34
_____________________________________________________________________________
__________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------
FORM 10-Q/A
---------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 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 Delaware 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 __
The number of shares outstanding of U S WEST, Inc.'s common stock (net of
shares held in treasury), as of November 1, 1995, was:
U S WEST Communications Group Common Stock - 471,931,905 shares;
U S WEST Media Group Common stock - 471,921,768 shares.
<PAGE>
U S WEST, Inc.
Form 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
<S> <C>
Item Page
1. U S WEST, Inc. Financial Information
Consolidated Statements of Income -
Three and nine months ended September 30, 1995 and 1994 3
Consolidated Balance Sheets -
September 30, 1995 and December 31, 1994 4
Consolidated Statements of Cash Flows -
Nine months ended September 30, 1995 and 1994 6
Consolidated Statements of Shareowners' Equity -
Nine months ended September 30, 1995 and 1994 7
Notes to Consolidated Financial Statements 8
2. U S WEST, Inc. Management's Discussion and Analysis of Financial 15
Condition and Results of Operations
1. Communications Group Financial Information
Combined Statements of Income -
Three and nine months ended September 30, 1995 and 1994 31
Combined Balance Sheets -
September 30, 1995 and December 31, 1994 32
Combined Statements of Cash Flows -
Nine months ended September 30, 1995 and 1994 34
Notes to Combined Financial Statements 35
2. Communications Group Management's Discussion and Analysis of Financial
Condition and Results of Operations 39
1. Media Group Financial Information
Combined Statements of Income -
Three and nine months ended September 30, 1995 and 1994 50
Combined Balance Sheets -
September 30, 1995 and December 31, 1994 51
Combined Statements of Cash Flows -
Nine months ended September 30, 1995 and 1994 53
Notes to Combined Financial Statements 54
2. Media Group Management's Discussion and Analysis of Financial
Condition and Results of Operations 61
PART II - OTHER INFORMATION
<CAPTION>
<S> <C>
1. Legal Proceedings 74
6. Exhibits and Reports on Form 8-K 74
</TABLE>
Form 10-Q - Part I
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME U S WEST, Inc.
(Unaudited)
<S> <C> <C> <C> <C>
3 Mos 3 Mos. 9 Mos. 9 Mos.
Ended Ended Ended Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
Dollars in million (except per share amounts) 1995 1994 1995 1994
Sales and other revenues $ 2,964 $ 2,765 $ 8,686 $ 8,114
Employee-related expenses 1,007 968 2,982 2,822
Other operating expenses 592 532 1,661 1,527
Taxes other than income taxes 103 109 330 322
Depreciation and amortization 573 509 1,695 1,519
Interest expense 137 104 404 323
Equity losses in unconsolidated ventures 38 26 128 83
Gains on asset sales:
Rural telephone exchanges 34 - 112 48
Paging assets - - - 68
Guaranteed minority interest expense 2 - 2 -
Other income (expense) - net (8) (3) (6) 11
Income before income taxes and
extraordinary item 538 514 1,590 1,645
Provision for income taxes 213 196 617 628
Income before extraordinary item 325 318 973 1,017
Extraordinary item:
Early extinguishment of debt, net of tax (9) - (9) -
NET INCOME 316 318 964 1,017
Preferred dividends 1 - 3 -
Earnings available for common stock $ 315 $ 318 $ 961 $ 1,017
Earnings per common share:
Income available for common stock
before extraordinary item $ 0.69 $ 0.70 $ 2.06 $ 2.25
Extraordinary item (0.02) - (0.02) -
EARNINGS PER COMMON SHARE $ 0.67 $ 0.70 $ 2.04 $ 2.25
DIVIDENDS PER COMMON SHARE $ 0.535 $ 0.535 $ 1.605 $ 1.605
AVERAGE COMMON SHARES
OUTSTANDING (thousands) 471,229 454,997 470,076 451,037
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
Form 10-Q - Part I
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS U S WEST, Inc.
(Unaudited)
<S> <C> <C>
September 30, December 31,
Dollars in millions 1995 1994
ASSETS
Current assets
Cash and cash equivalents $ 108 $ 209
Accounts and notes receivable 1,932 1,693
Inventories and supplies 248 189
Deferred tax asset 339 352
Other 310 323
Total current assets 2,937 2,766
Gross property, plant and equipment 32,278 31,014
Accumulated depreciation 17,936 17,017
Property, plant and equipment - net 14,342 13,997
Investment in Time Warner Entertainment 2,501 2,522
Intangible assets - net 1,824 1,858
Investment in international ventures 1,361 881
Net investment in assets held for sale 418 302
Other assets 1,378 878
Total assets $ 24,761 $ 23,204
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
Form 10-Q - Part I
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS U S WEST, Inc.
(Unaudited), Continued
<S> <C> <C>
September 30, December 31,
Dollars in millions 1995 1994
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities
Short-term debt $ 3,640 $ 2,837
Accounts payable 859 944
Employee compensation 408 367
Dividends payable 253 251
Current portion of restructuring charges 348 337
Other 1,428 1,278
Total current liabilities 6,936 6,014
Long-term debt 5,144 5,101
Postretirement and other postemployment benefit
obligations 2,372 2,502
Deferred taxes, credits and other 1,894 2,154
Company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely Company
guaranteed debentures 600 -
Preferred stock subject to mandatory redemption 51 51
Common shareowners' equity:
Common shares - no par, 2,000,000,000
authorized, 471,650,698 and 469,343,048
outstanding, respectively 8,161 8,056
Cumulative deficit (223) (458)
LESOP guarantee (157) (187)
Foreign currency translation adjustments (17) (29)
Total common shareowners' equity 7,764 7,382
Total liabilities and common shareowners' equity $ 24,761 $ 23,204
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
Form 10-Q - Part I
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
U S WEST, Inc.
<S> <C> <C>
Dollars in millions
Nine Months Ended September 30, 1995 1994
OPERATING ACTIVITIES
Net income $ 964 $ 1,017
Adjustments to net income
Depreciation and amortization 1,695 1,519
Postretirement medical and life costs, net of cash fundings (86) (13)
Gains on asset sales:
Rural telephone exchanges (112) (48)
Paging assets - (68)
Equity losses in unconsolidated ventures 128 83
Deferred income taxes and amortization of investment
tax credits 93 192
Changes in operating assets and liabilities:
Restructuring payments (268) (167)
Accounts and notes receivable (219) (173)
Inventories, supplies and other (81) (115)
Accounts payable and accrued liabilities 88 108
Other adjustments - net 21 (4)
Cash provided by operating activities 2,223 2,331
INVESTING ACTIVITIES
Expenditures for property, plant and equipment (1,943) (1,945)
Investment in international ventures (576) (214)
Proceeds from disposals of property, plant and equipment 166 49
Cash (to) net investment in assets held for sale (108) -
Proceeds from sale of paging assets - 143
Other - net (274) (97)
Cash (used for) investing activities (2,735) (2,064)
FINANCING ACTIVITIES
Net proceeds from issuance of short-term debt 688 403
Proceeds from issuance of long-term debt 499 251
Repayments of long-term debt (640) (408)
Proceeds from issuance of trust originated preferred
securities 581 -
Dividends paid on common stock (697) (663)
Proceeds from issuance of common stock 43 329
Proceeds from issuance of preferred stock - 50
Purchases of treasury stock (63) -
Cash provided by (used for) financing activities 411 (38)
Cash (used for) provided by continuing operations (101) 229
Cash to discontinued operations - (59)
CASH AND CASH EQUIVALENTS
Increase (decrease) (101) 170
Beginning balance 209 128
Ending balance $ 108 $ 298
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
Form 10-Q - Part I
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF
SHAREOWNERS' EQUITY (Unaudited) U S WEST, Inc.
<S> <C> <C>
Dollars in millions
Nine Months Ended September 30, 1995 1994
COMMON SHARES
Balance at beginning of period $ 8,056 $ 6,996
Issuance of common stock 103 179
Settlement of litigation - 210
Benefit trust contribution (OPEB) 61 185
Purchase of treasury stock (63) -
Other 4 (2)
Balance at end of period 8,161 7,568
CUMULATIVE DEFICIT
Balance at beginning of period (458) (857)
Net income 964 1,017
Dividends declared (760) (730)
Market value adjustment for debt securities 31 (49)
Balance at end of period (223) (619)
LESOP GUARANTEE
Balance at beginning of period (187) (243)
Activity 30 27
Balance at end of period (157) (216)
FOREIGN CURRENCY TRANSLATION
ADJUSTMENTS
Balance at beginning of period (29) (35)
Activity 12 26
Balance at end of period (17) (9)
TOTAL COMMON SHAREOWNERS' EQUITY $ 7,764 $ 6,724
COMMON SHARES AUTHORIZED AT
SEPTEMBER 30, (Thousands) 2,000,000 2,000,000
COMMON SHARES OUTSTANDING (Thousands)
Balance at beginning of period 469,343 441,140
Issuance of common stock 2,513 4,376
Settlement of litigation - 5,506
Benefit trust contribution (OPEB) 1,500 4,600
Purchase of treasury stock (1,705) -
Balance at end of period 471,651 455,622
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
A. Recapitalization Plan
On October 31, 1995, the shareholders of U S WEST, Inc., a Colorado
corporation ("U S WEST Colorado") voted to approve a proposal (the
"Recapitalization Plan") adopted by the Board of Directors to reincorporate
from Colorado to Delaware and create two classes of common stock that are
intended to reflect separately the performance of the communications and
multimedia businesses. Under the Recapitalization Plan, shareholders approved
an Agreement and Plan of Merger between U S WEST Colorado and U S WEST, Inc.,
a Delaware corporation ("U S WEST" or "Company"), pursuant to which U S WEST
continues as the surviving corporation. In connection with the merger, the
Certificate of Incorporation of U S WEST has been amended and restated to,
among other things, designate two classes of common stock of U S WEST, one
class of which is authorized as U S WEST Communications Group Common Stock
("Communications Stock"), and the other class is authorized as U S WEST Media
Group Common Stock ("Media Stock"). Effective November 1, 1995, each share of
common stock of U S WEST Colorado was converted into one share of
Communications Stock and one share of Media Stock.
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, Inc. ("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, U S WEST
Communications Services, Inc., U S WEST Communications Federal Services, Inc.,
U S WEST Advanced Technologies, Inc. and U S WEST Business Resources, Inc. U
S WEST Communications comprised approximately 98 percent of the revenues and
assets of the Communications Group in 1994.
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 NewVector 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.
<PAGE>
Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(Dollars in millions)
(Unaudited)
Dividends to be paid to the holders of Communications Stock will initially be
$0.535 per share per quarter. 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.
