<PAGE>
______________________________________________________________________________
______________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 1-8611
U S WEST, Inc.
A Colorado Corporation IRS Employer No. 84-0926774
7800 East Orchard Road, Englewood, Colorado 80111-2526
Telephone Number 303-793-6500
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes _X_ No ___
At April 30, 1995, 470,025,644 shares were outstanding.
<PAGE>
U S WEST, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Page
- ---- ----
<S> <C>
PART I - FINANCIAL INFORMATION
1. Financial Statements
Consolidated Statements of Operations -
Three months ended March 31, 1995 and 1994 3
Consolidated Balance Sheets -
March 31, 1995 and December 31, 1994 4
Consolidated Statements of Cash Flows -
Three months ended March 31, 1995 and 1994 6
Consolidated Statements of Shareowners' Equity -
Three months ended March 31, 1995 and 1994 7
Notes to Consolidated Financial Statements 8
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
PART II - OTHER INFORMATION
1. Legal Proceedings 22
6. Exhibits and Reports on Form 8-K 22
</TABLE>
<PAGE>
Form 10-Q - Part I
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) U S WEST, INC.
DOLLARS IN MILLIONS (EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
_______________________________________________________________________________
THREE MONTHS ENDED MARCH 31, 1995 1994
_______________________________________________________________________________
<S> <C> <C>
Sales and other revenues $2,828 $2,641
Employee-related expenses 978 911
Other operating expenses 510 477
Taxes other than income taxes 114 108
Depreciation and amortization 560 503
Interest expense 128 109
Equity losses in unconsolidated ventures 57 35
Gain on sales of rural telephone exchanges 63 24
Other expense - net 6 -
-----------------------
Income before income taxes 538 522
Provision for income taxes 208 198
-----------------------
NET INCOME $ 330 $ 324
-----------------------
-----------------------
EARNINGS PER COMMON SHARE $0.70 $0.73
DIVIDENDS PER COMMON SHARE $0.535 $0.535
AVERAGE COMMON SHARES OUTSTANDING
(thousands) 468,557 444,378
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
Form 10-Q - Part I
CONSOLIDATED BALANCE SHEETS (UNAUDITED) U S WEST, INC.
DOLLARS IN MILLIONS
<TABLE>
<CAPTION>
_______________________________________________________________________________
MARCH 31, DECEMBER 31,
1995 1994
_______________________________________________________________________________
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 148 $ 209
Accounts and notes receivable 1,664 1,693
Inventories and supplies 199 189
Deferred tax asset 343 352
Other 335 323
--------------------------------
Total current assets 2,689 2,766
--------------------------------
Gross property, plant and equipment 31,248 31,014
Accumulated depreciation 17,318 17,017
--------------------------------
Property, plant and equipment - net 13,930 13,997
Investment in Time Warner Entertainment 2,509 2,522
Intangible assets - net 1,887 1,858
Investment in international ventures 994 881
Net investment in assets held for sale 414 302
Other assets 1,176 878
--------------------------------
Total assets $23,599 $23,204
--------------------------------
--------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
Form 10-Q - Part I
CONSOLIDATED BALANCE SHEETS (UNAUDITED), CONTINUED U S WEST, INC.
DOLLARS IN MILLIONS
<TABLE>
<CAPTION>
_______________________________________________________________________________
MARCH 31, DECEMBER 31,
1995 1994
_______________________________________________________________________________
<S> <C> <C>
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities
Short-term debt $3,565 $2,837
Accounts payable 729 944
Employee compensation 316 367
Dividends payable 252 251
Current portion of restructuring charges 359 337
Other 1,364 1,278
--------------------------
Total current liabilities 6,585 6,014
--------------------------
Long-term debt 5,137 5,101
Postretirement and other postemployment benefit
obligations 2,281 2,502
Deferred taxes, credits and other 2,013 2,154
Preferred stock subject to mandatory redemption 51 51
Common shareowners' equity
Common shares - no par, 2,000,000,000
authorized, 469,934,527 and 469,343,048
outstanding, respectively 8,092 8,056
Cumulative deficit (360) (458)
LESOP guarantee (187) (187)
Foreign currency translation adjustments (13) (29)
--------------------------
Total common shareowners' equity 7,532 7,382
--------------------------
Total liabilities and common shareowners' equity $23,599 $23,204
--------------------------
--------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
Form 10-Q - Part I
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) U S WEST, INC.
