
origination and termination of interstate communications) and other matters. U S
WEST's interstate services have been subject to price cap regulation since
January 1991. Price caps are a form of incentive regulation and, ostensibly,
limit prices rather than profits. However, the FCC's price cap plan includes
sharing of earnings in excess of authorized levels with interexchange carriers.
The Company believes that competition will ultimately be the determining factor
in pricing telecommunications services. In January, 1994, the FCC announced that
it will begin reviewing its current form of regulation.
In September, 1993, the FCC adopted licensing rules for Personal
Communications Services ("PCS") and announced that it would auction the spectrum
frequencies available for PCS in late 1994. PCS offers users mobile voice and
data communications capabilities similar to existing analog cellular service. U
S WEST intends to pursue PCS opportunities as they become available.
COMPETITION. Historically, communications, entertainment and information
services were provided by different companies in different industries. The
convergence of these technologies is changing both the competitive environment
and the way U S WEST does business. This convergence, which is being fueled by
technological advances, will lead to more intense competition from companies
with which U S WEST has not historically competed. U S WEST became the first of
the regional holding companies to potentially compete beyond its region through
its investment in TWE. (See "TWE Investment" under "Recent Developments.")
U S WEST Communications' principal current competitors are competitive
access providers ("CAPs"). Competition from CAPs is currently limited to
providing large business customers (with high-volume traffic) private line
access to the facilities of interexchange carriers. In coming years, CAPs could
also become significant competitors for other local exchange services. MCI
announced plans in early 1994 to build fiber-optic rings and local switching
infrastructures in major metropolitan markets, hence providing the ability to
compete directly with the local telephone company. Additionally, AT&T's entrance
into the cellular communications market through its proposed acquisition of
McCaw Cellular Communications Inc. has the potential to create increased
competition in local exchange as well as cellular services. The loss of local
exchange customers to competitors would affect multiple revenue streams,
including those related to local and access services, and long-distance network
services, and could have a material, adverse effect on the Company's operations.
6
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Competition from long-distance companies continues to erode U S WEST
Communications' market share of intraLATA long-distance services such as WATS
and "800." These revenues have declined over the last several years as customers
have migrated to interexchange carriers that have the ability to offer these
services on both an intraLATA and interLATA basis. U S WEST and its affiliates
are prohibited from providing interLATA long-distance services.
The actions of state and federal public policymakers will play an important
role in determining how increased competition affects U S WEST. The Company is
working with regulators and legislators to help ensure that public policies keep
pace with our rapidly changing industry -- and allow the Company to bring new
services to the marketplace.
U S WEST supports regulatory reform. It is increasingly apparent that the
legal and regulatory framework under which the Company operates, which includes
restrictions on equipment manufacturing, prohibitions on cross-ownership of
cable TV by telephone companies and the provision of cable TV programming
content, and restrictions on the transport of voice, video and data across LATA
boundaries, limits both competition and consumer choice. U S WEST believes that
it is in the public interest to lift these restrictions and to place all
competitors under the same rules to ensure the industry's technological
development and long-term financial health.
For an additional discussion respecting competition, see "Other Items" in
Management's Discussion and Analysis of Financial Condition and Results of
Operations on page 18 of the 1993 Annual Report, which is incorporated by
reference herein.
OTHER U S WEST SUBSIDIARIES AND INVESTMENTS. Other continuing operations
include subsidiaries engaged in (i) publishing services, primarily "Yellow
Pages" and other directories, (ii) designing, engineering and operating mobile
telecommunications systems, (iii) cellular and land-line telecommunications,
network infrastructure and cable television businesses in certain foreign
countries, and (iv) entertainment services.
U S WEST Marketing Resources Group, Inc. ("Marketing Resources"), which
accounted for about 9% of U S WEST's 1993 revenues from continuing operations,
publishes nearly 300 white and yellow page directories in 14 states. Marketing
Resources competes with local and national publishers of directories, as well as
other advertising media such as newspapers, magazines, broadcast media and
direct mail. Marketing Resources intends to focus on enhancing core products,
developing and packaging new information products through new and existing
databases.
U S WEST NewVector Group, Inc. ("NewVector"), which accounted for
approximately 5% of U S WEST's 1993 revenues from continuing operations,
provides communications and information products and services, including
cellular and radio communications services, over wireless networks in 31
Metropolitan Service Areas and 34 Rural Service Areas, primarily located in the
U S WEST Region. Competition for full service cellular customers is currently
limited to holders of the two cellular licenses granted in a given cellular
market. Despite its rapid growth, the cellular industry is faced with many
challenges including the introduction of new technologies, increased competition
and an uncertain regulatory environment.
U S WEST Multimedia Communications, Inc. ("Multimedia Communications") was
formed to manage the TWE Investment, and has primary responsibility for aiding U
S WEST in achieving its strategic goal of becoming a leading provider of
interactive, integrated communications, entertainment and information services
in the U S WEST Region and other selected domestic and international markets.
Multimedia Communications is also responsible for identifying and pursuing
alliances, acquisitions and/or investments that complement U S WEST's strategy.
U S WEST is seeking to strengthen its national out-of-region presence by
acquiring or forming alliances with other communications, entertainment and
information services companies throughout the United States. The first major
step toward that goal was the TWE Investment made in September, 1993. See
"Recent Developments --
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TWE Investment." U S WEST intends to pursue additional out-of-region
opportunities that complement its out-of-region strategy and believes that
through the TWE Investment and those other opportunities it will be able to
provide a variety of integrated communications, entertainment and information
products and services to users through multimedia broadband networks across the
United States. However, U S WEST's ability to pursue certain of those
opportunities with third parties may be limited by the TWE Agreement.
During 1993, U S WEST continued expanding its international ventures, which
include investments in cable television and telecommunications, wireless
communications including PCS, and international networks. See "Recent
Developments -- Personal Communications Services." U S WEST's net investment in
international ventures approximated $477 million at December 31, 1993,
approximately 70% of which is in the United Kingdom.
Because U S WEST's international investments are in new, developing
businesses, they typically are in a high growth, investment phase for several
years and do not show net income or positive cash flow until they become more
mature. Consequently, start-up losses, which are part of the expected investment
in these businesses, will continue in the near term. The Company's future
commitment to international ventures is currently planned at about $450 million
over the next five years. The Company will continue to pursue opportunities in
attractive local markets around the world that fit its strategic objectives.
ITEM 2. PROPERTIES
The properties of U S WEST do not lend themselves to description by
character and location of principal units. At December 31, 1993, the majority of
U S WEST property was utilized in providing telecommunications services by U S
WEST Communications. Substantially all of U S WEST Communications' central
office equipment is located in owned buildings situated on land owned in fee,
while many garages and administrative and business offices are in leased
quarters. For information regarding the distribution of property, plant and
equipment at December 31, 1993, reference is made to Schedule V on page S-1.
ITEM 3. LEGAL PROCEEDINGS.
On May 12, 1992, an alleged shareholder of U S WEST filed an amended class
action complaint (the "Amended Complaint") in the United States District Court
for the District of Colorado against U S WEST and various individuals, including
certain present and former officers of U S WEST (the "Defendants"). ROSENBAUM V.
U S WEST, INC. ET AL, Civ. Action No. 91-B-2164 (D. Colo. filed May 12, 1992).
The Amended Complaint challenged the Defendants' actions in connection with U S
WEST's real estate activities and planned work force reductions, including its
December, 1991 decision to write down certain assets of U S WEST Real Estate,
and related disclosures, and alleged violations of the Securities Exchange Act
of 1934, the Securities Act of 1933 and the rules of the Securities and Exchange
Commission. This litigation was settled by the parties and the terms of the
settlement were approved by the court in November, 1993. In connection with the
settlement, U S WEST issued to certified class members non-transferable rights
(the "Rights") to purchase shares of common stock directly from U S WEST on a
commission-free basis at a 3% discount from the average of the high and low
trading prices of such stock on the New York Stock Exchange on February 23,
1994, the pricing date designated in accordance with the settlement. Class
members exercised approximately 5.6 million of these Rights and, in March, 1994,
approximately 5.6 million shares of U S WEST common stock were issued pursuant
to the settlement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
8
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EXECUTIVE OFFICERS OF U S WEST
Pursuant to General Instructions G(3), the following information is included
as an additional item in Part I:
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DATE ASSUMED
NAME POSITION AGE PRESENT POSITION
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A. Gary Ames (1) President & Chief Executive Officer of U S WEST 49 1990
Communications
James T. Anderson Vice President & Treasurer 54 1984
J. Thomas Bouchard Senior Vice President & Chief Human Resources 53 1989
Officer
Richard J. Callahan Executive Vice President, U S WEST, & President, 52 1988
U S WEST International and Business Development
Group
Charles M. Lillis Executive Vice President & Chief Planning 52 1987
Officer
Richard D. McCormick Chairman of the Board, Chief Executive Officer & 53 1986(2)
President
James M. Osterhoff Executive Vice President & Chief Financial 57 1991
Officer
Lorne G. Rubis Vice President 43 1992(3)
Charles P. Russ III Executive Vice President, General Counsel & 49 1992(4)
Secretary
Judith A. Servoss Vice President 48 1987
James H. Stever Executive Vice President 50 1993(5)
<FN>
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(1) Mr. Ames, while not an officer of U S WEST, performs significant policy
making functions equivalent to those typically performed by an officer.
(2) Mr. McCormick was appointed Chief Executive Officer on January 1, 1991,
and was elected Chairman of the Board effective May 1, 1992.
(3) Mr. Rubis was elected Vice President effective June 6, 1992.
(4) Mr. Russ was elected Executive Vice President, General Counsel and
Secretary effective June 8, 1992.
(5) Mr. Stever was elected Executive Vice President-Public Policy effective
January 8, 1993.
</TABLE>
Executive Officers are not elected for a fixed term of office, but serve at
the discretion of the Board of Directors.
Each of the above executive officers has held a managerial position with U S
WEST or an affiliate of U S WEST since 1989, except for Messrs. Osterhoff, Rubis
and Russ. Mr. Osterhoff was Vice President -- Finance and Chief Financial
Officer of Digital Equipment Corporation from 1985 to 1991. Mr. Rubis was Vice
President -- Quality for U S WEST International and Business Development Group,
a division of U S WEST, from 1991 to 1992; Director -- Quality and Service
Improvement for U S WEST NewVector Group, Inc., a subsidiary of U S WEST, from
1990 to 1991. Prior to joining the U S WEST family, Mr. Rubis worked as an
independent labor relations consultant and as co-founder and principal of
Workplace One, Ltd., a Canadian-based consulting firm, from 1979 to 1988. In
1988, he merged his firm with Deltapoint Corp., a Seattle-based Quality
Improvement consulting firm. Mr. Russ was Vice President, Secretary and General
Counsel of NCR Corporation from February, 1984 to June, 1992.
9
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information required by this item is included on page 47 of the 1993
Annual Report under the heading "Note 14: Quarterly Financial Data (Unaudited)"
and is incorporated herein by reference. The U.S. markets for trading in U S
WEST common stock are the New York Stock Exchange and the Pacific Stock
Exchange. As of December 31, 1993, U S WEST common stock was held by
approximately 836,328 shareholders of record.
ITEM 6. SELECTED FINANCIAL DATA.
The information required by this item is included on page 3 of the 1993
Annual Report under the heading "Financial Highlights" and is incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information required by this item is included on pages 12 through 26 of
the 1993 Annual Report and is incorporated herein by reference.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item is included on pages 28 through 47 of
the 1993 Annual Report and is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item with respect to executive officers is
set forth in Part I, page 10, under the caption "Executive Officers of U S
WEST."
The information required by this item with respect to Directors is included
in the U S WEST definitive Proxy Statement dated March 17, 1994 ("Proxy
Statement") under "Election of Directors" on pages 4 and 5 and is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is included in the Proxy Statement
under "Executive Compensation" on pages 14 through 21 and "Compensation of
Directors" on page 10 and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is included in the Proxy Statement
under "Securities Owned by Management" on page 3 and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not applicable.
10
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following independent accountants' report and consolidated financial
statements are incorporated by reference in Part II of this report on Form
10-K:
<TABLE>
<CAPTION>
PAGE NUMBER OF
ANNUAL REPORT
-----------------
<C> <S> <C>
(1) Report of Independent Accountants................................................... 27
(2) Consolidated Financial Statements:
Consolidated Statements of Operations -- for the years ended December 31, 1993,
1992 and 1991.................................................................... 28
Consolidated Balance Sheets as of December 31, 1993 and 1992...................... 29
Consolidated Statements of Cash Flows -- for the years ended December 31, 1993,
1992 and 1991.................................................................... 30
Notes to Consolidated Financial Statements........................................ 31 through 47
(3) Consolidated Financial Statement Schedules:
<CAPTION>
PAGE NUMBER
-----------------
<C> <S> <C>
Report of Independent Accountants................................................. 16
V -- Property, Plant and Equipment.............................................. S-1
VI -- Accumulated Depreciation and Amortization.................................. S-2
VIII -- Valuation and Qualifying Accounts......................................... S-3
IX -- Short-Term Borrowings...................................................... S-4
X -- Supplementary Income Statement Information................................. S-5
</TABLE>
Financial statement schedules other than those listed above have been omitted
because the required information is contained in the financial statements and
notes thereto, or because such schedules are not required or applicable.
(b) Reports on Form 8-K:
U S WEST filed the following reports on Form 8-K during the fourth
quarter of 1993:
(i) report dated October 13, 1993 relating to a press release announcing
the filing by Financial Security Assurance Holdings of an initial public
offering of 12,000,000 shares of common stock;
(ii) report dated October 19, 1993 relating to a release of earnings for
the period ended September 30, 1993;
(iii) report dated November 10, 1993 filing the U.S. version of a form of
Underwriting Agreement among U S WEST, Inc., Goldman, Sachs & Co., Lehman
Brothers Inc., Merrill Lynch & Co., Morgan Stanley & Co. Incorporated, and
Salomon Brothers, Inc. and the international version of a form of
Underwriting Agreement among U S WEST, Inc., Goldman Sachs International
Limited, Lehman Brothers International (Europe), Merrill Lynch International
Limited, Morgan Stanley International, and Salomon Brothers International
Limited; and
(iv) report dated December 8, 1993 restating the condensed consolidated
financial statements of Financial Security Assurance Inc. for nine months
ended September 30, 1993 and 1992, as amended by Forms 8-K/A dated December
13 and 28, 1993.
11
<PAGE>
(c) Exhibits:
Exhibits identified in parentheses below, on file with the Securities and
Exchange Commission ("SEC"), are incorporated herein by reference as
exhibits hereto.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ---------
<S> <C> <C>
(3a) -- Articles of Incorporation of U S WEST, Inc. dated September 22, 1983 (Exhibit 3a to Registration
Statement No. 2-87861).
(3a.1) -- Articles of Amendment to the Articles of Incorporation of U S WEST, Inc. dated June 6, 1988 (Exhibit
3b to Form 10-K, date of report March 29, 1989, File No. 1-8611).
(3a.2) -- Articles of Amendment to the Articles of Incorporation of U S WEST, Inc. dated May 3, 1991 (Exhibit
3c to Form SE filed on March 5, 1992, File No. 1-8611).
3b -- Bylaws of the Registrant as amended December 3, 1993.
4 -- No instrument which defines the rights of holders of long and intermediate term debt of U S WEST,
Inc. and all of its subsidiaries 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 and its affiliates, U S WEST, Inc., 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, date of report March 8, 1984, File
No. 1-3501).
(10b) -- Shared Network Facilities Agreement dated as of January 1, 1984, between American Telephone and
Telegraph Company, AT&T Communications of the Midwest, Inc., The Mountain States Telephone and
Telegraph Company, Northwestern Bell Telephone Company and Pacific Northwest Bell Telephone Company
(Exhibit 10b to Form 10-K, date of report March 8, 1984, File No. 1-3501).
(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, Northwestern Bell Telephone Company, Pacific
Northwest Bell Telephone Company and Central Services Organization (Exhibit 10d to Form 10-K, date
of report March 8, 1984, File No, 1-3501).
(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, Northwestern Bell Telephone Company, Pacific
Northwest Bell Telephone Company and Central Services Organization (Exhibit 10e to Form 10-K, date
of report March 8, 1984, File No. 1-3501).
(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, date
of report March 8, 1984, File No. 1-3501).
(10f) -- AMPS Software Agreement effective December 31, 1983, between American Telephone and Telegraph
Company and NewVector Communications, Inc. (Exhibit 10h to Form 10-K, date of report March 28,
1984, File No. 1-8611).
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ---------
<S> <C> <C>
(10g) -- Agreement Concerning Contingent 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, Northwestern Bell Telephone Company, Pacific
Northwest Bell Telephone Company and NewVector Communications, Inc. (Exhibit 10h to Form 10-K, date
of report March 8, 1984, File No. 1-3501).
(10h) -- 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, date of report March 8, 1984, File No. 1-3501).
(10i) -- U S WEST Executive Short Term Incentive Plan (Exhibit 10i to Form 10-K filed March 19, 1993, File
No. 1-8611).
(10j) -- Financial Counseling Program for Officers of U S WEST (Exhibit 10-ee to Registration Statement No.
2-87861).
(10k) -- U S WEST Deferred Compensation Plan for Non-Employee Directors (Exhibit 10-ff to Registration
Statement No. 2-87861).
(10l) -- Description of U S WEST Insurance Plan of Non-Employee Directors' Travel and Accident Insurance
(Exhibit 10-gg to Registration Statement No. 2-87861).
(10m) -- Extract from the U S WEST Management Pension Plan regarding limitations on and payments of pension
amounts which exceed the limitations contained in the Employee Retirement Income Security Act
(Exhibit 10-hh to Registration Statement No. 2-87861).
(10n) -- U S WEST Executive Non-Qualified Pension Plan (Exhibit 10o to Form 10-K, date of report March 29,
1989, File No. 1-8611).
(10o) -- U S WEST Deferred Compensation Plan (Exhibit 10o to Form SE filed March 5, 1992, File No. 1-8611).
(10p) -- Description of U S WEST Directors' Retirement Benefit Plan (Exhibit 10p to Form SE filed March 5,
1992, File No. 1-8611).
(10q) -- U S WEST Stock Incentive Plan (Exhibit 10r to Form 10-K, date of report March 29, 1989, File No.
1-8611).
(10r) -- Shareholders' Agreement dated as of January 1, 1988 among 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 10r to
Form SE filed March 5, 1992, File No. 1-8611).
(10s) -- U S WEST Senior Management Long Term Disability and Survivor Protection Plan (Exhibit 10-dd to
Registration Statement No. 2-87861).
(10t) -- U S WEST Mid-Career Pension Plan (Exhibit 10u to Form 10-K, date of report March 29, 1989, File No.
1-8611).
(10u) -- Form of Executive Severance Agreement (Exhibit 10v to Form SE filed on March 6, 1990, File No.
1-8611).
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ---------
<S> <C> <C>
(10v) -- Form of U S WEST, Inc. Non-Incentive Stock Option Agreement Under the Stock Incentive Plan (Exhibit
10v to Form 10-K, filed March 19, 1993, File No. 1-8611).
(10w) -- Form of U S WEST, Inc. Restricted Stock Agreement Under the Stock Incentive Plan (Exhibit 10w to
Form 10-K filed March 19, 1993, File No. 1-8611).
(10x) -- Employment letter from Richard D. McCormick to James M. Osterhoff dated November 1, 1991 (Exhibit
10x to Form 10-K filed March 19, 1993, File No. 1-8611).
(10y) -- Assignment Agreement, dated July 13, 1993, between U S WEST Overseas Operations, Inc. and Richard J.
Callahan (Exhibit (10a) to Form 10-Q filed November 5, 1993).
(10z) -- Agreement for Services, dated July 13, 1993, between U S WEST, Inc. and Richard J. Callahan (Exhibit
(10b) to Form 10-Q filed November 5, 1993).
(10aa) -- Admission Agreement dated as of May 16, 1993 between Time Warner Entertainment Company, L.P. and U S
WEST, Inc. (Exhibit 10 to Form 8-K filed May 24, 1993).
11 -- Statement Re Computation of Per Share Earnings.
12 -- Computation of Ratio of Earnings to Fixed Charges of U S WEST, Inc. and U S WEST Financial Services,
Inc.
13 -- 1993 Annual Report to Shareowners.
21 -- Subsidiaries of U S WEST, Inc.
23 -- Consent of Independent Accountants.
24 -- Powers of Attorney.
99a -- Financial Statements of Financial Security Assurance, a 92% owned subsidiary of U S WEST for the
year ended December 31, 1993.
99b -- Annual Report on Form 11-K for the U S WEST Savings Plan/ESOP for Salaried Employees for the year
ended December 31, 1993, to be filed by amendment.
99c -- Annual Report on Form 11-K for the U S WEST Savings and Security Plan/ESOP for the year ended
December 31, 1993, to be filed by amendment.
</TABLE>
14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of
Englewood, State of Colorado, on March 17, 1994.
U S WEST, Inc.
By /s/ JAMES M. OSTERHOFF
--------------------------------------
James M. Osterhoff
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
<TABLE>
<C> <S>
Principal Executive Officer Chairman of the Board, President
/s/ Richard D. McCormick* and Chief Executive Officer
Principal Financial Officer: Executive Vice President and
/s/ James M. Osterhoff* Chief Financial Officer
</TABLE>
Directors:
/s/ Richard B. Cheney*
/s/ Remedios Diaz-Oliver*
/s/ Grant A. Dove*
/s/ Mary M. Gates*
/s/ Allan D. Gilmour*
/s/ Pierson M. Grieve*
/s/ Shirley M. Hufstedler*
/s/ Allen F. Jacobson*
/s/ Richard D. McCormick*
/s/ Frank P. Popoff*
/s/ Glen L. Ryland*
/s/ Jerry O. Williams*
/s/ Daniel Yankelovich*
*By /s/ JAMES M. OSTERHOFF
----------------------------------------
James M. Osterhoff
(for himself and as Attorney-in-Fact)
Dated March 17, 1994
15
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
Our report on the consolidated financial statements of U S WEST, Inc., which
includes an explanatory paragraph regarding the discontinuance of accounting for
the operations of U S WEST Communications, Inc. in accordance with Statement of
Financial Accounting Standard No. 71, "Accounting for the Effects of Certain
Types of Regulation," in 1993, and a change in the method of accounting for
postretirement benefits other than pensions and other postemployment benefits in
1992, has been incorporated by reference in this Form 10-K from page 27 of the
1993 Annual Report to Shareowners of U S WEST, Inc. In connection with our
audits of such consolidated financial statements, we have also audited the
related consolidated financial statement schedules listed in the index on page
13 of this Form 10-K for the years ended December 31, 1993, 1992 and 1991.
In our opinion, the consolidated financial statement schedules referred to
above, when considered in relation to the basic financial statements taken as a
whole, present fairly, in all material respects, the information required to be
included therein.
/s/ COOPERS & LYBRAND
COOPERS & LYBRAND
Denver, Colorado
January 20, 1994
16
<PAGE>
U S WEST, INC.
SCHEDULE V -- PROPERTY, PLANT AND EQUIPMENT
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING ADDITIONS OTHER END OF
CLASSIFICATION OF PERIOD AT COST (A) RETIREMENTS (B) CHANGES (C) PERIOD
- --------------------------------------------- ---------- ----------- --------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
YEAR 1993
Land and buildings......................... $ 2,433.1 $ 105.7 $ 26.5 $ 9.1 $ 2,521.4
Telephone network equipment and outside
plant..................................... 21,242.7 1,646.0 643.1 233.5 22,479.1
Other...................................... 3,245.0 613.3 317.2 27.6 3,568.7
Construction in progress................... 682.6 76.2 0.0 (166.6) 592.2
---------- ----------- --------------- ----------- ----------
Total.................................. $ 27,603.4 $ 2,441.2 $ 986.8 $ 103.6 $ 29,161.4
---------- ----------- --------------- ----------- ----------
---------- ----------- --------------- ----------- ----------
YEAR 1992
Land and buildings......................... $ 2,317.9 $ 140.0 $ 21.1 $ (3.7) $ 2,433.1
Telephone network equipment and outside
plant..................................... 20,040.0 1,717.9 638.2 123.0 21,242.7
Other...................................... 3,359.3 506.1 711.3 90.9 3,245.0
Construction in progress................... 658.1 190.2 0.0 (165.7) 682.6
---------- ----------- --------------- ----------- ----------
Total.................................. $ 26,375.3 $ 2,554.2 $ 1,370.6 $ 44.5 $ 27,603.4
---------- ----------- --------------- ----------- ----------
---------- ----------- --------------- ----------- ----------
YEAR 1991
Land and buildings......................... $ 2,241.2 $ 104.1 $ 37.5 $ 10.1 $ 2,317.9
Telephone network equipment and outside
plant..................................... 19,310.1 1,624.4 942.7 48.2 20,040.0
Other...................................... 3,227.1 480.6 481.8 133.4 3,359.3
Construction in progress................... 586.1 216.4 0.0 (144.4) 658.1
---------- ----------- --------------- ----------- ----------
Total.................................. $ 25,364.5 $ 2,425.5 $ 1,462.0 $ 47.3 $ 26,375.3
---------- ----------- --------------- ----------- ----------
---------- ----------- --------------- ----------- ----------
<FN>
- ------------------------
NOTE: Certain reclassifications within the schedule have been made to conform
to the current year presentation.
(a) Additions include transfers from construction in progress and interest
charged to construction.
(b) Items of telephone plant, when retired or sold, are deducted from the
property accounts at the amounts at which they are included. These amounts
are estimated if not specifically identifiable. Telephone network equipment
and outside plant includes the retirement of approximately $302 of fully
depreciated customer premises wiring for 1991.
(c) Includes transfers from construction in progress, adjustments resulting
from physical inventories and prior year reclassifications.
</TABLE>
S-1
<PAGE>
U S WEST, INC.
SCHEDULE VI -- ACCUMULATED DEPRECIATION AND AMORTIZATION
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE AT
BEGINNING CHARGED TO OTHER END OF
CLASSIFICATION OF PERIOD EXPENSE RETIREMENTS (A) CHANGES (B) PERIOD
- --------------------------------------------- ---------- ----------- --------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
YEAR 1993
Buildings.................................. $ 530.0 $ 80.5 $ 23.1 $ 68.6 $ 656.0
Telephone network equipment and outside
plant..................................... 7,821.9 1,408.9 629.5 4,787.8 13,389.1
Other...................................... 1,305.1 452.2 229.9 357.1 1,884.5
---------- ----------- --------------- ----------- ----------
Total.................................. $ 9,657.0 $ 1,941.6 $ 882.5 $ 5,213.5 $ 15,929.6
---------- ----------- --------------- ----------- ----------
---------- ----------- --------------- ----------- ----------
YEAR 1992
Buildings.................................. $ 465.5 $ 71.8 $ 18.5 $ 11.2 $ 530.0
Telephone network equipment and outside
plant..................................... 7,078.8 1,359.9 635.9 19.1 7,821.9
Other...................................... 1,538.0 425.9 677.6 18.8 1,305.1
---------- ----------- --------------- ----------- ----------
Total.................................. $ 9,082.3 $ 1,857.6 $ 1,332.0 $ 49.1 $ 9,657.0
---------- ----------- --------------- ----------- ----------
---------- ----------- --------------- ----------- ----------
YEAR 1991
Buildings.................................. $ 435.6 $ 81.2 $ 30.7 $ (20.6) $ 465.5
Telephone network equipment and outside
plant..................................... 6,684.2 1,319.1 954.7 30.2 7,078.8
Other...................................... 1,523.3 394.3 404.2 24.6 1,538.0
---------- ----------- --------------- ----------- ----------
Total.................................. $ 8,643.1 $ 1,794.6 $ 1,389.6 $ 34.2 $ 9,082.3
---------- ----------- --------------- ----------- ----------
---------- ----------- --------------- ----------- ----------
<FN>
- ------------------------
NOTE: Certain reclassifications within the schedule have been made to conform
to the current year presentation.
(a) Telephone network equipment and outside plant includes the retirement of
approximately $302 of fully depreciated customer premises wiring for 1991.
(b) Consists principally of removal costs and salvage received from disposal,
and the 1993 increase in accumulated depreciation recorded in conjunction
with the company's decision to discontinue accounting for the operations of
U S WEST Communications in accordance with SFAS No. 71, "Accounting for the
Effects of Certain Types of Regulation." The impact on accumulated depre-
ciation by class of plant follows:
</TABLE>
<TABLE>
<S> <C>
Buildings......................................... $ 80
Telephone network equipment and outside plant..... 4,723
Other............................................. 348
---------
Total......................................... $ 5,151
---------
---------
</TABLE>
S-2
<PAGE>
U S WEST, INC.
SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING CHARGED TO OTHER END OF
OF PERIOD EXPENSE ACCOUNTS DEDUCTIONS PERIOD
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
CONTINUING OPERATIONS:
ALLOWANCE FOR CREDIT LOSSES
Year 1993................................ $ 59.0 $ 83.4(a) $ 0.8 $ 89.2(b) $ 54.0
Year 1992................................ 59.2 88.9(a) 10.5 99.6(b) 59.0
Year 1991................................ 57.9 104.3(a) (0.2) 102.8(b) 59.2
RESERVES RELATED TO 1993 BUSINESS
RESTRUCTURING, INCLUDING FORCE AND
FACILITY CONSOLIDATION
Year 1993................................ $ 0.0 $1,000.0 $ 0.0 $ 64.3 $ 935.7
RESERVES RELATED TO 1991 BUSINESS
RESTRUCTURING, INCLUDING FORCE REDUCTIONS
AND THE WRITE-OFF OF CERTAIN INTANGIBLE
ASSETS
Year 1993................................ $ 215.8 $ 0.0 $ 0.0 $ 120.4 $ 95.4
Year 1992................................ 313.7 0.0 0.0 97.9 215.8
Year 1991................................ 0.0 363.8 0.0 50.1 313.7
DISCONTINUED OPERATIONS:
ALLOWANCE FOR CREDIT LOSSES
Year 1993................................ $ 62.8 $ 64.4 $(52.5)(c) $ 64.7(b) $ 10.0
Year 1992................................ 61.5 20.3 7.1 26.1(b) 62.8
Year 1991................................ 48.7 31.3 13.5 32.0(b) 61.5
LOSS RESERVE ON FINANCIAL GUARANTEES (D)
Year 1993................................ $ 72.4 $ 102.7 $ 0.0 $ 139.0 $ 36.1
Year 1992................................ 12.4 67.5 0.0 7.5 72.4
Year 1991................................ 0.0 12.4 0.0 0.0 12.4
OTHER (E)
Year 1993................................ $ 86.3 $ 0.2 $ 3.3 $ 89.7(c) $ 0.1
Year 1992................................ 83.8 0.0 8.7 6.2 86.3
Year 1991................................ 96.5 0.0 6.4 19.1 83.8
RESERVES RELATED TO 1991 BUSINESS
RESTRUCTURING, INCLUDING REAL ESTATE
VALUATION ALLOWANCE AND 1993 PROVISION FOR
LOSS ON DISPOSAL OF THE CAPITAL ASSETS
SEGMENT
Year 1993................................ $ 402.5 $ 120.0(f) $ 0.0 $ 186.0 $ 336.5
Year 1992................................ 500.0 0.0 0.0 97.5 402.5
Year 1991................................ 0.0 551.1 0.0 51.1 500.0
<FN>
- --------------------------
NOTE: Certain reclassifications within the schedule have been made to conform
to the current year presentation.
(a) Does not include amounts charged directly to expense. These amounts were
$9.5, $8.9 and $7.2 for 1993 1992 and 1991, respectively.
(b) Represents credit losses written off during the period, less collection of
amounts previously written off.
(c) Primarily due to sale of U S WEST Financial Services finance receivables
and assets.
(d) The company adopted SFAS No. 113, "Accounting and Reporting for Reinsurance
of Short-Duration and Long-Duration Contracts" in 1993. SFAS No. 113
requires reinsurance receivables to be reflected as assets rather than
netted against the loss reserve. Prior years have been restated for
comparability.
(e) Primarily valuation allowance related to the 1990 purchase of a $294 face
amount mobile home loan portfolio for $197.
(f) Provision for estimated loss on disposal of the Capital Assets Segment of
$100 and an additional provision of $20 to reflect the cumulative effect on
deferred taxes of the 1993 federally mandated increase in income tax rates.
</TABLE>
S-3
<PAGE>
U S WEST, INC.
SCHEDULE IX -- SHORT-TERM BORROWINGS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
END OF MAXIMUM AVERAGE WEIGHTED
PERIOD AMOUNT AMOUNT AVERAGE
BALANCE AT WEIGHTED OUTSTANDING OUTSTANDING INTEREST RATE
END OF AVERAGE DURING THE DURING THE DURING THE
PERIOD INTEREST RATE PERIOD (A) PERIOD (B) PERIOD (C)
---------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
YEAR 1993
Commercial paper................................ $ 1,027.7 2.77% $ 2,875.5 $ 1,367.5 3.27%
Other........................................... 1.6 4.81% 26.2 16.8 7.50%
Current portion of long-term debt............... 794.7 NA NA NA NA
Allocated to discontinued operations............ (47.8) NA NA NA NA
----------
Total....................................... $ 1,776.2
----------
----------
YEAR 1992
Commercial paper................................ $ 306.6 3.49% $ 561.3 $ 328.2 4.07%
Other........................................... 35.5 6.75% 126.5 64.2 8.04%
Current portion of long-term debt............... 329.7 NA NA NA NA
Allocated to discontinued operations............ (89.3) NA NA NA NA
----------
Total....................................... $ 582.5
----------
----------
YEAR 1991
Commercial paper................................ $ 267.0 5.00% $ 1,054.7 $ 600.9 6.26%
Other........................................... 26.5 6.93% 39.7 17.5 7.44%
Current portion of long-term debt............... 73.4 NA NA NA NA
----------
Total....................................... $ 366.9
----------
----------
<FN>
- ------------------------
NOTE: Certain reclassifications within the schedule have been made to conform
to the current year presentation.