B. Summary of Significant Accounting Policies
Consolidated Financial Statements
The Consolidated Financial Statements have been prepared by U S WEST 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 proxy statement mailed to all shareholders
on September 5, 1995.
Certain reclassifications within the Consolidated Financial Statements have
been made to conform to the current year presentation.
<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>
<S> <C> <C> <C> <C>
Three Mos. Three Mos. Nine Mos. Nine Mos.
Dollars in millions Ended Ended Ended Ended
Sept. 30, Sept. 30 Sept. 30 Sept. 30,
1995 1994 1995 1994
Revenues $ 2,324 $ 2,203 $ 6,762 $ 6,177
Operating expenses* 2,056 1,968 6,037 5,512
Interest and other - net** 195 170 556 480
Income before income taxes
and extraordinary item $ 73 $ 65 $ 169 $ 185
Income before extraordinary
item 47 41 107 145
Extraordinary item, net of tax (24) - (24) -
Net income $ 23 $ 41 $ 83 $ 145
<FN>
<F1>
* Includes 1995 and 1994 depreciation and amortization of $260 and $254, and
$761 and $707 for the three and nine months ended, respectively.
<F2>
** Includes 1995 and 1994 corporate services of $17 and $15, and $47 and $45
for the three months and nine months ended, respectively.
</FN>
</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
Company's recorded share of TWE operating results before extraordinary item
was ($3) and $1, and ($14) and ($5) for the three months and nine months ended
September 30, 1995 and 1994, respectively. In addition, TWE recorded an
extraordinary loss for the early extinguishment of debt in third quarter 1995.
The Media Group's portion of this extraordinary loss was $4, net of an income
tax benefit of $2.
<PAGE>
Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(Dollars in millions)
(Unaudited)
D. Company-Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trust Holding Solely Company Guaranteed Debentures
On September 11, 1995, U S WEST Financing I, a wholly-owned subsidiary of U S
WEST ("U S WEST Financing"), issued $600 of 7.96 % Trust Originated Preferred
Securities (the "Preferred Securities") and $19 of common securities. U S
WEST holds all of the outstanding common securities of U S WEST Financing. U
S WEST Financing used the proceeds from such issuance to purchase from U S
WEST Capital Funding, Inc., a wholly-owned subsidiary of U S WEST ("Capital
Funding"), $619 principal amount of Capital Funding's 7.96% Subordinated
Deferrable Interest Notes due 2025 (the "Subordinated Debt Securities"), the
obligations under which are guaranteed by U S WEST. The sole assets of U S
WEST Financing are and will be the Subordinated Debt Securities. In addition,
U S WEST has guaranteed the payment of interest and redemption amounts to
holders of Preferred Securities when U S WEST Financing has funds available
for such payments as well as Capital Funding's undertaking to pay all of U S
WEST Financing's costs, expenses and other obligations. The interest and other
payment dates on the Subordinated Debt Securities correspond to the
distribution and other payment dates on the Preferred Securities. Under
certain circumstances, the Subordinated Debt Securities may be distributed to
the holders of Preferred Securities and common securities in liquidation of U
S WEST Financing. The Subordinated Debt Securities are redeemable in whole or
in part by Capital Funding at any time on or after September 11, 2000, at a
redemption price of $25.00 per Subordinated Debt Security plus accrued and
unpaid interest. If Capital Funding redeems the Subordinated Debt Securities,
U S WEST Financing is required to redeem the Preferred Securities concurrently
at $25.00 per share plus accrued and unpaid distributions. As of September
30, 1995, 24,000,000 Preferred Securities were outstanding.
E. Debt
During third quarter 1995, U S WEST Communications refinanced $410 of
commercial paper to take advantage of favorable long-term interest rates. In
addition to the commercial paper, U S WEST Communications refinanced $90 of
long-term debt. Expenses associated with the refinancing of long-term debt
resulted in an extraordinary charge to income of $5, net of a tax benefit of
$3.
Subsequent to third quarter 1995, U S WEST refinanced $1.3 billion of
commercial paper, including $750 at U S WEST Communications.
<PAGE>
Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(Dollars in millions)
(Unaudited)
F. AirTouch Joint Venture
Effective November 1, 1995, AirTouch and the Company have entered into Phase I
of their joint venture. In accordance with the closing agreement, during
Phase I the Media Group Combined Financial Statements will continue to reflect
the Company's existing ownership of the domestic cellular operations. The
newly formed Wireless Management Company will provide centralized services to
both companies on a contract basis. In Phase II, AirTouch and the Company
will contribute their domestic cellular assets to the newly formed venture.
This phase will occur within four years, upon obtaining interim regulatory
relief, or earlier, at AirTouch's option.
G. 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.
On September 22, 1995, the Company filed a lawsuit in Delaware Chancery Court
to prevent the proposed merger of Time Warner and Turner Broadcasting. The
Time Warner Entertainment partnership is, among other things, in competition
with Turner Broadcasting, and the Company believes that ownership of Turner by
Time Warner would constitute breach of contract and fiduciary duties by Time
Warner. Time Warner filed a countersuit against the Company on October 11,
1995, alleging misrepresentation, breach of contract and other misconduct on
the part of the Company. Time Warner's countersuit seeks a reformation of the
Time Warner Entertainment partnership agreement, an order that enjoins U S
WEST from breaching the partnership agreement, and unspecified compensatory
damages. U S WEST has denied each of the claims in Time Warner's countersuit.
A trial date of March 16,1996 has been set.
<PAGE>
Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(Dollars in millions)
(Unaudited)
H. Investment in International Ventures
The Company's investments in international ventures increased $480 from
December 31, 1994. The increase primarily consists of a 20 percent investment
in Malaysia to provide local wireline and wireless communications, the
acquisition of a 50 percent interest in cable television systems in the
Netherlands and the acquisition of a 29 percent interest in cable television
systems in the Czech Republic.
On October 2, 1995, TeleWest Communications' acquisition and share exchange
with SBC CableComms (UK) became effective. U S WEST and Tele-Communications,
Inc., the major shareholders, each will own 26.7 percent of the combined
company. In fourth quarter 1995, the Company will recognize an after tax gain
of approximately $100 in conjunction with the merger.
I. 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 $30
and $64, and $137 and $443 for the three months and nine months ended
September 30, 1995 and 1994, respectively. Included are the sale of
properties for approximately $52 and $253 for the nine months ended September
30, 1995 and 1994, respectively. The sales were in line with Company
estimates.
<PAGE>
Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(Dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
The components of net investment in assets held for sale follow:
<S> <C> <C>
September 30, December 31,
Dollars in millions 1995 1994
ASSETS
Cash $ 16 $ 7
Finance receivables - net 1,005 1,073
Investment in real estate - net of valuation allowance 420 465
Bonds, at market value 165 155
Investment in FSA 374 329
Other assets 198 362
Total assets 2,178 2,391
LIABILITIES
Debt 922 1,283
Deferred income taxes 700 693
Accounts payable, accrued liabilities and other 128 103
Minority interests 10 10
Total liabilities 1,760 2,089
Net investment in assets held for sale $ 418 $ 302
</TABLE>
<TABLE>
<CAPTION>
Selected financial data for U S WEST Financial Services follows:
<S> <C> <C> <C> <C>
3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
Sept. 30 Sept. 30, Sept. 30, Sept. 30,
Dollars in millions 1995 1994 1995 1994
Operating revenues $ 9 $ 15 $ 30 $ 45
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, December 31,
Dollars in millions 1995 1994
Net finance receivables $ 911 $ 981
Total assets 1,223 1,331
Total debt 419 533
Total liabilities 1,153 1,282
Shareowner's equity 70 49
</TABLE>
<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 income before extraordinary item for three and nine
months ended September 30 follow:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
3 Mos. 3 Mos. 9 Mos. 9 Mos.
Ended Ended Ended Ended
Sept. 30, Sept. 30, Percent Sept. 30, Sept. 30, Percent
Dollars in millions 1995 1994 Change 1995 1994 Change
Communications Group $ 292 $ 267 9.4 $ 900 $ 851 5.8
Media Group:
Consolidated:
Multimedia content and services 63 63 - 179 190 (5.8)
Wireless communications 24 11 - 56 62 (9.7)
Cable and telecommunications (1) - - (7) - -
Unconsolidated equity investments:
Time Warner Entertainment Company, L.P. (3) (2) (50.0) (16) (13)
(23.1)
TeleWest Communications plc (11) (10) (10.0) (23) (24) 4.2
Mercury One-2-One (18) (16) (12.5) (57) (40) (42.5)
Other (21) 5 - (59) (9) -
Total Media Group 33 51 (35.3) 73 166 (56.0)
Income before extraordinary item $ 325 $ 318 2.2 $ 973 $ 1,017
(4.3)
Earnings per common share before extraordinary item
$ 0.69 $ 0.70 (1.4) $ 2.06 $ 2.25 (8.4)
</TABLE>
Results of Operations - Third Quarter
U S WEST's third quarter 1995 income before extraordinary item was $314, a
decrease of $4, or 1.3 percent, over third quarter 1994, excluding a gain of
$21 on the sale of rural telephone exchanges and expenses of $10 associated
with the Recapitalization Plan, all in third quarter 1995.
Third quarter 1995 earnings per common share before extraordinary item were
$0.67 compared with $0.70 in 1994, excluding the effects of the gain on the
sale of rural telephone exchanges ($0.04 per share) and expenses associated
with the Recapitalization Plan ($0.02 per share). Earnings per common share
reflect approximately 16 million additional average shares outstanding, of
which 12.8 million were issued in connection with the acquisition of cable
systems in the Atlanta, Georgia metropolitan area (the "Atlanta Systems").
<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
The Communications Group's third quarter income before extraordinary item was
$276, an increase of $9, or 3.4 percent, compared with third quarter 1994,
excluding the gain on sale of rural telephone exchanges and expenses of $5
associated with the Recapitalization Plan. Increased income at the
Communications Group is attributable to higher demand for services, access
line growth and lower employee benefit costs, including the effects of certain
benefit cost true-ups. Partially offsetting these items was an increase in
operating costs incurred to address current customer service issues, increased
depreciation expense, and higher interest expense.
The Media Group's third quarter income before extraordinary item was $38, a
decrease of $13, or 25 percent, compared with third quarter 1994, excluding
expenses of $5 associated with the Recapitalization Plan. The decline is
primarily due to increased interest expense associated with the acquisition of
the Atlanta Systems and the expansion of international investments, partially
offset by improvement in the wireless communications business. The
amortization of goodwill associated with the Atlanta Systems acquisition also
caused a significant increase in the effective tax rate which contributed to
lower earnings.