IN MILLIONS
<TABLE>
<CAPTION>
_______________________________________________________________________________
THREE MONTHS ENDED MARCH 31, 1995 1994
_______________________________________________________________________________
<S> <C> <C>
OPERATING ACTIVITIES
Net income $330 $324
Adjustments to net income:
Depreciation and amortization 560 503
Gain on sales of rural telephone exchanges (63) (24)
Equity losses in unconsolidated ventures 57 35
Deferred income taxes and amortization
of investment tax credits 20 75
Changes in operating assets and liabilities:
Restructuring payments (82) (22)
Accounts and notes receivable 32 26
Inventories, supplies and other (43) (59)
Accounts payable and accrued liabilities (103) (35)
Other adjustments - net (167) (66)
------------------------
Cash provided by operating activities 541 757
------------------------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment (617) (654)
Investment in international ventures (182) (70)
Proceeds from disposals of property, plant
and equipment 92 18
Cash (to) net investment in assets held for sale (60) -
Other - net (63) (6)
------------------------
Cash (used) for investing activities (830) (712)
------------------------
FINANCING ACTIVITIES
Net proceeds from short-term debt 678 335
Proceeds from issuance of long-term debt - 182
Repayments of long-term debt (168) (116)
Dividends paid on common stock (230) (223)
Proceeds from issuance of common stock 11 256
Purchases of treasury stock (63) -
------------------------
Cash provided by financing activities 228 434
------------------------
Cash (used for) provided by continuing operations (61) 479
------------------------
Cash (to) discontinued operations - (161)
------------------------
CASH AND CASH EQUIVALENTS
Increase (decrease) (61) 318
Beginning balance 209 128
------------------------
Ending balance $ 148 $ 446
------------------------
------------------------
</TABLE>
See Notes to Consolidated Financial Statements
6
<PAGE>
Form 10-Q - Part I
CONSOLIDATED STATEMENTS OF
SHAREOWNERS' EQUITY (UNAUDITED) U S WEST, INC.
DOLLARS IN MILLIONS
<TABLE>
<CAPTION>
_______________________________________________________________________________
THREE MONTHS ENDED MARCH 31, 1995 1994
_______________________________________________________________________________
<S> <C> <C>
COMMON SHARES
Balance at beginning of period $8,056 $6,996
Issuance of common stock 31 66
Settlement of litigation - 210
Benefit trust contribution (OPEB) 61 185
Purchase of treasury stock (63) -
Other 7 -
------------------------
Balance at end of period 8,092 7,457
CUMULATIVE DEFICIT
Balance at beginning of period (458) (857)
Net income 330 324
Dividends declared (252) (242)
Market value adjustment for debt securities 20 (40)
------------------------
Balance at end of period (360) (815)
LESOP GUARANTEE
Balance (187) (243)
FOREIGN CURRENCY TRANSLATION
ADJUSTMENTS
Balance at beginning of period (29) (35)
Activity 16 11
------------------------
Balance at end of period (13) (24)
------------------------
TOTAL COMMON SHAREOWNERS' EQUITY $7,532 $6,375
------------------------
------------------------
COMMON SHARES AUTHORIZED AT MARCH 31, (THOUSANDS) 2,000,000 2,000,000
------------------------
------------------------
COMMON SHARES OUTSTANDING (THOUSANDS)
Beginning balance 469,343 441,140
Issuance of common stock 794 1,580
Settlement of litigation - 5,506
Benefit trust contribution (OPEB) 1,500 4,600
Purchase of treasury stock (1,702) -
-----------------------
Ending balance 469,935 452,826
-----------------------
-----------------------
</TABLE>
See Notes to Consolidated Financial Statements.
7
<PAGE>
Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
(UNAUDITED)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATED FINANCIAL STATEMENTS
The Consolidated Financial Statements have been prepared by U S WEST, Inc.
("U S WEST" or "Company"), pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). Certain information and footnote
disclosures normally accompanying financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such SEC rules and regulations. In the opinion of the Company's
management, the Consolidated Financial Statements include all adjustments,
consisting of only normal recurring adjustments, necessary to present fairly the
financial information set forth therein. It is suggested that these
Consolidated Financial Statements be read in conjunction with the financial
statements and notes thereto included in the Company's Annual Report for the
year ended December 31, 1994.
Certain reclassifications within the Consolidated Financial Statements have been
made to conform to the current year presentation.
B. RECAPITALIZATION PROPOSAL
The Board of Directors of U S WEST, a Colorado corporation, has adopted a
proposal (the "Recapitalization Proposal") that would change the state of
incorporation of U S WEST from Colorado to Delaware and create two classes of
common stock that are intended to reflect separately the performance of the
Company's communications and multimedia businesses. Under the Recapitalization
Proposal, shareholders of the Company will be asked to approve an Agreement and
Plan of Merger between the Company and U S WEST, Inc., a Delaware corporation
and wholly owned subsidiary of U S WEST ("U S WEST Delaware"), pursuant to which
U S WEST would be merged (the "Merger") with and into U S WEST Delaware with U S
WEST Delaware continuing as the surviving corporation. In connection with the
Merger, the Certificate of Incorporation of U S WEST Delaware would be amended
and (as so amended and restated, the "Restated Certificate") to, among other
things, designate two classes of common stock of U S WEST Delaware, one class of
which would be authorized as U S WEST Communications Group Common Stock
("Communications Stock"), and the other class of which would be authorized as U
S WEST Media Group Common Stock ("Media Stock"). Upon consummation of the
Merger, each share of existing common stock of the Company would be
automatically converted into one share of Communications Stock and one share of
Media Stock.