(a) Computed based on amounts outstanding at month end.
(b) Computed as the cumulative monthly average divided by 12 months.
(c) Computed by dividing the aggregate related interest expense by the average
amount outstanding.
</TABLE>
S-4
<PAGE>
U S WEST, INC.
SCHEDULE X -- SUPPLEMENTARY INCOME STATEMENT INFORMATION
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
CHARGED TO COSTS AND EXPENSES
----------------------------------
ITEM 1993 1992 1991
- ----------------------------------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Maintenance and repairs................................................ $ 1,594.3 $ 1,522.0 $ 1,425.3
Property taxes......................................................... 305.9 258.8 291.5
Gross receipts taxes................................................... 77.2 74.0 94.3
Advertising............................................................ 116.7 100.2 90.3
<FN>
- ------------------------
NOTE: Certain reclassifications within the schedule have been made to conform
to the current year presentation.
</TABLE>
S-5
<PAGE>
[LOGO]
RECYCLED PAPER
<PAGE> 1
EXHIBIT 3B
BYLAWS
OF
U S WEST, Inc.
ADOPTED JUNE 6, 1986
As Last Amended on December 3, 1993
1
<PAGE> 2
BYLAWS
OF
U S WEST, Inc.
ARTICLE ONE
SHAREHOLDERS
Section 1. ANNUAL MEETING. The annual meeting of the
shareholders shall be held on the first Friday of May in each year,
at an hour to be named in the notice of the meeting, unless such
day should fall on a legal holiday in the State of Colorado, in
which event the meeting shall be held at the same hour on the next
succeeding business day that is not a legal holiday. If the annual
meeting is not held on the day designated, or at any adjournment
thereof, the Board of Directors shall cause a meeting in lieu
thereof to be held as soon thereafter as is convenient.
Section 2. SPECIAL MEETINGS. Special meetings of the
shareholders may be called for any purpose. Such meetings may be
called by the Chairman of the Board or by the Board of Directors,
and shall be called by the Chairman of the Board at the request of
the holders of not less than one-third (1/3) of the outstanding
shares of the corporation entitled to vote at the meeting.
(Amended May 1, 1992)
Section 3. PLACE OF MEETING. Any annual meeting or special
meeting may be held at any place either within or without the State
of Colorado.
Section 4. NOTICE OF MEETING. Written notice stating the
place, day, and hour of the meeting and, in the case of a special
meeting, the purpose for which the meeting is called, shall be
delivered not less than ten (10) days nor more than fifty (50) days
before the date of the meeting, either personally or by mail, by or
at the direction of the Chairman of the Board, the Secretary or the
person calling the meeting, to each shareholder of record entitled
to vote at such meeting; except that, if the authorized shares are
to be increased, at least thirty (30) days' notice shall be given.
(Amended May 1, 1992)
Section 5. RECORD DATE. For the purpose of determining those
shareholders entitled to notice of or to vote at any meeting of
shareholders, or to receive payment of any dividend, or in order to
make a determination of shareholders for any other proper purpose,
the Board of Directors shall fix, in advance, a date as the record
date for the determination of shareholders.
2
<PAGE> 3
Such date shall be not more than fifty (50) days, and for a meeting
of shareholders, not less than ten (10) days prior to the date on
which the particular action requiring such determination of
shareholders is to be taken.
Section 6. QUORUM. A majority of the shares entitled to
vote, represented in person or by proxy, shall constitute a quorum
at a meeting of shareholders. If a quorum is present, the
affirmative vote of the majority of the shares represented at the
meeting and entitled to vote on the subject matter shall be the act
of the shareholders, unless the vote of a greater proportion or
number is required by law. If a quorum is not represented at any
meeting of the shareholders, such meeting may be adjourned for a
period not to exceed sixty (60) days at any one adjournment.
Section 7. PROXIES. At all meetings of shareholders, a
shareholder may vote by proxy executed in writing by the
shareholder or by a duly authorized attorney-in-fact. No proxy
shall be valid after eleven (11) months from the date of its
execution, unless otherwise provided in the proxy.
Section 8. NOTICE OF SHAREHOLDER PROPOSALS. A proposal for
action to be presented by any shareholder at an annual or special
meeting of shareholders shall be out-of-order and shall not be
acted upon at such meeting unless such proposal was specifically
described in the corporation's notice to shareholders of the
meeting and the matters to be acted upon thereat or unless such
proposal shall have been submitted in writing to the corporation
and received by the Secretary at the principal executive offices of
the corporation at least thirty (30) days prior to the date of such
annual or special meeting by the shareholder who intends to present
such proposal, and such proposal is, under law, an appropriate
subject of shareholder action. In addition, such shareholder shall
include the following information with the proposal: (i) the name
and record address of the shareholder proposing such business, (ii)
the number of shares of the corporation which are beneficially
owned by the shareholder and (iii) any material interest of the
shareholder in such business. (Added February 2, 1990)
Section 9. CONDUCT OF SHAREHOLDER MEETINGS. The Chairman of
the Board shall have the right and authority to prescribe such
rules, regulations and procedures and to do all such acts and
things as are necessary or desirable for the proper conduct of
annual meetings, including, without limitation, the establishment
of rules for determining if business is proper to be brought before
such meeting; the establishment of procedures for the maintenance
of order and safety; limitations on the time allotted to questions
or comments on the affairs of the corporation; restrictions on
entry to such meeting of shareholders after the time prescribed for
the commencement thereof and the opening and closing of the voting
polls. (Amended May 1, 1992)
3
<PAGE> 4
Section 10. INSPECTOR OF ELECTION. In advance of any meeting
of shareholders, the Chairman of the Board may appoint one or more
persons, other than nominees, as inspector of election to act at
such meeting and any adjournment thereof. The duties of such
inspector shall include: determining the number of shares
outstanding and the voting power of each, the shares represented at
the meeting, the existence of a quorum, and the authenticity,
validity and effect of proxies; receiving votes, ballots or
consents; hearing and determining all challenges and questions in
any way arising in connection with the right to vote; counting and
tabulating all votes or consents; determining the result and doing
such acts as may be proper to conduct the election or vote with
fairness to all shareholders. If there is more than one inspector
of election, the decision, act or certificate of a majority is
effective in all respects as the decision, act or certificate of
all. Any report or certificate made by the inspector of election
is prima facie evidence of the facts stated therein. (Amended May
1, 1992)
ARTICLE TWO
BOARD OF DIRECTORS
Section 1. GENERAL POWERS. The business and affairs of the
corporation shall be managed by its Board of Directors.
Section 2. NUMBER, TENURE AND QUALIFICATIONS. The Board of
Directors shall consist of fourteen (14) persons of the age of
eighteen years or older who need not be shareholders of the
corporation or residents of Colorado. Directors of the corporation
shall be elected at the annual meeting of the shareholders.
Directors elected at the first annual meeting shall hold office for
the term for which elected, and Directors elected at subsequent
annual meetings shall hold office until the third succeeding annual
meeting after their election. Each Director shall hold office for
the term for which elected and until a successor has been elected
and qualified. The President shall preside at all meetings of the
shareholders and the Board of Directors. (Amended December 3,
1993)
Section 3. MEETINGS.
(a) Regular meetings of the Board of Directors shall
be held at such times as shall be fixed by resolution of the Board.
(b) Special meetings of the Board may be called at
any time by the Chairman of the Board, or, if the Chairman of the
Board is absent or unable or refuses to act, by the Secretary or
any five (5) members of the Board. (Amended May 1, 1992)
4
<PAGE> 5
(c) Notice need not be given of regular meetings of
the Board of Directors, nor need notice be given of adjourned
meetings. Notice of special meetings shall be given in writing by
depositing in the U.S. Mail at least three (3) days prior to the
date of the meeting or forty-eight (48) hours' notice delivered
personally or by telephone or telegraph. Neither the business to
be transacted at nor the purpose of any such meeting need be
specified in the notice. Attendance of a Director at a meeting
shall constitute a waiver of notice of that meeting except when the
Director attends for the express purpose of objecting to the
transaction of any business in that the meeting because the meeting
is not lawfully called or convened.
(d) Members of the Board of Directors or any
committee designated by such Board may participate in a meeting of
the Board or committee by means of conference telephone or similar
communications equipment by which all persons participating in the
meeting can hear each other at the same time. Such participation
shall constitute presence at the meeting.
Section 4. QUORUM AND VOTING. A majority of the number of
Directors fixed by these Bylaws shall constitute a quorum for the
transaction of business, and the acts of a majority of Directors
present at a meeting at which a quorum is present shall constitute
the acts of the Board of Directors. If, at any meeting of the
Board of Directors, less than a quorum is present, a majority of
those present may adjourn the meeting until a quorum is present.
Section 5. VACANCIES. A vacancy occurring in the Board of
Directors may be filled by the affirmative vote of a majority of
the remaining Directors though less than a quorum of the Board of
Directors. A Director elected to fill a vacancy shall be elected
for the unexpired term of that Director's predecessor in office.
Any Directorship to be filled by reason of an increase in the
number of Directors shall be filled by the affirmative vote of a
majority of the Directors then in office or by an election at an
annual meeting or at a special meeting of shareholders called for
that purpose. A Director chosen to fill a position resulting from
an increase in the number of Directors shall hold office until the
next annual meeting of shareholders and until a successor has been
elected and qualified.
Section 6. COMPENSATION. Directors shall be entitled to
receive from the corporation such compensation and reimbursement
for expenses as the Board of Directors may determine.
Section 7. COMMITTEES. The Board of Directors may, by
resolution adopted by a majority of the full Board of Directors,
designate from among its members an Executive Committee and one or
more other committees, each of which, to the extent provided in the
resolution, shall have all the authority of the Board of Directors;
5
<PAGE> 6
except that no such committee shall have the authority to
(i) declare dividends or distributions, (ii) approve or recommend
to shareholders actions or proposals required by the Colorado
Corporation Code to be approved by shareholders, (iii) fill
vacancies on the Board of Directors or any committee thereof,
(iv) amend the Bylaws, (v) approve a plan of merger not requiring
shareholder approval, (vi) reduce earned or capital surplus,
(vii) authorize or approve the reacquisition of shares unless
pursuant to a general formula or method specified by the Board of
Directors, or (viii) authorize or approve the issuance or sale of,
or any contract to issue or sell, shares or designate the terms of
a series of a class of shares. The Board of Directors shall have
the power at any time to fill vacancies in, to change the size or
membership of, and to discharge any such committee.
ARTICLE THREE
OFFICERS
Section 1. ENUMERATION OF OFFICES. The corporation shall
have as officers a Chairman of the Board, a President, a Secretary,
and a Treasurer, each of whom shall be elected by the Board of
Directors. The corporation may also have a Chief Financial
Officer, a General Counsel, a Controller, and such Executive Vice
Presidents, Senior Vice Presidents, and Vice Presidents as the
Board may elect. Such other officers as may be deemed necessary
may also be elected by the Board of Directors. Any two or more
offices may be held by the same person, except the offices of
Chairman of the Board and Secretary, President and Secretary, and
the offices of Treasurer and Controller. (Amended May 1, 1992)
Section 2. TERM OF OFFICE. Each officer shall hold office
until a successor is elected or until such officer's resignation,
death, or removal.
Section 3. REMOVAL. Any officer may be removed by the Board
of Directors whenever in its judgment the best interests of the
corporation would be served thereby.
Section 4. VACANCIES. A vacancy in any office because of
death, resignation, removal, or otherwise, may be filled by the
Board of Directors.
Section 5. CHAIRMAN OF THE BOARD; POWERS AND DUTIES. The
Chairman of the Board shall be the chief executive officer of the
corporation. Subject to the control of the Board of Directors, the
Chairman of the Board shall supervise and direct generally all the
business and affairs of the corporation. The Chairman of the Board
shall preside at all meetings of the shareholders and the Board of
Directors. Any document may be signed by the Chairman of the Board
6
<PAGE> 7
or any other person who may be thereunto authorized by the Board of
Directors or the Chairman of the Board. The Chairman of the Board
may appoint such assistant officers as are deemed necessary.
(Amended May 1, 1992)
Section 6. PRESIDENT, EXECUTIVE VICE PRESIDENTS, SENIOR VICE
PRESIDENTS, AND VICE PRESIDENTS; POWERS AND DUTIES. The President
shall be the chief operating officer of the corporation. The
President and each Executive Vice President, each Senior Vice
President, and each Vice President shall have such powers and
perform such duties as may be assigned by the Board of Directors or
the Chairman of the Board. In case of the absence or disability of
the Chairman of the Board or a vacancy in the office, the
President, an Executive Vice President, a Senior Vice President, or
a Vice President designated by the Chairman of the Board or the
Board of Directors shall exercise all the powers and perform all
the duties of the Chairman of the Board. (Amended May 1, 1992)
Section 7. SECRETARY AND ASSISTANT SECRETARIES. The
Secretary shall attend all meetings of the shareholders and the
Board of Directors and shall keep the minutes for such meetings in
one or more books provided for that purpose. The Secretary shall
be custodian of the corporate records, except those required to be
in the custody of the Treasurer or the Controller, shall keep the
seal of the corporation, and shall execute and affix the seal of
the corporation to all documents duly authorized for execution
under seal on behalf of the corporation, and shall perform all of
the duties incident to the office of Secretary, as well as such
other duties as may be assigned by the Chairman of the Board or the
Board of Directors.
The Assistant Secretaries shall perform such of the
Secretary's duties as the Secretary shall from time to time direct.
In case of the absence or disability of the Secretary or a vacancy
in the office, an Assistant Secretary designated by the Chairman of
the Board or by the Secretary, if the office is not vacant, shall
perform the duties of the Secretary. (Amended April 3, 1992, to be
effective May 1, 1992)
Section 8. CHIEF FINANCIAL OFFICER; POWERS AND DUTIES. The
Chief Financial Officer shall be responsible for maintaining the
financial integrity of the corporation, shall prepare the financial
plans for the corporation, and shall monitor the financial
performance of the corporation and its subsidiaries, as well as
performing such other duties as may be assigned by the Chairman of
the Board or the Board of Directors. (Amended May 1, 1992)
7
<PAGE> 8
Section 9. TREASURER AND ASSISTANT TREASURERS; POWERS AND
DUTIES. The Treasurer shall have care and custody of the funds and
securities of the corporation, shall deposit such funds in the name
and to the credit of the corporation with such depositories as the
Treasurer shall approve, shall disburse the funds of the
corporation for proper expenses and dividends, and as may be
ordered by the Board of Directors, taking proper vouchers for such
disbursements. The Treasurer shall perform all of the duties
incident to the office of Treasurer, as well as such other duties
as may be assigned by the Chairman of the Board or the Board of
Directors.
The Assistant Treasurers shall perform such of the Treasurer's
duties as the Treasurer shall from time to time direct. In case of
the absence or disability of the Treasurer or a vacancy in the
office, an Assistant Treasurer designated by the Chairman of the
Board or by the Treasurer, if the office is not vacant, shall
perform the duties of the Treasurer. (Amended
May 1, 1992)
Section 10. GENERAL COUNSEL; POWERS AND DUTIES. The General
Counsel shall be a licensed attorney at law and shall be the chief
legal officer of the corporation. The General Counsel shall have
such power and exercise such authority and provide such counsel to
the corporation as deemed necessary or desirable to enforce the
rights and protect the property and integrity of the corporation,
shall also have the power, authority, and responsibility for
securing for the corporation all legal advice, service, and
counseling, and shall perform all of the duties incident to the
office of General Counsel, as well as such other duties as may be
assigned by the Chairman of the Board or the Board of Directors.
(Amended May 1, 1992)
Section 11. CONTROLLER AND ASSISTANT CONTROLLERS; POWERS AND
DUTIES. The Controller shall be the chief accounting officer of
the corporation and shall keep and maintain in good and lawful
order all accounts required by law and shall have sole control
over, and ultimate responsibility for, the accounts and accounting
methods of the corporation and the compliance of the corporation
with all systems of accounts and accounting regulations prescribed
by law. The Controller shall audit, to such extent and at such
times as may be required by law or as the Controller may think
necessary, all accounts and records of corporate funds or property,
by whomsoever kept, and for such purposes shall have access to all
such accounts and records. The Controller shall make and sign all
necessary and proper accounting statements and financial reports of
the corporation, and shall perform all of the duties incident to
the office of Controller, as well as such other duties as may be
assigned by the Chairman of the Board or the Board of Directors.
8
<PAGE> 9
The Assistant Controllers shall perform such of the
Controller's duties as the Controller shall from time to time
direct. In case of the absence or disability of the Controller or
a vacancy in the office, an Assistant Controller designated by the
Chairman of the Board or the Controller, if the office is not
vacant, shall perform the duties of the Controller. (Amended
May 1, 1992)
Section 12. SALARIES. The salaries of all officers of the
corporation shall be fixed by or in the manner provided by the
Board of Directors. If authorized by a resolution of the Board,
the salary of any officer other than the Chairman of the Board may
be fixed by the Chairman of the Board or a Committee of the Board.
No officer shall be disqualified from receiving a salary by reason
of also being a Director of the corporation. (Amended May 1, 1992)
ARTICLE FOUR
STOCK CERTIFICATES
The shares of the corporation shall be represented by
certificates in such form as shall be approved by the Board of
Directors. Such certificates shall be signed by the Chairman of
the Board, the President, an Executive Vice President, or a Vice
President and by the Treasurer or an Assistant Treasurer or by the
Secretary or an Assistant Secretary of the corporation and may be
sealed with the seal of the corporation or a facsimile thereof.
Any or all of the signatures upon a certificate may be facsimiles
if the certificate is countersigned by a transfer agent or regis-
tered by a registrar other than the corporation itself or an
employee of the corporation. If any officer who has signed or
whose facsimile signature has been placed upon such certificate has
ceased to be such officer before the certificate is issued, it may
be issued by the corporation with the same effect as if such person
were such officer at the date of its issue. (Amended May 1, 1992)
ARTICLE FIVE
INDEMNIFICATION OF DIRECTORS, OFFICERS, AND EMPLOYEES
Section 1. SCOPE OF INDEMNIFICATION.
(a) The corporation shall indemnify an indemnified
representative against any liability incurred in connection with
any proceeding in which the indemnified representative may be
involved as a party or otherwise, by reason of the fact that such
person is or was serving in an indemnified capacity, except to the
extent that any such indemnification against a particular liability
is expressly prohibited by applicable law or where a judgment or
other final adjudication adverse to the indemnified representative
9
<PAGE> 10
establishes, or where the corporation determines, that his or her
acts or omissions (i) were in breach of such person's duty of
loyalty to the corporation or its shareholders, (ii) were not in
good faith or involved intentional misconduct or a knowing
violation of law, or (iii) resulted in receipt by such person of an
improper personal benefit. The rights granted by this Article
shall not be deemed exclusive of any other rights to which those
seeking indemnification, contribution, or advancement of expenses
may be entitled under any statute, certificate or articles of
incorporation, agreement, contract of insurance, vote of
shareholders or disinterested directors, or otherwise. The rights
of indemnification and advancement of expenses provided by or
granted pursuant to this Article shall continue as to a person who
has ceased to be an indemnified representative in respect of
matters arising prior to such time and shall inure to the benefit
of the heirs, executors, administrators, and personal
representatives of such a person.
(b) If an indemnified representative is not entitled
to indemnification with respect to a portion of any liabilities to
which such person may be subject, the corporation shall nonetheless
indemnify such indemnified representative to the maximum extent for
the remaining portion of the liabilities.
(c) The termination of a proceeding by judgment,
order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent shall not, of itself, create a presumption that the
indemnified representative is not entitled to indemnification.
(d) To the extent permitted by law, the payment of
indemnification provided for by this Article, including the
advancement of expenses pursuant to Section 2, with respect to
proceedings other than those brought by or in the right of the
corporation, shall be subject to the conditions that the
indemnified representative shall give the corporation prompt notice
of any proceeding, that the corporation shall have complete charge
of the defense of such proceeding and the right to select counsel
for the indemnified representative, and that the indemnified
representative shall assist and cooperate fully in all matters
respecting the proceeding and its defense or settlement. The
corporation may waive any or all of the conditions set forth in the
preceding sentence. Any such waiver shall be applicable only to
the specific payment for which the waiver is made and shall not in
any way obligate the corporation to grant such waiver at any future
time. In the event of a conflict of interest between the
indemnified representative and the corporation that would
disqualify the corporation's counsel from representing the
indemnified representative under the rules of professional conduct
applicable to attorneys, it shall be the policy of the corporation
to waive any or all of the foregoing conditions subject to such
10
<PAGE> 11
limitations or conditions as the corporation shall deem to be
reasonable in the circumstances.
(e) For purposes of this Article:
(1) "indemnified capacity" means any and all past,
present, or future services by an indemnified representative in one
or more capacities as a director, officer, employee, or agent of
the corporation or, at the request of the corporation, as a
director, officer, employee, agent, fiduciary, or trustee of
another corporation, partnership, joint venture, trust, employee
benefit plan, or other entity or enterprise; any indemnified
representative serving an affiliate of the corporation in any
capacity shall be deemed to be doing so at the request of the
corporation; an "affiliate of the corporation" means an entity that
directly or indirectly, through one or more intermediaries,
controls, or is controlled by, or is under common control with, the
corporation;
(2) "indemnified representative" means any and all
directors, officers, and employees of the corporation and any other
person designated as an indemnified representative by the Board of
Directors of the corporation;
(3) "liability" means any damage, judgment, amount
paid in settlement, fine, penalty, punitive damage, excise tax
assessed with respect to an employee benefit plan, or cost or
expense of any nature (including, without limitation, expert
witness fees, costs of investigation, litigation and appeal costs,
attorneys' fees, and disbursements); and
(4) "proceeding" means any threatened, pending, or
completed action, suit, appeal, or other proceeding of any nature,
whether civil, criminal, administrative, or investigative, whether
formal or informal, whether external or internal to the
corporation, and whether brought by or in the right of the
corporation, a class of its security holders or otherwise.
Section 2. ADVANCING EXPENSES. As provided by the Colorado
Corporation Code and to the maximum extent permitted by such law,
the corporation shall pay the reasonable expenses incurred in good
faith by an indemnified representative in advance of the final
disposition of a proceeding described in Section 1. Before making
any such advance payment of expenses, the corporation shall receive
an undertaking by or on behalf of the indemnified representative to
repay such amount if it shall ultimately be determined that such
person is not entitled to be indemnified by the corporation
pursuant to this Article. Such undertaking shall be an unlimited,
unsecured general obligation of the indemnified representative and
shall be accepted without reference to the ability of such person
to make repayment. No advance shall be made by the corporation if
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<PAGE> 12
a determination is reasonably and promptly made by the Board of
Directors by majority vote of a quorum of disinterested directors,
or (if such a quorum is not obtainable or, even if obtainable, a
quorum of disinterest directors so directs) by independent legal
counsel in a written opinion, that, based upon the facts known to
the Board or counsel at the time such determination is made, the
indemnified representative has acted in such a manner as to permit
or require the denial of indemnification pursuant to the provisions
of Section 1. (Amended October 6, 1989)
ARTICLE SIX
MISCELLANEOUS
Section 1. CORPORATE SEAL. The official seal for the
corporation shall be circular in form and be inscribed with the
name of the corporation, the state of incorporation, and the word
"Seal".
Section 2. WAIVER OF NOTICE. When any notice is required to
be given to any shareholder or Director of the corporation under
the provisions of these Bylaws or under the provisions of the
Articles of Incorporation or under the provisions of the Colorado
Corporation Code, a waiver thereof, in writing, signed by the
person entitled to such notice whether before, at, or after the
time stated therein, shall be equivalent to the giving of such
notice.
Section 3. ADOPTION OR AMENDMENT OF BYLAWS. New Bylaws may
be adopted or the Bylaws may be amended, altered, changed, or
repealed either by the affirmative vote of the holders of eighty
percent (80%) of the outstanding shares of Voting Stock of the
corporation or by the affirmative vote of two-thirds (2/3) of the
members of the Board of Directors. (Amended January 8, 1988)
12
<PAGE>
EXHIBIT 11
U S WEST, Inc.
Computation of Earnings Per Share
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
1993 1992
4th Quarter YTD 4th Quarter YTD
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Income from continuing operations $264,025 $475,858 $261,934 $1,075,779
Discontinued operations:
Income to June 1, 1993, net of tax* - 38,526 41,701 103,614
Estimated loss from June 1, 1993
through disposal, net of tax - (100,000) - -
Income tax rate change - (20,000) - -
-------- ----------- -------- ----------
Income before extraordinary items and
cumulative effect of change in
accounting principles 264,025 394,384 303,635 1,179,393
Extraordinary items:
Discontinuance of SFAS No. 71, net of tax - (3,123,000) - -
Early extinguishment of debt, net of tax - (77,220) - -
Cumulative effect of change in accounting
principles related to postretirement
and postemployment benefits, net of tax - - - (1,793,384)
-------- ----------- -------- ---------
Net income (loss) for per share calculation $264,025 ($2,805,836) $303,635 ($613,991)
======== ========== ======== =========
EARNINGS (LOSS) PER SHARE:
1993 1992
4th Quarter YTD 4th Quarter YTD
---------- ---------- ----------- -----------
Weighted average shares outstanding 429,196 419,365 413,836 412,518
======== ======== ======== ========
Income from continuing operations $0.62 $1.13 $0.63 $2.61
Discontinued operations:
Income to June 1, 1993, net of tax* - 0.09 0.10 0.25
Estimated loss from June 1, 1993
through disposal, net of tax - (0.24) - -
Income tax rate change - (0.04) - -
Extraordinary items:
Discontinuance of SFAS No. 71, net of tax - (7.45) - -
Early extinguishment of debt, net of tax - (0.18) - -
Cumulative effect of change in accounting
principles related to postretirement
and postemployment benefits, net of tax - - - (4.35)
-------- -------- -------- --------
Earnings (Loss) per share $0.62 ($6.69) $0.73 ($1.49)
======== ======== ======== ========
<FN>
* 1992 income is through December 31
</TABLE>
1
<PAGE>
EXHIBIT 11
U S WEST, Inc.
Computation of Earnings Per Share
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
EARNINGS (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE: 1993 1992
4th Quarter YTD 4th Quarter YTD
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Weighted average shares outstanding 429,196 419,365 413,836 412,518
Incremental shares from assumed exercise
of stock options 482 424 153 149
-------- -------- -------- --------
Total shares 429,678 419,789 413,989 412,667
======== ======== ======== ========
Income from continuing operations $0.61 $1.13 $0.63 $2.61
Discontinued operations:
Income to June 1, 1993, net of tax - 0.09 0.10 0.25
Estimated loss from June 1, 1993
through disposal, net of tax - (0.24) - -
Income tax rate change - (0.04)
Extraordinary items:
Discontinuance of SFAS No. 71, net of tax - (7.45) - -
Early extinguishment of debt, net of tax - (0.18) - -
Cumulative effect of change in accounting
principles related to post-retirement
and post-employment benefits, net of tax - - - (4.35)
-------- -------- -------- --------
Earnings (loss) per common and common $0.61 ($6.69) $0.73 ($1.49)
equivalent share ======== ======== ======== ========
</TABLE>
2
<PAGE>
EXHIBIT 11
U S WEST, Inc.
Computation of Earnings Per Share
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
EARNINGS (LOSS) PER SHARE - ASSUMING
FULL DILUTION: 1993 1992
4th Quarter YTD 4th Quarter YTD
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Income from continuing operations $264,025 $475,858 $261,934 $1,075,779
Interest on Convertible Liquid Yield Options
Notes (LYONS) * 5,417 - 4,889 19,216
-------- -------- -------- ----------
Adjusted income from continuing operations
for per share calculation $269,442 $475,858 $266,823 $1,094,995
======== ======== ======== ==========
Weighted average shares outstanding 429,196 419,365 413,836 412,518
Incremental shares from assumed exercise
of stock options 482 464 177 197
Shares issued upon conversion of LYONS * 10,233 - 10,238 10,238
-------- -------- -------- ----------
Total shares 439,911 419,829 424,251 422,953
======== ======== ======== ==========
Adjusted income from continuing operations $0.61 $1.13 $0.63 $2.59
Discontinued operations:
Income to June 1, 1993, net of tax - 0.09 0.10 0.24
Estimated loss from June 1, 1993
through disposal, net of tax - (0.24) - -
Income tax rate change - (0.04)
Extraordinary items:
Discontinuance of SFAS No. 71, net of tax - (7.45) - -
Early extinguishment of debt, net of tax - (0.18) - -
Cumulative effect of change in accounting
principles related to post-retirement
and post-employment benefits, net of tax - - - (4.24)
-------- -------- -------- ----------
Earnings (loss) per share - assuming $0.61 ($6.69) $0.73 ($1.41)
full dilution ======== ======== ======== ==========
<FN>
* Amounts are excluded from the fully diluted earnings (loss) per share
calculation if anti-dilutive.
</TABLE>
3
<PAGE>
EXHIBIT 12
U S WEST, Inc.
RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Millions)
<TABLE>
<CAPTION>
Quarter Ended
12/31/93 12/31/92
----------------------------------------------------------------------
<S> <C> <C>
Income from continuing operations $394.1 $369.3
before income taxes
Interest expense 125.1 109.2
Interest factor on rentals (1/3) 27.5 26.2
------ ------
Earnings $546.7 $504.7
Interest expense 125.1 109.2
Interest factor on rentals (1/3) 27.5 26.2
------ ------
Fixed charges $152.6 $135.4
Ratio of earnings to fixed charges 3.58 3.73
----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Year Ended
12/31/93 12/31/92
----------------------------------------------------------------------
<S> <C> <C>
Income from continuing operations $744.7 $1,569.2
before income taxes
Interest expense 439.3 453.5
Interest factor on rentals (1/3) 101.8 97.9
------ ------
Earnings $1,285.8 $2,120.6
Interest expense 439.3 453.5
Interest factor on rentals (1/3) 101.8 97.9
------ ------
Fixed charges $541.1 $551.4
Ratio of earnings to fixed charges 2.38 3.85
----------------------------------------------------------------------
</TABLE>
The year ended 1993 ratio is based on earnings from continuing
operations before extraordinary charges associated with the decision
to discontinue accounting for the operations of the Company in
accordance with SFAS No. 71 of $3,123.0 and the early
extinguishment of debt of $77.2. The year ended 1993 ratio includes
a one-time restructuring charge of $1,000.0. Excluding the
restructuring charge the ratio of earnings to fixed charges would
have been 4.22.
The year ended 1992 ratio is based on earnings before the cummulative
effect of change in accounting principles which reduced net income by
$1,793.4.
<PAGE>
U S WEST, Inc.
RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Millions)
<TABLE>
<CAPTION>
Year Ended
1993 1992 1991 1990 1989
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income from continuing operations $744.7 $1,569.2 $1,209.3 $1,680.5 $1,505.5
before income taxes
Interest expense 439.3 453.5 481.4 459.0 460.2
Interest factor on rentals (1/3) 101.8 97.9 90.4 88.6 79.4
-------------------------------------------------------
Earnings $1,285.8 $2,120.6 $1,781.1 $2,228.1 $2,045.1
Interest expense 439.3 453.5 481.4 459.0 460.2
Interest factor on rentals (1/3) 101.8 97.9 90.4 88.6 79.4
-------------------------------------------------------
Fixed charges $541.1 $551.4 $571.8 $547.6 $539.6
Ratio of earnings to fixed charges 2.38 3.85 3.11 4.07 3.79
- ---------------------------------------------------------------------------------------------
</TABLE>
All years have been restated to exclude the Capital Assets segment which was
discontinued as of June 1, 1993.
The 1993 ratio is based on earnings from continuing operations before
extraordinary charges associated with the decision to discontinue accounting
for the operations of the Company in accordance with SFAS No. 71 of $3,123.0
and the early extinguishment of debt of $77.2. The 1993 and 1991 ratios
include restructuring charges of $1,000.0 and $363.8, respectively. Excluding
the restructuring charges the 1993 and 1991 ratios of earnings to fixed
charges would have been 4.22 and 3.75, respectively.
The 1992 ratio is based on earnings before the cummulative effect of change in
accounting principles which reduced net income by $1,793.4.
<PAGE>
U S WEST Financial Services, Inc.
RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Thousands)
<TABLE>
<CAPTION>
With Without
Parent Support Parent Support
Quarter Ended Quarter Ended
12/31/93 12/31/92 12/31/93 12/31/92
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income before income taxes $65,453 $34,393 $65,453 $34,393
Interest expense 50,809 34,317 50,809 34,317
Interest factor on rentals (1/3) 183 236 183 236
------ ------ ------ ------
Earnings 116,445 68,946 116,445 68,946
Interest expense 50,809 34,317 50,809 34,317
Interest factor on rentals (1/3) 183 236 183 236
------ ------ ------ ------
Fixed charges $50,992 $34,553 $50,992 $34,553
Ratio of earnings to fixed charges 2.28 2.00 2.28 2.00
- ------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Year Ended Year Ended
12/31/93 12/31/92 12/31/93 12/31/92
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income before income taxes $123,596 $83,283 $123,596 $83,283
Interest expense 144,980 150,394 144,980 150,394
Interest factor on rentals (1/3) 789 924 789 924
------ ------ ------ ------
Earnings 269,365 234,601 269,365 234,601
Interest expense 144,980 150,394 144,980 150,394
Interest factor on rentals (1/3) 789 924 789 924
------ ------ ------ ------
Fixed charges $145,769 $151,318 $145,769 $151,318
Ratio of earnings to fixed charges 1.85 1.55 1.85 1.55
- ------------------------------------------------------------------------------------
</TABLE>
<PAGE>
[Graphic]
U S WEST
1993 ANNUAL REPORT
<PAGE>
U S WEST IS LEADING A MULTIMEDIA REVOLUTION THAT WILL CHANGE THE WAY WE WORK,
LEARN AND PLAY. IT'S EASY WHETHER IT'S MOVIES ON DEMAND, PERSONALIZED NEWS
AND HOME SHOPPING, OR VOICE COMMUNICATIONS, WE'LL PACKAGE THE SERVICES YOU
WANT. DELIVER THEM WHEN AND WHERE YOU WANT. AND MAKE SURE THEY'RE SIMPLE TO
USE.
<PAGE>
[Picture]
AS 1, 2, 3.
<PAGE>
TABLE OF CONTENTS
3 Financial Highlights
4 Letter to Shareowners
6 Review of Operations
12 Management's Discussion
and Analysis of Financial Condition
and Results of Operations
27 Reports of Management and
Independent Accountants
28 Consolidated Financial Statements
48 Board of Directors
49 Corporate Executives and
Shareowner Information
CORPORATE PROFILE
U S WEST Inc. is in the connections business, helping customers share
information, entertainment and communications services in local markets
worldwide. U S WEST is headquartered in Englewood, Colo., a suburb of Denver.
The company's major subsidiary, U S WEST Communications, provides services
to more than 25 million residential and business customers in 14 western and
Midwestern states. U S WEST Communications was created from three former Bell
telephone companies: Mountain Bell, Northwestern Bell and Pacific Northwest
Bell.
U S WEST's stock trades under the symbol USW an the New York Stock
Exchange and other major exchanges throughout the world.
CORPORATE MISSION
U S WEST's mission is to be a leading provider of integrated
communications, entertainment and information services over wired broadband and
wireless networks in selected local markets worldwide.
CORPORATE VISION
By the year 2000, U S WEST will be the finest company in the
world at connecting people with their world.
<PAGE>
U S WEST INC.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Dollars In millions (except per share date)
- ------------------------------------------------------------------------------------------------------------------------------
1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C>
FINANCIAL DATA
Sales and other revenues $ 10,294 $ 9,823 $ 9,528 $ 9,369 $ 9,229
Income from continuing operations (Note I) 476 1,076 840 1,145 1,075
Net income (loss) (Note 2) (2,806) (61.4) 553 1,199 1,111
----------------------------------------------------------
Total assets $ 20,680 $ 23,461 $ 23,375 $ 22,160 $ 21,307
Total debt (Note 3) 7,199 5,430 5,969 5,147 5,313
Shareowners' equity 5,861 8,268 9,587 9,240 8,071
----------------------------------------------------------
Earnings per share (continuing operations) (Note 1) $ 1.13 $ 2.61 $ 2.09 $ 2.97 $ 2.91
Earnings (loss) per share (Note 2) (6.69) (1.49) 1.38 3.11 3.01
Dividends per share 2.14 2.12 2.08 2.00 1.88
Book value per share 13.29 19.95 23.39 23.48 21.58
----------------------------------------------------------
Return on shareowners' equity (Note 4) -- 14.4% 5.7% 13.7% 14.2%
Debt-to-capital ratio (Note 3) 55.1% 38.6% 39.4% 35.8% 39.7%
Capital expenditures (Note 3) $ 2,441 $ 2,554 $ 2,425 $ 2,217 $ 1,912
----------------------------------------------------------
OTHER SELECTED DATA (Domestic Operations)
Telephone network access lines in service (thousands) 13,843 13,345 12,935 12,562 12,218
Billed access minutes of use (millions) 48,123 44,369 41,701 38,832 36,374
Cellular subscribers (Note 5) 601,000 415,000 300,000 219,000 141,000
----------------------------------------------------------
Employees 60,778 63,707 65,829 65,469 70,587
Number of shareowners 836,328 867,773 899,082 935,530 962,027
Weighted average shares outstanding (thousands) 419,365 412,518 401,332 386,012 369,098
- --------------------------------------------------------------------------------------------------------------------
<FN>
Note 1 -- 1993 Income from continuing operations was reduced by a restructuring
charge of $610 ($1.46 per share) as discussed In Note 3 to the Consolidated
Financial Statements, and $54 ($.13 per share) for the cumulative effect on
deferred taxes of the 1993 federally mandated increase in income tax rates. 1991
income from continuing operations was reduced by a restructuring charge of
$229.9 ($.57 per share).
Note 2 -- See Consolidated Statements of Operations.
Note 3 -- Debt, the debt-to-capital ratio and capital expenditures exclude
discontinued operations.
Note 4 -- 1993 return on shareowners'equity is not presented. Return on
shareowners' equity for fourth quarter 1993 (based on income from continuing
operations) was 19.9 percent. 1992 return on shareowners' equity is based on
income before cumulative effect of change in accounting principles.
Note 5 -- Cellular subscribers have been restated to include MSA, RSA and
wholesale subscribers.
</TABLE>
3
U S West
<PAGE>
TO OUR SHAREOWNERS:
1993 WAS A HISTORIC YEAR FOR U S WEST. IN A SERIES OF FIRSTS THAT HAVE BEEN
WIDELY IMITATED, WE MOVED INTO NEW TECHNOLOGIES AND NEW MARKETS. THE WALL STREET
JOURNAL DESCRIBED UA AS BEING "AT THE FOREFROND OF THE REVOLUTION IN
INTERACTIVE TELEVISION AND TELECOMMUNICATIONS." We got there by announcing
concrete plans to harness the converging technologies of information,
communications and entertainment. And by maintaining our leadership in making
new services easy for our customers to use.
By doing so, we're continuing to build future value for our shareowners.
HIGHLIGHTS OF THE YEAR INCLUDED:
- -- announcement of our plans to build an Interactive multimedia network in many
cities across the 14-state region that U S WEST Communications serves. This
network will enable us to provide the full range of tomorrow's information and
entertainment services, as well as telecommunications.
- -- a precedent-setting alliance with Time Warner Entertainment to build similar
networks in many cities outside our home territory. The first such Full Service
Network -TM- will begin service this year in Orlando, Fla.
- -- the introduction in London, with our partner Cable & Wireless, of the
world's first "personal communications services." PCS features wireless,
pocket-size phones that work almost anywhere and are priced for the average
consumer.
- -- strong growth of the world's largest combined telephone and cable TV
service, which we and Tele-Communications Inc. (TCI) offer in the United
Kingdom.
- -- a plan to re-engineer all customer service operations at U S WEST
Communications, consolidating 560 service centers Into 26 "super centers" that
will provide faster, improved installation, repair and other services.
- -- adoption of new accounting methods to speed the depreciation of telephone
wires and switches.
- -- technical and market trials of services that will provide you a single
telephone number, enabling calls to "find" you at home, at the office or
in your car.
- -- a successful trial in suburban Denver, with TCI and AT&T, of
"viewer-controlled cable television," in which consumers could choose the
movies they wanted, when they wanted.
- -- an alliance with 14 mobile telephone companies, making it easier for cellular
phone users to place and receive calls while traveling across the U.S. and
Canada.
- -- a U.S. alliance with Electronic Data Systems and France Telecom Intelmatique
to offer easy-to-use home-banking, bill-paying and money-transfer systems.
- -- and continued leadership in selling services like Voice Messaging and Caller
ID, by making them easier to use than similar services offered by others.
Each of these developments was an important step toward fulfilling our
strategic mission: to become a leading provider of interactive communications,
entertainment and information services. And to provide them together, over wired
and wireless networks, in selected local markets worldwide.
In the years ahead, we'll develop multimedia systems that will provide
movies, banking, shopping, education, medical monitoring, personalized news
reports and other services.
Most important: We can say to our customers, "You'll be able to choose what
you want the network to deliver ... and when. And we'll make it easy for you, by
providing easy-to-use 'menus' and customized packages of products and services."
As we focused on improving our services and building future value for our
shareowners, we also upheld our commitments to the present. Our sales, earnings
from operations (excluding a restructuring charge) and quality of service
continued to improve.
Revenues for the year were $10.29 billion, up 4.8 per strong percent from
1992. Especially strong were sales of
4
U S West
<PAGE>
cellular telephone service; we added a record 186,000 subscribers - a 45 percent
increase. Meanwhile, the number of telephone access lines served by U S WEST
Communications grew by 498,000 -- a record 3.7 percent increase from 1992. Also
up, by 8.5 percent, were "minutes of use," an indicator of long-distance calling
volumes.
This strong volume growth and continued cost controls resulted in a 6.7
percent increase in U S WEST's earnings before interest, taxes, depreciation,
amortization and other income, or EBITDA. (That figure excludes the effects of a
one-time restructuring charge.) EBITDA is considered an important indicator of
the operating performance of companies in growing industries.
Income from continuing operations was $1.14 billion, or 2.72 per share,
excluding one-time charges and the operations of the financial services busi-
nesses, which the company is selling. Including the effects of all one-time
charges, the company reported a loss for the year of $2.81 billion -- but this
did not affect the cash available for current obligations or for dividends.
Cash dividends for the year were $2.14, up about 1 percent.
U S WEST stock was trading at $38.375 as the year began and $45,875 at year's
end, up 19.5 percent. Combined with dividends, this represents a "total return"
of 25.4 percent for the year.
We continued to work hard, worldwide, to improve the quality of our products
and services.
In Utah, we invited customers to "Just Say When" they wanted telephone
installations and repairs. In a matter of weeks, customers' ratings of our
service improved 40 percent, thanks to this program. We're extending it
companywide.
Overall, the percentage of customers giving us an "A" rating is up 16 percent
since 1990.
As we continue to streamline our operations and introduce new technology,
there will be fewer jobs at U S WEST. While this is an unfortunate reality,
we're striving to ensure that the remaining jobs will be BETTER, as we work
to meet the needs of our customers and the challenges of growing competition
in the communications industry.
We intend to be the leader in our markets, and we're investing in networks and
systems that we believe will generate long-term growth in sales, cash flow and
earnings. In other developments during 1993, we began selling our financial
services businesses; this will enable us to concentrate our capital and our
attention on the opportunities I've described in the communications business.
In other events, two members were elected to the U S WEST Board of Directors:
Frank Popoff, chairman and chief executive officer of The Dow Chemical Co.; and
Marilyn Carlson Nelson, vice chair of Carlson Holdings Inc., and chair of
Citizens State Bank of Waterville and Montgomery, Minn.
Among the challenges we faced in 1993 was the widespread flooding in Iowa. U S
WEST employees did an outstanding job of keeping the phone lines working for
our customers and for public service agencies, as well as doing a great deal of
volunteer work.
Your company received the national Corporate Conscience Award from the Council
on Economic Priorities. The award recognized the U S WEST Foundation's support
of education, including the American Indian College Fund, and economic develop-
ment, through the REvive program for rural areas. The foundation invested more
then $23 million in the region's future during 1993.
We were also the only communications company listed in a 1993 update of "The
100 Best Companies to Work For in America." And we were listed, once again, in
WORKING MOTHER magazine's list of best places for women to work. We are pleased
to be listed, and are continuing our efforts in these areas.
We're excited about our work, which we call "connecting people to their
world." And we intend to become the world's best at doing so.
Sincerely,
Richard D. McCormick
Chairman and Chief Executive Officer .
[Photo]
"YOU'LL BE ABLE TO CHOOSE WHAT YOU WANT...AND WHEN"
RICHARD D. McCORMICK
5
U S West
<PAGE>
1993 ANNUAL REPORT EVERYWHERE WE TURN THESE DAYS, WE HEAR ABOUT THE "INFORMATION
SUPERHIGHWAY." TO SOME, IT MAY BE A VAGUE, EVEN INTIMIDATING, CONCEPT, BUT TO
US WEST IT REPRESENTS AN UNPRECEDENTED OPPORTUNITY TO IMPROVE PEOPLE'S LIVES --
AND INCREASE SHAREHOLDER VALUE. THAT'S why we're taking the lead in developing
the information superhighway - and making it as easy as 1, 2, 3.
The information superhighway will bring you an array of convenient services -
WHENEVER and WHEREVER you want. If you're working at home, it will help you
communicate with the office by phone, fax, computer and video. If you're
relaxing at home, you'll be able to order movies on demand. Play video games
with somebody across town. Or shop from a host of video catalogs.
If you want to buy a shirt, for example, you'll just tap a remote control,
choose the store from a menu on your TV screen, find the right department and
order the shirt in the size and color you want. The whole process could take
only a minute or two, and you could have the shirt delivered to your door the
next day.
This new network also will bring people together -- even when they're miles
apart. Voice and video services can connect distant classrooms, enabling
students at both schools to work together on a project. Or a doctor at an urban
hospital can help diagnose a patient at a rural clinic by reviewing an X-ray
that's sent electronically.
THE KEY IS MAKING IT EASY TO USE
CLEARLY, THE INFORMATION SUPERHIGHWAY CAN OFFER UNLIMITED POSSIBILITIES. BUT
THOSE DREAMS WILL BECOME REALITY ONLY IF THE TECHNOLOGY IS EASY TO USE. THAT'S
WHY U S WEST, WITH AN UNPARALLELED TRACK RECORD OF MEETING CUSTOMERS' NEEDS, IS
COMMITTED TO packaging these new services in a simple, helpful way. Because
U S WEST foresaw -- and -- the convergence of cable TV and telephone services,
we have a head start at realizing the promise of this new era. And to help
ensure that public policies keep pace with our rapidly changing industry, we're
working constructively with state and federal government officials.
As the chairman's letter indicates, U S WEST has taken
6
U S West
<PAGE>
several bold steps to make the most of the convergence of the
communications, entertainment and information industries:
- - In February, U S WEST was the first regional Bell company to commit to
upgrading its network to provide two-way video, voice and data services.
We're testing that network this year in Omaha, and plan to build similar
systems in Denver; Minneapolis - St. Paul; Portland, Oregon; and Boise,
Idaho. By the end of 1994, we intend to unveil initial deployment plans
for multimedia networks in 15 more cities in our region.
- - In May, U S WEST also became the first regional Bell company to announce
plans to deliver multimedia services OUTSIDE its home territory. Our
partnership witht Time Warner Entertainment was the first domestic alliance
between a telecommunications company and a major entertainment company. We
completed the $2.5 billion agreement in September, and customers will
start using Time Warner's Full Service Network-TM- this year in Orlando,
Fla. Together, our companies plan to build Full Service Networks in many
other cities served by Time Warner Cable.
- - In September in the United Kingdom, U S WEST and Cable & Wireless became
the first companies in the world to offer commercial "personal
communications services," or PCS -- a new generation of pocket-size,
mobile telephones that work almost anywhere and are priced for the average
consumer. Initial orders for the service, known as Mercury One-2-One, are
exceeding our projections.
- - Also in the United Kingdom, U S WEST and Tele-Communications Inc. (TCI)
are the largest providers of telephone and cable TV services in one
convenient package. And the experience we're gaining there -- as a
head-to-head competitor with British Telecom -- is proving invaluable at
home.
- - U S WEST's test of video-on-demand services with TCI and AT&T was the
first by a regional Bell company. Customers participating in the trial in
suburban Denver bought 12 times more movies than the projected national
average for pay-per-view TV.
As our business horizons widen, it's clear that no one company can do
it all. Success in these new markets requires key alliances to take
advantage of the complementary technological expertise of other companies.
Here again, U S WEST is at the forefront of change: Besides our
partnerships with TCI, Cable & Wireless and Time Warner Entertainment, we
have several key business relationships that align us with the leaders in
hardware, software and network technologies.
DOMESTIC TELECOMMUNICATIONS
AS WE PREPARE FOR THE FUTURE, U S WEST CONTINUES TO OFFER HIGH-QUALITY
TELECOMMUNICATIONS SERVICES TODAY. OUR LARGEST SUBSIDIARY, U S WEST
COMMUNICATIONS, PROVIDES LOCAL-AREA TELECOMMUNICATIONS SERVICES TO MORE THAN 25
MILLION CUSTOMERS IN 14 STATES, encompassing the Pacific Northwest, the Rocky
Mountains, the Southwest and the Upper Midwest.
The region we serve has a diversified economy, including growth areas
such as high-tech manufacturing and computer software development, as well
as farming, mining, oil and gas production, tourism, manufacturing and
insurance. Regional employment growth continues to outpace the nation's.
In 1993, that growth was reflected in record increases in "access
lines" -- the number of home and business telephone numbers we serve. In
fact, our record access-line growth of 3.7 percent, or 498,000 lines,
made U S WEST one of the fastest-growing regional Bell companies. In
addition, minutes of use, an indicator of long-distance calling volumes,
grew by 8.5 percent in 1993.
7
U S WEST
<PAGE>
FOCUSING ON THE FUTURE
AS WE EVALUATE OUR RISKS AND OPPORTUNITIES IN THIS COMPETITIVE INDUSTRY, WE'RE
FOCUSING ON THREE AREAS OF OUR BUSINESS TO ENSURE OUR CONTINUED SUCCESS:
- - BUILDING CUSTOMER LOYALTY; - CONTINUING TO REDUCE COSTS; AND - DEVELOPING NEW
SOURCES OF REVENUE. Building customer loyalty is our number-one priority. In a
competitive marketplace, CUSTOMERS decide the winners and losers. When we asked
customers about our service, they told us they expect reliability, easy
access to someone who can help and prompt repairs when there's a problem.
While we're very good at those things, here's what we're doing to be
even better:
- - We're creating 26 full-service centers in 10 cities to replace 560
centers spread across our 14-state region. Employees staffing these new
centers will have the training and systems available to them to
immediately take care of ANY customer need;
- - We're calling customers after a service or business transaction to be
sure they're satisfied;
- - We're letting customers schedule appointments when it's convenient for
THEM, including nights and weekends; and
- - We're using new technology to diagnose and fix many potential problems
BEFORE they affect service.
Much of what we're doing to improve service also will help us reduce
costs by being more efficient. Unfortunately, as part of that
streamlining, we intend to eliminate 9,000 jobs in the next three years.
Those cost savings enable us to devote more resources toward developing
new services.
With the help of our research-and-development laboratory, two U S
WEST products have become industry leaders: our easy-to-use voice mail
and our Caller ID service, which shows the caller's NAME as well as
number.
To help our customers work better and live better, and to generate
new sources of revenue, we introduced a stream of other user-friendly
services in 1993:
- - A directory-assistance service that connects callers to the number they
request;
- - A single-number service in Phoenix that allows companies with several
branches, such as a pizza delivery business, to advertise one number to
call. Callers are automatically routed to the nearest store;
- - A U S WEST Visa Card that serves as a credit card for consumer purchases
AND a telephone calling card;
- - Advanced pay phones with voice prompts, larger number-buttons and a
next-call button for multiple credit-card calls. And if these pay phones
develop trouble, they automatically go out of service and notify our
repair
center; and
- - A "broadcast" fax service that helps travel and hospitality companies
sell airline tickets, hotel rooms and tours. By faxing a single
promotional message, these companies can reach a list of thousands of
travel agents.
We're also meeting the needs of the growing data-communications
market with sophisticated products, such as:
- - Frame relay service, which enables companies with computer networks to
exchange large volumes of data;
- - Desktop video service, which allows customers to use personal computers
for video calls; and
- - A new service that's expected to change the data-communications industry
by sending voice, data, video and images in a single format.
We're also designing services for new markets. We formed the U S WEST
Multimedia Group to work with Time Warner Entertainment and other partners
in packaging a wealth of services to attract customers outside our
14-state region.
In three Colorado cities, we're providing a service that recognizes
your voice and dials programmed telephone numbers upon request. And we're
developing innovative ways to keep the growing number of work-at-home
people connected to the rest of the world.
8
U S WEST
<PAGE>
Our major sales in 1993 included:
- - A series of long-term contracts with Boeing valued at more than $17.5
million to use high-speed computers and communications to help engineer a
new wide-body Boeing 777 airplane; and
- - A communications system worth more than $30 million at the new Denver
International Airport. The system makes the airport the biggest single
user of fiber optics in U S WEST's region.
THE WIRELESS WORLD
OUR MOBILE COMMUNICATIONS COMPANY, U S WEST NEWVECTOR, PROVIDES U S WEST
CELLULAR SERVICE IN MOST OF THE MAJOR CITIES IN OUR 14-STATE REGION, PLUS
SAN DIEGO. 1993 WAS A YEAR OF MARKET INNOVATIONS AND EXCEPTIONAL SUBSCRIBER
GROWTH FOR U S WEST CELLULAR. AT year's end, we served more than 600,000
customers, up 45 percent from 1992.
That strong growth should continue because record numbers of
consumers are discovering the convenience, personal security and
time-saving advantages of cellular phones.
We expanded our cellular reach this year by helping develop and
introduce MobiLink -- a new national standard for cellular telephone
service. Supported by 14 mobile telephone companies, MobiLink offers
unprecedented network quality and customer service across the United
States and Canada.
We also continued to modernize our cellular systems. In Seattle,
Denver and Minneapolis, we converted our networks to the latest Motorola
technology and launched a new service that combines the benefits of a
cellular phone, pager and answering machine in one pocket-size package.
Called the MegaPhone, these digital services can print a brief message on
the phone's display screen, indicate when a message is waiting, or let you
return a call with the push of a button.
Thanks to a new, enhanced directory-assistance service, our customers
on the go in Phoenix and San Diego can call a SelectConnect operator to
get specific information, such as an Italian restaurant on the west side
of town. The operators will list the various options, provide directions
and automatically connect you to the restaurant of your choice to make a
reservation. We plan to expand this time-saving service to other U S WEST
Cellular markets in 1994.
In the Seattle area, we're testing a new generation of
digital networks that will offer customers even better call quality,
greater privacy and more convenient services.
U S WEST NewVector was the first cellular carrier in the world to purchase
this system.
Associating phones with people, rather than places, is the key to the
next major growth market in mobile telephones -- personal communications
services. We'll be testing these new pocket-size phones this year in
Boise, Idaho, and Boulder, Colo.
To focus exclusively on two-way, wireless communications, we signed
an agreement to sell U S WEST Paging to The WestLink Company. The sale is
expected to be completed by mid-1994. NewVector will continue to resell
packaged paging services for our customers.
9
U S WEST
<PAGE>
MARKETING SERVICES
THE BUSINESSES OF U S WEST MARKETING RESOURCES BRING BUYERS AND SELLERS
TOGETHER THROUGH WHITE AND YELLOW PAGES DIRECTORIES, DATA-BASE MARKETING AND
INTERACTIVE MULTIMEDIA INFORMATION SERVICES. OUR CORE BUSINESS, U S WEST
DIRECT, ANNUALLY PUBLISHES MORE than 300 directories and distributes a total of
40 million copies. In 1993, our Yellow Pages revenues grew nearly 6 percent --
almost triple the industry average. And to retain that competitive edge, we're
making our directory production process even more efficient and responsive to
customer needs.
In addition, U S WEST Marketing Resources entered the billion-dollar
data-base marketing business by introducing a new retail service in Omaha
called Your Value Card. An electronic coupon resembling a credit card,
Your Value Card gives buyers automatic discounts, while participating
businesses gain valuable marketing information about their marketplace.
To remain a leader in the information services industry, we're giving
customers push-button control in getting the precise information they want
24 hours a day. In 1993, for example, we:
- - Introduced U S WEST CityKey in San Francisco. CityKey is a two-way
information service that lets guests of certain hotels use the TV and
remote control in their rooms to get information on local entertainment,
sports and transportation;
- - Launched U S WEST EasySource in the Denver Yellow Pages. This 16-page
"infotainment" section of the Yellow Pages is an interactive audio service
that offers timely news, sports, weather and other consumer information;
and
- - Formed an alliance with Electronic Data Systems and France Telecom
Intelmatique to let customers bank at home and receive and pay certain
bills electronically.
INTERNATIONAL OPERATIONS
THROUGH U S WEST INTERNATIONAL, WE'RE PIONEERING NEW TECHNOLOGIES AND DEVELOPING
AND OPERATING GROWING BUSINESSES THAT PROVIDE CABLE TV AND TELEPHONE SERVICES,
AS WELL AS WIRELESS COMMUNICATIONS. AND WE'RE TRANSFERRING THE KNOWLEDGE WE'RE
GAINING IN Europe to new markets at home. The heart of our international
operations is in the United Kingdom, where our joint venture with TCI, TeleWest
Communications, is the largest operator of combined cable TV and telephone
networks. At the end of 1993, TeleWest's network passed about one-third of
the 3.3 million households in our 24
10
U S WEST
<PAGE>
franchises, and served 226,000 cable TV customers, up from 144,000 at the
end of 1992. TeleWest also provided 140,000 telephone lines in 1993, up
from 77,000 the year before.
Also in the U.K., U S WEST and Cable & Wireless last fall introduced
Mercury One-2-One -- the world's first high-quality, pocket-size, mobile
telephone designed and priced for the average consumer. Customer response
to this new technology, known as personal communications services, has
exceeded our expectations.
In Russia, we're playing a major role in building a cellular
telephone system across 10 regions of that vast country. We already
provide cellular service in Moscow and St. Petersburg, and international
long-distance switching centers in those cities and Lithuania. To continue
improving Russia's infrastructure, we formed an innovative organization --
the Russian Telecommunications Development Corporation -- to manage and
fund various telecommunications projects there.
In addition, U S WEST International:
- - Won a license in 1993 to build and operate a new digital cellular
telephone system in Hungary, where another type of cellular service we
provide has been extremely popular. We also operate growing cellular
businesses in the Czech Republic and Slovakia;
- - Operates cable TV systems in Hungary, Norway, Sweden and France; and
- - Publishes eight Yellow Pages directories in Poland.
EASY AS 1,2,3
ALL THE SERVICES U S WEST
OFFERS HAVE ONE THING IN COMMON:
THEY WERE DESIGNED FOR OUR CUSTOMERS'
CONVENIENCE. AS AN INDUSTRY LEADER, WE'RE
COMMITTED TO NOT ONLY MEETING -- BUT EXCEEDING --
CUSTOMER EXPECTATIONS. BECAUSE BY BUILDING CUSTOMER LOYALTY, WE'RE ALSO
creating superior, long-term shareholder value. As we begin to package new
video, voice and data services for our customers, our goal is just as
clear: to make the information superhighway as easy to use as the
telephone.
AS EASY AS 1, 2, 3.
11
U S WEST
<PAGE>
U S WEST INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS - 1993 COMPARED TO 1992
- ---------------------------------------------------------------------------------------------------------
Increase (Decrease)
-----------------------
1993 1992 $ %
---------------------------------------------------
<S> <C> <C> <C> <C>
Income from continuing operations $ 475.9* $ 1,075.8 $ (599.9) (55.8)
Income (loss) from discontinued operations (81.5) 103.6 (185.1) --
Extraordinary items:
Discontinuance of SFAS No. 71, net of tax (3,123.0) -- (3,123.0) --
Early extinguishment of debt, net of tax (77.2) -- (77.2) --
Cumulative effect of change in accounting principles -- (1,793.4) 1,793.4 --
---------------------------------------------------
Net loss $(2,805.8) $ (614.0) $(2,191.8) --
---------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Earnings per share from continuing operations $ 1.13* $ 2.61 $ (1.48) (56.7)
Earnings (loss) per share from discontinued operations (.19) .25 (.44) --
Extraordinary items:
Discontinuance of SFAS No. 71 (7.45) -- (7.45) --
Early extinguishment of debt (.18) -- (.18) --
Cumulative effect of change in accounting principles -- (4.35) 4.35 --
---------------------------------------------------
Loss per share $ (6.69) $ (1.49) $ (5.20) --
---------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
<FN>
*1993 income from continuing operations was reduced by $610.0, or $1.46 per share, for a restructuring
charge, and $54.0, or $.13 per share, for the cumulative effect on deferred taxes of the 1993 federally
mandated increase in income tax rates.
</TABLE>
In 1993, U S WEST Inc. ("U S WEST" or the "company") income from
continuing operations was $475.9, which includes a $610.0 (after tax)
restructuring charge and $54.0 for the cumulative effect on deferred taxes
of the 1993 federally mandated increase in income tax rates. Excluding
these one-time effects, 1993 income from continuing operations and related
earnings per share were $1,139.9 and $2.72, respectively. As normalized, 1993
income from continuing operations increased by $64.1 or 6.0 percent, over
the same period last year, and related earnings per share increased by $.11,
or 4.2 percent, on more shares outstanding. The increase is primarily
attributable to improvements in telephone, domestic cellular and publishing
operations, and lower financing costs, partially offset by increased losses
associated with developing businesses.
Revenue growth and continued cost controls in 1993 resulted in a 6.7
percent increase in the company's earnings before interest, taxes,
depreciation, amortization and other income ("EBITDA"), excluding the
effects of the 1993 restructuring charge. The company considers EBITDA an
indicator of the operational strength of its businesses.
The plan underlying the 1993 restructuring charge is designed to
achieve faster, more responsive customer services, while reducing the
costs of providing these services. The plan includes a work-force
reduction of approximately 8,000 employees by the end of 1996, in addition
to a remaining reduction of approximately 1,000 employees related to the
1991 restructuring plan. (See further discussion under "Restructuring
Charges.")
During the second quarter of 1993, the U S WEST Board of Directors
approved a plan to dispose of the Capital Assets segment, which includes
activities related to financial services and financial guarantee insurance
operations. Also included in the segment is U S WEST Real Estate Inc., for
which disposition was previously announced. The Capital Assets segment is
being accounted for as discontinued operations in accordance with
Accounting Principles Board Opinion No. 30, which provides for the
reporting of the operating results of discontinued operations separately
from continuing operations. The company recorded a provision of $100.0
(after tax), or $.24 per share, for the estimated loss on disposal of the
discontinued operations. An additional provision of $20.0 was recorded in
the third quarter to reflect the cumulative effect on deferred taxes of
the 1993 federally mandated increase in income tax rates. Income from
discontinued operations to June 1, 1993, was $38.5, net of $15.3 in income
taxes. Income from discontinued operations subsequent to June 1, 1993, is
being deferred and was included within the provision for loss on disposal
of the Capital Assets segment.
An extraordinary, non-cash charge of $3.1 billion (after tax) was
incurred in conjunction with U S WEST's decision
12
U S WEST
<PAGE>
to discontinue accounting for the operations of U S WEST Communications
Inc. ("U S WEST Communications") in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 71, "Accounting for the Effects of
Certain Types of Regulation." SFAS No. 71 generally applies to regulated
companies that meet certain requirements, including a requirement that a
company be able to recover its costs, competition notwithstanding, by
charging its customers at prices established by its regulators. U S WEST's
decision to discontinue the application of SFAS No. 71 was based on the
belief that competition, market conditions and the development of broadband
technology, more than prices established by regulators, will determine the
future revenues of U S WEST Communications. As a result of this change, the
remaining asset lives of U S WEST Communications' telephone plant have been
shortened to more closely reflect the useful (economic) lives of such plant.
U S WEST Communications' accounting and reporting for regulatory purposes are
not affected by the change.
During 1993, U S WEST Communications refinanced long-term debt issues
aggregating $2.7 billion in principal amount. These refinancings allowed
the company to take advantage of favorable interest rates. Extraordinary
costs associated with the redemptions reduced 1993 income by $77.2 (after
tax).
The accounting change in 1992 relates to the required adoption of two
accounting standards related to post-retirement and postemployment
benefits (SFAS Nos. 106 and 112). The adoption of SFAS Nos. 106 and 112,
which resulted in a one-time, non-cash charge against 1992 earnings of
$1,793.4 (after tax), including $52.7 related to SFAS No. 112, is more
fully discussed in "Results of Operations - 1992 Compared to 1991."
<TABLE>
<CAPTION>
INCOME FROM CONTINUING OPERATIONS: BASE AND DEVELOPING BUSINESSES
- -----------------------------------------------------------------------------
Decrease
-----------------
1993 1992 $ %
------------------------------------------
<S> <C> <C> <C> <C>
Base businesses:
U S WEST Communications $ 435.3 $ 950.0 $(514.7) (54.2)
Publishing and other 179.5 206.8 (27.3) (13.2)
-----------------------------------------
Total base 614.8 1,156.8 (542.0) (46.9)
Developing businesses (138.9) (81.0) (57.9) (71.5)
-----------------------------------------
Income from continuing operations $ 475.9* $1,075.8 $(599.9) (55.8)
-----------------------------------------
- ----------------------------------------------------------------------------
<FN>
*1993 income from continuing operations was reduced by $610.0, or $1.46 per
share, for a restructuring charge, and $54.0, or $.13 per share, for the
cumulative effect on deferred taxes of the 1993 federally mandated increase
in income tax rates.
</TABLE>
U S WEST's operations consist of "base" businesses that have moderate,
though consistent, growth rates and which generate substantial income and cash
flows, and "developing" businesses that are high-growth potential businesses
that are not expected, in the aggregate, to show positive net cash flows or
earnings in the near term.