Results of Operations - Nine Months
For the nine months ended September 30, 1995, income before extraordinary item
was $913, a decrease of $32, or 3.4 percent, excluding gains on the sales of
rural telephone exchanges of $70 ($0.14 per share) and $31 ($0.07 per share)
in 1995 and 1994, respectively, expenses of $10 ($0.02 per share) associated
with the Recapitalization Plan in 1995, and a gain of $41 ($0.09 per share)
for the sale of paging operations in 1994. Earnings per share were $1.94 for
the nine months ended September 30, 1995, as compared with $2.09 in 1994,
excluding the one-time items.
The Communications Group's income before extraordinary item was $835, an
increase of $15, or 1.8 percent, as compared with the nine months ended
September 30, 1994, excluding the gains on the sales of rural telephone
exchanges and expenses associated with the Recapitalization Plan. The Media
Group's income before extraordinary item during the first nine months of 1995
was $78, a decrease of $47, or 38 percent, as compared with the same period
1994, excluding the expenses associated with the Recapitalization Plan in 1995
and the 1994 gain on the sale of paging operations.
<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
Earnings Before Interest, Taxes, Depreciation, Amortization and Other
("EBITDA")
Increased demand for the Communications Group's services resulted in growth in
EBITDA of 5.8 and 4.8 percent for third quarter and nine months ended
September 30, 1995, respectively, as compared with the same periods in 1994.
The Media Group's EBITDA increased by approximately 30 percent, to $207, for
third quarter 1995, primarily due to improvement in the wireless
communications business and acquisition of the Atlanta Systems. Excluding the
effects of the acquisition, EBITDA increased by approximately 14 percent. For
the nine months ended September 30, 1995, EBITDA increased by approximately 29
percent, to $552, primarily due to improvement in the wireless communications
business and acquisition of the Atlanta Systems. Excluding the effects of the
acquisition and the paging sale, EBITDA increased by approximately 15 percent.
The Company believes EBITDA is an important indicator of the operational
strength of its businesses. EBITDA, however, should not be considered as an
alternative to operating or net income as an indicator of performance or as an
alternative to cash flows from operating activities as a measure of liquidity,
in each case determined in accordance with GAAP.
Sales and Other Revenues
<TABLE>
<CAPTION>
An analysis of the change in U S WEST's consolidated sales and other revenues follows:
<S> <C> <C> <C> <C> <C> <C>
3 Mos. 3 Mos. 9 Mos. 9 Mos.
Ended Ended Ended Ended
Sept. 30, Sept. 30, Percent Sept. 30, Sept. 30, Percent
Dollars in millions 1995 1994 Change 1995 1994 Change
Communications Group $ 2,389 $ 2,316 3.2 $ 7,045 $ 6,850 2.8
Media Group 604 482 25.3 1,725 1,359 26.9
Intergroup eliminations (29) (33) (12.1) (84) (95) (11.6)
Total $ 2,964 $ 2,765 7.2 $ 8,686 $ 8,114 7.0
</TABLE>
<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
Communications Group Revenue
<TABLE>
An analysis of changes in the Communications Group's revenues follows:
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Lower Increase Increase
Price (Higher) (Decrease) (Decrease)
Dollars in millions 1995 1994 Changes Refunds Demand Other Dollars Percentage
Local service
Third quarter $1,105 $1,034 $ 5 ($7) $ 73 $ - $ 71 6.9
Nine months 3,231 3,035 9 (7) 194 - 196 6.5
Interstate access
Third quarter 594 573 (9) (5) 36 (1) 21 3.7
Nine months 1,774 1,691 (27) (15) 126 (1) 83 4.9
Intrastate access
Third quarter 186 188 (12) 4 6 - (2) (1.1)
Nine months 558 541 (24) 7 26 8 17 3.1
Long-distance network
Third quarter 298 323 (5) - (14) (6) (25) (7.7)
Nine months 891 1,019 (20) - (42) (66) (128) (12.6)
Other services
Third quarter 206 198 8 8 4.0
Nine months 591 564 27 27 4.8
Total
Third quarter 2,389 2,316 (21) (8) 101 1 73 3.2
Nine months $7,045 $6,850 ($62) ($15) $ 304 ($32) $ 195 2.8
</TABLE>
Local service revenues increased principally as a result of higher demand for
services, as evidenced by an increase of 495,000 access lines, or 3.5 percent,
during the last 12 months. Access line growth was 4.2 percent as adjusted for
sales of approximately 103,000 rural telephone access lines during the last 12
months.
Higher revenues from interstate access services resulted from increases of
10.0 and 9.4 percent in interstate billed access minutes of use for the three
and nine months ended September 30, 1995, respectively, as compared with the
same periods in 1994. The increased volume of business more than offset the
effects of price reductions and refunds.
Intrastate access revenues decreased for the three months ended September 30,
1995, compared with the same period in 1994, primarily due to the effects of
price reductions, partially offset by higher demand. Intrastate access
revenues increased for the nine months ended September 30, 1995, compared with
1994, primarily due to the impacts of multiple toll carrier plans.
<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
Multiple toll carrier plans ("MTCP") implemented in Oregon and Washington in
May and July 1994, respectively, allow independent telephone companies to act
as toll carriers. The impact on Communications Group for the nine months
ended September 30, 1995, was long-distance revenue losses of $62, partially
offset by increases in intrastate access revenue of $12 and decreases in other
operating expenses (i.e. access expense) of $42. These regulatory arrangements
did not impact third quarter results.
Long-distance network revenues decreased by 7.7 and 12.6 percent for the three
months and nine months ended September 30, 1995, respectively, compared with
the same periods in 1994, primarily due to the effects of competition and
price reductions. Adjusted for the effects of MTCP, long-distance network
revenues decreased by 6.5 percent for the nine months ended September 30,
1995, as compared with the same period last year.
Revenues from other services increased primarily as a result of continued
market penetration in voice messaging services, increases in inside wire
services, sales of customer premise equipment and wire installation projects,
partially offset by decreases in billing and collection revenues.
Media Group Revenue
<TABLE>
An analysis of the Media Group's revenues follows:
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
3 Mos. 3 Mos. 9 Mos. 9 Mos.
Ended Ended Ended Ended
Sept 30, Sept. 30, Percent Sept 30, Sept 30, Percent
Dollars in millions 1995 1994 Change 1995 1994 Change
Multimedia content and services $ 292 $ 277 5.4 $ 856 $ 774 10.6
Wireless communications 246 198 24.2 676 563 20.1
Cable and telecommunications 56 - - 165 - -
Other 10 7 42.9 28 22 27.3
Total Media Group $ 604 $ 482 25.3 $ 1,725 $ 1,359 26.9
</TABLE>
Multimedia Content and Services. Revenues related to Yellow Pages directory
advertising increased approximately $17, or 7.3 percent, and $50, or 7.1
percent, in third quarter and the nine months ended September 30, 1995,
respectively, as compared with 1994, due to pricing and an increase in Yellow
Pages advertising volume. Product enhancements and the effect of improved
marketing programs on business volume also contributed to the increase in
revenues. Excluding the sale of certain non-strategic operations, non-Yellow
Pages revenues increased by $4 and $8 in third quarter and the nine months
ended September 30, 1995, respectively, as compared with 1994.
International directory publishing revenue decreased by $3 in third quarter
1995 as compared with 1994, primarily due to a delay in publication of certain
directories. Revenue for the nine months ended September 30, 1995, increased
by $30 compared with 1994 due to the May 1994 purchase of Thomson Directories.
<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
Wireless Communications. Cellular service revenues increased by $55, or 32.7
percent, and $162, or 35.7 percent, in third quarter and the nine months ended
September 30, 1995, respectively, as compared with 1994. This increase is due
to a 55 percent increase in subscribers during the last twelve months,
partially offset by a 13 percent drop in average revenue per subscriber to
$62.00 per month for the nine months ended September 30, 1995, as compared
with 1994. The increase in subscribers relates to lower costs for cellular
phone equipment and enhanced service offerings, which has resulted in
additional penetration into the consumer user market. The decrease in average
revenue per subscriber is due to continuing competitive pressures and price
sensitivity of non-business users.
Cellular equipment revenues decreased by $7, or 23.3 percent, and $21, or 25.9
percent, in third quarter and the nine months ended September 30, 1995,
respectively, as compared with 1994. This decrease is primarily due to a
decrease in unit sales and price per unit due to the impacts of competition.
Paging revenues for the nine months ended September 30, 1995, decreased $28 as
compared with 1994 due to the sale of the paging assets in 1994.
Cable and Telecommunications. Domestic cable and telecommunications revenues
reflect the December 1994 acquisition of the Atlanta Systems.
<TABLE>
Costs and Expenses
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
3 Mos. 3 Mos. 9 Mos. 9 Mos.
Ended Ended Ended Ended
Sept. 30 Sept. 30, Percent Sept. 30, Sept. 30, Percent
Dollars in millions 1995, 1994 Change 1995 1994 Change
Employee-related expenses $ 1,007 $ 968 4.0 $ 2,982 $ 2,822 5.7
Other operating expenses 592 532 11.3 1,661 1,527 8.8
Taxes other than income taxes 103 109 (5.5) 330 322 2.5
Depreciation and amortization 573 509 12.6 1,695 1,519 11.6
Interest expense 137 104 31.7 404 323 25.1
Equity losses in unconsolidated ventures 38 26 46.2 128 83 54.2
Other income (expense) - net (8) (3) - (6) 11 -
</TABLE>
<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
Communications Group employee-related expense increased $7 and $68 for the
three and nine months ended September 30, 1995, respectively, compared with
the same periods in 1994. Higher employee-related expenses at the
Communications Group are primarily the result of initiatives to improve
customer service and address business growth. Customer service has been
impacted by temporary declines in productivity partly caused by restructuring
efforts. Higher levels of employee-related expenses at the Communications
Group are expected to continue through the remainder of the year. Overtime
payments and contract labor increased employee-related expenses at the
Communications Group by approximately $54 and $149 for third quarter and the
first nine months of 1995, respectively, as compared with the same periods in
1994. Partially offsetting these increases was a reduction in the accrual for
postretirement benefits, certain benefit cost true-ups, and lower travel and
conference expenses.
Since December 1993, the Communications Group has separated 4,299 employees
under the Restructuring Plan. (See "Restructuring Charges.") These
separations have been partially offset by the addition of approximately 2,600
employees (a significant portion of which are temporary) primarily dedicated
to improving customer service and developing new business opportunities.
Benefits from the net work-force reductions at Communications Group have
offset wage and salary increases.
The Company estimates that it will achieve employee reductions of 9,000 in
connection with the Restructuring Plan by the end of 1997. (See
"Restructuring Charges.") These employee reductions will be partially offset
by the planned addition of some employees at the Communications Group by the
end of 1997 to accommodate business growth, including wireless cable and data
transmission services.