8
<PAGE>
Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(DOLLARS IN MILLIONS)
(UNAUDITED)
The Communications Stock and Media Stock are designed to provide shareholders
with separate securities that are intended to reflect separately the
communications businesses of U S WEST Communications and certain other
subsidiaries of the Company (the "Communications Group") and the Company's
multimedia businesses (the "Media Group" and, together with the Communications
Group, the "Groups").
The Communications Group is comprised of U S WEST Communications, Inc. ("U S
WEST Communications"), U S WEST Communications Services, Inc., U S WEST Federal
Services, Inc., U S WEST Advanced Technologies, Inc. and U S WEST Business
Resources, Inc.
The Media Group is comprised of U S WEST Marketing Resources Group, Inc., a
publisher of White and Yellow Pages telephone directories, and provider of
multimedia content and services, U S WEST New Vector Group, Inc., which provides
communications and information products and services over wireless networks, U S
WEST Multimedia Communications, Inc., which owns domestic cable television
operations and investments and U S WEST International Holdings, Inc., which
primarily owns investments in international cable and telecommunications,
wireless communications and directory publishing operations.
Under the Recapitalization Proposal, dividends to be paid to the holders of
Communications Stock will initially be at a quarterly rate of $0.535 per share.
Dividends on the Communications Stock will be paid at the discretion of the
Board of Directors of U S WEST, based primarily upon the financial condition,
results of operations and business requirements of the Communications Group and
the Company as a whole. With regard to the Media Stock, the Board of Directors
of U S WEST currently intends to retain future earnings, if any, for the
development of the Media Group's businesses and does not anticipate paying
dividends on the Media Stock in the foreseeable future.
A preliminary proxy statement on the Recapitalization Proposal was filed with
the Securities and Exchange Commission on May 12, 1995.
9
<PAGE>
Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(DOLLARS IN MILLIONS)
(UNAUDITED)
C. INVESTMENT IN TIME WARNER ENTERTAINMENT
On September 15, 1993, U S WEST acquired 25.51 percent pro rata priority capital
and residual equity interests in Time Warner Entertainment Company L.P. ("TWE").
Summarized operating results for TWE follow:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, 1995 1994
- -----------------------------------------------------------------------------
<S> <C> <C>
Revenues $2,046 $1,919
Operating expenses* 1,855 1,716
Interest and other - net** 176 151
------------------
Income before income taxes $ 15 $ 52
------------------
------------------
Net income $ 4 $ 48
------------------
------------------
<FN>
* Includes 1995 and 1994 depreciation and amortization of $226 and $213,
respectively.
** Includes 1995 and 1994 corporate services of $15.
</TABLE>
The Company accounts for its investment in TWE under the equity method of
accounting. U S WEST's recorded share of TWE operating results represents
allocated TWE net income or loss adjusted for the amortization of the excess of
fair market value over the book value of the partnership net assets. The
Companys recorded shares of TWE operating results was $(13) and $(12) for the
three months ended March 31, 1995 and 1994, respectively.
10
<PAGE>
Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(DOLLARS IN MILLIONS)
(UNAUDITED)
D. CONTINGENCIES
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 PSC's initial order denied a
refund request from interexchange carriers and other parties related to the Tax
Reform Act of 1986. This action is still in the discovery process. If a formal
filing - made in accordance with the remand from the Supreme Court - alleges
that the exceptions apply, the range of possible risk to U S WEST
Communications is $0 to $140.
E. NET INVESTMENT IN ASSETS HELD FOR SALE
Effective January 1, 1995, the capital assets segment has been accounted for in
accordance with Staff Accounting Bulletin No. 93, issued by the Securities
Exchange Commission, which requires discontinued operations not disposed of
within one year of the measurement date to be accounted for prospectively in
continuing operations as net investment in assets held for sale. The net
realizable value of the assets will be reevaluated on an ongoing basis with
adjustments to the existing reserve, if any, being charged to continuing
operations. Prior to January 1, 1995, the entire capital assets segment was
accounted for as discontinued operations in accordance with Accounting
Principles Board Opinion No. 30.