BASE BUSINESSES
- -----------------------------------------------------------------------------
U S WEST's base businesses include U S WEST Communications, which provides
telecommunications services in 14 western and midwestern states, serving
approximately 80 percent of the population and approximately 40 percent of the
land area. U S WEST Communications offers local service, exchange access service
and long-distance network service. About 28 percent of the company's access
lines are devoted to providing services to business customers. The access line
growth rate for business customers, who tend to be heavier users of the
telephone network, has consistently exceeded the growth rate for residential
customers. During 1993, business access lines grew by 5.0 percent vs. 3.2
percent for consumer lines. Overall, 1993 access line growth was 3.7 percent.
Base businesses also include the publishing of approximately 300 White and
Yellow Pages directories in 14 states.
During 1993, income from the company's base operations increased to
$1,237.0, excluding the effects of the 1993 restructuring charge and the
cumulative effect on deferred taxes of the 1993 federally mandated increase in
income tax rates. This represents an increase of $80.2, or 6.9 percent, over the
same period last year. The increase is attributable to higher demand for
telephone services, including the effects of record growth in access lines, and
continued cost controls, partially offset by lower prices.
13
U S WEST
<PAGE>
DEVELOPING BUSINESSES
- -----------------------------------------------------------------------------
Developing businesses include U S WEST's domestic cellular business and a
growing portfolio of domestic and international telecommunications and cable
television investments, the most significant of which is represented by the
company's September 1993 $2.5 billion investment in Time Warner Entertainment
Company L.P. ("TWE"). Other investments include joint ventures in cable TV and
telephony businesses in the United Kingdom, wireless communications, including
personal communications services, and international networks. Most of these
investments are in high-growth, investment phases. While certain of the
company's Eastern European cellular and network ventures are currently in a
positive cash flow and income position, the majority of the company's portfolio
consists of businesses that will not show positive net income or cash flow until
they mature. These losses, which are part of our expected investment in these
businesses, will continue in the near term.
Business volumes related to the developing businesses continue to expand
rapidly. Domestic cellular operations added a record 186,000 subscribers in
1993, a 45 percent increase from 1992. Cable TV subscribers in the United
Kingdom joint venture increased to 226,000, compared to 144,000 one year ago.
Additionally, the joint venture provides 140,000 telephone access lines in the
United Kingdom, compared to 77,000 in 1992. The number of cellular customers
served by joint venture operations in Hungary, the Czech Republic, Slovakia and
Russia grew to 63,000 in 1993, compared to 32,000 a year ago.
<TABLE>
<CAPTION>
SALES AND OTHER REVENUES
- -------------------------------------------------------------------------------
INCREASE (DECREASE)
-------------------
1993 1992 $ %
---------------------------------------
<S> <C> <C> <C> <C>
Base businesses:
U S WEST Communications operations:
Local service $ 3,829.1 $3,674.3 $154.8 4.2
Access charges - interstate 2,146.9 2,046.9 100.0 4.9
Access charges - intrastate 682.0 672.8 9.2 1.4
Long-distance network service 1,441.5 1,419.7 21.8 1.5
Other services 556.4 510.0 46.4 9.1
---------------------------------------
Total U S WEST Communications 8,655.9 8,323.7 332.2 4.0
Publishing and other 1,076.9 1,092.3 (15.4) (1.4)
---------------------------------------
Total base 9,732.8 9,416.0 316.8 3.4
Developing business:*
Domestic cellular 560.8 406.6 154.2 37.9
--------------------------------------
Total revenues $ 10,293.6 $9,822.6 $471.0 4.8
--------------------------------------
- ------------------------------------------------------------------------------
<FN>
*With the exception of domestic cellular, which is a consolidated subsidiary,
substantially all of the company's investments in developing businesses are
in ventures that are accounted for using the equity method.
</TABLE>
Approximately 84 percent of the revenues of U S WEST are attributable to
the operations of U S WEST Communications, approximately 58 percent of which are
derived in the states of Arizona, Colorado, Minnesota and Washington.
The primary factors that influence changes in revenues at U S WEST
Communications include customer demand for products and services, whether
through new service offerings or access line growth, price changes and customer
refunds related to regulatory proceedings. An analysis of the change in U S WEST
Communications' revenues follows:
<TABLE>
<CAPTION>
LOCAL SERVICE
- -----------------------------------------------------------------------------------
INCREASE
PRICE HIGHER RECLASSIFICATIONS ------------------
DECREASES REFUNDS DEMAND AND OTHER $ %
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$(5.7) $(10.6) $175.5 $(4.4) $154.8 4.2
- -----------------------------------------------------------------------------------
</TABLE>
Local service revenues include local telephone exchange, local private line
and public telephone services. The increase in local service revenues was
primarily attributable to access line growth, partially offset by refunds and
price decreases.
14
U S WEST
<PAGE>
ACCESS CHARGES
- -----------------------------------------------------------------------------
Access charges are collected primarily from the interexchange carriers for
their use of the local exchange network. For interstate access services, there
is also a fee collected directly from telephone customers. Approximately 41
percent of U S WEST Communications' access revenues and 13 percent of its total
revenues are derived from providing access service to American Telephone and
Telegraph Company ("AT&T").
<TABLE>
<CAPTION>
INTERSTATE ACCESS CHARGES
- -----------------------------------------------------------------------------------
INCREASE
PRICE LOWER RECLASSIFICATIONS ------------------
DECREASES REFUNDS DEMAND AND OTHER $ %
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$(71.5) $5.8 $175.4 $(9.7) $100.0 4.9
- -----------------------------------------------------------------------------------
</TABLE>
Increased demand for interstate access services, as evidenced by an
increase of 8.5 percent in interstate billed access minutes of use, more than
offset the effects of price decreases. Interstate price reductions have been
phased in by the Federal Communications Commission ("FCC") over a number of
years. U S WEST Communication reduced its annual interstate access prices by
approximately $60, effective July 1, 1993, in addition to $90, effective
July 1, 1992, primarily due to FCC-mandated changes which resulted in a cost
shift to intrastate jurisdictions. Access prices will continue to decline,
whether mandated by the FCC or as a result of an increasingly competitive
market for access services.
<TABLE>
<CAPTION>
INTRASTATE ACCESS CHARGES
- -----------------------------------------------------------------------------------
INCREASE
PRICE LOWER RECLASSIFICATIONS ------------------
DECREASES REFUNDS DEMAND AND OTHER $ %
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$(18.1) $8.0 $19.3 -- $9.2 1.4
- -----------------------------------------------------------------------------------
</TABLE>
Intrastate access charges increased primarily as a result of increased
demand and lower refunds, largely offset by the effects of price decreases.
<TABLE>
<CAPTION>
LONG-DISTANCE NETWORK SERVICE
- -----------------------------------------------------------------------------------
INCREASE
PRICE HIGHER RECLASSIFICATIONS ------------------
DECREASES REFUNDS DEMAND AND OTHER $ %
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$(7.1) $(0.6) $31.2 $(1.8) $21.8 1.5
- -----------------------------------------------------------------------------------
</TABLE>
Long-distance network service revenues are derived from calls made within
the service area boundaries of U S WEST Communications, commonly referred to as
"LATAs." The increase in long-distance network service revenues reflects
business growth, partially offset by the impacts of competition, particularly in
Wide Area Telephone Service ("WATS") and "800" services, and price decreases.
OTHER SERVICES
- -----------------------------------------------------------------------------
Other services revenues are derived from billing and collection services
provided to interexchange carriers, and new services such as voice messaging.
These revenues increased 9.1 percent in 1993 due to increased revenue from
billing and collection services and continued market penetration in voice
messaging services.
<TABLE>
<CAPTION>
PUBLISHING AND OTHER
- -----------------------------------------------------------------------------------
INCREASE (DECREASE)
------------------
1993 1992 $ %
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Publishing $ 949.2 $ 949.1 $ .1 --
Other-net 127.7 143.2 (15.5) (10.8)
------------------------------------------------
Total $1,076.9 $1,092.3 $(15.4) (1.4)
------------------------------------------------
- -----------------------------------------------------------------------------------
</TABLE>
Revenue for the entire publishing and other group was reduced by
approximately $86 in 1993 due to the sale of certain publishing and telephone
equipment distribution operations. Revenues from ongoing operations increased
$70.6, or 6.5 percent, primarily as a result of price increases related to
publishing activities. Volume of Yellow Pages directory advertising was
essentially flat in 1993, while the industry as a whole experienced declines
in unit volume.
15
U S WEST
<PAGE>
<TABLE>
<CAPTION>
DOMESTIC CELLULAR
- -----------------------------------------------------------------------------------
INCREASE
------------------
1993 1992 $ %
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Domestic cellular $560.8 $406.6 $154.2 37.9
- -----------------------------------------------------------------------------------
</TABLE>
Domestic cellular revenues increased as a result of an expanded cellular
customer base, which grew by 45 percent in the last 12 months. This growth
reflects increased penetration and a migration to the retail distribution
channel. The cellular customer base is expected to continue growing, though
rates of growth will likely be affected by increased competition in coming
years. Average cellular revenue declined by 5.6 percent (consistent with
industry trends) to approximately $76 per customer, per month. This trend is
expected to continue as cellular penetration in mass markets increases.
<TABLE>
<CAPTION>
COSTS AND EXPENSES
- -----------------------------------------------------------------------------------
INCREASE (DECREASE)
------------------
1993 1992 $ %
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Employee-related costs $3,630.7 $3,521.1 $109.6 3.1
Other operating expenses 2,018.7 1,960.9 57.8 2.9
Taxes other than income taxes 417.0 377.6 39.4 10.4
Depreciation and amortization 1,954.5 1,880.5 74.0 3.9
Restructuring charge 1,000.0 -- -- --
Interest expense 439.3 453.5 (14.2) (3.1)
Other income (expense) - net (88.7) (59.8) 28.9 48.3
- -----------------------------------------------------------------------------------
</TABLE>
Employee-related costs include basic salaries and wages, overtime,
contract labor, benefits (including pension and health care) and payroll
taxes. Employee-related costs at U S WEST Communications increased by $54.0,
or 1.9 percent, over 1992. This increase was attributable to basic wage
increases, increased overtime costs (affected by flood damage in the
midwestern states) and costs incurred for temporary employees in conjunction
with customer service initiatives. These factors were partially offset by the
effects of work-force reductions, primarily in conjunction with the company's
1991 restructuring plan. During 1993, U S WEST Communications reduced its
employee level by 2,755 employees. The work-force reductions and the
company's emphasis on health care cost containment through managed care and
other programs, and earnings on the amounts funded for postretirement benefit
costs, resulted in a decline in health care costs of approximately $25 in
1993. Growth in the company's domestic cellular business also contributed to
the increase in employee-related costs.
Other operating expenses include access charges (incurred by U S WEST
Communications for the routing of its long-distance traffic through the
facilities of independent companies), network software expenses, cellular
marketing costs, and marketing and related costs associated with publishing
activities. Other operating expenses increased by $43.2, or 2.8 percent, at
U S WEST Communications as a result of higher network software costs and
increased advertising expenses. Higher marketing costs related to an
expanding domestic cellular subscriber base also contributed to the increase
in other operating expenses, partially offset by lower expenses due to the
sale of certain publishing and telephone equipment distribution operations.
Taxes other than income taxes primarily consist of property taxes and
taxes based on gross receipts of telephone operations. The increase is due in
part to adjustments made in 1992 for resolution of certain longstanding
appeals.
Depreciation and amortization expense increased $71.1, or 4.1 percent,
at U S WEST Communications as a result of a higher depreciable asset base and
increased rates of depreciation. These effects were partially offset by the
completion of depreciation reserve deficiency amortization programs in
several jurisdictions. Prior to the September 1993 discontinuance of SFAS No.
71, depreciation expense was based on regulator-approved depreciation rates.
The company's discontinuance of SFAS No. 71 has resulted in the use of
shorter asset lives (for financial reporting purposes) to more closely
reflect the economic lives of telephone plant. Based on these new economic
lives, U S WEST Communications expects depreciation expense in 1994 to
increase by approximately 3 percent to 5 percent from the 1993 amount. U S
WEST Communications continues to pursue higher regulator-approved
depreciation rates and improved capital recovery within the regulatory
environment.
16
U S WEST
<PAGE>
Interest expense decreased principally due to the effects of lower
interest rates, partially offset by increased debt of approximately $1.8
billion used to fund new initiatives, including the investment in TWE. U S
WEST's average borrowing cost decreased to 6.7 percent from 7.7 percent in
1992. (See "Liquidity and Capital Resources" for a discussion of the impact
of the company's debt refinancings.)
Other income (expense) - net includes equity losses, associated with
developing businesses, of $74.4, compared to $42.7 in 1992. The increase in
these losses is primarily due to new investments, including the company's
investment in personal communications services in the United Kingdom.
RESTRUCTURING CHARGES
- -----------------------------------------------------------------------------
The company's 1993 operating results reflect a pretax restructuring
charge of $1 billion ($610 after tax). The restructuring charge includes
specific, incremental and direct costs that can be estimated with reasonable
accuracy and are clearly identifiable with the related plan.
The 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 will develop new systems that will enable
it to monitor networks to reduce the risk of service interruptions, activate
telephone service on demand, provide automated inventory systems and
centralize its service centers so customers can have their telecommunications
needs resolved with one phone call. The company will also reduce its work
force by approximately 8,000 employees by the end of 1996 (in addition to a
remaining reduction of 1,000 employees pursuant to the 1991 restructuring
plan) and consolidate the operations of its existing 560 customer centers
into 26 centers in 10 cities.
Following is a schedule of the costs included in the restructuring charge:
- -----------------------------------------------------------------------------
<TABLE>
<S> <C>
Employee separation $ 240
Real estate 120
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 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 $225 in 1994, 1995 and 1996, respectively.
In addition to these expenditures, the company anticipates incremental
capital expenditures related to there structuring plan of approximately $490
in the next three years.
The 1993 restructuring plan is estimated to reduce cumulative total
employee and related costs by approximately $525 during the next three years,
starting in 1994. These savings are expected to be largely offset by higher
employee salaries and wages for the remainder of the work force.
The company's 1991 restructuring plan included a pretax charge of $363.8
($229.9 after tax) due to planned work-force reductions and the write-off of
certain intangible and other assets. The work-force reductions covered
approximately 6,000 employees, of which approximately 5,000 have left the
company as of December 31, 1993. The portion of the 1991 restructuring charge
related to work-force reductions was $240, of which approximately $56 was
unused at December 31, 1993.
17
U S WEST
<PAGE>
PROVISION FOR INCOME TAXES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECREASE
------------------
1993 1992 $ %
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Provision for income taxes $268.8 $493.4 $(224.6) (45.5)
Effective tax rate 36.1% 31.4% -- --
- -----------------------------------------------------------------------------------
<FN>
Continuing operations basis.
</TABLE>
The increase in the effective tax rate ("ETR") resulted primarily from
the $54.0 cumulative effect on deferred taxes of the 1993 federally mandated
increase in income tax rates and the effects of discontinuing SFAS No. 71,
partially offset by the tax effects of the restructuring charge. (See Note 11
to the Consolidated Financial Statements.)
In 1994, the ETR is expected to rise to approximately 37.5 percent
primarily because of the full-year impact of discontinuing SFAS No. 71.
In 1993, U S WEST implemented SFAS No. 109, "Accounting for Income
Taxes." Adoption of the new standard did not have a material effect on the
company's financial position or results of operations, primarily because of
the company's 1989 adoption of SFAS No. 96 which reflected deferred income
taxes at current income tax rates.
OTHER ITEMS
- -----------------------------------------------------------------------------
COMPETITIVE ENVIRONMENT
- -----------------------------------------------------------------------------
Historically, communications, entertainment and information services
were provided by different companies in different industries. The convergence
of these technologies is changing both the competitive environment and the
way U S WEST does business. This convergence, which is being fueled by
technological advances, will lead to more intense competition from companies
with which U S WEST has not historically competed. U S WEST became the first
of the regional holding companies to potentially compete beyond its region
through its investment in TWE. (See "U S WEST Competitive Strategy.")
U S WEST Communications' principal current competitors are competitive
access providers ("CAPs"). Competition from CAPs is currently limited to
providing large business customers (with high-volume traffic) private line
access to the facilities of interexchange carriers. In coming years, CAPs
could also become significant competitors for other local exchange services.
MCI announced plans in early 1994 to build fiber-optic rings and local
switching infrastructure in major metropolitan markets, hence providing the
ability to compete directly with the local telephone company. Additionally,
AT&T's entrance into the cellular communications market through its proposed
acquisition of McCaw Cellular Communications Inc. has the potential to create
increased competition in local exchange as well as cellular services. The
loss of local exchange customers to competitors would affect multiple revenue
streams, including those related to local and access services, and
long-distance network services, and could have a material, adverse effect on
the company's operations. (See "U S WEST Competitive Strategy.")
Competition from long-distance companies continues to erode U S WEST
Communications' market share of intraLATA long-distance services such as WATS
and "800." These revenues have declined over the last several years as
customers have migrated to inter-exchange carriers that have the ability to
offer these services on both an intraLATA and interLATA basis. U S WEST and
its affiliates are prohibited from providing interLATA long-distance
services.
The actions of state and federal public policymakers will play an
important role in determining how increased competition affects U S WEST. The
company is working with regulators and legislators to help ensure that public
policies keep pace with our rapidly changing industry -- and allow the
company to bring new services to the marketplace.
U S WEST supports regulatory reform. It is increasingly apparent that
the legal and regulatory framework under which the company operates, which
includes restrictions on equipment manufacturing, prohibitions on
cross-ownership of cable TV by telephone companies and the provision of cable
TV programming content, and restrictions on the transport of voice, video and
data across LATA boundaries, limits both competition and consumer choice. U S
WEST believes that it is in the public interest to lift these restrictions
and to place all competitors under the same rules to ensure the industry's
technological development and long-term financial health.
18
U S WEST
<PAGE>
U S WEST COMPETITIVE STRATEGY
- -----------------------------------------------------------------------------
U S WEST intends to implement its competitive strategy by focusing on
three key objectives: 1) business growth through the development of broadband
networks and a broadened wireless presence; 2) customer loyalty through
continuous improvement in customer service; and 3) improved productivity
through systems re-engineering and other cost controls. This strategy is
directed both domestically (in-region and out-of-region) and internationally.
U S WEST will continue to employ strategic alliances in new and
developing businesses. In addition to strategic alliances, the company will
make direct investments in assets or businesses that are consistent with the
company's competitive strategy. Such investment activities could require
large amounts of capital. Financing for any of these types of activities will
come from a combination of debt, equity and proceeds from the disposition of
the Capital Assets segment and other assets or businesses that no longer fit
U S WEST's strategic objectives. The company may also seek new investors to
raise capital for certain developing businesses.
BASE BUSINESSES
- -----------------------------------------------------------------------------
In 1993, the company announced its intention to build a "broadband," or
high speed, interactive telecommunications network capable of providing
voice, data and video services to customers in major metropolitan markets
within the U S WEST region. Assuming FCC approval, U S WEST Communications
anticipates converting about 100,000 access lines to this technology by the
end of 1994 and 500,000 access lines annually beginning in 1995. This network
modernization program will position U S WEST Communications to compete with
all future providers of voice, data and video services. Technical and
marketing trials of the broadband network will commence in the second and
third quarters, respectively, of 1994.
U S WEST Communications obtained approximately $200 of revenues from new
products and services during 1993, an increase of approximately $65, or 47
percent, from 1992. Significant new products include voice messaging, now
three years old with an installed customer base exceeding 690,000, and Custom
Local Area Signaling Services, which include features such as caller name and
number identification. To meet the demand for high-speed data
communications, U S WEST Communications has introduced products such as frame
relay service, which enables companies with computer networks to exchange
large volumes of data.
The 1993 restructuring plan supports U S WEST's objectives to improve
customer services and increase productivity, while continuing to narrow its
cost of service disadvantage with current and potential competitors.
Employee-related costs comprise approximately 45 percent of the total
operating costs of U S WEST. The company will continue its efforts to control
these costs, primarily through systems improvements and reductions in
staffing. At U S WEST Communications, the number of employees per ten
thousand access lines decreased by 8.7 percent in 1993, and has dropped 17.8
percent since 1990. The company anticipates that this trend will continue.
Future growth within the company's publishing operations is centered
around: 1) improved performance in the core Yellow Pages through increased
customer satisfaction and product enhancements; 2) the introduction of
data-base marketing services; and 3) the introduction of interactive
information and transaction services.
DEVELOPING BUSINESSES--DOMESTIC
- -----------------------------------------------------------------------------
U S WEST is expanding its customer base and strengthening its national
out-of-region presence by acquiring or forming alliances with other
communications, entertainment and information services companies. The first
major step towards that goal was the TWE investment, pursuant to which U S
WEST acquired on September 15, 1993, 25.51 percent pro-rata priority capital
and residual equity interests in TWE. TWE owns and operates substantially all
of the entertainment assets previously owned by Time Warner Inc., consisting
primarily of its filmed entertainment, programming - HBO and cable
businesses. In connection with the TWE investment, the company acquired 12.75
percent of the common stock of Time Warner Entertainment Japan Inc., a joint
venture company established to expand and develop the market for
entertainment services in Japan.
U S WEST and TWE intend to upgrade a substantial portion of TWE's cable
systems to "Full Service Network -TM-"
19
U S WEST
<PAGE>
capacity in the next five years. U S WEST and TWE will jointly designate the
systems to be upgraded and share management control over those systems. Each
Full Service Network, when completed, will utilize fiber optics, digital
compression, digital switching and storage services to provide consumers with
a wide variety of services, including video-on-demand, interactive games,
distance learning, full motion video, interactive shopping, and alternative
access and local telephone services.
In 1993, the company's domestic cellular customer base grew to
approximately 600,000, up 45 percent from the year before. To maintain a high
growth rate, the company is focusing significant attention on upgrading its
cellular systems and increasing its penetration in the consumer market.
Furthermore, the company is anticipating increased competition as new
personal communications services ("PCS") enter the wireless market. The
company anticipates that it will be a participant in PCS.
DEVELOPING BUSINESSES--INTERNATIONAL
- -----------------------------------------------------------------------------
In the international arena, U S WEST is focusing its efforts on certain
strategic businesses, primarily in the United Kingdom ("U.K."), where the
company is able to participate directly in the convergence of cable TV and
telecommunications. The U.K. market is unique because its regulatory policies
allow cable TV operators to also provide telephone service in their franchise
areas. Strategic alliances will be used internationally where U S WEST and
its partners can leverage their respective technological resources and
management expertise.
During 1993, U S WEST continued expanding its international ventures.
TeleWest Communications ("TeleWest"), a joint venture with
Tele-Communications Inc., is the largest provider of combined cable TV and
telephone service in the U.K. With the 1993 purchase of seven franchises,
TeleWest now owns all or part of 24 franchises, encompassing 3.3 million
homes. Also in 1993, four TeleWest operating systems installed their own
local telephone switches. All franchises are expected to operate their own
telephone switches by the end of 1994, thus eliminating some costs to
interconnect with other carriers' systems.
In the U.K., Mercury One-2-One, a 50-50 joint venture between U S WEST
and Cable & Wireless PLC, launched the world's first PCS in 1993. Mercury
One-2-One's PCS is a form of digital cellular communications designed to
offer consumers both higher quality service and more features at lower prices
than existing analog cellular communications systems. Initial orders for the
service are exceeding expectations.
In December 1993, U S WEST sold a 29 percent interest in its Russian
ventures to seven institutional investors for $40, raising new funds for
investment in new telecommunications projects in Russia.
The company's net investment in international ventures approximated $477
at December 31, 1993, 70 percent of which is invested in the U.K. The
company's future commitment to existing international ventures is currently
planned at about $450 over the next five years. The company will continue to
pursue opportunities in attractive local markets around the world that fit
its strategic objectives.
FEDERAL REGULATORY ISSUES
- -----------------------------------------------------------------------------
In September 1993, the FCC approved rules for licensing new PCS, which
include making local exchange companies eligible for any PCS license except
where they are affiliated with a cellular carrier. Cellular licensees will be
permitted to bid for a 30-megahertz PCS license outside their existing
service areas and a 10-megahertz license within their existing areas. The FCC
also announced that it would auction the spectrum frequencies available for
PCS in late 1994. The company intends to pursue PCS opportunities as they
become available.
On August 3, 1993, the FCC announced that it will require that certain
telephone companies, including U S WEST Communications, allow competitive
access providers to interconnect directly to a local telephone company's
switching equipment. The decision extends the current collocation requirement
applicable to special access (i.e. private line) services to local transport
for switched access services. The effect of this decision will be to increase
competition and lower prices for interstate access services provided to
interexchange carriers. The FCC has granted local telephone companies subject
to this requirement additional pricing flexibility.
U S WEST's interstate services have been subject to price cap regulation
since January 1991. Price caps are a form of incentive regulation and,
ostensibly, limit prices rather than profits. However, the FCC's price cap
plan
20
U S WEST
<PAGE>
includes sharing of earnings in excess of authorized levels with
interexchange carriers. The company believes that competition will ultimately
be the determining factor in pricing telecommunications services. In January
1994, the FCC announced that it will begin reviewing its current form of
regulation.
The FCC has adopted a regulatory structure known as "Open Network
Architecture," under which U S WEST Communications is required to unbundle
its telephone network services in a manner that will accommodate the service
needs of the growing number of information service providers.
STATE REGULATORY ISSUES
- -----------------------------------------------------------------------------
At U S WEST Communications, there are pending regulatory actions in
local regulatory jurisdictions that call for price decreases, refunds or
both. In one such instance, the Utah Supreme Court has remanded a Utah Public
Service Commission ("PSC") order to the PSC for reconsideration, thereby
establishing two exceptions to the rule against retroactive ratemaking: 1)
unforeseen and extraordinary events, and 2) misconduct. The 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.
U S WEST Communications has sought alternative forms of regulation
("AFOR") plans that provide for competitive parity, enhanced pricing
flexibility and improved capability in bringing to market new products and
services. In a number of states where AFOR plans have been adopted, such
actions have been accompanied by agreements to refund revenues, reduce
existing prices or upgrade service, any of which could have adverse
short-term effects on earnings. Similar agreements may have resulted under
traditional rate-of-return regulation.
In addition to the FCC price cap plan, U S WEST Communications has AFOR
plans in the states of Washington, Minnesota, Oregon, Colorado, Idaho,
Nebraska, North Dakota and South Dakota.
DISCONTINUED OPERATIONS
- -----------------------------------------------------------------------------
During the second quarter of 1993, U S WEST announced that it would
dispose of its Capital Assets segment. In December 1993, U S WEST sold $2.0
billion of finance receivables and the business of U S WEST Financial
Services to NationsBank Corporation. The sales price was in line with the
company's estimate. Proceeds from the sale of $2.1 billion were used to repay
related debt and to reinvest in communications businesses.
During 1993, U S WEST Real Estate Inc. sold five properties for proceeds
of approximately $60. In January 1994, two properties were sold for
approximately $230. The sales were in line with company estimates. The
company anticipates disposing of the remainder of its real estate portfolio
during the next several years.
The company believes its reserves related to discontinued operations are
adequate. (Further details on the discontinued operations are provided in
Note 13 to the Consolidated Financial Statements.)
LIQUIDITY AND CAPITAL RESOURCES
- -----------------------------------------------------------------------------
Cash provided by operating activities increased by $80.5, or 2.5
percent, from 1992, primarily due to growth in base businesses, partially
offset by a $200 increase in postretirement benefit funding. Additionally,
1992 cash provided by operating activities included the effect of an income
tax refund of approximately $125. Cash from operations is the primary source
by which U S WEST funds its capital expenditures and shareholder dividends.
The company expects that cash from operations will fund a significant share
of expected future requirements for existing businesses. Additional
financing, including that related to new investment opportunities, will be
met through debt, equity and the proceeds from disposition of the Capital
Assets segment and other assets or businesses that no longer fit U S WEST's
strategic objectives.
21
U S WEST
<PAGE>
In the last 12 to 18 months, U S WEST has actively pursued a strategy of
refinancing its long-term debt to obtain lower interest rates. During 1993,
U S WEST refinanced debt issues aggregating $2.7 billion in principal amount.
The company expects an annual interest expense reduction of approximately $35
as a result of this refinancing.
Debt increased by approximately $1.8 billion compared to the prior year
(including $1.2 billion of short-term debt), principally as a result of the
company's investment in TWE. The company has benefited from the decline in
short-term interest rates by increasing its use of short-term financing.
U S WEST maintains a commercial paper program to finance short-term cash flow
requirements, as well as to maintain a presence in the short-term debt
market. U S WEST will ultimately seek long-term refinancing of a portion of
its short-term debt, though the timing of this refinancing is uncertain. The
company could be exposed to higher interest costs on the short-term portion
of its debt in the event of an abrupt increase in interest rates.
U S WEST's reported 1993 debt-to-capital ratio was 55.1 percent compared
to 39.6 percent at December 31, 1992. The increase in the debt-to-capital
ratio was primarily attributable to the effects of the discontinuance of SFAS
No. 71, which reduced shareowners' equity by $3.1 billion. Debt used to
finance developing businesses also contributed to the increase.
Including debt related to discontinued operations, the debt-to-capital
ratio was 59.7 percent and 51.7 percent at December 31, 1993 and 1992,
respectively.
Debt related to discontinued operations decreased by approximately $1.9
billion in 1993. (See Note 13 to the Consolidated Financial Statements.) For
financial reporting purposes this debt is netted against the related assets
of the discontinued operations.
The company maintains short-term lines of credit aggregating
approximately $3 billion, all of which were available at December 31, 1993.
Under registration statements filed with the Securities and Exchange
Commission, as of December 31, 1993, U S WEST companies were permitted to
issue up to approximately $2.1 billion of new debt securities.
U S WEST uses various financial instruments for purposes of managing
financial risk. The company enters into forward contracts to hedge debt
refinancings when there is a belief that interest rates may rise or during
periods of significant volatility in the credit markets. The company enters
into foreign currency forward contracts to hedge investments in foreign
entities. When market conditions permit, the company also enters into
interest rate swap agreements to obtain lower-cost financing than that
available through traditional forms of financing.
Total capital expenditures were $2,441.2 in 1993 and $2,554.2 in 1992.
Capital expenditures at U S WEST Communications were $2,181.9 in 1993 and
$2,356.6 in 1992. The 1993 capital expenditures of U S WEST Communications
were substantially devoted to the continued modernization of telephone plant,
including investments in fiber optic cable and the conversion of central
offices to digital technology, in order to improve customer service and
network productivity. In 1994, capital expenditures are expected to
approximate $2.6 billion, including $2.3 billion at U S WEST Communications.
The company's dividend growth rate has slowed in recent years due to
U S WEST's commitment to its developing businesses. Dividends increased by $.02,
to $2.14 per share in 1993, an increase of .9 percent. Continued dividend
growth could be affected by projected financing requirements related to
strategic investments.
During the fourth quarter, proceeds of $1,020.0 resulting from the sale
of 22 million shares of common stock were used to reduce short-term
indebtedness, including indebtedness incurred in conjunction with the TWE
investment, and for general corporate purposes. This issuance, along with
approximately 5.6 million shares of common stock to be issued in March 1994
in connection with the settlement of shareholder litigation ("Rosenbaum v.
U S WEST Inc. et al."), for proceeds of approximately $210, will have a
dilutive effect on 1994 earnings.
22
U S WEST
<PAGE>
RESULTS OF OPERATIONS - 1992 COMPARED TO 1991
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INCREASE (DECREASE)
-------------------
1992 1991* $ %
----------------------------------------------
<S> <C> <C> <C> <C>
Income from continuing operations $ 1,075.8 $ 839.6 $ 236.2 28.1
Income (loss) from discontinued operations 103.6 (286.2) 389.8 --
Cumulative effect of change in accounting principles (1,793.4) -- (1,793.4) --
----------------------------------------------
Net income (loss) $ (614.0) $ 553.4 $(1,167.4) --
----------------------------------------------
- -----------------------------------------------------------------------------------------------------
Earnings per share from continuing operations $ 2.61 $ 2.09 $ .52 24.9
Earnings (loss) per share from discontinued operations .25 (.71) .96 --
Cumulative effect of change in accounting principles (4.35) -- (4.35) --
----------------------------------------------
Earnings (loss) per share $ (1.49) $ 1.38 $ (2.87) --
----------------------------------------------
- -----------------------------------------------------------------------------------------------------
<FN>
*1991 income from continuing operations was reduced by $229.9, or $.57 per share, and income from
discontinued operations was reduced by $360.1, or $.90 per share, as a result of a restructuring
charge.
</TABLE>
In 1992, income from continuing operations was $1,075.8 and related
earnings per share were $2.61. In 1991, excluding a restructuring charge,
income from continuing operations was $1,069.5, and related earnings per
share were $2.66. Excluding the effects of the 1991 restructuring charge,
1992 income from continuing operations increased by $6.3, or .6 percent, and
related earnings per share decreased by $.05, or 1.9 percent, on more shares
outstanding.
Income from discontinued operations increased by $29.7, or 40.2 percent,
excluding the effects of a 1991 valuation allowance related to real estate
operations and a write-off of intangible assets related to financial services
that reduced 1991 income from discontinued operations by $360.1. Improved
operating margins in financial services (primarily as a result of lower
interest expense), increased investment income associated with financial
guarantee insurance activities and the absence of real estate losses
contributed to the increase. Due to phasing out the operations of U S WEST
Real Estate Inc., related 1992 operating losses were charged against the
valuation allowance.