Employee-related expenses also increased due to the 1994 purchases of the
Atlanta Systems and Thomson Directories, and growth initiatives in the
multimedia content and services segment.
The 1994 purchases of the Atlanta Systems and Thomson Directories increased
other operating expenses by $24 and $98 for third quarter and nine months
ended 1995, respectively, as compared with the same periods in 1994.
Additionally, expansion of the cellular customer base increased other
operating expenses by $15 and $39 for third quarter and nine months ended
1995, respectively, as compared with the same periods in 1994.
Other operating expenses at Communications Group increased by $15 in third
quarter 1995 compared with third quarter 1994. The increase is due to several
items, including costs associated with the sales of customer premise equipment
and wire installation projects. For the nine months ended September 30, 1995,
other operating expenses decreased by $24, primarily due to the effect of the
multiple toll carrier plans.
Increased depreciation and amortization expense was attributable to the
effects of a higher depreciable asset base at the Communications Group and the
purchase of the Atlanta Systems.
<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 increased by $12 and $45 in third quarter 1995 and the nine
months ended September 30, 1995, respectively, as compared with 1994. The
increases were primarily due to costs related to the expansion of the customer
base at Mercury One-2-One ("One 2 One") in the nine months ended September 30,
1995, as compared with 1994.
Interest expense increased primarily as a result of increased debt at the
Communications Group, the purchase of the Atlanta Systems, partially financed
through the issuance of short-term debt, new international investments and a
reclassification of debt from net investment in assets held for sale.
Liquidity and Capital Resources
Operating Activities
Cash provided by operations decreased by $108 compared with the first nine
months of 1994. Business growth was more than offset by the combined effects
of an increase of $73 in postretirement benefit funding, an increase of $101
in Restructuring Plan expenditures and higher income tax payments, including
approximately $60 related to the partial sale of the Company's joint venture
interest in TeleWest.
Investing Activities
Investments in international ventures were $576 in the nine months ended
September 30, 1995, as compared with $214 in 1994. Significant 1995 Media
Group investing activities include equity investments in Malaysia to provide
local wireline and wireless communications, the acquisition of cable
television systems in the Netherlands and Czech Republic and additional
capital contributions to One 2 One in the U.K.
In March 1995, PCS PrimeCo, L.P. ("PCS PrimeCo") was awarded PCS licenses in
11 markets. The Company's share of the cost of the licenses was approximately
$268, all of which was funded by June 30, 1995. Under the PCS PrimeCo
partnership agreement, the Company is required to fund 25 percent of PCS
PrimeCo's operating and capital costs, including licensing costs. The Company
anticipates that its total funding obligations to PCS PrimeCo during the next
four years will be significant.
Cash provided to the net investment in assets held for sale of $108 for the
nine months ended September 30, 1995, primarily reflects the payment of debt.
<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
At September 30, 1995, the Company guaranteed debt associated with its
international investments in the principal amount of approximately $165.
In the first nine months of 1995, U S WEST received cash proceeds of $162 from
the sale of certain rural telephone exchanges as compared with proceeds of $51
in the same period last year.
Financing Activities
During the first nine months of 1995, debt increased by $846. Communications
Group debt increased by $714, primarily related to increased expenditures
(including capital related to service quality issues and implementation of the
Restructuring Plan) and cash fundings for postretirement medical and life
costs.
Media Group debt increased by $132 due to new international investments, cash
funding of the PCS licenses and a reclassification of debt from net investment
in assets held for sale. These increases were largely offset by reductions of
debt related to the investment in TWE and the reduction of commercial paper by
issuing Preferred Securities. The Company issued $600 of Trust Originated
Preferred Securities (the "Preferred Securities") in third quarter 1995. U S
WEST has fully and unconditionally guaranteed the payment of interest and
redemption amounts to holders of the Preferred Securities. The Preferred
Securities are redeemable in whole or in part by U S WEST at any time on or
after September 11, 2000, at a redemption price of $25.00 per Preferred
Security. As of September 30, 1995, 24,000,000 Preferred Securities were
outstanding.
Excluding debt included in net investment in assets held for sale, the
percentage of debt to total capital at September 30, 1995, was 51.1 percent
compared with 51.8 percent at December 31, 1994. Including debt related to
net investment in assets held for sale, the percentage of debt to total
capital was 53.6 and 55.5 percent at September 30, 1995, and December 31,
1994, respectively. The percentage of debt to total capital has decreased at
September 30, 1995 as compared with December 31, 1994 primarily as a result of
issuing the Preferred Securities, which are included as a component of total
capital.
During the first quarter of 1995, U S WEST purchased 1,704,700 shares of U S
WEST Common Stock for $63, at an average price of $37.02 per share.
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
and/or U S WEST Communications.
<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 and enhanced system functionality that will
enable it to monitor networks to reduce the risk of service interruptions,
activate telephone service on demand, rapidly design and engineer new services
for customers and centralize its service centers. 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.
The Restructuring Plan is scheduled to be completed by the end of 1997.
Implementation to date has been driven by growth in the business and related
service issues, revisions to system delivery schedules and productivity issues
caused by the major rearrangement of resources due to restructuring. These
issues may continue to affect the timing of the implementation of the
Restructuring Plan.
<TABLE>
<CAPTION>
Following is a schedule of the costs included in the Restructuring Plan:
<S> <C> <C> <C> <C> <C> <C>
Actual Actual Estimate Estimate Estimate
Dollars in millions 1993 1994 1995 1996 1997 Total
Cash expenditures:
Employee separation (1) $ - $ 19 $ 76 $ 99 $ 66 $ 260
Systems development - 127 161 112 - 400
Real estate - 50 71 9 - 130
Relocation - 21 23 31 5 80
Retraining and other - 16 27 15 7 65
Total cash expenditures - 233 358 266 78 935
Asset write-down 65 - - - - 65
Total Plan 65 233 358 266 78 1,000
Remaining 1991 plan employee
costs (1) - 56 - - - 56
Total $ 65 $ 289 $ 358 $ 266 $ 78 $1,056
<FN>
(1) Employee separation costs, including the balance of the 1991 restructuring reserve
at December 31, 1993, aggregate $316.
</FN>
</TABLE>
<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. System development costs include new
systems and the application of enhanced system functionality to existing
single purpose systems to provide integrated, end-to-end customer service. A
substantial portion of the work-force reductions will be enabled by developing
new systems and enhanced system functionality, which will simplify 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 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. Future
operating costs also will be impacted by business growth.
Employee Separation. Net employee reductions will total 9,000 under the
Restructuring Plan. While the Company will separate 10,000 employees,
approximately 1,000 employees that were originally expected to relocate have
chosen separation or other job assignments and will be replaced. The
estimated total cost for employee separations is $316, compared with $286 in
the original estimate. The $30 cost associated with these additional employee
separations has been reclassified from relocation to the reserve for employee
separations.
The following estimates of employee separations and related amounts reflect
the extension of employee reductions into 1997:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Estimate Actual Estimate Estimate Estimate
Employee separations 1994 (1994) (1) 1995 1996 1997 Total
Managerial 1,061 497 612 1,090 521 2,720
Occupational 1,887 1,683 1,638 2,310 1,649 7,280
Total 2,948 2,180 2,250 3,400 2,170 10,000
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Estimate Actual Estimate Estimate Estimate
Employee separation amounts 1994 (1994) (1) 1995 1996 1997 Total
Managerial $ 25 $ 5 $ 22 $ 43 $ 20 $ 90
Occupational 15 14 54 56 46 170
Total 40 19 76 99 66 260
Remaining 1991 reserve 56 56 - - - 56
Total $ 96 $ 75 $ 76 $ 99 $ 66 $ 316
<FN>
(1) Includes the remaining employees and the separation amounts associated with the
balance of the 1991 restructuring reserve at
December 31, 1993.
</FN>
</TABLE>
<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
Compared with the original estimates, employee reduction and separation
amounts shown above have been reduced by 1,219 employees and $27,
respectively, in 1995, and increased by 800 employees and $12 in 1996, and
2,170 employees and $66 in 1997, respectively.
Systems Development. U S WEST Communications' existing information management
systems were largely developed to support a monopoly environment. These
systems have become increasingly inadequate due to the effects of increased
competition, new forms of regulation and changing technology that have driven
consumer demand for new services that can be delivered quickly, reliably and
economically. The Company believes that improved customer service, delivered
at lower cost, can be achieved by a combination of new systems and introducing
new functionality to existing systems. This is a change from the Company's
initial strategy which placed more emphasis on the development of new systems.
The Restructuring Plan is now less dependent on development of entirely new,
untested systems and related technology.
The systems development program involves new systems and enhanced system
functionality for systems that support the following core processes:
Service Delivery - to support service on demand for all products and services.
These new systems and enhanced system functionality will permit one
customer service representative to handle all facets of a customer's
requirements as contrasted to the numerous points of customer
interface required today.
Service Assurance - for performance monitoring from one location and remote
testing in the new environment, including identification and
resolution of faults prior to customer impact.
Capacity Provisioning - for integrated planning of future network capacity,
including the installation of software controllable service
components.
The direct, incremental and nonrecurring costs of providing new systems and
enhanced system functionality follow:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Estimate Actual Estimate Estimate
1994 1994 1995 1996 Total
Service delivery $ 35 $ 21 $ 21 $ 31 $ 73
Service assurance 45 12 24 28 64
Capacity provisioning 17 57 92 30 179
All other 28 37 24 23 84
Total $ 125 $ 127 $ 161 $ 112 $ 400
</TABLE>
<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
The Company continues to review its estimates of systems expenditures under
the Restructuring Plan. Management does not anticipate any material revisions
in total estimated expenditures. However, should expenditures exceed the
remaining reserve, additional amounts would be expensed as incurred.
Systems expenses charged to current operations at U S WEST Communications
consist of costs associated with the information management function,
including planning, developing, testing and maintaining data bases for general
purpose computers, in addition to systems costs related to maintenance of
telephone network applications. Other systems expenses are for administrative
(i.e. general purpose) systems which include customer service, order entry,
billing and collection, accounts payable, payroll, human resources and
property records. Ongoing systems costs comprised approximately six percent
of total operating expenses at U S WEST Communications in 1994, 1993 and 1992.
U S WEST Communications expects systems costs charged to current operations as
a percent of total operating expenses to approximate the current level
throughout the life of the Restructuring Plan. However, systems costs could
increase relative to other operating costs as the business becomes more
technology dependent.