Sales and other revenues of net investment in assets held for sale were
$75 and $305 for the three months ended March 31, 1995 and 1994, respectively.
Included in sales and other revenues are the sale of properties for
approximately $47 and $230 during the first quarter of 1995 and 1994,
respectively. The sales were in line with Company estimates.
11
<PAGE>
Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(DOLLARS IN MILLIONS)
(UNAUDITED)
The components of "net investment in assets held for sale" follow:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
DOLLARS IN MILLIONS 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 47 $ 7
Finance receivables - net 1,070 1,073
Investment in real estate - net 421 465
Bonds, at market value 138 155
Investment in FSA 349 329
Other assets 264 362
---------------------
Total assets 2,289 2,391
---------------------
LIABILITIES
Debt 1,032 1,283
Deferred income taxes 713 693
Accounts payable and accrued liabilities 120 103
Minority interests 10 10
---------------------
Total liabilities 1,875 2,089
---------------------
Net investment in assets held for sale $ 414 $ 302
---------------------
---------------------
</TABLE>
Selected financial data for U S WEST Financial Services follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Three Months Ended March 31, 1995 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
Operating revenues $10 $17
- ------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
DOLLARS IN MILLIONS 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C>
Net finance receivables $ 976 $ 981
Total assets 1,338 1,331
Total debt 531 533
Total liabilities 1,268 1,282
Shareowner's equity 70 49
- ------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
RESULTS OF OPERATIONS
Comparative details of continuing operations for the three months ended March 31
follow:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
PERCENT
THREE MONTHS ENDED MARCH 31, 1995 1994 CHANGE
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales and other revenues $2,828 $2,641 7.1
Employee-related expenses 978 911 7.4
Other operating expenses 510 477 6.9
Taxes other than income taxes 114 108 5.6
Depreciation and amortization 560 503 11.3
Interest expense 128 109 17.4
Equity losses in unconsolidated ventures 57 35 62.9
Gain on sales of rural telephone exchanges 63 24 --
Other expense - net 6 -- --
Provision for income taxes 208 198 5.1
------------------------------
Net income $330 $324 1.9
------------------------------
------------------------------
Earnings per common share $0.70 $0.73 (4.1)
------------------------------
------------------------------
</TABLE>
U S WEST's first quarter net income was $291, a decrease of $18, or 5.8 percent,
over first quarter 1994, excluding the effects of certain rural telephone
exchange sales in first quarter 1995 and 1994. After tax gains on the sales of
certain rural telephone exchanges were $39 ($.08 per share) and $15 ($.03 per
share) in first-quarter 1995 and 1994, respectively. The decrease in net income
is primarily attributable to expansion of international ventures, resulting in
increased equity losses. First quarter 1995 earnings per common share were $.62
compared with $.70 in 1994, excluding the effects of rural telephone exchange
sales. Earnings per share reflects approximately 24 million additional average
shares outstanding, of which 12.8 million were issued in connection with the
December 1994 purchase of cable television properties in the Atlanta, Georgia
area (the "Atlanta Systems").
Increased demand for the Company's services resulted in growth in earnings
before interest, taxes, depreciation, amortization and other ("EBITDA") of 7.1
percent. EBITDA also excludes the sales of certain rural telephone exchanges
and equity losses. The Company believes EBITDA is an important indicator of the
operational strength of its businesses.
13
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS), CONTINUED
SALES AND OTHER REVENUES
An analysis of the change in U S WEST's consolidated sales and other revenues
follows:
<TABLE>
<CAPTION>
Lower
Price (Higher) Inc (Dec)
Changes Refunds Demand Other $ %
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U S WEST Communications:
Local service $ 2 $ 9 $ 54 $ -- $ 65 6.6
Interstate access (8) (9) 44 -- 27 4.8
Intrastate access (5) 2 11 6 14 8.0
Long-distance network (9) -- (12) (31) (52) (14.8)
Other services -- -- -- 5 5 3.4
------------------------------------------------------------
$(20) $ 2 $ 97 $(20) 59 2.7
Cellular 34 20.3
Publishing 16 6.7
Domestic cable 54 --
International directories 14 --
Other 10 76.9
- ---------------------------------------------------------------------------------------------------------
Increase in Sales and Other
Revenues $187 7.1
------------
------------
</TABLE>
The increase in sales and other revenues was primarily due to increased demand
for services at U S WEST Communications, the December 1994 acquisition of the
Atlanta Systems and continued subscriber growth in the Company's cellular
business. The Company increased its cellular subscriber base by 58 percent, to
approximately 1,048,000, during the last 12 months.
Local service revenues at U S WEST Communications increased principally as a
result of higher demand for services, as evidenced by an increase of 494,000
access lines, or 3.5 percent, during the last 12 months. Access line growth was
4.2 percent as adjusted for the sale of approximately 91,000 rural telephone
access lines during the last 12 months.