The accounting change relates to two recent accounting standards issued
by the Financial Accounting Standards Board. The first is SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other than Pensions,"
which mandates that employers reflect in their current expenses an accrual
for the cost of providing retirement medical and life insurance benefits to
current and future retirees. Prior to 1992, U S WEST, like most corporations,
recognized these costs as they were paid. U S WEST also adopted SFAS No. 112,
"Employers' Accounting for Postemployment Benefits." SFAS No. 112 requires
that employers accrue for the estimated costs of benefits, such as workers'
compensation and disability, provided to former or inactive employees who are
not eligible for retirement. Adoption of SFAS Nos. 106 and 112 resulted in a
one-time, non-cash charge against 1992 earnings of $1,793.4 (after tax),
including $52.7 related to SFAS No. 112.
INCOME FROM CONTINUING OPERATIONS: BASE AND DEVELOPING BUSINESSES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INCREASE
--------------------
1992 1991 $ %
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Base businesses:
U S WEST Communications $ 950.0 $798.5 $151.5 19.0
Publishing and other 206.8 139.8 67.0 47.9
----------------------------------------------
Total base 1,156.8 938.3 218.5 23.3
Developing businesses (81.0) (98.7) 17.7 17.9
----------------------------------------------
Income from continuing operations $1,075.8 $839.6* $236.2 28.1
----------------------------------------------
- -----------------------------------------------------------------------------------------------------
<FN>
*1991 income from continuing operations was reduced by $229.9, or $.57 per share, for a restructuring
charge.
</TABLE>
Income from base businesses was essentially flat, absent the effects of
the 1991 restructuring charge. The ongoing impact from the adoption of SFAS
No. 106 was offset by operating improvements in telephone, cellular and
publishing operations and lower international joint venture losses.
23
U S WEST
<PAGE>
SALES AND OTHER REVENUES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INCREASE (DECREASE)
--------------------
1992 1991* $ %
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Base businesses:
U S WEST Communications operations:
Local service $3,674.3 $3,500.6 $173.7 5.0
Access charges - interstate 2,046.9 2,023.4 23.5 1.2
Access charges - intrastate 672.8 649.7 23.1 3.6
Long-distance network service 1,419.7 1,462.7 (43.0) (2.9)
Other services 510.0 528.0 (18.0) (3.4)
---------------------------------------------
Total U S WEST Communications 8,323.7 8,164.4 159.3 2.0
Publishing and other 1,092.3 1,038.8 53.5 5.2
---------------------------------------------
Total base 9,416.0 9,203.2 212.8 2.3
Developing business:*
Domestic cellular 406.6 324.9 81.7 25.1
---------------------------------------------
Total revenues $9,822.6 $9,528.1 $294.5 3.1
---------------------------------------------
- ----------------------------------------------------------------------------------------------------
<FN>
*With the exception of domestic cellular, which is a consolidated subsidiary, substantially all of
the company's investments in developing businesses are in ventures that are accounted for using the
equity method.
</TABLE>
An analysis of the change in U S WEST Communications' revenues follows:
LOCAL SERVICE
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INCREASE
PRICE LOWER RECLASSIFICATIONS ------------------
INCREASES REFUNDS DEMAND AND OTHER $ %
- -----------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C>
$.3 $23.2 $167.7 $(17.5) $173.7 5.0
- -------------------------------------------------------------------------------8----
</TABLE>
The increase in local service revenues was primarily attributable to
access line growth of 2.9 percent. Refunds in 1992 were significantly less
than the prior year.
INTERSTATE ACCESS CHARGES
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INCREASE
PRICE HIGHER RECLASSIFICATIONS ------------------
DECREASES REFUNDS DEMAND AND OTHER $ %
- -----------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C>
$(87.6) $(5.4) $125.1 $(8.6) $23.5 1.2
- -----------------------------------------------------------------------------------
</TABLE>
Increased demand for interstate services, as evidenced by an increase of
6.5 percent in interstate billed access minutes of use, more than offset the
effects of price decrease and refunds. U S WEST Communications reduced
interstate access prices by $80 annually, July 1, 1991, as a result of the
FCC's adoption of price cap regulation for interstate services. Prices were
again reduced, by approximately $90 annually, effective July 1, 1992,
primarily due to FCC-mandated changes resulted in a cost shift to intrastate
jurisdictions.
INTRASTATE ACCESS CHARGES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INCREASE
PRICE HIGHER RECLASSIFICATIONS ------------------
DECREASES REFUNDS DEMAND AND OTHER $ %
- -----------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C>
$(12.4) $(1.5) $7.2 $29.8 $23.1 3.6
- -----------------------------------------------------------------------------------
</TABLE>
Intrastate access charges increased primarily as a result of a
reclassification of certain revenues from local and long-distance network
services. Prior to 1992, private line services were provided primarily to end
users under tariffs in effect in most states. These services are now provided
to both end users and carriers. Pursuant to the FCC's rules and
regulations,private line service provided to carriers has been reclassified
from local service and long-distance network service to intrastate access
service. The reclassification has no effect on net income. Excluding the
effects of the reclassification, intrastate access revenues decreased by
$11.4, or 1.8 percent, due to the effects of price decreases and refunds,
which more than offset increased demand.
24
U S WEST
<PAGE>
LONG-DISTANCE NETWORK SERVICE
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECREASE
PRICE LOWER RECLASSIFICATIONS ------------------
DECREASES REFUNDS DEMAND AND OTHER $ %
- -----------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C>
$(22.2) $16.1 $(22.3) $(14.6) $(43.0) (2.9)
- -----------------------------------------------------------------------------------
</TABLE>
The decline in long-distance network service revenues reflects the
effect of competition (particularly in WATS and "800" services), price
decreases and the reclassification of certain private-line revenues to
intrastate access service. These effects were partially offset by lower
refund activity in 1992. Excluding the reclassification, long-distance
network revenues declined 1.8 percent.
OTHER SERVICES
- -------------------------------------------------------------------------
Other services revenues declined in 1992, with lower revenues from billing
and collection services partially offset by increased revenues from voice
messaging services.
PUBLISHING AND OTHER
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INCREASE (DECREASE)
------------------
1992 1991 $ %
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Publishing $ 949.1 $ 890.7 $58.4 6.6
Other-net 143.2 148.1 (4.9) (3.3)
------------------------------------------------
Total $1,092.3 $1,038.8 $53.5 5.2
------------------------------------------------
- -----------------------------------------------------------------------------------
</TABLE>
Volume of Yellow Pages directory advertising was essentially flat in 1992,
with the increase in publishing revenues the result of price increases.
DOMESTIC CELLULAR
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INCREASE
------------------
1992 1991 $ %
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Domestic cellular $406.6 $324.9 $81.7 25.1
- -----------------------------------------------------------------------------------
</TABLE>
Cellular revenues increased as a result of an expanded cellular customer
base, which grew 38 percent in 1992. Average cellular revenue per customer
declined 4.7 percent, consistent with industry trends.
<TABLE>
<CAPTION>
COSTS AND EXPENSES
- -----------------------------------------------------------------------------------
INCREASE (DECREASE)
------------------
1992 1991 $ %
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Employee-related costs $3,521.1 $3,303.6 $217.5 6.6
Other operating expenses 1,960.9 1,888.6 72.3 3.8
Taxes other than income taxes 377.6 415.8 (38.2) (9.2)
Depreciation and amortization 1,880.5 1,825.0 55.5 3.0
Restructuring charge -- 363.8 (363.8) --
Interest expense 453.5 481.4 (27.9) (5.8)
Other income (expense) - net (59.8) (40.6) 19.2 47.3
- -----------------------------------------------------------------------------------
</TABLE>
25
U S WEST
<PAGE>
The increase in employee-related costs is primarily attributable to higher
health care costs for active employees as well as the 1992 ongoing impact from
the adoption of SFAS No. 106. Basic wage increases largely offset the effects of
the work-force reduction initiatives implemented in 1991 at U S WEST
Communications.
The increase in other operating expenses resulted from increased marketing
costs related to an expanding cellular subscriber base and higher network
software costs.
Taxes other than income taxes declined due to adjustments made in 1992 for
resolution of certain longstanding appeals.
Depreciation and amortization expense increased as a result of a higher
depreciable asset base and increased rates of depreciation sought by U S WEST
Communications and provided by regulators in certain jurisdictions. These
effects were partially offset by the completion of inside wire and depreciation
reserve deficiency amortization programs in several jurisdictions.
Interest expense decreased principally due to the effects of lower interest
rates and lower financing needs. U S WEST's average borrowing cost decreased to
7.7 percent in 1992, from 8.3 percent in 1991.
PROVISION FOR INCOME TAXES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Increase
------------------------
1992 1991 $ %
-------------------------------------------------
<S> <C> <C> <C> <C>
Provision for income taxes $493.4 $369.7 $123.7 33.5
Effective tax rate 31.4% 30.6% -- --
- --------------------------------------------------------------------------------------------------------
<FN>
Continuing operations basis.
</TABLE>
The increase in the ETR is a result of the $363.8 restructuring charge in
1991. Excluding the effects of the restructuring charge, the 1991 ETR would have
been 31.7 percent.
OTHER ITEMS
- -------------------------------------------------------------------------------
1991 RESTRUCTURING CHARGE
- -------------------------------------------------------------------------------
The company's 1991 income from continuing operations reflects a
restructuring charge of $363.8 ($229.9 after tax) due to planned work-force
reductions and the write-off of certain intangible and other assets.
Approximately $240 of the restructuring charge relates to a reserve for planned
work-force reductions totaling 6,000 employees over three years at U S WEST
Communications.
During 1992, U S WEST Communications reduced its employee level by
approximately 2,300 employees.
During 1991, U S WEST also established a $500
valuation allowance related to the phasing out of real estate operations, now
included as part of discontinued operations in the Consolidated Financial
Statements. Discontinued operations also include a restructuring charge of $50
related to the write-off of intangible assets.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------------------------------------------------------
Cash provided by operating activities increased by $484.2, or 17.5 percent,
from 1991. The effects of lower financing costs and an income tax settlement of
approximately $125 contributed to improved cash flow from operations.
Debt, excluding that related to discontinued operations, decreased by
approximately $539 compared to the prior year. During 1992, U S WEST refinanced
six debt issues aggregating $747 in principal amount.
Capital expenditures were $2,554.2 in 1992, compared with $2,425.5 in 1991.
Capital expenditures at U S WEST Communications were $2,356.6 in 1992 and
$2,168.2 in 1991. The 1992 capital expenditures of U S WEST Communications were
substantially devoted to the continued modernization of telephone plant.
26
U S WEST
<PAGE>
REPORT OF MANAGEMENT
- -------------------------------------------------------------------------------
The consolidated financial statements of U S WEST have been prepared in
conformity with generally accepted accounting principles applied on a consistent
basis. The integrity and objectivity of information in these financial
statements, including estimates and judgments, are the responsibility of
management as is all other financial information included in this report.
U S WEST maintains a system of internal accounting controls designed to
provide a reasonable assurance as to the integrity and reliability of financial
statements, the safeguarding of assets and the prevention and detection of
material errors or fraudulent financial reporting. Monitoring of such systems
includes an internal audit program designed to objectively assess the
effectiveness of internal controls and recommend improvements therein.
Limitations exist in any system of internal accounting controls based
upon the recognition that the cost of the system should not exceed the benefits
derived. U S WEST believes that the company's system does provide reasonable
assurance that transactions are executed in accordance with management's
general or specific authorizations and is adequate to accomplish the stated
objectives.
The independent certified public accountants, whose report is included
herein, are engaged to express an opinion on our consolidated financial
statements. Their opinion is based on procedures performed in accordance with
generally accepted auditing standards, including examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
In an attempt to assure objectivity, the financial information contained in
this report is subject to review by the Audit Committee of the board of
directors. The Audit Committee is composed of outside directors who meet
regularly with management, internal auditors and independent auditors to review
financial reporting matters, the scope of audit activities and the resolution of
audit findings.
RICHARD D. MCCORMICK
Chairman and Chief Executive Officer
JAMES M. OSTERHOFF
Executive Vice President and Chief Financial Officer
January 20, 1994
REPORT OF INDEPENDENT ACCOUNTANTS
- -------------------------------------------------------------------------------
To the Board of Directors and Shareowners of U S WEST Inc.:
We have audited the accompanying consolidated balance sheets of U S WEST
Inc. as of December 31, 1993 and 1992 and related consolidated statements of
operations and cash flows for each of the three years ended December 31, 1993.
These financial statements are the responsibility of the company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of U S WEST Inc.
as of December 31, 1993 and 1992, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
1993, in conformity with generally accepted accounting principles.
As discussed in Note 4 to the consolidated financial statements, the
company discontinued accounting for the operations of U S WEST Communications
Inc. in accordance with Statement of Accounting Standards No. 71. "Accounting
for the Effects of Certain Types of Regulation," in 1993. As discussed in
Note 10 to the consolidated financial statements, the company changed its
method of accounting for postretirement benefits other than pensions and other
postemployment benefits in 1992.
COOPERS & LYBRAND
Denver, Colorado
January 20, 1994, except for the last paragraph in Note 8 to the consolidated
financial statements, as to which the date is February 23, 1994
27
U S WEST
<PAGE>
<TABLE>
<CAPTION>
U S WEST INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
--------------------------------------
Dollars in millions (except per share amounts) 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales and other revenues $10,293.6 $9,822.6 $9,528.1
Employee-related costs 3,630.7 3,521.1 3,303.6
Other operating expenses 2,018.7 1,960.9 1,888.6
Taxes other than income taxes 417.0 377.6 415.8
Depreciation and amortization 1,954.5 1,880.5 1,825.0
Restructuring charges 1,000.0 -- 363.8
Interest expense 439.3 453.5 481.4
Other income (expense) - net (88.7) (59.8) (40.6)
--------------------------------------
Income from continuing operations before income taxes 744.7 1,569.2 1,209.3
Provision for income taxes 268.8 493.4 369.7
--------------------------------------
Income from continuing operations 475.9 1,075.8 839.6
Discontinued operations:
Income (loss), net of tax (to June 1, 1993) 38.5 103.6 (286.2)
Estimated loss from June 1, 1993 through disposal, net of tax (100.0) -- --
Income tax rate change (20.0) -- --
--------------------------------------
Income before extraordinary items and cumulative
effect of change in accounting principles 394.4 1,179.4 553.4
Extraordinary items:
Discontinuance of SFAS No. 71, net of tax (3,123.0) -- --
Early extinguishment of debt, net of tax (77.2) -- --
Cumulative effect of change in accounting principles:
Transition effect of change in accounting for postretirement benefits
other than pensions and other postemployment benefits, net of tax -- (1,793.4) --
--------------------------------------
Net income (loss) $(2,805.8) $ (614.0) $ 553.4
--------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Earnings (loss) per share:
Continuing operations $ 1.13 $ 2.61 $ 2.09
Discontinued operations:
Income (loss) (to June 1, 1993) 0.09 0.25 (0.71)
Estimated loss from June 1, 1993 through disposal (0.24) -- --
Income tax rate change (0.04) -- --
Extraordinary items:
Discontinuance of SFAS No. 71 (7.45) -- --
Early extinguishment of debt (0.18) -- --
Cumulative effect of change in accounting principles -- (4.35) --
--------------------------------------
Earnings (loss) per share $ (6.69) $ (1.49) $ 1.38
--------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Average shares outstanding (thousands) 419,365 412,518 401,332
<FN>
The accompanying notes are an integral part of the Consolidated Financial Statements.
</TABLE>
28
U S WEST
<PAGE>
<TABLE>
<CAPTION>
U S WEST INC.
CONSOLIDATED BALANCE SHEETS
December 31,
-------------------------
Dollars in millions 1993 1992
- ------------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 128.2 $ 158.9
Accounts and notes receivable, less allowance for
credit losses of $54.0 and $58.5, respectively 1,570.1 1,498.6
Inventories and supplies 192.7 196.6
Deferred tax asset 335.5 --
Prepaid and other 273.3 354.7
--------------------------
Total current assets 2,499.8 2,208.8
Property, plant and equipment - net 13,231.8 17,946.4
Investment in Time Warner Entertainment 2,552.4 --
Net investment in foreign affiliates 477.0 307.0
Net assets of discontinued operations 554.5 885.9
Other assets 1,364.2 2,112.6
--------------------------
Total assets $20,679.7 $23,460.7
--------------------------
- -------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Short-term debt $ 1,776.2 $ 582.5
Accounts payable 977.0 960.5
Employee compensation 386.3 392.4
Dividends payable 236.1 219.8
Current portion of restructuring charges 455.7 105.6
Other 1,150.2 913.1
--------------------------
Total current liabilities 4,981.5 3,173.9
Long-term debt 5,422.7 4,847.4
Postretirement and postemployment benefit obligations 2,698.6 2,825.0
Deferred taxes, credits and other 1,715.7 4,346.5
Shareowners' equity:
Common shares-no par, 2,000,000,000 authorized; 448,126,801 and
421,611,063 issued; 441,139,829 and 414,461,871 outstanding, respectively 6,996.6 5,770.2
Retained earnings (deficit) (857.1) 2,826.1
LESOP guarantee (243.0) (294.4)
Foreign currency translation adjustments (35.3) (34.0)
--------------------------
Total shareowners' equity 5,861.2 8,267.9
--------------------------
Total liabilities and shareowners' equity $20,679.7 $23,460.7
--------------------------
- -------------------------------------------------------------------------------------------------------------------------
<FN>
The accompanying notes are an integral part of the Consolidated Financial Statements.
</TABLE>
29
U S WEST
<PAGE>
U S WEST INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
Dollars in millions 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income (loss) $(2,805.8) $ (614.0) $ 553.4
Adjustments to net income (loss):
Depreciation and amortization 1,954.5 1,880.5 1,825.0
Discontinuance of SFAS No. 71 3,123.0 -- --
Restructuring charges 1,000.0 -- 363.8
Discontinued operations 81.5 (103.6) 286.2
Cumulative effect of change in accounting principles -- 1,793.4 --
Deferred income taxes and amortization of
investment tax credits (224.3) 4.3 (148.8)
Changes in operating assets and liabilities:
Accounts and notes receivable (90.1) 44.1 (22.5)
Inventories, supplies and other (55.9) (24.5) (38.4)
Accounts payable and accrued liabilities 198.7 65.4 (82.4)
Other - net 156.2 211.7 36.8
----------------------------------------
Cash provided by operating activities 3,337.8 3,257.3 2,773.1
- ------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment (2,449.2) (2,249.6) (2,361.2)
Investment in Time Warner Entertainment (1,556.9) -- --
Proceeds from disposals of property, plant and equipment 44.8 75.3 45.1
Other - net (240.0) (82.2) 23.0
----------------------------------------
Cash (used for) investing activities (4,201.3) (2,256.5) (2,293.1)
- ------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net proceeds (repayments) of short-term debt 687.4 25.2 (241.3)
Proceeds from issuance of long-term debt 2,281.7 344.1 1,061.2
Repayments of long-term debt (3,085.0) (769.9) --
Dividends paid (812.0) (796.0) (755.6)
Proceeds from issuance of common stock 1,150.1 91.3 124.3
----------------------------------------
Cash provided by (used for) financing activities 222.2 (1,105.3) 188.6
----------------------------------------
Cash provided by (used for) continuing operations (641.3) (104.5) 668.6
----------------------------------------
Cash provided by (used for) discontinued operations 610.6 (237.5) (386.7)
- ------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
Increase (decrease) (30.7) (342.0) 281.9
Beginning balance 158.9 500.9 219.0
----------------------------------------
Ending balance $ 128.2 $ 158.9 $ 500.9
----------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
<FN>
The accompanying notes are an integral part of the Consolidated Financial Statements.
</TABLE>
30
U S WEST
<PAGE>
U S WEST INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(Dollars in Millions, Except Per Share Amounts)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- -------------------------------------------------------------------------------
BASIS OF PRESENTATION: The Consolidated Financial Statements include the
accounts of US WEST Inc. ("U S WEST" or the "company") and its majority-owned
subsidiaries, except for discontinued operations as discussed in Note 13 to the
Consolidated Financial Statements. All significant intercompany accounts and
transactions have been eliminated. Investments in partnerships, joint ventures
and less than majority-owned subsidiaries are generally accounted for using the
equity method.
In the third quarter of 1993, U S WEST discontinued accounting for its
regulated telephone operations, hereafter referred to as U S WEST
Communications, under Statement of Financial Accounting Standards ("SFAS") No.
71, "Accounting for the Effects of Certain Types of Regulation." (See Note 4 to
the Consolidated Financial Statements.)
U S WEST operates in one industry segment (Communications and Related
Services) as defined in SFAS No.14, "Financial Reporting for Segments of a
Business Enterprise." The company's Capital Assets segment has been
discontinued. The largest volume of the company's services are provided to
American Telephone and Telegraph Company. During 1993, 1992 and 1991 revenues
related to those services provided to AT&T were $1,160, $1,203, and $1,267,
respectively. Related accounts receivable at December 31, 1993, and 1992,
totaled $96.9 and $109.2, respectively.
Certain reclassifications within the financial statements have been made to
conform to the current year presentation.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include highly liquid
investments with original maturities of three months or less that are readily
convertible into cash and are not subject to significant risk from fluctuations
in interest rates.
INVENTORIES AND SUPPLIES: New and reusable materials of U S WEST
Communications are carried at average cost, except for significant individual
items that are valued based on specific costs. Non-reusable material is carried
at its estimated salvage value. Inventories of U S WEST's non-telephone
operations are carried at the lower of cost or market on a first-in, first-out
basis.
PROPERTY, PLANT AND EQUIPMENT: The investment in property, plant and
equipment is carried at cost, less accumulated depreciation. Additions,
replacements and substantial betterments are capitalized. Costs for normal
repair and maintenance of property, plant and equipment are charged to expense
as incurred.
U S WEST Communications' provision for depreciation of property, plant and
equipment is based on various straight-line group methods using remaining useful
(economic) lives based on industry-wide studies. (See Note 4 to the Consolidated
Financial Statements.) Prior to discontinuing SFAS No. 71, depreciation was
based on lives specified by regulators. When the depreciable property, plant and
equipment of U S WEST Communications is retired or sold, the original cost less
the net salvage value is generally charged to accumulated depreciation.
The non-telephone operations of U S WEST provide for depreciation using
both straight-line and accelerated methods. When such depreciable property,
plant and equipment is retired or sold, the resulting gain or loss is recognized
currently as an element of other income.
Interest related to qualifying construction projects is capitalized and is
reflected as a reduction of interest expense, except at U S WEST Communications
where, prior to discontinuing SFAS No. 71, it was included as an element of
other income. Amounts capitalized by U S WEST were $19.5, $28.8, and $35.9 in
1993, 1992, and 1991, respectively.
INTANGIBLE ASSETS: The excess of consideration over the fair value of net
assets acquired, and the costs of licenses and other identifiable intangible
assets, are amortized by the straight-line method over periods ranging up to 40
years.
FOREIGN CURRENCY TRANSLATION: For international investments, assets and
liabilities are translated at year-end exchange rates and income statement items
are translated at average exchange rates for the year. Resulting translation
adjustments are recorded as a separate component of shareowners' equity.
REVENUE RECOGNITION: Local telephone service and cellular access revenues
are generally billed monthly, in advance, and revenues are recognized the
following month when services are provided. Revenues derived from other
telephone services, including exchange
31
U S WEST
<PAGE>
access, long distance and cellular airtime usage, are billed and recorded
monthly as services are provided.
Directory advertising revenues and related directory costs are generally
deferred and recognized over the period during which directories are utilized,
normally 12 months. The balance of deferred directory costs included in prepaid
and other is $197.2 and $186.8 at December 31, 1993 and 1992, respectively.
FINANCIAL INSTRUMENTS: Net interest income or expense on interest rate
swaps is recognized over the life of the swaps as an adjustment to interest
expense. Gains and losses on forward contracts, designated and effective as
hedges of interest rate exposure on debt refinancings, are deferred and
recognized as an adjustment to interest expense over the life of the underlying
debt. Gains and losses on foreign currency forward contracts, designated and
effective as hedges, are deferred and recognized with the assets, liabilities or
transactions being hedged.
INCOME TAXES: The provision for income taxes consists of an amount for
taxes currently payable and an amount for tax consequences deferred to future
periods in accordance with SFAS No. 109. U S WEST implemented SFAS No. 109,
"Accounting for Income Taxes," in 1993. Adoption of the new standard did not
have a material effect on the financial position or results of operations,
primarily because of the company's earlier adoption of SFAS No. 96.
For financial statement purposes, investment tax credits of U S WEST
Communications are being amortized over the economic lives of the related
property, plant and equipment in accordance with the deferred method of
accounting for such credits.
EARNINGS (LOSS) PER SHARE: Earnings (loss) per share are computed on the
basis of the weighted average number
of shares of common stock outstanding during each year.
NOTE 2: 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") for an aggregate purchase price of $2.553 billion, consisting of $1.532
billion in cash and $1.021 billion in the form of a four-year promissory note
bearing interest at a rate of 4.391 percent per annum. TWE owns and operates
substantially all of the entertainment assets previously owned by Time Warner
Inc., consisting primarily of its filmed entertainment, programming-HBO and
cable businesses. As a result of U S WEST's admission to the partnership,
certain wholly-owned subsidiaries of Time Warner ("General Partners") and
subsidiaries of Toshiba Corporation and ITOCHU Corporation hold pro-rata
priority capital and residual equity interests of 63.27, 5.61 and 5.61 percent,
respectively. In connection with the TWE investment, the company acquired 12.75
percent of the common stock of Time Warner Entertainment Japan Inc., a joint
venture company established to expand and develop the market for entertainment
services in Japan.
The company has an option to increase its pro-rata priority capital and
residual equity interests in TWE from 25.51 percent up to 31.84 percent
depending upon cable operating performance, as defined in the TWE Partnership
Agreement. The option is exercisable, in whole or part, between January 1, 1999
and May 31, 2005 for an aggregate cash exercise price of $1.25 billion to $1.8
billion, depending upon the year of exercise. Either TWE or U S WEST may elect
that the exercise price for the option be paid with partnership interests rather
than cash.
Pursuant to the TWE Partnership Agreement and U S WEST Admission Agreement,
there are six levels of capital. From the most to least senior, the capital
accounts are: senior preferred (held by the General Partners); A preferred (held
pro rata by all partners); B, C and D preferreds (all held by the General
Partners); and common (residual equity interests held pro rata by all partners).
Of the $2.553 billion contributed by U S WEST, $1.658 billion represents A
preferred capital and $895 represents common capital. The TWE Partnership
Agreement provides for special allocations of income and distributions of
partnership capital, which are based on the fair value of assets contributed to
the partnership. Partnership income, to the extent earned, is allocated as
follows: (1) to the partners so that the economic burden of the income tax
consequences of partnership operations is borne as though the partnership was
taxed as a corporation ("special tax income"); (2) to the partners' preferred
capital accounts in order of priority shown above, at various rates of return
ranging from 8 percent to 13.25 percent; and (3) to the partners' common capital
according to their residual partnership interests. To the extent partnership
income is insufficient to satisfy all special allocations in a particular
accounting period, the unearned portion is carried over until satisfied out of
future partnership income. Partnership losses generally will be
32
U S WEST
<PAGE>
allocated in reverse order, first to eliminate prior allocations of partnership
income, except senior preferred and special tax income, next to reduce initial
capital amounts, other than senior preferred, then to reduce the senior
preferred account and finally, to eliminate special tax income. Also, the
senior preferred is scheduled to be distributed in three annual installments
beginning July 1, 1997. The value of the C and D preferreds will be determined
at future dates and is dependent upon achievement of certain operating targets
between 1992 and 2001.
Beginning July 1, 1994, the TWE Partnership Agreement generally permits cash
distributions to the partners to pay applicable taxes on their allocable taxable
income from TWE. In addition, beginning July 1, 1995, and subject to restricted
payment limitations and availability under the applicable financial ratios
contained in the TWE Credit Agreement, distributions other tan tax-related
distributions are also permitted. For other than distributions related to taxes
or the senior preferred, the TWE Partnership Agreement requires certain cash
distribution thresholds be met to the limited partners before the General
Partners receive their full share of distributions.
The company accounts for its investment in TWE under the equity method
accounting. The company's recorded share of TWE operating results represents
allocated TWE net income or loss adjusted for the amortization of the excess of
fair market value over the book value of the partnership assets, This excess is
being amortized on a straight-line basis over 25 years. As a result of this
amortization and the special invome allocations described above, U S WEST's
recorded share of TWE's 1993 operating results was not material. Furthermore,
it is nor expected that material amounts of TWE's operating results will be
allocated to the company in the initial years of the partnership.
As consideration for its expertise and participation in the cable operations
of TWE, the company is entitled to a management fee of $130 payable over five
years.
<TABLE>
<CAPTION>
Summarized financial information for TWE is presented below:
- -----------------------------------------------------------------------------------
Year ended
------------------
December 31, 1993
- ------------------------------------------------------------------------------------
Summarized Operating Results
- ------------------------------------------------------------------------------------
<S> <C>
Revenues $ 7,946
Operating expenses* (7,063)
Interest and other - net** (611)
--------
Income before income taxes and extraordinary item 272
========
Net income 198
--------
- ------------------------------------------------------------------------------------
<FN>
* Includes depreciation and amortization of $902
** Includes corporate services of $60
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
Summarized Financial Position December 31, 1993
- ------------------------------------------------------------------------------------
<S> <C>
Current assets $ 3,745
Non-current assets 14,218
Current liabilities 2,265
Non-current liabilities 8,162
Senior preferred capital 1,536
Partners' capital 6,000
- ------------------------------------------------------------------------------------
</TABLE>
33
U S WEST
<PAGE>
NOTE 3: RESTRUCTURING CHARGES
The company's 1993 operating results reflect a pretax restructuring charge of
$1 billion. The restructuring charge includes only the specific incremental and
direct costs that can be estimated with reasonable accuracy and are clearly
identifiable with the
related plan.
The 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 will develop new systems that will enable it to monitor
networks to reduce the risk of service interruptions, activate telephone service
on demand, provide automated inventory systems and centralize its service
centers so customers can have their telecommunications needs resolved with one
phone call. The company will also reduce its work force by approximately 8,000
employees by the end of 1996 (in addition to a remaining reduction of 1,000
employees pursuant to the 1991 restructuring plan) and consolidate the
operations of its existing 560 customer centers into 26 centers in 10 cities.
<TABLE>
<CAPTION>
Following is a schedule of the costs included in the restructuring charge:
- -----------------------------------------------------------------------------
<S> <C>
Employee separation $ 240
Real estate 120
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 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 company's 1991 restructuring plan included a pretax charge of $363.8 due
to planned work-force reductions and the write-off of certain intangible and
other assets. The work-force reductions covered approximately 6,000 employees,
of which approximately 5,000 have left the company as of December 31, 1993. The
portion of the 1991 restructuring charge related to work-force reductions was
$240, of which approximately $56 was unused at December 31, 1993.
NOTE 4: PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
The composition of property, plant and equipment follows:
- ---------------------------------------------------------------------------
December 31,
------------------------
<S> <C> <C>
1993 1992
------------------------
Land and buildings $ 2,521.4 $ 2,433.1
Telephone network equipment and outside plant 22,479.1 21,242.7
Other 3,568.7 3,245.0
Construction in progress 592.2 682.6
------------------------
29,161.4 27,603.4
------------------------
Less accumulated depreciation on:
Buildings 656.0 530.0
Telephone network equipment and outside plant 13,389.1 7,821.9
Other 1,884.5 1,305.1
------------------------
15,929.6 9,657.0
------------------------
Property, plant and equipment - net $13,231.8 $17,946.4
------------------------
- ---------------------------------------------------------------------------
<FN>
Accumulated depreciation reflects an increase of $5,151 as of third quarter 1993
in conjunction with the company's decision to discontinue accounting for the
operations of U S WEST Communications in accordance with SFAS No. 71.
</TABLE>
34
U S WEST
<PAGE>
DISCONTINUANCE OF SFAS NO. 71
- -------------------------------------------------------------------------------
U S WEST incurred a non-cash, extraordinary charge of $3.1 billion, net of an
income tax benefit of $2.3 billion, in conjunction with its decision to
discontinue accounting for the operations of U S WEST Communications in
accordance with SFAS No. 71, "Accounting for the Effects of Certain Types of
Regulation," as of September 30, 1993. SFAS No. 71 generally applies to
regulated companies that meet certain requirements, including a requirement
that a company be able to recover its costs, competition notwithstanding, by
charging its customers at prices established by its regulators. U S WEST's
decision to discontinue application of SFAS No. 71 was based on the belief that
competition, market conditions and the development of broadband technology, more
than prices established by regulators, will determine the future revenues of
U S WEST Communications. As a result of this change, the remaining asset lives
of U S WEST Communications' plant have been shortened to more closely reflect
the useful (economic) lives of such plant.