Progress Under the Restructuring Plan:
Following is a reconciliation of restructuring reserve activity since December
1993.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
First Change in
Nine Relocation/
Reserve Months Employee Reserve
Balance 1994 Reserve 1995 Separation Balance
12/31/93 Activity 12/31/94 Activity Estimates 9/30/95
Employee separations
Managerial $ 80 $ 5 $ 75 $ 19 $ 7 $ 63
Occupational 150 14 136 48 23 111
Total separations 230 19 211 67 30 174
Systems Development
Service delivery 73 21 52 13 39
Service assurance 64 12 52 16 36
Capacity provisioning 179 57 122 65 57
All other 84 37 47 17 30
Total systems 400 127 273 111 162
Real estate 130 50 80 58 22
Relocation 110 21 89 13 (30) 46
Retraining and other 65 16 49 18 31
Total 935 233 702 267 - 435
Remaining 1991 Plan
expenditures 56 56 - - - -
Total $ 991 $ 289 $ 702 $ 267 $ - $ 435
</TABLE>
<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
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Cumulative
Separations
Employee separations 1994 Separations 1995 Separations At September 30,1995
Managerial 497 581 1,078
Occupational 1,683 1,538 3,221
Total 2,180 2,119 4,299
</TABLE>
Recapitalization Plan
On October 31, 1995, the shareholders of U S WEST, Inc., a Colorado
corporation, voted to approve a proposal by the Board of Directors to
reincorporate 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. For a more complete discussion on the Recapitalization Plan see
Note A in the Notes to the Consolidated Financial Statements.
AirTouch Joint Venture
Effective November 1, 1995, AirTouch and the Company have entered into Phase I
of their joint venture. In accordance with the closing agreement, during
Phase I the Media Group Combined Financial Statements will continue to reflect
the Company's existing ownership of the domestic cellular operations. The
newly formed Wireless Management Company will provide centralized services to
both companies on a contract basis. In Phase II, AirTouch and the Company
will contribute their domestic cellular assets to the newly formed venture.
This phase will occur within four years, upon obtaining interim regulatory
relief, or earlier, at AirTouch's option.
TeleWest Merger
On October 2, 1995, TeleWest Communications' acquisition and share exchange
with SBC CableComms (UK) became effective. U S WEST and Tele-Communications,
Inc., the major shareholders, will each own 26.7 percent of the combined
company. In fourth quarter 1995, the Media Group will recognize an after tax
gain of approximately $100 in conjunction with the merger.
<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
Broadband
In 1993, U S WEST announced its intention to build an interactive multimedia
telecommunications network (the "Broadband Network") capable of providing
voice, data and video services to customers within the Communications Group
Region. The Company began limited testing of the Broadband Network in Omaha,
Nebraska in December 1994. A market trial in the Omaha area that will cover
up to 50,000 homes commenced in August 1995.
In early 1994, U S WEST Communications filed applications with the FCC to
install Broadband Network architecture in Denver; Minneapolis-St. Paul; Salt
Lake City; Boise; and Portland, Oregon (collectively, the "Broadband
Applications"). In May 1995, U S WEST Communications withdrew the Broadband
Applications. The Communications Group is evaluating the relative costs of
alternative video technologies, as well as the near-term feasibility of
interactive services. In order to satisfy anticipated demand for combined
video and telephony services on a cost-effective basis, the Communications
Group's strategy may include selective investments in wireless cable
technologies.
Regulatory
On October 11, 1995, the U.S. Justice Department recommended that U S WEST be
allowed to offer long-distance telephone service outside its 14-state region.
The agreement, among U S WEST, the Justice Department and AT&T, must be
approved by U. S. District Court Judge Harold Greene, who oversees the consent
decree that broke up AT&T in 1984, and barred the Regional Holding Companies
from a number of businesses, including interLATA long distance.
If approved by Judge Greene, U S WEST will be able to offer long-distance
service outside U S WEST's local service territory. Such an approval would
mean that U S WEST would be the first Regional Holding Company allowed to
offer interLATA long-distance service outside its region.
Union Contract
On October 2, 1995, U S WEST union members approved a new three-year contract
with the Company. The contract provides for salary increases of 10.6 percent
over three years effective January 1 of each year. The contract also provides
employees with a lump sum payment of $1,500 in lieu of wage increases
beginning in August of each year. This lump sum payment will be recognized
over the life of the contract. The agreement covers 33,000 Communications
Workers of America members who work for U S WEST Communications and U S WEST
Business Resources.
<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
On October 15, 1995, U S WEST Direct and the CWA reached a tentative agreement
on their contract, subject to ratification by the CWA membership. This
contract would provide for salary increases of 10.5 percent over three years
and provides employees with a lump sum payment of $850.
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.
On September 22, 1995, the Company filed a lawsuit in Delaware Chancery Court
to prevent the proposed merger of Time Warner and Turner Broadcasting. The
Time Warner Entertainment partnership is, among other things, in competition
with Turner Broadcasting, and the Company believes that ownership of Turner by
Time Warner would constitute breach of contract and fiduciary duties by Time
Warner. Time Warner filed a countersuit against the Company on October 11,
1995, alleging misrepresentation, breach of contract and other misconduct on
the part of the Company. Time Warner's countersuit seeks a reformation of the
Time Warner Entertainment partnership agreement, an order that enjoins U S
WEST from breaching the partnership agreement, and unspecified compensatory
damages. U S WEST has denied each of the claims in Time Warner's countersuit.
A trial date of March 16,1996 has been set.
57
Form 10-Q - Part I
COMBINED STATEMENTS OF INCOME
(Unaudited) U S WEST COMMUNICATIONS GROUP
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
3 Mos. 3 Mos. 9 Mos. 9 Mos.
Ended Ended Ended Ended
Dollars in millions Sept. 30, Sept. 30, Sept. 30, Sept. 30,
(except per share amounts) 1995 1994 1995 1994
Operating Revenues:
Local service $ 1,105 $ 1,034 $ 3,231 $ 3,035
Interstate access 594 573 1,774 1,691
Intrastate access 186 188 558 541
Long-distance network 298 323 891 1,019
Other services 206 198 591 564
Total operating revenues 2,389 2,316 7,045 6,850
Operating Expenses:
Employee-related expenses 835 828 2,479 2,411
Other operating expenses 404 389 1,099 1,123
Taxes other than income taxes 95 102 306 301
Depreciation and amortization 513 476 1,514 1,420
Total operating expenses 1,847 1,795 5,398 5,255
Income from operations 542 521 1,647 1,595
Interest expense 108 94 315 277
Gains on sales of rural telephone exchanges 34 - 112 48
Other expense - net 14 5 30 21
Income before income taxes and
extraordinary item 454 422 1,414 1,345
Provision for income taxes 162 155 514 494
Income before extraordinary item 292 267 900 851
Extraordinary item:
Early extinguishment of debt, net of tax (5) - (5) -
NET INCOME $ 287 $ 267 $ 895 $ 851
Pro form earnings per share:
Income before extraordinary item $ 0.62 $ 0.59 $ 1.91 $ 1.89
Extraordinary item (0.01) - (0.01)
Pro forma earnings per share $ 0.61 $ 0.59 $ 1.90 $ 1.89
PRO FORMA AVERAGE COMMON SHARES OUTSTANDING (thousands)
471,229 454,997 470,076 451,037
<FN>
See Notes to Combined Financial Statements.
</FN>
</TABLE>
<PAGE>
Form 10-Q - Part I
COMBINED BALANCE SHEETS
(Unaudited) U S WEST COMMUNICATIONS GROUP
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, December 31,
Dollars in millions 1995 1994
ASSETS
Current assets:
Cash and cash equivalents $ 81 $ 116
Accounts and notes receivable 1,699 1,500
Inventories and supplies 222 166
Deferred tax asset 294 300
Other 44 56
Total current assets 2,340 2,138
Gross property, plant and equipment 30,675 29,578
Accumulated depreciation 17,395 16,537
Property, plant and equipment - net 13,280 13,041
Other assets 803 765
Total assets $ 16,423 $ 15,944
<FN>
See Notes to Combined Financial Statements.
</FN>
</TABLE>
<PAGE>
Form 10-Q - Part I
COMBINED BALANCE SHEETS
(Unaudited), Continued U S WEST COMMUNICATIONS GROUP
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, December 31,
Dollars in millions 1995 1994
LIABILITIES AND EQUITY
Current liabilities:
Short-term debt $ 2,092 $ 1,608
Accounts payable 785 888
Employee compensation 350 313
Dividends payable 252 250
Current portion of restructuring charges 342 318
Other 879 831
Total current liabilities 4,700 4,208
Long-term debt 4,746 4,516
Postretirement and other postemployment benefit
obligations 2,287 2,427
Deferred taxes, credits and other 1,418 1,614
Communications Group equity 3,272 3,179
Total liabilities and equity $ 16,423 $ 15,944
<FN>
See Notes to Combined Financial Statements.
</FN>
</TABLE>
<PAGE>
Form 10-Q - Part I
COMBINED STATEMENTS OF
CASH FLOWS (Unaudited) U S WEST COMMUNICATIONS GROUP
<TABLE>
<CAPTION>
<S> <C> <C>
Dollars in millions
Nine Months Ended September 30, 1995 1994
OPERATING ACTIVITIES
Net income $ 895 $ 851
Adjustments to net income:
Depreciation and amortization 1,514 1,420
Postretirement medical and life costs, net of
cash fundings (156) (208)
Gains on sales of rural telephone exchanges (112) (48)
Deferred income taxes and amortization
of investment tax credits 121 142
Changes in operating assets and liabilities:
Restructuring payments (254) (160)
Accounts and notes receivable (204) (125)
Inventories, supplies and other (63) (61)
Accounts payable and accrued liabilities (33) (30)
Other adjustments - net (10) (20)
Cash provided by operating activities 1,698 1,761
INVESTING ACTIVITIES
Expenditures for property, plant and equipment (1,703) (1,746)
Proceeds from disposals of property, plant
and equipment 161 49
Cash (used for) investing activities (1,542) (1,697)
FINANCING ACTIVITIES
Net proceeds from issuance of short-term debt 365 332
Proceeds from issuance of long-term debt 499 315
Repayments of long-term debt (256) (271)
Dividends paid on common stock (694) (663)
Proceeds from issuance of common stock - 211
Equity transfer to Media Group (105) -
Cash provided by financing activities (191) (76)
CASH AND CASH EQUIVALENTS
Increase (decrease) (35) (12)
Beginning balance 116 56
Ending balance $ 81 $ 44
<FN>
See Notes to Combined Financial Statements
</FN>
</TABLE>
<PAGE>
Form 10-Q - Part I
NOTES TO COMBINED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
A. Recapitalization Plan
On October 31, 1995, the shareholders of U S WEST, Inc., a Colorado
corporation ("U S WEST Colorado") voted to approve a proposal (the
"Recapitalization Plan") adopted by the Board of Directors to reincorporate
from Colorado to Delaware and create two classes of common stock that are
intended to reflect separately the performance of the communications and
multimedia businesses. Under the Recapitalization Plan, shareholders approved
an Agreement and Plan of Merger between U S WEST Colorado and U S WEST, Inc.,
a Delaware corporation (" U S WEST" or "Company"), pursuant to which U S WEST
continues as the surviving corporation. In connection with the merger, the
Certificate of Incorporation of U S WEST has been amended and restated to,
among other things, designate two classes of common stock of U S WEST, one
class of which is authorized as U S WEST Communications Group Common Stock
("Communications Stock"), and the other class is authorized as U S WEST Media
Group Common Stock ("Media Stock"). Effective November 1, 1995, each share of
common stock of U S WEST Colorado was converted into one share of
Communications Stock and one share of Media Stock.