14
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS), CONTINUED
Higher revenues from interstate access services resulted from an increase of 9.2
percent in interstate billed access minutes of use, which more than offset the
effects of price reductions and refunds.
Multiple toll carrier plans ("MTCP") were implemented in Oregon and Washington
in May and July 1994, respectively. These regulatory arrangements allow
independent telephone companies to act as toll carriers. The impact to U S WEST
Communications in the first quarter was a loss of $31 in long-distance revenue,
partially offset by an increase of $6 to intrastate access revenue, and a
decrease of $21 to other operating expenses (i.e. access expense).
In addition to the effects of MTCP, intrastate access charges increased as a
result of higher demand, while long-distance network revenues continue to be
impacted by competition.
Revenues from other services increased primarily as a result of continued market
penetration in voice messaging services.
COSTS AND EXPENSES
Consolidated employee-related expenses increased by $67, or 7.4 percent, for the
first quarter as compared with the same period last year. Approximately $45 of
this increase is a result of overtime payments and contract labor related to
customer service and streamlining initiatives at U S WEST Communications,
partially offset by lower health-care and other employee benefit costs. The
remainder of the increase is primarily attributable to the 1994 purchases of the
Atlanta Systems and U S WEST's purchase of Thomson Directories in the United
Kingdom.
Consolidated other operating expenses increased by $33, or 6.9 percent, for the
first quarter as compared with the same period last year. The 1994 purchases of
the Atlanta Systems and Thomson Directories increased other operating expenses
by $31. An increase in selling costs of $13 related to expansion of the
cellular customer base also contributed to the increase in other operating
expenses. Partially offsetting these cost increases were the MTCP effects on
other operating expenses at U S WEST Communications.
Increased depreciation and amortization expense was attributable to the effects
of a higher depreciable asset base at U S WEST Communications and the purchase
of the Atlanta Systems.
15
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS), CONTINUED
Equity losses in unconsolidated ventures increased primarily due to increased
network expansion costs at Mercury One-2-One.
Interest expense increased as a result of higher rates on short term commercial
paper at U S WEST Communications and the purchase of the Atlanta Systems,
partially financed through the issuance of short-term debt.
The effective tax rate was 38.7 percent in the first quarter compared with 37.9
percent in the same period last year. The increase is primarily attributable to
the effects of the amortization of intangible assets and goodwill associated
with the Atlanta Systems acquisition.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations decreased by $216 compared with the first quarter of
1994, primarily due to an increase of $94 in postretirement benefit funding and
an increase of $60 in Restructuring Plan expenditures.
The Company from time to time engages in discussions regarding acquisitions. The
Company may fund such acquisitions with internally generated funds, debt or
equity. The incurrence of indebtedness to fund such acquisitions and/or the
assumption of indebtedness in connection with acquisitions, if significant,
could result in a downgrading of the credit rating of the Company or U S WEST
Communications.
U S WEST invested approximately $182 in international businesses in the first
quarter of 1995, primarily in Malaysia and the Czech Republic.
In the first quarter of 1995, U S WEST received cash proceeds of $88 from the
sale of certain rural telephone exchanges.
During the first quarter, debt increased by $764 and the debt-to-capital ratio
increased from 51.8 percent at December 31, 1994, to 53.6 percent at March 31,
1995. The increase in debt and the debt-to-capital ratio was primarily related
to the cash funding of a portion of the Company's postretirement benefit
obligation, the funding of international investments and the reclassification of
certain debt from net assets held for sale to continuing operations.
In the first quarter of 1995, U S WEST purchased 1,702,200 shares of U S WEST
Common Stock for $63, at an average price of $37.02 per share.
16
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS), CONTINUED
RESTRUCTURING
The Company's 1993 results reflected a $1 billion restructuring charge (pretax).
The related restructuring 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 Restructuring Plan, the Company is developing
new systems that will enable it to monitor networks to reduce the risk of
service interruptions, activate telephone service on demand, provide automated
inventory systems and centralize its service centers so that customers can have
their telecommunications needs resolved with one phone call. The Company is
consolidating its 560 customer service centers into 26 centers in 10 cities and
reducing its total work force by approximately 9,000 employees (including the
remaining employee reductions associated with the restructuring plan announced
in 1991).