Following is a list of the major categories of property, plant and equipment and
the manner in which lives were affected by the discontinuance of SFAS No. 71:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Average Life (years)
-----------------------------------
Before After
Category Discontinuance Discontinuance
- -----------------------------------------------------------------------------
<S> <C> <C>
Digital switch 17-18 10
Digital circuit 11-13 10
Aerial copper cable 18-28 15
Underground copper cable 25-30 15
Buried copper cable 25-28 20
Fiber cable 30 20
- -----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Following is a schedule of the nature and amounts of the after-tax charge recognized as
a result of the company's discontinuance of SFAS No. 71:
- --------------------------------------------------------------------------------
<S> <C>
Plant-related $3,124
Tax-related regulatory assets and liabilities (208)
Other regulatory assets and liabilities 207
-------
Total $3,123
-------
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
NOTE 5: DEBT
- ---------------------------------------------------------------------------------------------
SHORT-TERM DEBT
- ---------------------------------------------------------------------------------------------
The components of short-term debt follow:
- ---------------------------------------------------------------------------------------------
December 31,
----------------------
1993 1992
----------------------
<S> <C> <C>
Notes payable:
Commercial paper $1,027.7 $306.6
Other 1.6 35.5
Current portion of long-term debt, including $450.0 payable
to TWE in 1993 794.7 329.7
Allocated to discontinued operations - net (47.8) (89.3)
-------------------
Total $1,776.2 $582.5
---------------------
- ---------------------------------------------------------------------------------------------
</TABLE>
35
U S WEST
<PAGE>
Long-term Debt
- -------------------------------------------------------------------------------
Long-term debt consists principally of debentures and medium-term notes, debt
associated with the company's Leveraged Employee Stock Ownership Plans (LESOP),
and zero-coupon, subordinated notes convertible at any time into U S WEST common
shares. The zero-coupon notes have a yield to maturity of approximately 7.3
percent and are recorded at a discounted value of $479.6. Long-term debt also
includes a $555.2 note payable to TWE in 1993.
<TABLE>
<CAPTION>
Interest rates and maturities of long-term debt at December 31 follow:
- --------------------------------------------------------------------------------------------
Maturities Total Total
------------------------------------------------
Interest rates 1995 1996 1997 1998 Thereafter 1993 1992
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Up to 5% $ 450.0 $118.3 $ -- $ 35.4 $ 240.0 $ 843.7 $ 479.4
Above 5% to 6% -- -- -- 300.0 261.0 561.0 196.1
Above 6% to 7% 91.5 -- 1.2 -- 1,289.7 1,382.4 330.7
Above 7% to 8% -- 670.0 16.0 -- 1,375.2 2,061.2 2,367.1
Above 8% to 9% 21.3 33.9 -- -- 448.9 504.1 1,915.2
Above 9% to 10% -- 0.7 28.7 -- 370.0 399.4 399.5
-------------------------------------------------------------------------
$562.8 $822.9 $45.9 $335.4 $3,984.8 5,751.8 5,688.0
==============================================
Capital lease obligations and other 139.5 90.7
Unamortized discount - net (101.4) (180.7)
Allocated to discontinued operations - net (367.2) (750.6)
------------------------
Total $5,422.7 $4,847.4
--------------------------
- ---------------------------------------------------------------------------------------------
</TABLE>
During 1993, U S WEST refinanced debt issues aggregating $2.7 billion in
principal amount. Expenses associated with the refinancing resulted in an
extraordinary charge to income of $77.2, net of a tax benefit of $47.8. The
refinancing allowed the company to take advantage of favorable interest rates.
U S WEST is permitted to borrow up to approximately $3 billion under short-term
formal lines of credit, all of which were available at December 31, 1993.
Interest payments, net of amounts capitalized, were $679.8, $704.1, and $740.9
for 1993, 1992, and 1991, respectively, of which $212.4, $220.3 and $257.9,
respectively, relate to discontinued operations.
NOTE 6: LEASING ARRANGEMENTS
- -------------------------------------------------------------------------------
U S WEST has entered into operating leases for office facilities, equipment and
real estate. Minimum future lease payments as of December 31, 1993, under
non-cancellable operating leases, follow:
<TABLE>
<CAPTION>
- -----------------------------------------------------
Year
- -----------------------------------------------------
<S> <C>
1994 $ 161.5
1995 141.4
1996 125.7
1997 121.3
1998 120.5
Therafter 1,041.5
-------------
Total $ 1,711.9
-------------
- ----------------------------------------------------
<FN>
Rent expense under operating leases was $274.8, $274.1, and $215.2 in 1993,
1992 and 1991, respectively.
</TABLE>
36
US WEST
<PAGE>
NOTE 7: FINANCIAL INSTRUMENTS DISCLOSURES
- --------------------------------------------------------------------------------
INSTRUMENTS WITH OFF-BALANCE SHEET MARKET RISK - SWAPS AND FORWARD CONTRACTS
- --------------------------------------------------------------------------------
U S WEST is party to various interest rate swaps and forward contracts for
the purpose of managing interest rate and foreign currency exposures. Based on
amounts outstanding at December 31, 1993, if any party to these agreements fails
to perform, the estimated accounting loss would not be material to the company's
results of operations or to its financial position.
INSTRUMENTS WITH OFF-BALANCE SHEET CREDIT RISK - FINANCIAL GUARANTEES
- -------------------------------------------------------------------------------
Financial guarantees are included in Note 13 to the Consolidated Financial
Statements.
FAIR VALUES OF FINANCIAL INSTRUMENTS
- -------------------------------------------------------------------------------
Fair values of cash equivalaents, short-term debt and other current amounts
receivable and payable approximate the carrying amount.
Amounts receivable and payable related to foreign currency forward contracts,
which are used to hedge foreign commitments, are recorded at fair value based on
currency exchange rates in effect at the balance sheet date.
Fair value of debt, inclusive of discontinued operations, is based on quoted
market prices where available or, if not available, is based on discounting
future cash flows using current interest rates. Fair value of debt includes the
effect of variable-to-fixed and fixed-to-variable interest rate swaps on
notional principal amounts of $795 and $515 at December 31, 1993, and $1,000 and
$440 at December 31, 1992, respectively. Maturities on interest rate swaps in
effect at December 31, 1993, range from 1994 to 2004. Fair value of interest
rate swaps is based on estimated amounts the company would receive or pay to
terminate such agreements taking into account current interest rates and
creditworthiness of the counterparties.
The carrying amounts and fair values of total debt follow:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
----------------------------
1993 1992
---------------------------
<S> <C> <C>
Carrying amount $8,694.7 $8,863.0
Fair value 9,000.0 9,070.0
</TABLE>
- -------------------------------------------------------------------------------
Includes both continuing and discontinued operations debt.
37
U S WEST
<PAGE>
NOTE 8: SHAREOWNERS' EQUITY
- -------------------------------------------------------------------------------
Following are transactions affecting shareowners' equity:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Shares
-------------- Retained Foreign Currency
Shares Earnings Translation
(thousands) Amount (Deficit) Adjustments
-----------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1991 393,493 $5,013.3 $4,605.4 $ 6.2
- -------------------------------------------------------------------------------------------------
Issuance of treasury shares 1,337 49.0
Issuance of common stock 15,106 545.2
Net income 553.4
Dividends ($2.08 per share) (842.7)
Foreign currency translation adjustments 0.3
Other - net (1.0)
-----------------------------------------------------
BALANCE AT DECEMBER 31, 1991 409,936 5,606.5 4,316.1 6.5
-----------------------------------------------------
Issuance of treasury shares 578 20.4
Issuance of common stock 3,948 144.4
Net loss (614.0)
Dividends ($2.12 per share) (876.0)
Foreign currency translation adjustments (40.5)
Other - net (1.1)
----------------------------------------------------
BALANCE AT DECEMBER 31, 1992 414,462 5,770.2 2,826.1 (34.0)
- ------------------------------------------------------------------------------------------------
Issuance of treasury shares 162 6.3
Issuance of common stock 26,516 1,223.5
Net loss (2,805.8)
Dividends ($2.14 per share) ( 904.7)
Foreign currency translation adjustments (1.3)
Market value adjustment for debt securities 35.1
Other - net (3.4) (7.8)
-----------------------------------------------------
BALANCE AT DECEMBER 31, 1993 441,140 $6,996.6 $(857.1) $(35.3)
-----------------------------------------------------
</TABLE>
- ------------------------------------------------------------------------------
U S WEST has 50,000,000 authorized shares of preferred stock, of which none
have been issued.
At December 31, 1993, the company held 6,986,972 treasury shares with a cost
basis of $142.7.
During fourth quarter 1993, the company issued 22 million shares of U S WEST
common stock for cash proceeds of $1,020.0. The company used the net proceeds to
reduce short-term indebtedness, including indebtedness incurred in connection
with the TWE investment, and for general corporate purposes.
On July 11, 1991, shareowners of U S WEST NewVector Group Inc. ("NewVector")
voted to approve the company's merger offer, making NewVector a wholly-owned
subsidiary of U S WEST. Pursuant to the merger, the company issued approximately
11.1 million shares of U S WEST common stock valued at approximately $399 to
former shareholders of NewVector. The merger was accounted for as a purchase and
the resulting goodwill of approximately $375 is being amortized on a
straight-line basis over a period of 40 years.
LEVERAGED EMPLOYEE STOCK OWNERSHIP PLANS (LESOP)
- -------------------------------------------------------------------------------
U S WEST maintains employee savings plans for management and occupational
employees under which the company matches a certain percentage of eligible
contributions made by employees with shares of company stock. The company
established two LESOPs in 1989 to provide the company stock used for matching
contributions to the savings plans.
The long-term debt of the LESOP trusts, which is unconditionally guaranteed
by the company, is included in the accompanying consolidated balance sheets and
corresponding amounts have been recorded as reductions to shareowners' equity.
The trusts will repay the debt with company contributions and certain dividends
received on shares of the company's common stock held by the LESOP. Total
company contributions to the trusts (excluding dividends) were $74.6, $77.7, and
$70.9 in 1993, 1992, and 1991, respectively, of which $23.7, $27.8, and $31.7,
respectively, have been classified as interest expense. The company recognizes
expense based on the cash payments method. Dividends on unallocated shares held
by the LESOP were $14.1, $17.3, and $20.1 in 1993, 1992, and 1991, respectively.
38
U S WEST
<PAGE>
SHAREHOLDER RIGHTS PLAN
- -------------------------------------------------------------------------------
The board of directors of the company has adopted a Shareholder Rights Plan
which, in the event of a takeover attempt, would entitle existing shareowners to
certain preferential rights. The rights expire on April 6, 1999, and are
redeemable by the company at any time prior to the date they would become
effective.
SUBSEQUENT EVENT
- -------------------------------------------------------------------------------
In connection with the settlement of shareowner litigation ("Rosenbaum v.
U S WEST Inc. et al."), the company will issue approximately 5.6 million shares
of U S WEST common stock in March 1994 for proceeds of approximately $210 to
class members connected with this litigation. U S WEST issued, to certified
class members, non-transferable rights to purchase shares of common stock
directly from U S WEST, on a commission-free basis, at a 3 percent discount from
the average of the high and low trading prices of such stock on the New York
Stock Exchange on February 23, 1993, the pricing date designated in accordance
with the settlement.
NOTE 9: STOCK INCENTIVE PLANS
- -------------------------------------------------------------------------------
U S WEST maintains stock incentive plans for executives and key employees.
The Human Resources Committee of the board of directors is responsible for the
administration of the executive plan, which provides for the grant of options
and the grant and sale of restricted and non-restricted stock. The board of
directors has delegated the administration of the non-executive plan to a
special committee. Options may be exercised no later than ten years and one
month after the grant date. A total of 17,000,000 shares of U S WEST common
stock are reserved for issuance under the plans.
Data for outstanding options under the plan is summarized below:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of Average
Shares Option Price
--------------------------
<S> <C> <C>
OUTSTANDING AT JANUARY 1, 1991 2,306,783 $32.15
- -------------------------------------------------------------------------------
Granted 1,415,502 35.30
Exercised (277,760) 25.91
Cancelled or expired (24,119) 35.34
--------------------------
OUTSTANDING AT DECEMBER 31, 1991 3,420,406 33.97
- -------------------------------------------------------------------------------
Granted 1,410,311 38.13
Exercised (327,221) 26.15
Cancelled or expired (53,346) 36.17
--------------------------
OUTSTANDING AT DECEMBER 31, 1992 4,450,150 35.81
- -------------------------------------------------------------------------------
Granted 1,486,106 48.83
Exercised (412,444) 31.73
Cancelled or expired (222,273) 36.87
--------------------------
OUTSTANDING AT DECEMBER 31, 1993 5,301,539 $39.76
--------------------------
- -------------------------------------------------------------------------------
</TABLE>
Options to purchase 1,412,791 and 913,312 shares were exercisable at
December 31, 1993 and 1992, respectively. A total of 8,649,750 and 10,111,549
shares of U S WEST common stock were available for grant under the plans at
December 31, 1993 and 1992, respectively.
39
U S WEST
<PAGE>
NOTE 10: EMPLOYEE BENEFITS
- -------------------------------------------------------------------------------
PENSION PLAN
- -------------------------------------------------------------------------------
Effective January 1, 1993, U S WEST merged its two defined benefit pension
plans, which cover substantially all management and occupational employees, into
a single plan. Management benefits are based upon a final pay formula, while
occupational benefits are based upon a flat benefit formula. U S WEST uses the
projected unit credit method for the determination of pension cost for financial
reporting purposes and the aggregate cost method for funding purposes. No
funding was required in 1993, 1992 or 1991.
The composition of the net pension credit and the actuarial assumptions of the
plan follow:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1993 1992 1991
----------------------------------------
<S> <C> <C> <C>
Details of pension credit:
Service cost - benefits earned during
the period $ 148.2 $ 141.1 $ 124.0
Interest cost on projected benefit obligation 513.9 479.6 466.0
Actual return on plan assets (1,320.1) (410.8) (1,312.0)
Net amortization and deferral 577.9 (318.3) 613.4
----------------------------------------
Net pension credit $ (80.1) $(108.4) $ (108.6)
----------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
The expected long-term rate of return on plan assets used in determining the
net pension credit was 9.00 percent for 1993, 9.25 percent for 1992 and 9.50
percent for 1991.
The funded status of the plan follows:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
-----------------------
1993 1992
-----------------------
<S> <C> <C>
Accumulated benefit obligation, including vested benefits of $5,286 and $4,867, respectively $5,860.0 $5,192.0
-----------------------
- -----------------------------------------------------------------------------------------------------------------------------
Plan assets at fair value, primarily stocks and bonds $8,987.3 $8,068.8
Less: Projected benefit obligation 7,432.0 6,555.0
-----------------------
Plan assets in excess of projected benefit obligation 1,555.3 1,513.8
Less: Unrecognized net gain 70.5 24.1
Prior service cost not yet recognized in net periodic pension cost 72.3 77.3
Balance of unrecognized net asset at January 1, 1987 865.0 945.0
-----------------------
Prepaid pension asset $ 547.5 $ 467.4
-----------------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The actuarial assumptions used to calculate the projected benefit obligation
follow:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
----------------
1993 1992
----------------
<S> <C> <C>
Discount rate 7.25 8.25
Rate of increase in future compensation levels 5.50 5.50
- -------------------------------------------------------------------------------
</TABLE>
Anticipated future benefit changes have been reflected in the above
calculations.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
- -------------------------------------------------------------------------------
U S WEST and most of its subsidiaries provide certain health care and life
insurance benefits to retired employees. Effective January 1, 1992, U S WEST
adopted SFAS No. 106 "Employers' Accounting for Post-retirement Benefits Other
Than Pensions," which mandates that employers reflect in their current expenses
the cost of providing retirement medical and life insurance benefits to current
and future retirees. Prior to 1992, U S WEST recognized these costs as they were
paid. Adoption of SFAS No. 106 resulted in a one-time, non-cash charge
<PAGE>
against 1992 earnings of $1,740.7, net of a deferred income tax benefit of
$1,037.7, for the prior service of active and retired employees. U S WEST uses
the projected unit credit method for the determination of postretirement medical
costs for financial reporting purposes.
In conjunction with the adoption of SFAS No. 106, for financial reporting
purposes the company elected to immediately recognize the accumulated
postretirement benefit obligation for current and future retirees, net of the
fair value of plan assets. In 1992, pursuant to SFAS No. 71, a regulatory asset
associated with the recognition of the transition benefit obligation was not
recorded because of uncertainties as to the timing and extent of recovery given
the company's assessment of its long-term competitive environment. However, the
Federal Communications Commission and certain state jurisdictions permit
amortization of the transition obligation over the average remaining service
period of active employees for regulatory accounting purposes.
The composition of net postretirement benefit costs and actuarial assumptions
underlying plan benefits follow:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1993 1992
----------------------------------------
<S> <C> <C>
Details of postretirement
benefit costs:
Service cost - benefits earned
during the period $ 71.1 $ 66.9
Interest cost on accumulated
benefit obligation 271.0 255.9
Actual return on plan assets (125.0) (47.8)
Net amortization and deferral 48.9 --
----------------------------------------
Net postretirement benefit costs $ 266.0 $275.0
----------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
The expected long-term rate of return on plan assets used in determining net
postretirement benefit costs was 9.00 percent in 1993 and 1992.
The funded status of the plan follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1993 1992
-----------------------------------
<S> <C> <C>
Accumulated postretirement benefit
obligation attributable to:
Retirees $2,105.5 $2,089.5
Fully eligible plan participants 322.3 257.2
Other active plan participants 1,153.0 1,035.7
-----------------------------------
Total accumulated postretirement
benefit obligation 3,580.8 3,382.4
Unrecognized net gain 40.8 --
Fair value of plan assets,
primarily stocks, bonds and life
insurance (1,001.3) (635.9)
-----------------------------------
Accrued postretirement benefit obligation $ 2,620.3 $2,746.5
-----------------------------------
</TABLE>
- --------------------------------------------------------------------------------
The actuarial assumptions used to calculate the accumulated postretirement
benefit obligation follow:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1993 1992
-----------------------------------
<S> <C> <C>
Discount rate 7.25 8.00
Medical trend* 10.30 11.00
- --------------------------------------------------------------------------------
<FN>
*Medical cost trend rate gradually declines to an ultimate rate of 5.5 percent
in 2011.
</TABLE>
A 1-percent increase in the assumed health care cost trend rates for each
future year would have increased the aggregate of the service and interest cost
components of 1993 net postretirement benefit costs by approximately $55 and
increased the 1993 accumulated postretirement benefit obligation by
approximately $475.
For U S WEST Communications, the annual amount funded will generally follow
the amount of expense allowed in regulatory jurisdictions.
Anticipated future benefit changes have been reflected in the above
calculations.
41
U S WEST
<PAGE>
OTHER POSTEMPLOYMENT BENEFITS
- -------------------------------------------------------------------------------
U S WEST also adopted, effective January 1, 1992, SFAS No. 112, "Employers'
Accounting for Postemployment Benefits." SFAS No. 112 requires that employers
accrue for the estimated costs of benefits, such as workers' compensation and
disability, provided to former or inactive employees who are not eligible for
retirement. Adoption of SFAS No. 112 resulted in a one-time, non-cash charge
against 1992 earnings of $52.7, net of a deferred income tax benefit of $32.3.
No adjustment to the postemployment benefit liability was necessary at December
31, 1993.
NOTE 11: INCOME TAXES
- --------------------------------------------------------------------------------
The components of the provision for income taxes follow:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1993 1992 1991
------------------------------
<S> <C> <C> <C>
Federal:
Current $422.5 $427.1 $448.8
Deferred (145.4) 46.4 (84.8)
Investment tax credits - net (56.1) (63.2) (74.9)
------------------------------
221.0 410.3 289.1
------------------------------
State and local:
Current 70.6 62.0 69.7
Deferred (22.8) 21.1 10.9
------------------------------
47.8 83.1 80.6
------------------------------
Provision for income taxes $268.8 $493.4 $369.7
------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The unamortized balance of investment tax credits at December 31, 1993 and
1992, was $280.0 and $520.8, respectively. During 1993, the unamortized balance
of investment tax credits was reduced by $185.6 in conjunction with the
company's decision to discontinue accounting for the operations of U S WEST
Communications in accordance with SFAS No. 71. (See Note 4 to the Consolidated
Financial Statements.)
Amounts paid for income taxes were $391.3, $458.8, and $484.3 in 1993, 1992
and 1991, respectively, inclusive of discontinued operations.
Effective January 1, 1993, U S WEST adopted SFAS No. 109, "Accounting for
Income Taxes." SFAS No. 109 uses a balance sheet approach that generally allows
consideration of expected future income in determining deferred income taxes.
Prior to 1993, the company used the SFAS No.96 approach that gave no recognition
to future events other than the recovery of assets and settlement of liabilities
at their carrying amounts. The cumulative effect of adopting SFAS No. 109 was
not material to results of operations.
The effective tax rate differs from the statutory tax rate as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
In percent 1993 1992 1991
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory tax rate* 35.0 34.0 34.0
State income taxes - net of federal effect 4.0 3.5 4.3
Tax law change - catch-up adjustment 3.1 -- --
Investment tax credit amortization (3.0) (4.2) (4.8)
Rate differential on reversing temporary
differences (2.2) (3.1) (3.2)
Restructuring charges (1.5) -- (1.1)
Depreciation on capitalized
overheads - net 1.4 2.1 2.3
Other (0.7) (0.9) (0.9)
-----------------------------------
Effective tax rate 36.1 31.4 30.6
-----------------------------------
- --------------------------------------------------------------------------------
<FN>
*Federal statutory tax rate increase effective January 1, 1993.
</TABLE>
42
U S WEST
<PAGE>
<TABLE>
<CAPTION>
The components of the net deferred tax liability follow:
- --------------------------------------------------------------------------------------
December 31, January 1,
------------------------
1993 1993*
------------------------
<S> <C> <C>
Property, plant and equipment $1,339.8 $2,965.7
Leases 663.1 598.0
State deferred taxes - net of federal effect 277.3 433.9
Revenue requirement adjustment to regulatory asset -- 356.4
Other 139.5 228.5
-----------------------
Deferred tax liabilities 2,419.7 4,582.5
-----------------------
Pension, postretirement and postemployment benefits 736.0 814.1
Revenue requirement adjustment to regulatory liability -- 463.6
Restructuring, discontinued operations and other 619.4 253.4
State deferred taxes - net of federal effect 219.9 161.0
Unamortized investment tax credit 94.4 178.2
Other 259.8 178.2
-----------------------
Deferred tax assets 1,929.5 2,048.5
-----------------------
Net deferred tax liability $ 490.2 $2,534.0
-----------------------
- -------------------------------------------------------------------------------------
<FN>
* SFAS No. 109 was adopted January 1, 1993. The net deferred tax liability at
January 1, 1993 is shown for comparative purposes.
</TABLE>
The current portion of the deferred tax asset is $335.5 resulting primarily
from restructuring charges and compensation-related items.
Prior to the discontinuance of SFAS No. 71, U S WEST Communications recorded
additional deferred taxes and established a corresponding regulatory asset,
primarily related to the cumulative amount of tax benefits previously flowed
through to ratepayers. In addition, US WEST Communications recorded a regulatory
liability coincidental with the reduction of the deferred tax reserves from
higher historical to lower current tax rates. The regulatory asset and liability
were grossed up, in accordance with SFAS No. 96, for the tax effect of future
revenue requirements. In connection with the discontinuance of SFAS No. 71, the
remaining balance of the regulatory asset and liability, and the related
deferred tax asset and liability, were written off. (See Note 4 to the
Consolidated Financial Statements.)
On August 10, 1993, federal legislation was enacted that increased the
corporate tax rate from 34 percent to 35 percent retroactive to January 1, 1993.
The cumulative effect on deferred taxes of the 1993 increase in income tax rates
was $74, including $20 for discontinued operations.
The net deferred tax liability includes $606.9 (including an asset of $73.9)
in 1993 and $662.5 in 1992 related to discontinued operations.
NOTE 12: CONTINGENCIES
At U S WEST Communications, there are pending regulatory actions in local
regulatory jurisdictions that call for rate reductions, 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.
43
U S West
<PAGE>
NOTE 13: DISCONTINUED OPERATIONS
During second quarter 1993, the U S WEST Board of Directors approved a plan
to dispose of the Capital Assets segment through the sale of segment assets and
businesses. Accordingly, the company recorded an after-tax charge of $100, or
$.24 per share, related to the disposition. An additional charge of $20, or $.04
per share, is related to the effect of the increase in federal income tax
rates, as described in Note 11 to the Consolidated Financial Statements. The
Capital Assets segment includes activities related to financial services and the
financial guarantee insurance operations. Also included in the segment is U S
WEST Real Estate Inc., for which disposition was announced in 1991 and a $500
valuation allowance was established to cover both carrying costs and losses on
disposal of related properties. The entire Capital Assets segment has been
accounted for as discontinued operations in accordance with Accounting
Principles Board Opinion No. 30. Prior periods presented have been reclassified
to reflect the effects of discontinued operations.
Sales and other revenues of discontinued operations were $709.7 in 1993,
$672.0 in 1992 and $1,097.4 in 1991. Income (loss) from discontinued operations
for 1993 (to June 1), 1992 and 1991 totaled $38.5, $103.6 and ($286.2),
respectively. Income (loss) from discontinued operations subsequent to June 1,
1993, is being deferred and was included in the provision for loss on disposal.
The assets and liabilities of the Capital Assets segment have been separately
classified on the Consolidated Balance Sheets as net assets of discontinued
operations.
In December 1993, the company sold $2.0 billion of finance receivables and the
business of U S WEST Financial Services to NationsBank Corporation. Sales
proceeds of $2.1 billion were used primarily to repay related debt and for
reinvestment in communications businesses. The pretax gain on the sale of
approximately $100, net of selling expenses, was in line with management's
estimate and was included in the company's estimate of provision for loss on
disposal.
During 1993, U S WEST Real Estate Inc. sold five properties for proceeds of
approximately $60. In January 1994, two properties were sold for approximately
$230. The company anticipates disposing of the remainder of its real estate
portfolio during the next several years.
<TABLE>
<CAPTION>
NET ASSETS OF DISCONTINUED OPERATIONS
- -------------------------------------------------------------------------------------
December 31,
------------------------
1993 1992
------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 24.0 $ 45.4
Finance receivables - net 1,131.0 3,056.6
Bonds, 1993 at market value, 1992 at amortized cost 894.4 999.8
Investment in real estate - net of valuation allowance 710.8 720.9
Other assets 600.4 792.3
-----------------------
Total assets $3,360.6 $5,615.0
-----------------------
LIABILITIES
Debt $1,495.8 $3,433.1
Deferred income taxes 680.8 662.5
Unearned premiums 345.7 297.1
Accounts payable and accrued liabilities 243.5 282.2
Minority interests 40.3 54.2
-----------------------
Total liabilities 2,806.1 4,729.1
-----------------------
Net assets of discontinued operations $ 554.5 $ 885.9
-----------------------
- -------------------------------------------------------------------------------------
</TABLE>
44
U S WEST
<PAGE>
Finance receivables primarily consist of investments in leveraged leases related
to aircraft and power plants. For leveraged leases, the cost of the assets
leased is financed primarily through non-recourse debt which is netted against
the related lease receivable.
<TABLE>
<CAPTION>
The components of finance receivables follow:
- ----------------------------------------------------------------------
December 31,
--------------------------
1993 1992
--------------------------
<S> <C> <C>
Receivables $1,208.3 $3,239.4
Unguaranteed estimated residual values 477.4 493.4
--------------------------
1,685.7 3,732.8
Less: Unearned income 490.4 527.1
Credit loss and other allowances 64.3 149.1
--------------------------
Finance receivables - net $1,131.0 $3,056.6
--------------------------
- ----------------------------------------------------------------------
</TABLE>
In December 1993, the company adopted SFAS No. 115, "Accounting for Investments
in Debt and Equity Securities." Accordingly, investments in debt securities,
which are designated as available for sale, are carried at market value. Any
resulting unrealized gains or losses, net of applicable deferred income taxes,
are reflected as a component of shareowners' equity. The change in net
unrealized gains and losses of $35.1, net of deferred taxes of $18.9, is
included in the net assets of discontinued operations at December 31, 1993.
<TABLE>
<CAPTION>
The amortized cost and estimated market value of investments in debt securities follow:
- ----------------------------------------------------------------------------------------------------------------------------------
December 31, 1993 December 31, 1992
--------------------------------------------- --------------------------------------------------
Gross Gross Gross Gross
Carrying Unrealized Unrealized Fair Carrying Unrealized Unrealized Fair
Marketable Debt Securities Amount Gains Losses Value Amount Gains Losses Value
- ---------------------------------------------------------------------------- --------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Municipal $742.3 $50.5 $(0.9) $791.9 $579.5 $19.7 $(1.5) $ 597.7
Corporate -- -- -- -- 233.2 8.7 (4.9) 237.0
Other 98.1 4.5 (0.1) 102.5 187.1 7.2 (1.3) 193.0
------------------------------------------- -------------------------------------------------
Total $840.4 $55.0 $(1.0) $894.4 $999.8 $35.6 $(7.7) $1,027.7
------------------------------------------- -------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
DEBT
Interest rates and maturities of debt associated with discontinued operations at December 31 follow:
- ----------------------------------------------------------------------------------------------------------------------------------
Maturities Total Total
---------------------------------------------------------------------
Interest rates 1994 1995 1996 1997 1998 Thereafter 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Up to 5% $276.3 $150.0 $50.0 $10.0 $ -- $ 10.0 $ 496.3 $ 705.7
Above 5% to 6% -- 5.0 -- -- -- -- 5.0 5.0
Above 6% to 7% -- -- -- 54.3 -- -- 54.3 54.1
Above 7% to 8% 8.5 7.0 5.3 5.0 -- -- 25.8 316.5
Above 8% to 9% 72.0 -- 37.6 -- -- 154.0 263.6 385.7
Above 9% to 10% 38.5 60.9 -- 47.5 5.0 25.0 176.9 321.2
Above 10% -- -- -- -- 29.2 -- 29.2 128.3
Commercial paper rates 29.7 -- -- -- -- -- 29.7 676.7
--------------------------------------------------------------------------------------------------
$425.0 $222.9 $92.9 $116.8 $34.2 $189.0 $1,080.8 $2,593.2
======================================================================
Allocated from continuing
operations - net 415.0 839.9
----------------------
Total $1,495.8 $3,433.1
----------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Debt of $123.7 at December 31, 1993 and 1992 was collateralized by first
deeds of trust on associated real estate, assignment of rents from leases, and
operating and management agreements.
45
U S WEST
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET CREDIT RISK - FINANCIAL GUARANTEES
- -------------------------------------------------------------------------------
The principal amounts insured on asset-backed and municipal obligations follow:
- -------------------------------------------------------------------------------
Asset-backed (1) Municipal (2)
December 31, December 31,
--------------------------- -------------------------
Term to Maturity 1993 1992 1993 1992
- ---------------------------------------------------- -------------------------
<S> <C> <C> <C> <C>
0 to 5 Years $ 5,955 $ 5,872 $ 1,888 $1,186
5 to 10 Years 2,050 1,719 2,771 1,614
10 to 15 Years 1,286 1,629 2,176 1,321
15 to 20 Years 593 276 2,346 1,536
20 and Above 2,501 2,372 4,606 3,838
---------------------- ----------------------
Total $12,385 $11,868 $13,787 $9,495
-------------------------- -------------------------
- ----------------------------------------------------- -------------------------
<FN>
(1) Excludes amounts ceded to other insurers of $6,210 and $4,781, in 1993 and
1992, respectively, and includes $25 of assumed obligations in 1993 and
1992.
(2) Excludes amounts ceded to other insurers of $5,576 and $3,946, in 1993 and
1992, and includes $1,218 and $1,478 of assumed obligations in 1993 and
1992, respectively.
</TABLE>
<TABLE>
<CAPTION>
The principal amount of insured obligations in the municipal portfolio, net of
amounts ceded, include the following types of issues:
------------------------
December 31,
------------------------
Type of Issue 1993 1992
- -------------------------------------------------------------------------------
<S> <C> <C>
General obligation $ 3,487 $2,439
Tax-backed revenue 2,919 1,744
Housing revenue 1,879 1,354
Municipal utility revenue 1,783 1,182
Health care revenue 1,399 925
Transportation revenue 710 547
Other 1,610 1,304
----------------------
Total $13,787 $9,495
----------------------
- ------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Concentrations of collateral associated with insured asset-backed obligations,
net of amounts ceded, follow:
- ------------------------------------------------------------------------------
December 31,
-----------------------
Type of Collateral 1993 1992
- ------------------------------------------------------------------------------
<S> <C> <C>
Residential mortgages $ 3,874 $ 3,765
Consumer receivable 1,443 1,015
Securities:
Government debt 2,039 2,320
Non-government securities 1,709 1,794
Commercial mortgages:
Commercial real estate 809 871
Corporate secured 1,018 1,072
Investor-owned utility first mortgage bonds 772 693
Other asset-backed 721 338
----------------------
Total $12,385 $11,868
----------------------
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL FINANCIAL INFORMATION
- -------------------------------------------------------------------------------
Information for U S WEST Financial Services Inc., a member of the discontinued
segment, follows:
- ----------------------------------------------------------------------------------
Year Ended December 31,
-------------------------
Summarized Operating Results 1993 1992 1991
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $409.9 $302.0 $333.8
Income (loss) before parent support and income taxes * 83.3 (2.5)
Income (loss) before parent support * 55.1 (1.6)
Net income * 55.1 52.2
- ----------------------------------------------------------------------------------
<FN>
*Results of Financial Services are included in discontinued operations.
</TABLE>
46
U S WEST
<PAGE>
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
------------------------------
Summarized Financial Position 1993 1992
- -------------------------------------------------------------------------------
<S> <C> <C>
Net finance receivables $1,019.8 $3,176.5
Total assets 1,783.9 3,423.7
Total debt 957.1 2,324.6
Total liabilities 1,734.9 3,054.7
Shareowner's equity 49.0 369.0
</TABLE>
- --------------------------------------------------------------------------------
For the year ended December 31, 1991, Financial Services' operating results
reflect a pretax charge of approximately $50 due to the write-off of intangible
assets.