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, Inc. ("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, U S WEST
Communications Services, Inc., U S WEST Communications Federal Services, Inc.,
U S WEST Advanced Technologies, Inc. and U S WEST Business Resources, Inc. U
S WEST Communications comprised approximately 98 percent of the revenues and
assets of the Communications Group in 1994.
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 NewVector 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.
<PAGE>
Form 10-Q - Part I
NOTES TO COMBINED FINANCIAL STATEMENTS, continued
(Dollars in millions)
(Unaudited)
Dividends to be paid to the holders of Communications Stock will initially be
$0.535 per share per quarter. 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.
B. Summary of Significant Accounting Policies
Combined Financial Statements
The Combined Financial Statements of the Groups comprise all of the accounts
included in the corresponding Consolidated Financial Statements of the
Company. Investments in less than majority-owned ventures are generally
accounted for using the equity method. The separate Group Combined Financial
Statements give effect to the accounting policies that are applicable upon
implementation of the Recapitalization Plan. The separate Group Combined
Financial Statements have been prepared on a basis that management believes to
be reasonable and appropriate and include: (i) the combined historical balance
sheets, results of operations and cash flows of the businesses that comprise
each of the Groups, with all significant intragroup amounts and transactions
eliminated; (ii) in the case of the Communications Group Combined Financial
Statements, certain corporate assets and liabilities of U S WEST and related
transactions identified with the Communications Group; (iii) in the case of
the Media Group Combined Financial Statements, all other corporate assets and
liabilities and related transactions of U S WEST; and (iv) an allocated
portion of the corporate expense of U S WEST. Transactions between the
Communications Group and the Media Group have not been eliminated.
<PAGE>
Form 10-Q - Part I
NOTES TO COMBINED FINANCIAL STATEMENTS, continued
(Dollars in millions)
(Unaudited)
Notwithstanding the allocation of assets and liabilities (including contingent
liabilities) and stockholders' equity between the Communications Group and the
Media Group for the purpose of preparing the respective financial statements
of such Group, holders of Communications Stock and Media Stock are subject to
risks associated with an investment in a single company and all of the
Company's businesses, assets and liabilities. Such allocation of assets and
liabilities and change in the equity structure of the Company does not result
in a distribution or spin-off to shareholders of any assets or liabilities of
the Company or any of its subsidiaries or otherwise affect responsibility for
the liabilities of the Company or such subsidiaries. As a result, the rights
of the holders of the Company's or any of its subsidiaries' debt are not
affected. Financial effects arising from either Group that affect the
Company's results of operations or financial condition could, if significant,
affect the results of operations or financial position of the other Group or
the market price of the class of common stock relating to the other Group.
Any net losses of the Communications Group or the Media Group, and dividends
or distributions on, or repurchases of Communications Stock, Media Stock or
Preferred Stock, will reduce the funds of the Company legally available for
payment of dividends on both the Communications Stock and Media Stock.
Accordingly, the Communications Group Combined Financial Statements should be
read in conjunction with the Company's Consolidated Financial Statements and
the Media Group Combined Financial Statements.
The Combined Financial Statements have been prepared by the 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 Combined
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 Combined Financial Statements
be read in conjunction with the financial statements and notes thereto
included in the Company's proxy statement mailed to all shareholders on
September 5, 1995.
Certain reclassifications within the Combined Financial Statements have been
made to conform to the current year presentation.
<PAGE>
Form 10-Q - Part I
NOTES TO COMBINED FINANCIAL STATEMENTS, continued
(Dollars in millions)
(Unaudited)
C. 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 is $0 to $140.
D. Debt
During third quarter 1995, U S WEST Communications refinanced $410 of
commercial paper to take advantage of favorable long-term interest rates. In
addition to the commercial paper, U S WEST Communications refinanced $90 of
long-term debt. Expenses associated with the refinancing of long-term debt
resulted in an extraordinary charge to income of $5, net of an income tax
benefit of $3.
Subsequent to third quarter 1995, U S WEST Communications refinanced $750 of
commercial paper.
<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 income before extraordinary item for three and nine
months ended September 30 follow:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
3 Mos. 3 Mos. 9 Mos. 9 Mos.
Ended Ended Ended Ended
Sept. 30, Sept. 30, Percent Sept. 30, Sept. 30, Percent
Dollars in millions 1995 1994 Change 1995 1994 Change
Income before extraordinary item $ 292 $ 267 9.4 $ 900 $ 851 5.8
Pro forma earnings per share before
extraordinary item $ 0.62 $ 0.59 5.1 $ 1.91 $ 1.89 1.1
</TABLE>
The Communications Group's third quarter 1995 income before extraordinary item
was $276, an increase of $9, or 3.4 percent, over third quarter 1994,
excluding a gain of $21 on the sale of rural telephone exchanges and expenses
of $5 associated with the Recapitalization Plan, both in third quarter 1995.
Increased income at the Communications Group is attributable to higher demand
for services, access line growth and lower employee benefit costs, including
the effects of certain benefit cost true-ups. Partially offsetting these
items was an increase in operating costs incurred to address current customer
service issues, increased depreciation expense and higher interest expense.
Third quarter 1995 pro forma earnings per share before extraordinary item
("earnings per share") were $0.59, unchanged from the prior year, excluding
the effects of the gain on sale of rural telephone exchanges ($0.04 per share)
and expenses associated with the Recapitalization Plan ($0.01 per share).
Earnings per share in 1995 reflect approximately 16 million additional average
shares outstanding, of which 12.8 million were issued in connection with the
December 1994 purchase by the Media Group of cable television properties in
the Atlanta, Georgia area.
For the nine months ended September 30, 1995, income before extraordinary item
was $835, an increase of $15, or 1.8 percent, excluding gains on the sales of
rural telephone exchanges of $70 ($0.14 per share) and $31 ($0.07 per share)
in 1995 and 1994, respectively, and expenses of $5 ($0.01 per share)
associated with the Recapitalization Plan in 1995. Earnings per share for the
nine months ended September 30, 1995, excluding one time items, were $1.78,
compared with $1.82 in the same period in 1994.
<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
Increased demand for the Communications Group's services resulted in growth in
earnings before interest, taxes, depreciation, amortization and other
("EBITDA") of 5.8 and 4.8 percent for third quarter and nine months ended
September 30, 1995, respectively, as compared with the same periods in 1994.
The Communications Group believes EBITDA is an important indicator of the
operational strength of its businesses. EBITDA, however, should not be
considered as an alternative to operating or net income as an indicator of the
performance or as an alternative to cash flows from operating activities as a
measure of liquidity, in each case determined in accordance with GAAP.
Sales and Other Revenues
An analysis of changes in the Communications Group's revenues follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dollars in millions Lower Incr. Inc.
Price (Higher) (Decr.) (Decr.)
1995 1994 Changes Refunds Demand Other Dollars Percent
Local service
Third quarter $1,105 $1,034 $ 5 ($7) $ 73 $ - $ 71 6.9
Nine months 3,231 3,035 9 (7) 194 - 196 6.5
Interstate access
Third quarter 594 573 (9) (5) 36 (1) 21 3.7
Nine months 1,774 1,691 (27) (15) 126 (1) 83 4.9
Intrastate access
Third quarter 186 188 (12) 4 6 - (2) (1.1)
Nine months 558 541 (24) 7 26 8 17 3.1
Long-distance network
Third quarter 298 323 (5) - (14) (6) (25) (7.7)
Nine months 891 1,019 (20) - (42) (66) (128) (12.6)
Other services
Third quarter 206 198 8 8 4.0
Nine months 591 564 27 27 4.8
Total
Third quarter 2,389 2,316 (21) (8) 101 1 73 3.2
Nine months $7,045 $6,850 ($62) ($15) $ 304 ($32) $ 195 2.8
</TABLE>
Local service revenues increased principally as a result of higher demand for
services, as evidenced by an increase of 495,000 access lines, or 3.5 percent,
during the last 12 months. Access line growth was 4.2 percent as adjusted for
sales of approximately 103,000 rural telephone access lines during the last 12
months.
Higher revenues from interstate access services resulted from increases of
10.0 and 9.4 percent in interstate billed access minutes of use for the three
and nine months ended September 30, 1995, respectively, as compared with the
same periods in 1994. The increased volume of business more than offset the
effects of price reductions and refunds.
<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
Intrastate access revenues decreased for the three months ended September 30,
1995, compared with the same period in 1994, primarily due to the effects of
price reductions, partially offset by higher demand. Intrastate access
revenues increased for the nine months ended September 30, 1995, compared with
1994, primarily due to the impacts of multiple toll carrier plans.
Multiple toll carrier plans ("MTCP") implemented in Oregon and Washington in
May and July 1994, respectively, allow independent telephone companies to act
as toll carriers. The impact on the Communications Group for the nine months
ended September 30, 1995, was long-distance revenue losses of $62, partially
offset by increases in intrastate access revenue of $12 and decreases in other
operating expenses (i.e. access expense) of $42. These regulatory
arrangements did not impact third quarter results.
Long-distance network revenues decreased by 7.7 and 12.6 percent for the three
months and nine months ended September 30, 1995, respectively, compared with
the same periods in 1994, primarily due to the effects of competition and
price reductions. Adjusted for the effects of MTCP, long-distance network
revenues decreased by 6.5 percent for the nine months ended September 30,
1995, compared with the same period last year.
Revenues from other services increased primarily as a result of continued
market penetration in voice messaging services, increases in inside wire
services, sales of customer premise equipment and wire installation projects,
partially offset by decreases in billing and collection revenues.