Following is a schedule of the costs included in the Restructuring Plan:
<TABLE>
<CAPTION>
Actual Estimate
-------------------------------
1993 1994 1995 1996 1997 Total
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cash expenditures:
Employee separation $-- $ 19 $ 62 $ 75 $ 74 $ 230
Systems development -- 127 144 129 -- 400
Real estate -- 50 80 -- -- 130
Relocation -- 21 54 4 31 110
Retraining and other -- 16 19 10 20 65
----------------------------------------
Total cash expenditures -- 233 359 218 125 935
Asset write-down 65 -- -- -- -- 65
----------------------------------------
Total Plan 65 233 359 218 125 1,000
Remaining 1991 plan employee costs -- 56 -- -- -- 56
----------------------------------------
Total (1) $65 $289 $359 $218 $125 $1,056
----------------------------------------
----------------------------------------
<FN>
(1) The Restructuring Plan also provides for capital expenditures of $490 over
the life of the Restructuring Plan.
</TABLE>
17
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS), CONTINUED
Employee separation costs include severance payments, health-care coverage and
postemployment education benefits. Systems development costs include the
replacement of existing, single-purpose systems with new systems designed to
provide integrated, end-to-end customer service. The work-force reductions
would not be possible without the development and installation of the new
systems, which will eliminate the current, labor-intensive interfaces between
existing processes. Real estate costs include preparation costs for the new
service centers. The relocation and retraining costs are related to moving
employees to the new service centers and retraining employees on the new methods
and systems required in the new, restructured mode of operation.
The Company estimates that full implementation of the Restructuring Plan will
reduce employee-related expenses by approximately $400 per year. These savings
are expected to be offset by the effects of inflation.
PROGRESS UNDER THE RESTRUCTURING PLAN:
Following is a reconciliation of restructuring reserve activity during first
quarter 1995:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
RESERVE BALANCE RESERVE BALANCE
DECEMBER 31, 1994 1995 ACTIVITY MARCH 31, 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Employee separations
Managerial $75 $4 $71
Occupational 136 9 127
-----------------------------------------------------
Total separations 211 13 198
Systems Development
Service delivery 52 3 49
Service assurance 52 7 45
Capacity provisioning 122 24 98
All other 47 3 44
-----------------------------------------------------
Total systems 273 37 236
Real estate 80 22 58
Relocation 89 5 84
Retraining and other 49 5 44
-----------------------------------------------------
Total $702 $82 $620
-----------------------------------------------------
-----------------------------------------------------
<CAPTION>
1994 SEPARATIONS 1995 SEPARATIONS TOTAL
SEPARATIONS
-----------------------------------------------------
<S> <C> <C> <C>
Employee separations
Managerial 497 125 622
Occupational 1,683 491 2,174
-----------------------------------------------------
Total 2,180 616 2,796
-----------------------------------------------------
-----------------------------------------------------
</TABLE>
18
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS), CONTINUED
RECAPITALIZATION PROPOSAL
The Board of Directors of U S WEST has adopted a proposal that would change the
state of incorporation of U S WEST from Colorado to Delaware and create two
classes of common stock, the Communications Stock and the Media Stock, which are
intended to reflect separately the performance of the communications and
multimedia businesses. A preliminary proxy statement on the Recapitalization
Proposal was filed with the Securities and Exchange Commission on May 12, 1995.
For a more complete discussion on the Recapitalization
Proposal see Footnote B in the Notes to the Consolidated Financial Statements.
AIRTOUCH COMMUNICATIONS JOINT VENTURE
On July 25, 1994, AirTouch and U S WEST announced a definitive agreement to
combine their domestic wireless operations. The initial equity ownership of the
wireless joint venture will be approximately 70 percent by AirTouch and
approximately 30 percent by U S West. The transaction is expected to close in
the third quarter of 1995 upon obtaining federal and state regulatory approvals.
After closing, the earnings of the Company will reflect its 30 percent interest
in the joint venture. The wireless operations of both parties will initially
continue operating as separate entities owned by the individual partners, but
will receive support services on a contract basis from a joint wireless
management company.
PERSONAL COMMUNICATIONS SERVICES ("PCS") ALLIANCE
In October 1994, AirTouch and U S WEST agreed to form a strategic wireless
alliance with Bell Atlantic and NYNEX. As part of this alliance, the AirTouch-U
S WEST PCS Partnership and a partnership formed between Bell Atlantic and NYNEX
formed PCS Primeco, L.P. ("PCS Primeco") for the purpose of bidding on PCS
licenses being auctioned by the FCC. The objective of PCS Primeco is to build
and operate PCS networks where its partners do not operate cellular networks,
thus enabling them to establish a national wireless alliance. In the FCC
auction, which concluded in March 1995, PCS Primeco was awarded PCS licenses in
11 markets covering 57 million POPs including licenses in Chicago, Dallas,
Tampa, Houston, Miami and New Orleans. PCS Primeco will be governed by an
executive committee made up of three Bell Atlantic-NYNEX representatives and
three AirTouch-U S WEST representatives.