NOTE 14: QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data, and per share market and dividend data, follow:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
First Second Third Fourth
Quarterly Financial Data Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1993
Sales and other revenues $ 2,509.9 $2,541.5 $ 2,576.2 $2,666.0
Income (loss) from
continuing operations
before income taxes 449.1 436.0 (534.5) 394.1
Income (loss) from
continuing operations 295.7 291.2 (375.1) 264.1
Net income (loss) 316.1 159.1 (3,545.1) 264.1
Earnings (loss) per share
from continuing operations 0.71 0.70 (0.90) 0.62
Earnings (loss) per share 0.76 0.38 (8.50) 0.62
- --------------------------------------------------------------------------------
1992
Sales and other revenues $ 2,410.1 $2,444.3 $ 2,449.2 $2,519.0
Income from continuing
operations before income
taxes 439.6 405.6 354.7 369.3
Income from continuing
operations 295.6 275.0 243.3 261.9
Net income (loss) (1,476.1) 292.3 266.2 303.6
Earnings per share from
continuing operations 0.72 0.67 0.59 0.63
Earnings (loss) per share (3.58) 0.71 0.65 0.73
</TABLE>
- --------------------------------------------------------------------------------
1993 second quarter net income was reduced by $100 ($.24 per share) for a charge
related to discontinued operations and $50.2 ($.12 per share) for the early
extinguishment of debt. 1993 third quarter net loss includes a restructuring
charge of $610 ($1.46 per share) and $74 ($.18 per share), including $20 ($.05
per share) related to discontinued operations, for the cumulative effect on
deferred taxes of the 1993 federally mandated increase in income tax rates. 1993
third quarter net loss also includes extraordinary charges of $3,123 ($7.49 per
share) for the discontinuance of SFAS No. 71, and $27 ($.06 per share) for the
early extinguishment of debt.
1993 net income (loss) related to discontinued operations was $20.4 ($.05 per
share) and ($81.9) ($.20 per share) for the first and second quarters,
respectively. Income (loss) subsequent to June 1, 1993 is being deferred and was
included within the provision for loss on disposal of the Capital Assets
segment.
1992 first quarter net income was reduced by $1,793.4 ($4.35 per share) due to
the adoption of SFAS Nos. 106 and 112.
1992 net income related to discontinued operations was $21.7 ($.05 per share),
$17.3 ($.04 per share), $22.9 ($.06 per share) and $41.7 ($.10 per share), for
the first, second, third and fourth quarters, respectively.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Per Share Market and Dividend Data Market Price
------------
(whole dollars) High Low Close Dividends
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1993
First $43.875 $37.750 $43.625 $0.535
Second 46.000 40.625 45.875 0.535
Third 49.375 44.500 49.250 0.535
Fourth 50.750 45.750 45.875 0.535
- --------------------------------------------------------------------------------
1992
First $38.875 $33.375 $34.125 $0.53
Second 36.875 32.875 36.500 0.53
Third 40.000 36.250 38.000 0.53
Fourth 40.000 35.250 38.375 0.53
- --------------------------------------------------------------------------------
</TABLE>
47
U S WEST
<PAGE>
U S WEST BOARD OF DIRECTORS
[picture]
DICK CHENEY (53)
A former secretary of Defense in the Bush administration, he is a senior
fellow with the American Enterprise Institute in Washington, D.C. The former
five-term congressman from Wyoming also served as chief of staff for President
Ford. Mr. Cheney joined the U S WEST board in 1993.
[picture]
MARY M. GATES (64)
A regent of the University of Washington since 1975. Ms. Gates served as a
director of Pacific Northwest Bell from 1979 to 1988 and as a director of U S
WEST's cellular communications company, U S WEST NewVector Group, from 1990 to
1991. She joined the U S WEST board in 1992.
[picture]
SHIRLEY M. HUFSTEDLER (68)
A partner in the law firm of Hufstedler, Kaus & Ebbinger. She served as the
secretary of Education during the Carter administration and, for 11 years, as
a judge for the 9th U.S. Circuit Court of Appeals. Ms. Hufstedler joined the
U S WEST board in 1983, and chairs the Public Policy Committee.
[picture]
MARILYN CARLSON NELSON (54)
The vice chair of Carlson Holdings Inc., a group of companies involved in
marketing services, travel and hospitality services. Ms. Nelson is also chair
of Citizens State Bank of Waterville Minn. and Montgomery, Minn. She joined
the U S WEST board in 1993.
[picture]
JERRY O. WILLIAMS (55)
President of Grand Eagle Enterprises, a private investment group. He is former
president and chief operating officer of AM International Inc., a manufacturer
and seller of design, display, reproduction and finishing, products and
supplies in the graphics industry. He joined the U S WEST board in 1988.
[picture]
REMEDIOS DIAZ-OLIVER (55)
The president and chief executive officer of All American Container Inc.,
which sells and distributes glass, plastic and metal containers for a variety
of products worldwide. Ms. Diaz-Oliver joined the U S WEST board in 1988.
[picture]
ALLAN D. GILMOUR (59)
Vice chairman of the Ford Motor Co., Mr. Gilmour has had a number of executive
assignments since joining Ford in 1960. He served as the company's chief
financial officer before taking over leadership of its international
automotive operations and, later, the Ford Automotive Group. He joined the U S
WEST board in 1992.
[picture]
ALLEN F. JACOBSON (67)
The former chairman and chief executive officer of 3M. He has been a member of
the U S WEST board since 1983 and is chairman of the Corporate Development and
Finance Committee.
[picture]
FRANK POPOFF (58)
The chairman and chief executive officer of The Dow Chemical Company. Since
joining Dow Chemical in 1959, he also served as the company's president and
chief operating officer and executive vice president for international
operations. Mr. Popoff joined the U S WEST board in 1993.
[picture]
DANIEL YANKELOVICH (69)
The founder and chairman of DYG Inc., a leading market research firm. He also
founded Yankelovich, Skelly and White, one of the nation's largest opinion
research organizations. He joined U S WEST's board in 1983 and is chairman of
the Trust Investment Committee.
[picture]
GRANT A. DOVE (65)
The managing partner of Technology Strategies and Alliances, a strategic
planning and investment banking firm. He spent nearly 30 years in a number of
executive positions with Texas Instruments. He joined the U S WEST board in
1988 and chairs the Human Resources Committee.
[picture]
PIERSON M. GRIEVE (66)
The chairman and chief executive officer of Ecolab Inc., a leading worldwide
developer and marketer of premium cleaning, sanitizing and maintenance products
and services for the hospitality, institutional and residential markets. He
joined the U S WEST board in 1990, and chairs the Board Affairs Committee.
[picture]
RICHARD D. MCCORMICK (53)
Named president and chief executive officer of U S WEST effective January 1,
1991 and chairman of the board May 1, 1992. Mr. McCormick was president of
Northwestern Bell Telephone Company before joining U S WEST as executive vice
president in 1965. He became a member of the company's board in 1986.
[picture]
GLEN L. RYLAND (69)
The president of RYCO Inc. He is former chairman, president and chief
executive officer of Frontier Holdings Inc., and its principal subsidiary,
Frontier Airlines. He joined the U S WEST board in 1983 and is chairman of the
Audit Committee.
BOARD RETIREMENT
JACK D. SPARKS (71)
Having reached the mandatory retirement age of 70, board member Jack D. Sparks
retired May 7, 1993, at the company's annual meeting of shareowners in
Minneapolis. The former chairman, chief executive officer and president of
Whirlpool Corporation, he was elected to the U S WEST board in 1985.
48
U S WEST
<PAGE>
U S WEST EXECUTIVE AND SUBSIDIARY OFFICERS
RICHARD D. MCCORMICK*
Chairman, President and Chief Executive Officer
A. GARY AMES*
President and Chief Executive Officer
RICHARD J. CALLAHAN*
Executive Vice President, U S WEST and President, U S West International and
Business Development Group
CHARLES M. LILLS*
Executive Vice President and Chief Planning Officer
JAMES M. OSTERHOFF*
Executive Vice President and Chief Financial Officer
CHARLES P. RUSS III*
Executive Vice President, General Counsel and Secretary
JAMES H. STEVER*
Executive Vice President, Public Policy
J. THOMAS BOUCHARD*
Senior Vice President and Chief Human Resources Officer
JAMES T. ANDERSON*
Vice President and Treasurer
LORNE G. RUBIS*
Vice President, Quality
JUDITH A. SERVOSS*
Vice President, Public Relations
H. LAIRD WALKER
Vice President, Federal Relations
JOHN DEFEO
President and Chief Executive Officer
U S WEST NewVector Group
THOMAS E. PARDUN
President and Chief Executive Officer
U S WEST Multimedia Group
SOLOMON D. TRUJILLO
President and Chief Executive Officer
U S WEST Marketing Resources Group
PEARRE WILLIAMS
President
Corporate Development Division
* Executive officer
SHAREOWNER INFORMATION
U S WEST SHAREOWNER SERVICES
If you have questions about your U S WEST account or need to make changes,
please write:
FOR GENERAL INFORMATION, TRANSFERS, THE U S WEST FACT BOOK OR THE COMPANY'S
CURRENT FORM 10-K REPORT:
U S WEST
P.O. Box 8935
Boston, MA 02266-8935
FOR DIVIDEND REINVESTMENT:
U S WEST
P.O. Box 8936
Boston, MA 02266-8936
SHAREOWNER TOLL-FREE NUMBER
1-800-537-0222
Shareowners calling from Alaska, Hawaii or outside the United States, please
call collect: 0-505-989-2004.
SHAREOWNER INVESTMENT PLAN
Shareowners can reinvest their dividends and make optional payments for a fee of
$1.00 per account, per quarter. Contact U S WEST Shareowner Services for
enrollment information.
EXPECTED DIVIDEND RECORD DATES
April 20, 1994
July 20, 1994
October 20, 1994
January 20, 1995
EXPECTED DIVIDEND PAYMENT DATES
May 2, 1994
August 1, 1994
November 1, 1994
February 1, 1995
ANNUAL MEETING
The annual meeting of shareowners will be held at 10 a.m. Friday, May 6, 1994,
at the Peter Kiewit Conference Center, 1313 Farnam, Omaha, NE 68182. A signer
will be at the meeting to assist the hearing impaired.
STOCK EXCHANGE LISTINGS
U S WEST common stock is listed on the New York, Pacific, London, Zurich, Basel,
Geneva, Amsterdam and Tokyo stock exchanges. Its ticker symbol is "USW" and it
is listed in newspaper stock tables under "US WEST."
STREET-NAME ACCOUNTS
Shareowner holding stock in street-name accounts who wish to receive U S WEST
quarterly reports may contact U S WEST Shareowner Services to be placed on the
mailing list.
CORPORATE HEADQUARTERS
U S WEST, Inc.
7800 East Orchard Road
P.O. Box 6508
Englewood, CO 80155-6508
303-793-6500
c 1994 U S WEST, Inc.
<PAGE>
[logo]
7800 EAST ORCHARD ROAD
P.O. BOX 6508
ENGLEWOOD, CO 80155-6508
<PAGE>
APPENDIX TO EXHIBIT 13
NARRATIVE DESCRIPTION OF
GRAPHIC AND IMAGE INFORMATION IN
U S WEST'S 1993 ANNUAL REPORT TO STOCKHOLDERS
---------------------------------------------
PAGE OF
ANNUAL REPORT DESCRIPTION
- ------------- -----------
Cover Centered at the top half of the page is a picture of a
complicated conglomeration of multimedia equipment within the
international symbol for "not allowed" (a red circle with a
red line crossing through it). Centered at the bottom of the
page are the words, in black type face:
U S WEST
1993 ANNUAL REPORT
1 A picture of a television monitor appears in the top center of
the page with the following words printed on the screen in red
type face: AS 1, 2, 3.
5 A picture of Richard D. McCormick appears on the screen of a
television monitor located in approximately the center of the
page. The caption below the picture, written in red type face,
reads: "YOU'LL BE ABLE TO CHOOSE WHAT YOU WANT ...AND WHEN"
followed by RICHARD D. McCORMICK (in black type face).
48 Photos of U S WEST Board members with their names and ages
below their pictures and a biographical description at the
right of their photo. (There is no picture for retired Board
member Jack D. Sparks.)
<PAGE>
1
EXHIBIT 21
Subsidiaries of U S WEST, Inc.
U S WEST Communications Group, Inc., a Colorado corporation
U S WEST Communications, Inc., a Colorado corporation
U S WEST Communications Federal Services, Inc., a Colorado
corporation
U S WEST Communications Services, Inc., a Colorado
corporation
U S WEST Enhanced Services, Inc., a Washington corporation
U S WEST Business Resources, Inc., a Colorado corporation
U S WEST Capital Corporation, a Colorado corporation
Financial Security Assurance Holdings, Ltd., a New York
corporation (Subsidiaries performing various reinsurance
services omitted: 4 U.S. and 1 foreign).
U S WEST Financial Services, Inc., a Colorado corporation
(Subsidiaries performing various financial services
omitted: 11 U.S. and 7 foreign.)
U S WEST Capital Funding, Inc., a Colorado corporation
U S WEST International Holdings, Inc., a Delaware corporation
U S WEST International, Inc., a Colorado corporation
(Subsidiaries providing cable, cellular, and wireless
telecommunications services in foreign countries omitted:
9 U.S. and 8 foreign)
U S WEST Investments, Inc., a Colorado corporation
U S WEST Real Estate, Inc., a Colorado corporation
(Subsidiaries holding various real estate investments
omitted: 7 U.S.)
U S WEST Marketing Resources Group, Inc., a Colorado corporation
U S WEST Interactive Services, Inc., a Colorado corporation
U S WEST Interactive Video Enterprises, Inc., a Colorado
corporation
LOCALTouch Holdings, Inc., a Colorado corporation
(Subsidiaries providing specialized directory services
omitted: 2 U.S.)
U S WEST MFT Co., a Delaware corporation
U S WEST Multimedia Communications, Inc., a Colorado corporation
U S WEST NewVector Group, Inc., a Colorado corporation
(Subsidiaries providing cellular and paging services omitted:
17 U.S.)
U S WEST Personal Communications Development, Inc., a Colorado
corporation
<PAGE>
2
U S WEST SPF Co., a Colorado corporation
U S WEST SPF Co. II, a Delaware corporation
U S WEST Technologies, a Colorado corporation
Western Range Insurance Co., a Vermont corporation
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration
Statements of U S WEST, Inc. on Forms S-3 (File Nos. 33-46274, 33-46274-01,
33-37010, 33-37010-01, 33-47086, 33-50049, 33-50049-01, 33-50047, 33-50047-01,
33-51427, and 33-50299) and on Forms S-8 (File Nos. 2-92088, 2-92089, 33-42076,
33-43364, and 33-43362) of our report, which includes an explanatory paragraph
regarding the discontinuance of accounting for operations of U S WEST Communica-
tions, Inc. in accordance with Statement of Financial Accounting Standard No.
71, "Accounting for the Effects of Certain Types of Regulation," in 1993, and a
change in the method of accounting for postretirement benefits other than
pensions and other postemployment benefits in 1992, dated January 20, 1994,
except for the last paragraph in Note 8 to the consolidated financial
statements, as to which the date is February 23, 1994, on our audits of the
consolidated financial statements of U S WEST, Inc. (the "Company"), as of
December 31, 1993 and 1992, and for the three years ended December 31, 1993,
1992 and 1991, which report is incorporated by reference from U S WEST Inc.'s
1993 Annual Report to Shareowners. We also consent to the incorporation by
reference of our report dated January 20, 1994 on the related consolidated
financial statement schedules, which report is included in this Annual Report on
Form 10-K.
Denver, Colorado
March 17, 1994
<PAGE>
1
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, U S WEST, Inc., a Colorado corporation (hereinafter referred to as
the "Company"), proposes to file with the Securities and Exchange Commission,
under the provisions of the Securities Exchange Act of 1934, as amended, an
annual report on Form 10-K for the fiscal year ended December 31, 1993; and
WHEREAS, each of the undersigned is a Director of the Company;
NOW THEREFORE, each of the undersigned constitutes and appoints JAMES M.
OSTERHOFF, BARBARA M. JAPHA, and STEPHEN E. BRILZ, and each of them, as
attorneys for me and in my name, place, and stead, and in my capacity as a
Director of the Company, to execute and file such annual report, and thereafter
to execute and file any amendment or amendments thereto on Form 10-K/A, hereby
giving and granting to said attorneys full power and authority to do and perform
all and every act and thing whatsoever requisite and necessary to be done in and
about the premises as fully, to all intents and purposes, as I might or could do
if personally present at the doing thereof, hereby ratifying and confirming all
that said attorneys may or shall lawfully do, or cause to be done, by virtue
hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney this 4th day of February, 1994.
/s/ Richard B. Cheney /s/ Remedios Diaz-Oliver
- ------------------------------ -----------------------------
Richard B. Cheney Remedios Diaz-Oliver
/s/ Grant A. Dove /s/ Mary M. Gates
- ------------------------------ -----------------------------
Grant A. Dove Mary M. Gates
/s/ Allan D. Gilmour /s/ Pierson M. Grieve
- ------------------------------ -----------------------------
Allan D. Gilmour Pierson M. Grieve
/s/ Shirley M. Hufstedler /s/ Allen F. Jacobson
- ------------------------------ -----------------------------
Shirley M. Hufstedler Allen F. Jacobson
<PAGE>
2
/s/ Frank P. Popoff /s/ Glen L. Ryland
- ------------------------------ -----------------------------
Frank P. Popoff Glen L. Ryland
/s/ Jerry O. Williams /s/ Daniel Yankelovich
- ------------------------------ -----------------------------
Jerry O. Williams Daniel Yankelovich
<PAGE>
3
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, U S WEST, Inc., a Colorado corporation (hereinafter referred to as
the "Company"), proposes to file with the Securities and Exchange Commission,
under the provisions of the Securities Exchange Act of 1934, as amended, an
annual report on Form 10-K for the fiscal year ended December 31, 1993; and
WHEREAS, the undersigned is an officer or Director, or both, of the Company
and holds the office, or offices, in the Company as indicated below his name;
NOW THEREFORE, each of the undersigned hereby constitutes and appoints
JAMES M. OSTERHOFF, BARBARA M. JAPHA, and STEPHEN E. BRILZ, and each of them, as
attorneys for him and in his name, place, and stead, and in each of his offices
and capacities in the Company, to execute and file such annual report, and
thereafter to execute and file any amendment or amendments thereto on Form
10-K/A, hereby giving and granting to said attorneys full power and authority to
do and perform all and every act and thing whatsoever requisite and necessary to
be done in and about the premises as fully, to all intents and purposes, as he
might or could do if personally present at the doing thereof, hereby ratifying
and confirming all that said attorneys may or shall lawfully do, or cause to be
done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 4th day
of February, 1994.
/s/ Richard D. McCormick /s/ James M. Osterhoff
- ------------------------------ ------------------------------
Richard D. McCormick James M. Osterhoff
Chairman of the Board, Chief Executive Vice President and
Executive Officer and Chief Financial Officer
President
<PAGE>
EXHIBIT 99A
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
Consolidated Financial Statements and
Report of Independent Accountants
December 31, 1993
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AND REPORT OF INDEPENDENT ACCOUNTANTS
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
REPORT OF INDEPENDENT ACCOUNTANTS 1
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets 2
Consolidated Statements of Income 3
Consolidated Statements of Changes in Shareholder's Equity 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 7
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder and Board of Directors
of Financial Security Assurance Inc.:
We have audited the accompanying consolidated balance sheets of Financial
Security Assurance Inc. and Subsidiaries (the "Company") as of December 31, 1993
and 1992 and the related consolidated statements of income, changes in
shareholder's equity, and cash flows for each of the three years in the period
ended December 31, 1993. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company at
December 31, 1993 and 1992, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31, 1993
in conformity with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, the Company
adopted the method of accounting and reporting for certain investments in debt
and equity securities prescribed by Statement of Financial Accounting Standards
No. 115.
New York, New York
January 20, 1994
1
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands,
except for share data)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
ASSETS 1993 1992
------ ------------- -------------
<S> <C> <C>
Bonds, at market value (amortized cost of $683,176) $ 736,872
Bonds, at lower of amortized cost or market value (market value of $726,548) $ 705,789
Short-term investments 31,720 6,799
------------- -------------
Total investments 768,592 712,588
Cash and cash equivalents 15,770 13,483
Accrued investment income 12,160 12,039
Premium receivable 3,669 4,568
Prepaid reinsurance premiums (including amounts ceded to affiliates of $79,462 and
$53,702) 127,849 98,225
Reinsurance recoverable on unpaid losses (including amounts recoverable from
affiliates of $79 and $7,884) 79 13,750
Deferred acquisition costs 81,992 85,084
Goodwill (net of accumulated amortization of $11,347) 81,598
Other assets 19,070 17,758
------------- -------------
TOTAL ASSETS $ 1,029,181 $ 1,039,093
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDER'S EQUITY
Unearned premiums $ 328,165 $ 297,073
Losses and loss adjustment expenses 36,094 72,430
Deferred federal income taxes 35,832 24,319
Ceded reinsurance balances payable 7,408 10,239
Payable for securities purchased 30,741
Amounts withheld on account for others 25,649 1,637
Accrued expenses and other liabilities 22,824 23,766
------------- -------------
TOTAL LIABILITIES 486,713 429,464
------------- -------------
COMMITMENTS AND CONTINGENCIES
Common stock (1,000 shares authorized; issued and outstanding; par value of $15,000
per share) 15,000 15,000
Additional paid-in capital 497,506 475,171
Unrealized gains on investments (net of deferred income taxes of $18,788) 34,892
Accumulated earnings (deficit) (4,930) 119,458
------------- -------------
TOTAL SHAREHOLDER'S EQUITY 542,468 609,629
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 1,029,181 $ 1,039,093
------------- -------------
------------- -------------
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
2
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1993 1992 1991
------------ ----------- -----------
<S> <C> <C> <C>
REVENUES:
Net premiums written (net of premiums ceded of $62,403, $52,734 and
$54,817, of which $42,541, $29,299 and $26,931 were ceded to
affiliates) $ 65,006 $ 78,397 $ 55,910
Decrease (increase) in unearned premiums (1,629) (14,540) 4,600
------------ ----------- -----------
Premiums earned (net of premiums ceded of $32,736, $25,575 and $26,864) 63,377 63,857 60,510
Net investment income 47,547 46,858 44,178
Net realized gains 18,352 28,952 9,043
Other income (2,057) 2,412 2,142
------------ ----------- -----------
TOTAL REVENUES 127,219 142,079 115,873
------------ ----------- -----------
EXPENSES:
Losses and loss adjustment expenses (net of reinsurance recoveries of
$18,628, $12,854 and $2,420) 84,054 54,623 9,901
Amortization and write-off of goodwill 81,598 3,718 3,717
Restructuring charge 85,409
Policy acquisition costs 15,575 14,600 13,405
Other operating expenses 23,768 15,596 14,427
------------ ----------- -----------
TOTAL EXPENSES 290,404 88,537 41,450
------------ ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (163,185) 53,542 74,423
------------ ----------- -----------
Provision (benefit) for income taxes:
Current (9,991) 11,195 14,935
Deferred (28,806) (1,676) 4,599
------------ ----------- -----------
Total provision (38,797) 9,519 19,534
------------ ----------- -----------
NET INCOME (LOSS) $ (124,388) $ 44,023 $ 54,889
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
3
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
(Dollars in thousands,
except per share data)
<TABLE>
<CAPTION>
ADDITIONAL UNREALIZED
COMMON PAID-IN GAINS ON RETAINED
STOCK CAPITAL INVESTMENTS EARNINGS TOTAL
--------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1990 $ 2,500 $ 397,671 $ -- $ 26,546 $ 426,717
Net income for the year 54,889 54,889
Capital contribution 90,000 90,000
--------- ----------- ------------ ------------
BALANCE, December 31, 1991 2,500 487,671 81,435 571,606
Transfer from additional paid-in capital to
common stock 12,500 (12,500)
Net income for the year 44,023 44,023
Dividend declared on common stock (6,000) (6,000)
--------- ----------- ------------ ------------
BALANCE, December 31, 1992 15,000 475,171 119,458 609,629
Net loss for the year (124,388) (124,388)
Net unrealized gains on investments (net of
deferred income taxes of $18,788) 34,892 34,892
Capital contribution (net of $11,960 which was
subsequently written off) 100,835 100,835
Stock repurchase (78,500) (78,500)
--------- ----------- ----------- ------------ ------------
BALANCE, December 31, 1993 $ 15,000 $ 497,506 $ 34,892 $ (4,930) $ 542,468
--------- ----------- ----------- ------------ ------------
--------- ----------- ----------- ------------ ------------
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
4
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1993 1992 1991
------------ ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Premiums received, net $ 79,166 $ 80,666 $ 54,249
Policy acquisition and other operating expenses paid, net (25,304) (42,919) (40,745)
Restructuring charge (85,409)
Loss and LAE paid (43,345) (6,578)
Net investment income received 43,627 42,107 35,837
Federal income taxes received (paid) 1,738 (9,712) (12,101)
Interest and liquidity fees paid (4,766)
Other 4,627 (395) 871
------------ ---------- ----------
Net cash provided by (used for) operating activities (29,666) 63,169 38,111
------------ ---------- ----------
Cash flows from investing activities:
Proceeds from sales of bonds and stocks 522,261 505,986 446,845
Proceeds from maturities of bonds 3,700
Purchases of bonds and stocks (448,997) (592,590) (587,908)
Purchases of property and equipment (749) (1,160) (1,919)
Net decrease (increase) in short-term investments (24,802) 32,953 (12,158)
------------ ---------- ----------
Net cash provided by (used for) investing activities 51,413 (54,811) (155,140)
------------ ---------- ----------
Cash flows from financing activities:
Stock repurchase (78,500)
Dividends paid (6,000)
Capital contribution 59,040 90,000
------------ ---------- ----------
Net cash provided by (used for) financing activities (19,460) (6,000) 90,000
------------ ---------- ----------
Net increase (decrease) in cash 2,287 2,358 (27,029)
Cash and cash equivalents at beginning of year 13,483 11,125 38,154
------------ ---------- ----------
Cash and cash equivalents at end of year $ 15,770 $ 13,483 $ 11,125
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
Continued
5
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1993 1992 1991
------------ ---------- ----------
<S> <C> <C> <C>
Reconciliation of net income (loss) to net cash provided by operating
activities:
Net income (loss) $ (124,388) $ 44,023 $ 54,889
Losses paid by U S WEST 63,326
Increase in accrued investment income (121) (169) (4,783)
Increase (decrease) in unearned premium 1,468 14,085 (4,734)
Decrease (increase) in deferred acquisition costs 3,092 (7,660) (10,137)
Increase (decrease) in current federal income taxes payable (8,253) 1,483 2,833
Increase (decrease) in unpaid losses and loss adjustment expenses (22,665) 48,656 9,902
Increase in amounts withheld for others 24,012
Provision (benefit) for deferred income taxes (28,806) (1,676) 4,599
Net realized gains on investments (18,352) (28,952) (9,043)
Amortization and write-off of goodwill 81,598 3,718 3,717
Depreciation and accretion of bond discount (3,835) (2,794) (1,593)
Change in other assets and liabilities 3,258 (7,545) (7,539)
------------ ---------- ----------
Cash provided by operating activities $ (29,666) $ 63,169 $ 38,111
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
6
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
1. ORGANIZATION AND OWNERSHIP
Financial Security Assurance Inc. (the "Company"), a wholly owned subsidiary
of Financial Security Assurance Holdings Ltd. (the "Parent"), is an insurance
company domiciled in the State of New York. The Company is engaged in providing
financial guaranty insurance on asset-backed financings and municipal
obligations.
The Parent was acquired by U S WEST, Inc. ("U S WEST") in 1989. In 1990, the
Parent sold 9.9% of issued and outstanding shares to The Tokio Marine and Fire
Insurance Co., Ltd. ("Tokio Marine"). As of December 31, 1992, the Parent was
owned 91.6% by U S WEST and 8.4% by Tokio Marine. As of December 31, 1993, the
Parent was owned 92.5% by U S WEST and 7.5% by Tokio Marine.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles ("GAAP") which differ in certain
material respects from the accounting practices prescribed or permitted by
insurance regulatory authorities (see Note 6). Significant accounting policies
under GAAP are as follows:
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary, Financial Security Assurance International Inc.
and its wholly owned subsidiary, Financial Security Assurance of Oklahoma, Inc.
(the "Subsidiaries"). All intercompany accounts and transactions have been
eliminated.
INVESTMENTS
In 1993, the Company adopted Financial Accounting Standards Board Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" ("SFAS 115"). Pursuant to SFAS 115, investments
in debt securities designated as available for sale are carried at market value
rather than the previous method, which was the lower of amortized cost or market
value. Any resulting unrealized gain or loss is reflected as a separate
component of shareholder's equity, net of applicable deferred income taxes.
Bond discounts and premiums are amortized on the effective yield method over
the remaining terms of the securities acquired. Short-term investments, which
are those investments with a maturity of more than three months but less than
one year at time of purchase, are carried at market value which approximates
cost. Realized gains or losses on sale of investments are determined on the
basis of specific identification. Investment income is recorded as earned.
7
<PAGE>
CASH EQUIVALENTS
Cash equivalents represent amounts deposited in money market funds and
investments with a maturity at time of purchase of three months or less.
PREMIUM REVENUE RECOGNITION
Gross and ceded premiums are earned in proportion to the amount of risk
outstanding over the expected period of coverage. Unearned premium and prepaid
reinsurance premiums represent that portion of premium which is applicable to
coverage of risk to be provided in the future on policies in force. When an
insured issue is retired or defeased prior to the end of the expected period of
coverage, the remaining unearned premium and prepaid reinsurance premium, less
any amount credited to a refunding issue insured by the Company, are recognized.
LOSSES AND LOSS ADJUSTMENT EXPENSES
In years prior to 1992, the Company provided reserves for loss and loss
adjustment expenses only on a case basis, for identified losses, because the
Company believed that losses on any given transaction were not expected. As a
result of the Company's additional loss experience during 1992, it adopted a new
methodology of reserving for losses and loss adjustment expenses in 1992 to
accrue for both a case basis reserve and, consistent with current industry
practice, a general loss reserve, which is an estimate of the potential losses
in the Company's insured portfolio.
A case basis reserve for unpaid losses and loss adjustment expenses is
recorded at the present value of the estimated loss when an insured risk is in
default at the balance sheet date or when, in management's opinion, the
likelihood of default is probable at the balance sheet date. If an issuer were
unable to pay any of the remaining debt service, and related collateral proved
to be of no value, the loss on the transaction would equal the present value of
the payment obligations, which approximates the principal value of the insured
obligation.
Reserves for losses and loss adjustment expenses are discounted at risk-free
rates. The amount of discount taken was approximately $8,963,000, $13,581,000
and $1,433,000 at December 31, 1993, 1992 and 1991, respectively.
Management of the Company periodically evaluates its estimates for losses
and loss adjustment expenses and establishes reserves that management believes
are adequate to cover the ultimate net cost of claims; the reserves are
necessarily based on estimates, and there can be no assurance that the ultimate
liability will not differ from such estimates.
DEFERRED ACQUISITION COSTS
Deferred acquisition costs comprise those expenses that vary with and are
primarily related to the production of business, including commissions paid on
reinsurance assumed, compensation and related costs of underwriting and
marketing personnel, certain rating agency fees, premium taxes and certain other
underwriting expenses, reduced by ceding commission income on premiums ceded to
reinsurers. Deferred acquisition costs include an allocation of a portion of U S
WEST's purchase price for the Company representing the costs of acquiring the
business in force at the acquisition date. Deferred acquisition costs and the
cost of acquired business are amortized over the period in which the related
premiums are earned. Recoverability of deferred acquisition costs is determined
by considering anticipated losses and loss adjustment expenses.
FEDERAL INCOME TAXES
The provision for income taxes consists of an amount for taxes currently
payable and a provision for tax consequences deferred to future periods
reflected at current income tax rates.
Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting for
Income Taxes." The new standard did not materially affect the Company's
financial position or results of operations as federal income taxes were
previously accounted for in accordance with SFAS No. 96.
8
<PAGE>
GOODWILL
At the time of the acquisition of the Parent by U S WEST in December 1989,
the commercial real estate portion of the Company's business was a major factor
in valuing the Company's franchise and determining the purchase price for the
Parent. Since that time, weaknesses in the general commercial real estate market
have caused the Company to withdraw from that market and, through December 31,
1993, incur approximately $113,000,000 of losses. These losses have had a
negative impact on the Company's performance in the marketplace and have
impaired the Company's franchise value. In connection with U S WEST's intention,
announced in 1993 (see Note 15), to divest its ownership of the Parent, U S WEST
has written off the remaining goodwill recorded in connection with its
acquisition of the Parent to reflect its investment in the Parent at net
realizable value. Accordingly, the Company's financial statements reflect the
write-off of goodwill that had represented the excess of the purchase price paid
by U S WEST over the Company's net tangible and identifiable intangible assets
at the time of the acquisition by U S WEST. Goodwill was previously being
amortized on a straight line basis over 25 years.