Costs and Expenses
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
3 Mos. 3 Mos. 9 Mos. 9 Mos.
Ended Ended Ended Ended
Sept. 30, Sept. 30, Percent Sept. 30, Sept. 30, Percent
1995 1994 Change 1995 1994 Change
Employee-related expenses $ 835 $ 828 0.8 $ 2,479 $ 2,411 2.8
Other operating expenses 404 389 3.9 1,099 1,123 (2.1)
Taxes other than income taxes 95 102 (6.9) 306 301 1.7
Depreciation and amortization 513 476 7.8 1,514 1,420 6.6
Interest expense 108 94 14.9 315 277 13.7
Other expense-net 14 5 - 30 21 42.9
</TABLE>
Higher employee-related expenses are primarily the result of initiatives to
improve customer service and address business growth. Customer service has
been impacted by temporary declines in productivity partly caused by
restructuring efforts. Higher levels of employee-related expenses are
expected to continue through the remainder of the year. Overtime payments and
contract labor increased employee-related expenses by approximately $54 and
$149 for third quarter and the first nine months of 1995, respectively, as
compared with the same periods in 1994. Partially offsetting these increases
was a reduction in the accrual for postretirement benefits, certain benefit
cost true-ups and lower travel and conference expenses.
<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
Since December 1993, the Communications Group has separated 4,299 employees
under the Restructuring Plan. ("See "Restructuring Charges.") These
separations have been partially offset by the addition of approximately 2,600
employees (a significant portion of which are temporary) primarily dedicated
to improving customer service and also developing new business opportunities.
Benefits from the net work-force reductions have offset wage and salary
increases.
The Communications Group estimates that it will achieve employee reductions of
9,000 in connection with the Restructuring Plan by the end of 1997. (See
"Restructuring Charges.") These employee reductions will be partially offset
by the planned addition of some employees by the end of 1997 to accommodate
business growth, including wireless cable and data transmission services.
The increase in other operating expenses during third quarter 1995 is due to
several items, including costs associated with the sales of customer premise
equipment and wire installation projects. For the nine months ended September
30, 1995, other operating expenses decreased primarily due to the effect of
the multiple toll carrier plans.
Increased depreciation and amortization expense was attributable to the
effects of a higher depreciable asset base. Interest expense increased
primarily as a result of an increased use of debt financing.
Liquidity and Capital Resources
Cash provided by operations decreased by $63 compared with the first nine
months of 1994. Business growth was more than offset by the effects of
increased expenditures related to implementation of the Restructuring Plan.
U S WEST, Inc. ("U S WEST" or "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 and/or U S WEST Communications.
In the first nine months of 1995, Communications Group received cash proceeds
of $162 from the sale of certain rural telephone exchanges as compared with
proceeds of $51 in the same period last year.
<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
During the first nine months of 1995, debt increased by $714 and the
percentage of debt to total capital increased from 65.8 percent at December
31, 1994, to 67.6 percent at September 30, 1995. The increase in debt and the
percentage of debt to total capital was primarily related to increased
expenditures (including capital related to service quality issues and
implementation of the Restructuring Plan) and cash fundings for postretirement
medical and life costs.
During the first nine months of 1995, the Communications Group made cash
equity infusions of $105 to the Media Group. As of November 1, 1995, the
effective date of the Recapitalization Plan, the Company does not intend to
transfer funds between the Groups, except for certain short-term, ordinary
course advances of funds associated with the Company's centralized cash
management. Such short-term transfers of funds will be accounted for as
short-term loans between the Groups bearing interest at the market rate at
which management determines the borrowing Group could obtain funds on a
short-term basis. If the Board of Directors of U S WEST (the "Board"), in its
sole discretion, determines that a transfer of funds between the Groups should
be accounted for as a long-term loan, the Board would establish the terms on
which such loan would be made, including the interest rate, amortization
schedule, maturity and redemption terms. Such terms would generally reflect
the then prevailing terms upon which management determines such Group could
borrow funds on a similar basis. The financial statements of the borrowing
Group will be charged with the amount of any such loan, as well as with
periodic interest accruing thereon. The Board may determine that a transfer
of funds from the Communications Group to the Media Group should be accounted
for as an equity contribution, in which case an Inter-Group Interest
(determined by the Board based on the then current Market Value of shares of
Media Stock) will either be created or increased, as applicable. Similarly,
if an Inter-Group Interest exists, the Board may determine that a transfer of
funds from the Media Group to the Communications Group should be accounted for
as a reduction in the Inter-Group Interest.
Restructuring
The Communications Group's 1993 results reflected an $880 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 new
systems and enhanced system functionality are being developed that will enable
it to monitor networks to reduce the risk of service interruptions, activate
telephone service on demand, rapidly design and engineer new services for
customers and centralize its service centers. The Communications Group is
consolidating its 560 customer service centers into 26 centers in 10 cities
and reducing its total work force by approximately 9,000 employees.
<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
The Restructuring Plan is scheduled to be completed by the end of 1997.
Implementation to date has been driven by growth in the business and related
service issues, revisions to system delivery schedules and productivity issues
caused by the major rearrangement of resources due to restructuring. These
issues may continue to affect the timing of the implementation of the
Restructuring Plan.
Following is a schedule of the costs included in the Restructuring Plan:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Actual Estimate Estimate Estimate
1994 1995 1996 1997 Total
Cash expenditures:
Employee separation (1) $ 19 $ 75 $ 96 $ 65 $ 255
Systems development 118 145 97 - 360
Real estate 50 71 9 - 130
Relocation 21 23 31 - 75
Retraining and other 8 27 15 10 60
Total cash expenditures 216 341 248 75 880
Remaining 1991 plan employee 56 - - - 56
costs (1)
Total $ 272 $ 341 $ 248 $ 75 $ 936
<FN>
(1) Employee separation costs, including the balance of the 1991 restructuring
reserve at December 31, 1993, aggregate $311.
</FN>
</TABLE>
Employee separation costs include severance payments, health-care coverage and
postemployment education benefits. System development costs include new
systems and the application of enhanced system functionality to existing
single purpose systems to provide integrated, end-to-end customer service. A
substantial portion of the work-force reductions will be enabled by developing
new systems and enhanced system functionality, which will simplify 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 methods and systems required in the
new, restructured mode of operation.
The Communications Group 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. Future operating costs also will be impacted by business growth.
<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. Net employee reductions will total 9,000 under the
Restructuring Plan. While the Communications Group will separate 10,000
employees, approximately 1,000 employees that were originally expected to
relocate have chosen separation or other job assignments and will be replaced.
The estimated total cost for employee separations is $311, compared with $281
in the original estimate. The $30 cost associated with these additional
employee separations has been reclassified from relocation to the reserve for
employee separations.
The following estimates of employee separations and related amounts reflect
the extension of employee reductions into 1997:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Estimate Actual Estimate Estimate Estimate
1994 1994 (1) 1995 1996 1997 Total
Employee separations
Managerial 1,061 497 612 1,090 521 2,720
Occupational 1,887 1,683 1,638 2,310 1,649 7,280
Total 2,948 2,180 2,250 3,400 2,170 10,000
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Estimate Actual Estimate Estimate Estimate
1994 1994 (1)` 1995 1996 1997 Total
Employee separation amounts
Managerial $ 22 $ 5 $ 21 $ 40 $ 19 $ 85
Occupational 15 14 54 56 46 170
Total 37 19 75 96 65 255
Remaining 1991 reserve 56 56 - - - 56
Total $ 93 $ 75 $ 75 $ 96 $ 65 $ 311
<FN>
<F1>
(1) Includes the remaining employees and the separation amounts associated with the
balance of the 1991 restructuring reserve at
December 31, 1993
</FN>
</TABLE>
Compared with the original estimates, employee reductions and separation
amounts shown above have been reduced by 1,219 and $27 in 1995, and increased
by 800 and $10 in 1996, and 2,170 and $65 in 1997.
Systems Development. The existing information management systems were largely
developed to support a monopoly environment. These systems have become
increasingly inadequate due to the effects of increased competition, new forms
of regulation and changing technology that have driven consumer demand for new
services that can be delivered quickly, reliably and economically. The
Communications Group believes that improved customer service, delivered at
lower cost, can be achieved by a combination of new systems and introducing
new functionality to existing systems. This is a change from the initial
strategy which placed more emphasis on the development of new systems. The
Restructuring Plan is now less dependent on development of entirely new,
untested systems and related technology.
<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
The systems development program involves new systems and enhanced system
functionality for systems that support the following core processes:
Service Delivery - to support service on demand for all products and services.
These new systems and enhanced system functionality will permit one
customer service representative to handle all facets of a customer's
requirements as contrasted to the numerous points of customer
interface required today.
Service Assurance - for performance monitoring from one location and remote
testing in the new environment, including identification and
resolution of faults prior to customer impact.
Capacity Provisioning - for integrated planning of future network capacity,
including the installation of software controllable service
components.
The direct, incremental and nonrecurring costs of providing new systems and
enhanced system functionality follow:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Estimate Actual Estimate Estimate
1994 1994 1995 1996 Total
Service delivery $ 35 $ 21 $ 21 $ 31 $ 73
Service assurance 45 12 24 28 64
Capacity provisioning 17 57 92 30 179
All other 8 28 8 8 44
Total $ 105 $ 118 $ 145 $ 97 $ 360
</TABLE>
The Communications Group continues to review its estimates of systems
expenditures under the Restructuring Plan. Material revisions in total
estimated expenditures are not anticipated. However, should expenditures
exceed the remaining reserve, additional amounts would be expensed as
incurred.
Systems expenses charged to current operations consist of costs associated
with the information management function, including planning, developing,
testing and maintaining data bases for general purpose computers, in addition
to systems costs related to maintenance of telephone network applications.
Other systems expenses are for administrative (i.e. general purpose) systems
which include customer service, order entry, billing and collection, accounts
payable, payroll, human resources and property records. Ongoing systems costs
comprised approximately six percent of total operating expenses in 1994, 1993
and 1992. The Communications Group expects systems costs charged to current
operations as a percent of total operating expenses to approximate the current
level throughout the life of the Restructuring Plan. However, systems costs
could increase relative to other operating costs as the business becomes more
technology dependent.
<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
Progress Under the Restructuring Plan:
Following is a reconciliation of restructuring reserve activity since December
1993.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Change in
First Nine Relocation
Reserve Months Employee Reserve
Reserve 1994 Balance 1995 Separation Balance
12/31/93 Activity 12/31/94 Activity Estimates 9/30/95
Employee separations
Managerial $ 75 $ 5 $ 70 $ 19 $ 7 $ 58
Occupational 150 14 136 48 23 111
Total separations 225 19 206 67 30 169
Systems Development
Service delivery 73 21 52 13 39
Service assurance 64 12 52 16 36
Capacity provisioning 179 57 122 65 57
All other 44 28 16 3 13
Total systems 360 118 242 97 145
Real estate 130 50 80 58 22
Relocation 105 21 84 13 (30) 41
Retraining and other 60 8 52 18 34
Total 880 216 664 253 411
Remaining 1991 Plan
expenditures 56 56 - - - -
Total $ 936 $ 272 $ 664 $ 253 $ - $ 411
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Cumulative
First Nine Months Separations
1994 Separations 1995 Separations At September 30,1995
Employee separations
Managerial 497 581 1,078
Occupational 1,683 1,538 3,221
Total 2,180 2,119 4,299
</TABLE>
Recapitalization Plan
On October 31, 1995, the shareholders of U S WEST, Inc., a Colorado
corporation, voted to approve a proposal by the Board of Directors to
reincorporate 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. For a more complete discussion on the Recapitalization Plan see
Note A in the Notes to the Combined Financial Statements.