19
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS), CONTINUED
REGULATORY
On April 28, 1995, the D.C. District Court, which has jurisdiction over
construction, implementation, modification and enforcement of the modified final
judgment ("MFJ"), waived the MFJ's restriction on the regional Bell operating
companies' ("RBOCs") provision of wireless long-distance service. The ruling
contained a number of provisions, including a requirement that local cellular
markets be competitive before long-distance services can be offered. The ruling
positions U S WEST to begin offering long-distance network services through its
cellular subsidiary. On April 24, 1995, the RBOCs also asked the D.C. District
Court for a waiver of the MFJ's restriction on the provision by the RBOC's of
information services on an interexchange basis. These requests for waivers
follow recommendations by the Department of Justice that the RBOCs be allowed to
provide wireless long-distance services and information services on an
interexchange basis.
In January 1995, the 9th U.S. Circuit Court of Appeals in San Francisco upheld
the June 15, 1994, Seattle Federal District Court ruling that affirmed U S
WEST's challenge to the constitutionality of the telephone company video
programming restriction in the 1984 Cable Act. The Act prevents telephone
companies from providing video programming within their regions. U S WEST
argued and the courts agreed, that the restriction violates its First Amendment
right to free speech. The decision would allow the Company to provide video
programming directly to its regional telephone subscribers. The Federal
Government can appeal to the U. S. Supreme Court. U S WEST Communications is
evaluating its options in light of this ruling. In January 1995, the Federal
Communications Commission ("FCC") instituted a proceeding to modify and
promulgate rules on the provision of video programming. In March 1995, the FCC
announced that it would not enforce its cross-ownership ban on local exchange
carriers providing video programming directly to subscribers in their local
telephone exchange service areas.
The Company's interstate services have been subject to price cap regulation
since January 1991. Price caps are an alternative form of regulation designed
to limit prices rather than profits. However, the FCC's price cap plan includes
sharing of earnings in excess of authorized levels. In March 1995, the FCC
issued an interim order on price cap regulation. This order increases the
productivity factor used in the price cap index, thus reducing the access prices
paid by interexchange carriers to local telephone companies. The interim order
also provides for a no-sharing productivity factor option and for increased
flexibility for adjusting prices downward in response to competition. During
the past several years the Company has used the higher productivity factor in
determining its access prices. Consequently, no significant impact is expected
in 1995 as a result of the interim order.
20
<PAGE>
Form 10-Q - Part I
Item 2. Management's' Discussion and Analysis of Financial Condition and
Results of Operations (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS), CONTINUED
Though Congress failed to pass telecommunications reform legislation in 1994,
new telecommunications legislation has been introduced in 1995. The thrust of
this legislation is to open up the network of local exchange carriers to further
competition, and to eliminate certain prohibitions upon local exchange carriers
entering into other lines of business. The proposed legislation would (i) open
local exchange service to competition and preempt states from imposing barriers
preventing such competition, (ii) impose new unbundling and interconnection
requirements on local exchange carrier networks, (iii) remove the MFJ
prohibitions on interLATA services and manufacturing if certain competitive
conditions are met, (iv) transfer any remaining MFJ requirements (including the
MFJ's nondiscrimination provisions) to the FCC's jurisdiction and (v) eliminate
any remaining cable and telephone company cross-ownership restrictions. There
is, however, uncertainty concerning the outcome of such legislation. The
passing of such legislation would significantly change the competitive landscape
of the telecommunications industry as a whole.
CONTINGENCIES
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
certain 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 an interexchange carrier and other parties that relates to
the Tax Reform Act of 1986. This action is still in the discovery process. If
a formal filing - made in accordance with the remand from the Supreme Court -
alleges that the exceptions apply, the range of possible risk is $0 to $140.
21
<PAGE>
Form 10-Q - Part II
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 6. Exhibits and Reports on Form 8-K
(A) EXHIBITS
EXHIBIT NO.
11 Statement regarding computation of earnings per share of U S WEST,
Inc.
12 Statement regarding computation of earnings to fixed charges ratio of
U S WEST, Inc.
27 Financial Data Schedule
(B) REPORTS ON FORM 8-K FILED DURING THE FIRST QUARTER:
(i) report dated January 19, 1995 concerning the release of earnings for
the fourth quarter ended December 31, 1994, and related exhibits.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
/S/ James M. Osterhoff
-----------------------
May 15, 1995 U S WEST, Inc.
James M. Osterhoff
Executive Vice President
and Chief Financial Officer
23
<PAGE>
EXHIBIT 11
U S WEST, Inc.