RESTATEMENT
The Company's consolidated balance sheets have been restated to adopt the
provisions of Statement of Financial Accounting Standards No. 113, "Accounting
and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts"
("SFAS No. 113"). Pursuant to SFAS No. 113, prepaid reinsurance premiums and
reinsurance recoverable on unpaid losses are reflected as assets rather than
netted against liabilities for unearned premiums and unpaid losses and loss
adjustment expenses in the consolidated balance sheets and ceded premiums
written and earned are disclosed parenthetically on the face of the consolidated
statements of income. The adoption of SFAS No. 113 had no effect on the net
income (loss) or shareholder's equity of the Company.
3. INVESTMENTS
Bonds at amortized cost of $41,915,000 and $36,929,000 at December 31, 1993,
and 1992, respectively, were on deposit with state regulatory authorities as
required by insurance regulations.
Consolidated net investment income consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Long-term bonds $ 48,620 $ 46,494 $ 42,945
Equity securities 20
Short-term investments and cash equivalents 769 1,563 2,379
Investment expenses (1,862) (1,199) (1,146)
--------- --------- ---------
Net investment income $ 47,547 $ 46,858 $ 44,178
--------- --------- ---------
--------- --------- ---------
</TABLE>
9
<PAGE>
The amortized cost and estimated market value of long-term bonds follows (in
thousands):
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
DECEMBER 31, 1993 COST GAINS LOSSES VALUE
- ----------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of the U.S. government
corporations and agencies $ 32,881 $ 983 $ (127) $ 33,737
Obligations of states and political subdivisions 565,626 48,646 (195) 614,077
Mortgage-backed securities 84,669 4,462 (73) 89,058
----------- ----------- ----------- -----------
Total $ 683,176 $ 54,091 $ (395) $ 736,872
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
DECEMBER 31, 1992
- -----------------
U.S. Treasury securities and obligations of the U.S. government
corporations and agencies $ 45,426 $ 762 $ (315) $ 45,873
Obligations of states and political subdivisions 533,733 18,869 (1,160) 551,442
Corporate securities 1,993 60 2,053
Mortgage-backed securities 124,637 3,832 (1,289) 127,180
----------- ----------- ----------- -----------
Total $ 705,789 $ 23,523 $ (2,764) $ 726,548
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
Unrealized gains (losses) consist of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1993 1992
--------- ---------
<S> <C> <C>
Long-term bonds:
Gains $ 54,091 $ 23,523
Losses (395) (2,764)
Short-term investments (16)
--------- ---------
Unrealized gains, net $ 53,680 $ 20,759
--------- ---------
--------- ---------
</TABLE>
The change in net unrealized gains (losses) consists of (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Long-term bonds $ 32,937 $ (3,399) $ 22,626
Short-term investments (16)
--------- --------- ---------
Change in net unrealized gains $ 32,921 $ (3,399) $ 22,626
--------- --------- ---------
--------- --------- ---------
</TABLE>
10
<PAGE>
The amortized cost and estimated market value of long-term bonds at December
31, 1993 and 1992, by contractual maturity, are shown below (in thousands).
Actual maturities could differ from contractual maturities because borrowers
have the right to call or prepay certain obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
DECEMBER 31, 1993 DECEMBER 31, 1992
------------------------ ------------------------
ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Due in one year or less $ 56 $ 57 $ 3,701 $ 3,820
Due after one year through five years 39,183 40,062 34,030 34,848
Due after five years through ten years 79,890 90,388 66,667 68,490
Due after ten years 479,378 517,307 476,753 492,210
Mortgage-backed securities (stated maturities of 16 to
30 years) 84,669 89,058 124,638 127,180
----------- ----------- ----------- -----------
Total $ 683,176 $ 736,872 $ 705,789 $ 726,548
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
Proceeds from sales of long-term bonds during 1993, 1992 and 1991 were
$522,248,000, $510,072,000 and $453,085,000, respectively. Gross gains of
$19,211,000, $29,850,000 and $10,221,000 and gross losses of $859,000, $697,000
and $1,134,000 were realized on sales in 1993, 1992 and 1991, respectively.
4. DEFERRED ACQUISITION COSTS
Acquisition costs deferred for amortization against future income and the
related amortization charged to expenses are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1992 1991
---------- ---------- ----------
<S> <C> <C> <C>
Balance, beginning of period $ 85,084 $ 77,424 $ 67,287
---------- ---------- ----------
Costs deferred during the period:
Ceding commission income (18,567) (14,527) (16,140)
Assumed commission expense 82 154 192
Premium taxes 2,963 3,138 2,769
Compensation and other acquisition costs 28,005 33,495 36,721
---------- ---------- ----------
Total 12,483 22,260 23,542
Costs amortized during the period (15,575) (14,600) (13,405)
---------- ---------- ----------
Balance, end of period $ 81,992 $ 85,084 $ 77,424
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
5. OTHER OPERATING EXPENSES
As a result of certain events which occurred in the fourth quarter of 1993,
the Company recognized non-recurring charges of approximately $7,158,000. These
charges are: (i) the acceleration of the amortization of deferred general
liquidity facility fees of $2,105,000 and legal fees of $203,000, (ii) a
$2,900,000 accrual for salary and related benefits primarily due to a profit
sharing plan settlement for terminated employees in the Company's Profit
Participation Plan and (iii) $1,950,000 primarily relating to the acceleration
of deferred acquisition expenses (net of amortization) as a result of the
non-recurring charges.
11
<PAGE>
Total salary expense and related benefits included in other operating
expenses were $14,953,000, $8,311,000 and $7,805,000 for the years ended
December 31, 1993, 1992 and 1991, respectively.
6. STATUTORY ACCOUNTING PRACTICES
GAAP differ in certain significant respects from accounting practices
prescribed or permitted by insurance regulatory authorities. The principal
differences result from the following statutory accounting practices:
- Upfront premiums on municipal business are recognized as earned when
related risk has expired rather than over the expected coverage period;
- Acquisition costs are charged to operations as incurred rather than as
related premiums are earned;
- A contingency reserve is computed based on the following statutory
requirements (rather than establishing a general loss reserve):
a. For all policies written prior to July 1, 1989, an amount equal to
50% of cumulative earned premiums less permitted reductions, plus;
b. For all policies written on or after July 1, 1989, an amount equal
to the greater of 50% of premiums written for each category of insured
obligation or a designated percent of principal guaranteed for that
category. These amounts are provided each quarter as either 1/60th or 1/80th
of the total required for each category, less permitted reductions;
- Certain assets designated as "non-admitted assets" are charged directly
to statutory surplus, but are reflected as assets under GAAP;
- Federal income taxes are only provided on taxable income for which
income taxes are currently payable;
- Accruals for deferred compensation are not recognized;
- Purchase accounting adjustments are not recognized;
- Incurred losses are reduced by recoveries under the U S WEST LOC
agreement (see Note 14);
- Bonds are carried at amortized cost.
A reconciliation of the Company's net income (loss) for the calendar years
1993, 1992 and 1991 and shareholder's equity at December 31, 1993, 1992 and
1991, prepared on a GAAP basis, to the amounts reported on a statutory basis, is
as follows (in thousands):
<TABLE>
<CAPTION>
Net income (loss): 1993 1992 1991
------------ --------- ----------
<S> <C> <C> <C>
GAAP BASIS $ (124,388) $ 44,023 $ 54,889
Premium revenue recognition (6,229) (4,595) (6,526)
Losses and loss adjustment expenses incurred 83,677 14,484
Deferred acquisition costs 3,092 (7,660) (10,137)
Deferred income tax provision (benefit) (28,806) (1,676) 4,599
Amortization of bonds 69 236 275
Amortization and write-off of goodwill 81,598 3,718 3,717
Accrual of deferred compensation 2,323 590 (5,387)
Other 2,251 (1,681) 234
------------ --------- ----------
STATUTORY BASIS $ 13,587 $ 47,439 $ 41,664
------------ --------- ----------
------------ --------- ----------
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
SHAREHOLDER'S EQUITY: 1993 1992 1991
------------ --------- ----------
<S> <C> <C> <C>
GAAP BASIS $ 542,468 $ 609,629 $ 571,606
Premium revenue recognition (24,466) (18,237) (13,642)
Loss and loss adjustment expense reserves 34,835 14,484
Deferred acquisition costs (81,992) (85,084) (77,424)
Contingency reserve (97,098) (82,563) (62,299)
Goodwill (81,598) (85,316)
Unrealized gain on investments, net of tax (34,892)
Deferred income taxes 17,044 24,319 25,995
Accrual of deferred compensation 9,062 6,739 6,149
Other (8,011) (8,809) (7,042)
------------ --------- ----------
STATUTORY BASIS (SURPLUS) $ 356,950 $ 378,880 $ 358,027
------------ --------- ----------
------------ --------- ----------
SURPLUS PLUS CONTINGENCY RESERVE $ 454,048 $ 461,443 $ 420,326
------------ --------- ----------
------------ --------- ----------
</TABLE>
7. FEDERAL INCOME TAXES
Effective with the acquisition of the Parent by U S WEST, the Company, its
Subsidiaries and its Parent have elected to file a consolidated federal income
tax return with U S WEST and its subsidiaries. Under a written tax sharing
agreement with U S WEST, the allocation of income taxes is based upon separate
return calculations which provide that benefits or liabilities created by the
Company will be allocated to the Company regardless of whether the benefits
are usable or additional liabilities are incurred in the U S WEST tax returns.
The amount recoverable from U S West included in other assets at December 31,
1993 is $3,804,000. The amount due to U S WEST included in accrued expenses and
other liabilities as December 31, 1992 is $4,449,000.
The cumulative balance sheet effects of deferred tax consequences are (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1993 1992
------------ ---------
<S> <C> <C>
Deferred acquisition costs $ 28,694 $ 28,925
Unearned premium adjustments 564
Contingency reserve 3,960 3,847
Unrealized capital gains 18,788
Other, net 1,119 729
---------- ---------
Total deferred tax liabilities 53,125 33,501
---------- ---------
Loss and loss adjustment expense reserves (12,193) (4,925)
Deferred compensation (3,965) (1,800)
Alternative minimum tax credit (1,135) (1,135)
Unearned premium adjustments (1,322)
---------- ---------
Total deferred tax assets (17,293) (9,182)
---------- ---------
Total deferred income taxes $ 35,832 $ 24,319
---------- ---------
---------- ---------
</TABLE>
13
<PAGE>
No valuation allowance was necessary at December 31, 1993 or 1992. On August
10,1993, federal legislation was enacted which increased the corporate tax rate
from 34% to 35% effective January 1, 1993. The higher tax rate increased the
Company's deferred tax liability by $715,000 at the date of enactment.
A reconciliation of the effective tax rate with the federal statutory rate
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Tax at statutory rate 35.0% 34.0% 34.0%
Tax exempt interest 6.7 (18.6) (9.7)
Amortization and write-off of goodwill (17.5) 2.4 1.7
Other (0.5) 0.2
--------- --------- ---------
Provision for income taxes 23.7% 17.8% 26.2%
--------- --------- ---------
--------- --------- ---------
</TABLE>
8. DIVIDENDS AND CAPITAL REQUIREMENTS
Under New York Insurance Law, the Company may pay a dividend without the
prior approval of the Superintendent of the New York State Insurance Department
only from earned surplus subject to the maintenance of a minimum capital
requirement and the dividend, which together with all dividends declared or
distributed by it during the preceding twelve months, may not exceed the lesser
of 10% of its policyholders' surplus shown on its last filed statement, or
adjusted net investment income, as defined, for such twelve-month period. As of
December 31, 1993, the Company had $35,700,000 available for the payment of
dividends under the above mentioned limitations.
In addition, the insurance departments of New York State and certain other
states and the agencies which rate the bonds insured by the Company and the
Subsidiaries have various requirements relating to the maintenance of certain
minimum ratios of statutory capital and reserves to net insurance in force.
9. CREDIT ARRANGEMENTS AND ADDITIONAL CLAIMS-PAYING RESOURCES
The Company has a credit arrangement aggregating $325,000,000 at December
31, 1993 which is provided by commercial banks and intended for general
application to transactions insured by the Company and the Subsidiaries. As of
December 31, 1993, there have been no borrowings under this arrangement. In
addition, there are credit arrangements assigned to specific insured
transactions.
10. EMPLOYEE BENEFIT PLANS
The Company maintains both a qualified and a non-qualified non-contributory
defined contribution pension plan for the benefit of all eligible employees. The
Company's contributions are discretionary and, when approved, are based upon a
fixed percentage of employee salaries. Pension expense, which is funded as
accrued, amounted to $1,435,000, $1,486,000 and $1,194,000 for the years ended
December 31, 1993, 1992 and 1991, respectively. Of these amounts, $1,214,000,
$1,124,000 and $867,000 have been deferred as policy acquisition costs during
the respective periods.
14
<PAGE>
The Company has an employee retirement savings plan for the benefit of all
eligible employees. The plan permits employees to contribute a percentage of
their salaries up to limits prescribed by the Internal Revenue Service (IRS
Code, Section 401(k)). The Company's contributions are discretionary, and none
have been made.
During 1991, the Company established the Profit Participation Plan as a
long-term incentive compensation plan for the benefit of certain of its
employees. Interests in the previous incentive plan were converted into new plan
interests. Under the plan, the Company is obligated to make payments to certain
employees based on the degree to which the Company achieves three-year
performance targets. Employees are awarded interests in the plan at the
beginning of the three-year performance period, and such interests vest and are
paid over the five-year period subsequent to the award. The Company accrued
$5,558,000 under the plan in 1991 and $3,504,000 in 1993. Of these amounts,
$4,184,000 and $0, respectively, have been deferred as policy acquisition costs.
In addition, of the total amount accrued, approximately $6,500,000 relates to
active employees and approximately $2,600,000 relates to terminated employees.
Prior to the closing of the Initial Public Offering (see Note 15), the
Parent intends to adopt the 1993 Equity Participation Plan and a Supplemental
Restricted Stock Plan.
Pursuant to the Supplemental Restricted Stock Plan, awards of outstanding
units to existing employees under the Profit Participation Plan will be valued
at $0.20 per dollar of award and, at the election of each outstanding employee,
be exchangeable for restricted shares of common stock valued at the initial
public offering price. Substantially all employees of the Company, including all
senior executives, are expected by management to exchange their outstanding
interests in the Profit Participation Plan for restricted shares of common stock
at the public offering price under the Supplemental Restricted Stock Plan. In
exchange for the accrued balance of approximately $6.4 million in such Profit
Participation Plan, the Parent expects to issue 265,353 shares of restricted
stock under the Supplemental Restricted Stock Plan, based upon an assumed
offering price per share of $24.00.
Pursuant to the 1993 Equity Participation Plan, 1,810,780 shares of common
stock (representing 7% of the outstanding shares of common stock at the closing
of the Offering), subject to anti-dilutive adjustment will be reserved for
awards of options and restricted shares of common stock to employees for the
purpose of providing through the grant of long-term incentives, a means to
attract and retain key personnel and to provide to participating officers and
other key employees long-term incentives for sustained high levels of
performance. The 1993 Equity Participation Plan also contains provisions which
permit the Compensation Committee to pay all or a portion of an employee's
bonuses in the form of shares of common stock. Up to an aggregate of 10,000,000
shares may be allocated to equity bonuses. Common stock bonus awards will be
made through open-market purchases of common stock and such common stock will be
credited to employees at a value equal to 85% of the average cost per share
thereof.
Prior to the closing of the Initial Public Offering, the Parent expects to
grant to officers and employees, in respect of future performance, non-qualified
options to purchase an aggregate of 1,036,000 shares of common stock at an
exercise price equal to the initial public offering price of shares of common
stock in the Initial Public Offering. The foregoing options will vest, subject
to continuation of employment and other terms of the option grants, at the rate
of 20% per year, for five one-year periods, with the first period ending on July
1, 1994. Such options expire ten years after the effective dates of their grant.
The Company does not currently provide post-retirement benefits other than
pensions to its employees, nor does it provide post-employment benefits to
former employees.
15
<PAGE>
11. COMMITMENTS AND CONTINGENCIES
The Company leases office space and equipment under non cancelable operating
leases which expire at various dates through 2005.
Future minimum rental payments are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -----------------------
<S> <C>
1994 $ 2,362
1995 2,213
1996 1,651
1997 1,907
1998 1,907
Thereafter 12,566
---------
$ 22,606
---------
---------
</TABLE>
Rent expense for the years ended December 31, 1993, 1992 and 1991 was
$3,743,000, $4,001,000 and $4,223,000, respectively (net of sublease income of
$16,000, $45,000 and $6,000 for the respective periods).
During the ordinary course of business, the Company and the Subsidiaries
have become parties to certain litigation. Management believes that these
matters will be resolved with no material financial impact on the Company.
12. REINSURANCE
The Company reinsures portions of its risks with affiliated (see Note 14)
and unaffiliated reinsurers under quota share treaties and on a facultative
basis. The Company's principal ceded reinsurance program consists of three quota
share treaties. One treaty covers all of the Company's approved regular lines of
business, except municipal obligation insurance. Under this treaty in 1993, the
Company ceded 19.9% of each covered policy, up to a maximum of $39,800,000
insured principal per policy. A second treaty covers the Company's municipal
obligation insurance business. Under this treaty in 1993, the Company ceded 16%
of each covered policy that is classified by the Company as providing municipal
obligation insurance as defined by Article 69 of the New York Insurance Law up
to a limit of $42,667,000 per single risk. At its sole option, the Company could
have increased the ceding percentage to 30% up to $80,000,000 per single risk,
which is defined by revenue source. Under the third treaty in 1993, the Company
ceded 5% to 25% (depending on the type of obligation) of its retention (i.e.,
after cessions of policies under the municipal obligation insurance treaty)
covering substantially all teaching hospital and higher education risks, up to
limits that range from $7,500,000 to $30,000,000 per single risk. At its sole
option, the Company could have increased the ceding percentage from 15% up to
30% (depending on the type of obligation) of its retention, subject to the same
limits. Each of the three treaties allows the Company to withhold a ceding
commission to defray its expenses. The percentage applicable in 1993 under the
non-municipal treaty was decreased from the percentage in effect for 1992, which
was 27.4%, and the percentage in effect in 1991, which was 31.9%. The 1993
municipal obligation treaty cession percentages decreased from the percentage in
1992 and 1991, which was 20% (which could be increased by the Company to 30%).
The 1993 teaching hospital and higher education treaty cession percentages have
changed from the percentages in 1992, which ranged from 10% to 25% of its
retention, which percentage the Company could have increased to 15% to 30%, and
have increased from the percentage in effect in 1991, which was 10% of the
Company's retention after cessions under the municipal obligation treaty, which
percentage the Company could have increased to 20%.
In the event (which management considers to be highly unlikely) that any or
all of the reinsuring companies were unable to meet their obligations to the
Company, the Company would be liable for such defaulted amounts. The Company has
also assumed reinsurance of municipal obligations from unaffiliated insurers.
16
<PAGE>
Amounts reinsured were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Written premiums ceded $ 62,403 $ 52,734 $ 54,817
Written premiums assumed 401 527 746
Earned premiums ceded 32,736 25,575 26,864
Earned premiums assumed 1,546 4,231 4,524
Loss and loss adjustment expense payments ceded 32,299 1,523
Loss and loss adjustment expense payments (recoveries) assumed 3 3 (1)
Incurred loss and loss adjustment expenses ceded 18,628 12,854 2,420
Incurred loss and loss adjustment expenses assumed 47 72 223
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1993 1992
-------------- -------------
<S> <C> <C>
Principal outstanding ceded $ 11,786,492 $ 8,727,482
Principal outstanding assumed 1,242,779 1,503,545
Unearned premium reserve ceded 127,849 98,225
Unearned premium reserve assumed 11,091 12,237
Loss and loss adjustment expense reserves ceded 79 13,750
Loss and loss adjustment expense reserves assumed 459 415
</TABLE>
13. OUTSTANDING EXPOSURE AND COLLATERAL
The Company's policies insure the timely payment of principal and interest
on asset-backed and municipal obligations. The principal amount insured as of
December 31, 1993 and 1992 (net of amounts ceded to other insurers of $6,210 and
$4,781 of asset-backed and $5,576 and $3,946 of municipal, respectively) and the
terms to maturity are as follows (in millions):
<TABLE>
Caption>
DECEMBER 31, 1993 DECEMBER 31, 1992
------------------------- -------------------------
TERMS TO MATURITY ASSET-BACKED MUNICIPAL ASSET-BACKED MUNICIPAL
- ----------------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
0 to 5 Years $ 5,295 $ 1,888 $ 5,872 $ 1,186
5 to 10 Years 1,591 2,771 1,719 1,614
10 to 15 Years 892 2,176 1,629 1,321
15 to 20 Years 593 2,346 276 1,536
20 Years and Above 2,501 4,606 2,372 3,838
------------ ----------- ------------ -----------
Total $ 10,872 $ 13,787 $ 11,868 $ 9,495
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
</TABLE>
17
<PAGE>
The Company limits its exposure to losses from writing financial guarantees
by underwriting investment grade obligations, by diversifying its portfolio and
by maintaining rigorous collateral requirements on asset-backed obligations. The
principal amounts of insured obligations in the asset-backed insured portfolio,
net of amounts ceded, are collateralized by the following types of collateral
(in millions):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
TYPES OF COLLATERAL 1993 1992
- ------------------- --------- ---------
<S> <C> <C>
Residential mortgages $ 3,874 $ 3,765
Consumer receivables 1,443 1,015
Government securities 2,039 2,320
Pooled Corporate Obligations 1,709 1,794
Commercial Mortgage Portfolio
Commercial real estate 195 871
Corporate secured 119 1,072
Investor-owned utility obligations 772 693
Other asset-backed obligations 721 338
--------- ---------
Total asset-backed $ 10,872 $ 11,868
--------- ---------
--------- ---------
</TABLE>
The asset-backed insured portfolio, which aggregated $17.1 billion principal
before reinsurance at December 31, 1993, was collateralized by assets with an
estimated fair value of $21.4 billion. At December 31, 1992, it aggregated $16.6
billion principal before reinsurance and was collateralized by assets with an
estimated fair value of $21.8 billion. Such estimates of the collateral's fair
value, which is reduced as exposure expires, are based upon information at the
inception of the insurance policy. At December 31, 1993 and 1992, the excess of
the estimated fair value of collateral over the principal insured averaged from
105% for government debt backed obligations to 169% for corporate secured
obligations. Collateral for specific transactions is generally not available to
pay claims related to other transactions. The amounts of losses ceded to
reinsurers is determined net of collateral.
The principal amount of insured obligations in the municipal insured
portfolio, net of amounts ceded, included the following types of issues (in
millions):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
TYPES OF ISSUES 1993 1992
- --------------- --------- ---------
<S> <C> <C>
General obligation bonds $ 3,487 $ 2,439
Housing revenue bonds 1,879 1,354
Municipal utility revenue bonds 1,783 1,182
Health care revenue bonds 1,399 925
Tax-supported bonds (non-general obligation) 2,919 1,744
Transportation revenue bonds 710 547
Other municipal bonds 1,610 1,304
--------- ---------
Total Municipal Obligations $ 13,787 $ 9,495
--------- ---------
--------- ---------
</TABLE>
18
<PAGE>
In its asset-backed business, the Company considers geographic concentration
as a factor in underwriting insurance covering securitizations of asset pools
such as residential mortgages or consumer receivables. However, after the
initial issuance of an insurance policy relating to such securitization, the
geographic concentration of the underlying assets may not remain fixed over the
life of the policy. In addition, in writing insurance for other types of
asset-backed obligations, such as securities primarily backed by government or
corporate debt, geographic concentration is not deemed by the Company to be
significant given other more relevant measures of diversification such as issuer
or industry.
The Company seeks to maintain a diversified portfolio of insured municipal
obligations designed to spread its risk across a number of geographic areas. The
following table sets forth by state those states in which municipalities located
therein issued an aggregate of 2% or more of the Company's net par amount
outstanding of insured municipal securities as of December 31, 1993:
<TABLE>
<CAPTION>
NET PAR PERCENT OF TOTAL
NUMBER OF AMOUNT MUNICIPAL NET PAR
STATE ISSUES OUTSTANDING AMOUNT OUTSTANDING
- ----- ----------- ----------- --------------------
(IN MILLIONS)
<S> <C> <C> <C>
Florida 86 $ 1,607 11.6%
New York 62 1,288 9.3
California 123 1,223 8.9
New Jersey 79 1,076 7.8
Lousiana 59 791 5.7
Michigan 45 661 4.8
Pennsylvania 63 658 4.8
Massachusetts 28 630 4.6
Texas 112 563 4.1
Maine 3 368 2.7
Rhode Island 6 286 2.1
All Other States 511 4,099 29.7
Non-U.S. 14 537 3.9
----- ----------- -----
Total 1,191 $ 13,787 100.0%
----- ----------- -----
----- ----------- -----
</TABLE>
14. RELATED PARTY TRANSACTIONS
Allocable expenses are shared by the Company and its Parent on a basis
determined principally by estimates of respective usage as stated in an expense
sharing agreement. The agreement is subject to the provisions of the New York
Insurance Law. Amounts included in other assets at December 31, 1993 and 1992
are $491,000 and 95,000, respectively, for unsettled expense allocations due
from the Parent.
The Company ceded premiums of $14,152,000, $15,863,000 and $8,933,000 to
Tokio Marine and Fire for the years ended December 31, 1993, 1992 and 1991,
respectively. The amounts included in prepaid reinsurance premiums at December
31, 1993 and 1992 for reinsurance ceded to Tokio Marine and Fire were
$28,864,000 and $19,732,000, respectively.
The Company ceded premiums of $28,389,000, $13,436,000 and $17,998,000 on a
quota share basis to affiliates of U S WEST for the years ended December 31,
1993, 1992 and 1991, respectively. The amounts included in prepaid reinsurance
premiums for reinsurance ceded to these affiliates were $50,598,000 and
$33,970,000 at December 31, 1993 and 1992, respectively. Reinsurance recoverable
on unpaid losses ceded to these affiliates at December 31, 1993 and 1992 were
$79,000 and $7,884,000, respectively.
19
<PAGE>
The Company insured debt with an outstanding par value of $76,006,000 and
$114,451,000 as of December 31, 1993 and 1992, respectively, issued by a trust
in which U S WEST Financial Services, Inc. (an affiliate) owns the subordinate
interest. Direct premiums written related to this debt issue were $637,000,
$906,000 and $1,261,000 for the years ended December 31, 1993, 1992 and 1991,
respectively. The direct unearned premium reserve on this issue was $126,000 and
$188,000 as of December 31, 1993 and 1992, respectively.
On November 25, 1992, U S WEST executed a $100,000,000 ten year irrevocable
letter of credit (the "LOC") in favor of the Company. To the extent that losses
and loss adjustment expenses incurred by the Company after December 31, 1992
exceeded by $25,000,000 in the aggregate the case basis reserves, if any,
established as of December 31, 1992 for any insurance policies covered by the
terms of the letter of credit, the Company could draw under the letter of credit
to cover such excess losses and loss adjustment expenses.
In the second quarter of 1993, the LOC was amended to eliminate the
$25,000,000 deductible and to provide for the reinstatement of the initial
$38,000,000 of drawings thereunder. The LOC could be drawn upon when losses and
loss adjustment expenses paid by the Company on commercial real estate
transactions exceeded the case basis reserves at December 31, 1992.
In the second quarter of 1993, the Company incurred losses of approximately
$63,000,000 for claims on three commercial mortgage transactions insured by the
Company. In the third quarter of 1993, the Company increased its general reserve
by $18,400,000 to reflect the potential for loss in the commercial mortgage
portfolio and recorded a reinsurance recoverable due to the protection against
loss provided by the LOC. While these losses were charged to the Company's
results of operations, the Company's capital position was unaffected since such
losses were covered by the LOC, drawings against which have been accounted for
as a capital contribution and a non-cash financing activity, net of the related
tax effect, under generally accepted accounting principles. In late June and
early July 1993, the three insured commercial mortgage transactions for which
case basis reserves had been established were refinanced with Company-insured
obligations. In connection with such refinancings, the Company paid losses of
approximately $34,800,000 and U S WEST paid losses of approximately $63,000,000
through drawings under the LOC. After giving effect to such drawings, the amount
available for future drawings under the LOC was reinstated to $75,000,000. In
December 1993, the Company completed the Restructuring (see Note 15) and
terminated the LOC; therefore, the $18,400,000 reinsurance recoverable, recorded
to offset the $18,400,000 increase in the General Reserve at such date, and the
related capital contribution ($11,960,000 net of tax) were written off.
15. INITIAL PUBLIC OFFERING AND RESTRUCTURING
In the second quarter of 1993, U S WEST announced that it would be divesting
its non-telecommunications businesses to redeploy capital into its
telecommunications businesses. In connection therewith, the Parent has filed a
registration statement with the Securities and Exchange Commission in
contemplation of an Initial Public Offering (the "Offering").
In December 1993, the Parent took certain steps (the "Restructuring") to
reduce its risk of loss from commercial mortgage transactions previously insured
by the Company. As part of the Restructuring, in December 1993, U S WEST
purchased an additional 3,000,000 shares of the Parent's common stock at $19.68
per share, the GAAP book value per share as of November 30, 1993, as adjusted
for the Restructuring. Also, the Parent made a capital contribution of
$59,040,000 to the Company. Pursuant to the Restructuring, (i) the Company and
U S WEST terminated the LOC; (ii) the Company redeemed, for approximately
$78,500,000, shares of its common stock held by the Parent; (iii) the Parent
contributed the proceeds of the stock redemption to Commercial Reinsurance
Company ("Commercial Re"), a newly formed reinsurance company; (iv) the Parent
distributed all of the outstanding shares of Commercial Re to the existing
shareholders of the Parent in proportion to their ownership interests in the
Parent at the time; and (v) the Company paid approximately $103,308,000, less a
ceding commission of approximately $5,370,000, as a premium to Commercial Re
to assume approximately 64.4% of the Company's exposure, on a weighted average
basis, on commercial mortgage transactions previously insured by the Company. In
addition, the Company will cede to Commercial Re a percentage of the future
installments (less ceding commission) on such deals.
20
<PAGE>
In connection with the Restructuring, the Company recognized a pre-tax loss
of approximately $85,409,000 (approximately $55,516,000 after taxes) due to the
amount by which the reinsurance premium paid to Commercial Re exceeded the
carrying amount of the related unearned premium reserve.
16. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair values have been determined by the Company
using available market information and appropriate valuation methodologies.
However, considerable judgment is necessary to interpret the data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amount the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
Long-term bonds -- The carrying amount of long-term bonds represents fair
value. The fair value of long-term bonds is based upon quoted market price.
Short-term investments -- The carrying amount is fair value which
approximates cost due to the short maturity of these instruments.
Cash and cash equivalents, receivable for investments sold and payable for
investments purchased -- The carrying amount approximates fair value because of
the short maturity of these instruments.
Unearned premiums net of prepaid reinsurance premiums -- The carrying amount
of unearned premiums net of prepaid reinsurance premiums represents the
Company's future premium revenue, net of reinsurance, on policies where the
premium was received at the inception of the insurance contract. The fair value
of unearned premiums net of prepaid reinsurance premiums is an estimate of the
premiums that would be paid under a reinsurance agreement with a third party to
transfer the Company's financial guarantee risk, net of that portion of the
premium retained by the Company to compensate it for originating and servicing
the insurance contract.
Installment premiums -- Consistent with industry practice, there is no
carrying amount for installment premiums since the Company will receive premiums
on an installment basis over the term of the insurance contract. Similar to
unearned premiums, the fair value of installment premiums is the estimated
present value of the future contractual premium revenues that would be paid
under a reinsurance agreement with a third party to transfer the Company's
financial guarantee risk, net of that portion of the premium retained by the
Company to compensate it for originating and servicing the insurance contract.
Loss and loss adjustment expenses net of reinsurance recoverable on unpaid
losses --The carrying amount and fair value is the present value of the expected
cash flows for specifically identified claims and potential losses in the
Company's insured portfolio.
<TABLE>
<CAPTION>
DECEMBER 31, 1993 DECEMBER 31, 1992
------------------------ ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
(DOLLARS IN THOUSANDS) AMOUNT FAIR VALUE AMOUNT FAIR VALUE
- -------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Assets:
Long-term bonds $ 736,872 $ 736,872 $ 705,789 $ 726,548
Short-term investments 31,720 31,720 6,799 6,799
Cash and cash equivalents 15,770 15,770 13,483 13,483
Liabilities:
Unearned premiums, net of prepaid reinsurance premiums 200,316 157,347 198,848 151,959
Loss and loss adjustment expenses, net of reinsurance
recoverable on unpaid losses 36,015 36,015 58,680 58,680
Payable for investments purchased 30,741 30,741
Off-balance-sheet instruments:
Installment premiums 61,947 63,783
</TABLE>
21
<PAGE>
17. NON-RECURRING CHARGES
As a result of certain events which occurred in the fourth quarter of 1993,
the Company recognized a non-recurring charge of approximately $9,970,000 before
taxes ($6,481,000 after taxes) against 1993 fourth quarter operations. This
charge primarily related to (i) a $2,812,000 write-down to net realizable value
of the Company's interest, received as additional consideration in connection
with an insured transaction, in the residual cash flow of the assets
collateralizing the insured transaction, (ii) the acceleration of the
amortization of deferred general liquidity facility fees of $2,105,000 and legal
fees of $203,000, (iii) a $2,900,000 accrual for salary and related benefits
primarily due to a profit sharing plan settlement for terminated employees in
the Company's Profit Participation Plan and (iv) $1,950,000 primarily relating
to the acceleration of deferred acquisition expenses (net of amortization) as a
result of the non-recurring charges.
22