Computation of Earnings Per Common Share
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended
EARNINGS PER COMMON SHARE: March 31,
1995 1994
---------- ----------
<S> <C> <C>
Net income 329,636 323,723
Less preferred dividends 827 --
Net income available for ---------- ----------
common share calculation $328,809 $323,723
========== ==========
Weighted average common shares 468,557 444,378
outstanding ========== ==========
Earnings per common share $0.70 $0.73
========== ==========
</TABLE>
1
<PAGE>
EXHIBIT 11
U S WEST, Inc.
Computation of Earnings Per Common Share
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
EARNINGS PER COMMON AND COMMON Three Months Ended
EQUIVALENT SHARE: March 31,
1995 1994
---------- ----------
<S> <C> <C>
Net income 329,636 323,723
Less preferred dividends 827 --
Net income available for ---------- ----------
common share calculation $328,809 $323,723
========== ==========
Weighted average common shares 468,557 444,378
outstanding
Incremental shares from assumed
exercise of stock options 461 391
---------- ----------
Total common shares 469,018 444,769
========== ==========
Earnings per common and $0.70 $0.73
common equivalent share ========== ==========
</TABLE>
2
<PAGE>
EXHIBIT 11
U S WEST, Inc.
Computation of Earnings Per Common Share
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
EARNINGS PER COMMON SHARE - ASSUMING Three Months Ended
FULL DILUTION: March 31,
1995 1994
---------- ----------
<S> <C> <C>
Net income $329,636 $323,723
Interest on Convertible Liquid Yield
Option Notes (LYONS) 5,578 5,441
---------- ----------
Adjusted income 335,214 329,164
Less preferred dividends 827 -
---------- ----------
Adjusted net income available for
common share calculations $334,387 $329,164
========== ==========
Weighted average common shares
outstanding 468,557 444,378
Incremental shares from assumed
exercise of stock options 600 391
Shares issued upon conversion of LYONS 9,894 10,230
---------- ----------
Total common shares 479,051 454,999
========== ==========
---------- ----------
Earnings per common share - $0.70 $0.72
assuming full dilution ========== ==========
<FN>
* Amounts are excluded from fully diluted earnings (loss) per common share
calculation due to their anti-dilutive effect.
</TABLE>
3
<PAGE>
EXHIBIT 12
U S WEST, Inc.
RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Millions)
<TABLE>
<CAPTION>
Quarter Ended
3/31/95 3/31/94
- ---------------------------------------------- --------- ---------
<S> <C> <C>
Income before income taxes $538 $522
Interest expense (net of amounts capitalized) 128 109
Interest factor on rentals (1/3) 22 23
--------- ---------
Earnings $688 $654
Interest expense 139 116
Interest factor on rentals (1/3) 22 23
--------- ---------
Fixed charges $161 $139
Ratio of earnings to fixed charges 4.27 4.71
- ---------------------------------------------- --------- ---------
</TABLE>
<PAGE>
U S WEST Financial Services, Inc.
RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Thousands)
<TABLE>
<CAPTION>
Quarter Ended
3/31/95 3/31/94
- ---------------------------------------------- --------- ---------
<S> <C> <C>
Income before income taxes $813 $1,127
Interest expense 9,150 12,724
Interest factor on rentals (1/3) 17 41
--------- ---------
Earnings $9,980 $13,892
Interest expense 9,150 12,724
Interest factor on rentals (1/3) 17 41
--------- ---------
Fixed charges $9,167 $12,765
Ratio of earnings to fixed charges 1.09 1.09
- ---------------------------------------------- --------- ---------
</TABLE>
Note: A Termination Agreement and Guarantee was entered into on June 24, 1994
between U S WEST, Inc., U S WEST Capital Corporation and U S WEST Financial
Services, Inc. (USWFS). The Agreement terminates the Support Agreement dated
January 5, 1990 whereby U S WEST, Inc. agreed to provide financial support to
USWFS. The Agreement provides replacement financial support in the form of a
direct guarantee by U S WEST of all outstanding indebtedness of USWFS.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1995
<CASH> 148
<SECURITIES> 0
<RECEIVABLES> 1,663
<ALLOWANCES> 0
<INVENTORY> 199
<CURRENT-ASSETS> 2,689
<PP&E> 31,248
<DEPRECIATION> 17,318
<TOTAL-ASSETS> 23,599
<CURRENT-LIABILITIES> 6,585
<BONDS> 8,702
<COMMON> 8,092
51
0
<OTHER-SE> (560)
<TOTAL-LIABILITY-AND-EQUITY> 23,599
<SALES> 2,828
<TOTAL-REVENUES> 2,828
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,162
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 128
<INCOME-PRETAX> 538
<INCOME-TAX> 208
<INCOME-CONTINUING> 330
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 330
<EPS-PRIMARY> .70
<EPS-DILUTED> .70
</TABLE>