<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
Broadband
In 1993, the Communications Group announced its intention to build an
interactive multimedia telecommunications network (the "Broadband Network")
capable of providing voice, data and video services to customers within its
region. Limited testing of the Broadband Network began in Omaha, Nebraska in
December 1994. A market trial in the Omaha area that will cover up to 50,000
homes commenced in August 1995.
In early 1994, U S WEST Communications filed applications with the FCC to
install Broadband Network architecture in Denver; Minneapolis-St. Paul; Salt
Lake City; Boise; and Portland, Oregon (collectively, the "Broadband
Applications"). In May 1995, U S WEST Communications withdrew the Broadband
Applications. The Communications Group is evaluating the relative costs of
alternative video technologies, as well as the near-term feasibility of
interactive services. In order to satisfy anticipated demand for combined
video and telephony services on a cost-effective basis, the Communications
Group's strategy may include selective investments in wireless cable
technologies.
Regulatory
On October 11, 1995, the U.S. Justice Department recommended that U S WEST be
allowed to offer long-distance telephone service outside its 14-state region.
The agreement, among U S WEST, the Justice Department and AT&T, must be
approved by U. S. District Court Judge Harold Greene, who oversees the consent
decree that broke up AT&T in 1984, and barred the Regional Holding Companies
from a number of businesses, including interLATA long distance.
If approved by Judge Greene, U S WEST will be able to offer long-distance
service outside U S WEST's local service territory. Such an approval would
mean that U S WEST would be the first Regional Holding Company allowed to
offer interLATA long-distance service outside its region.
Union Contract
On October 2, 1995, U S WEST union members approved a new three-year contract
with the Company. The contract provides for salary increases of 10.6 percent
over three years effective January 1 of each year. The contract also provides
employees with a lump sum payment of $1,500 in lieu of wage increases becoming
effective in August each year. This lump sum payment will be recognized over
the life of the contract. The agreement covers 33,000 Communications Workers
of America members who work for U S WEST Communications and U S WEST Business
Resources.
<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
Contingencies
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 is $0 to $140.
85
Form 10-Q - Part I
COMBINED STATEMENTS OF INCOME
(Unaudited) U S WEST MEDIA GROUP
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
3 Mos. 3 Mos. 9 Mos. 9 Mos.
Ended Ended Ended Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
Dollars in millions (except per share amounts) 1995 1994 1995 1994
Sales and other revenues $ 604 $ 482 $ 1,725 $ 1,359
Cost of sales and other revenues 193 161 539 433
Selling, general and administrative 204 162 634 498
Depreciation and amortization 60 33 181 99
Interest expense 29 10 89 46
Equity losses in unconsolidated ventures 38 26 128 83
Gain on sale of paging assets - - - 68
Guaranteed minority interest expense 2 - 2 -
Other income - net 6 2 24 32
Income before income taxes and extraordinary item
84 92 176 300
Provision for income taxes 51 41 103 134
Income before extraordinary item 33 51 73 166
Extraordinary item:
Early extinguishment of debt, net of tax (4) - (4) -
NET INCOME 29 51 69 166
Preferred dividends 1 - 3 -
Earnings available after preferred stock dividend
$ 28 $ 51 $ 66 $ 166
Pro forma earnings per common share:
Income available for common stock before
extraordinary item $ 0.07 $ 0.11 $ 0.15 $ 0.37
Extraordinary item ( 0.01) - ( 0.01) -
PRO FORMA EARNINGS PER COMMON
SHARE $ 0.06 $ 0.11 $ 0.14 $ 0.37
PRO FORMA AVERAGE COMMON
SHARES OUTSTANDING (thousands) 471,229 454,997 470,076 451,037
<FN>
See Notes to Combined Financial Statements.
</FN>
</TABLE>
<PAGE>
Form 10-Q - Part I
COMBINED BALANCE SHEETS
(Unaudited) U S WEST MEDIA GROUP
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, Decmeber 31,
Dollars in millions 1995 1994
ASSETS
Current assets:
Cash and cash equivalents $ 27 $ 93
Accounts and notes receivable 250 212
Deferred directory costs 246 234
Receivable from Communications Group 89 109
Other 91 108
Total current assets 703 756
Gross property, plant and equipment 1,603 1,436
Accumulated depreciation 541 480
Property, plant and equipment - net 1,062 956
Investment in Time Warner Entertainment 2,501 2,522
Intangible assets - net 1,824 1,858
Investment in international ventures 1,361 881
Net investment in assets held for sale 418 302
Other assets 581 119
Total assets $ 8,450 $ 7,394
<FN>
See Notes to Combined Financial Statements.
</FN>
</TABLE>
<PAGE>
Form 10-Q - Part I
COMBINED BALANCE SHEETS
(Unaudited), Continued U S WEST MEDIA GROUP
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, December 31,
Dollars in millions 1995 1994
LIABILITIES AND EQUITY
Current liabilities:
Short-term debt $ 1,548 $ 1,229
Accounts payable 169 170
Income taxes payable 202 86
Deferred revenue and customer deposits 96 76
Other 327 372
Total current liabilities 2,342 1,933
Long-term debt 398 585
Deferred taxes, credits and other 567 622
Company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely Company
guaranteed debentures 600 -
Preferred stock subject to mandatory redemption 51 51
Media Group equity 4,649 4,390
Company LESOP guarantee (157) (187)
Total equity 4,492 4,203
Total liabilities and equity $ 8,450 $ 7,394
<FN>
See Notes to Combined Financial Statements.
</FN>
</TABLE>
<PAGE>
Form 10-Q - Part I
COMBINED STATEMENTS OF CASH FLOWS
(Unaudited) U S WEST MEDIA GROUP
<TABLE>
<CAPTION>
<S> <C> <C>
Dollars in millions
Nine Months Ended September 30, 1995 1994
OPERATING ACTIVITIES
Net income $ 69 $ 166
Adjustments to net income:
Depreciation and amortization 181 99
Gain on sale of paging assets - (68)
Equity losses in unconsolidated ventures 128 83
Deferred income taxes and amortization
of investment tax credits (28) 50
Changes in operating assets and liabilities:
Accounts and notes receivable (15) (48)
Deferred directory costs, prepaid and other (18) (58)
Accounts payable and accrued liabilities 107 131
Other adjustments - net 40 26
Cash provided by operating activities 464 381
INVESTING ACTIVITIES
Expenditures for property, plant and equipment (240) (199)
Investment in international ventures (576) (214)
Cash (to) net investment in assets held for sale (108) -
Proceeds from sale of paging assets - 143
Other - net (269) (97)
Cash (used for) investing activities (1,193) (367)
FINANCING ACTIVITIES
Net proceeds from issuance of short-term debt 323 71
Repayments of long-term debt (384) (201)
Proceeds from issuance of trust originated preferred
securities - net 581 -
Dividends paid on preferred stock (3) -
Proceeds from issuance of common stock 104 305
Proceeds form issuance of preferred stock - 50
Equity transfer from Communications Group 105 -
Purchase of treasury stock (63) -
Cash provided by financing activities 663 225
Cash (used for) provided by continuing operations (66) 239
Cash (to) discontinued operations - (59)
CASH AND CASH EQUIVALENTS
(Decrease) increase (66) 180
Beginning balance 93 72
Ending balance $ 27 $ 252
<FN>
See Notes to Combined Financial Statements.
</FN>
</TABLE>
<PAGE>
Form 10-Q - Part I
NOTES TO COMBINED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
A. Recapitalization Plan
On October 31, 1995, the shareholders of U S WEST, Inc., a Colorado
corporation ("U S WEST Colorado") voted to approve a proposal (the
"Recapitalization Plan") adopted by the Board of Directors to reincorporate
from Colorado to Delaware and create two classes of common stock that are
intended to reflect separately the performance of the communications and
multimedia businesses. Under the Recapitalization Plan, shareholders approved
an Agreement and Plan of Merger between U S WEST Colorado and U S WEST, Inc.,
a Delaware corporation ("U S WEST" or "Company"), pursuant to which U S WEST
continues as the surviving corporation. In connection with the merger, the
Certificate of Incorporation of U S WEST has been amended and restated to,
among other things, designate two classes of common stock of U S WEST, one
class of which is authorized as U S WEST Communications Group Common Stock
("Communications Stock"), and the other class is authorized as U S WEST Media
Group Common Stock ("Media Stock"). Effective November 1, 1995, each share of
common stock of U S WEST Colorado was converted into one share of
Communications Stock and one share of Media Stock.
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, Inc. ("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, U S WEST
Communications Services, Inc., U S WEST Communications Federal Services, Inc.,
U S WEST Advanced Technologies, Inc. and U S WEST Business Resources, Inc. U
S WEST Communications comprised approximately 98 percent of the revenues and
assets of the Communications Group in 1994.
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 NewVector 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.
<PAGE>
Form 10-Q - Part I
NOTES TO COMBINED FINANCIAL STATEMENTS, continued
(Dollars in millions)
(Unaudited)
Dividends to be paid to the holders of Communications Stock will initially be
$0.535 per share per quarter. 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.
B. Summary of Significant Accounting Policies
Combined Financial Statements
The Combined Financial Statements of the Groups comprise all of the accounts
included in the corresponding Consolidated Financial Statements of the
Company. Investments in less than majority-owned ventures are generally
accounted for using the equity method. The separate Group Combined Financial
Statements give effect to the accounting policies that are applicable upon
implementation of the Recapitalization Plan. The separate Group Combined
Financial Statements have been prepared on a basis that management believes to
be reasonable and appropriate and include: (i) the combined historical balance
sheets, results of operations and cash flows of the businesses that comprise
each of the Groups, with all significant intragroup amounts and transactions
eliminated; (ii) in the case of the Communications Group Combined Financial
Statements, corporate assets and liabilities of U S WEST and related
transactions identified with the Communications Group; (iii) in the case of
the Media Group Combined Financial Statements, all other corporate assets and
liabilities and related transactions of U S WEST; and (iv) an allocated
portion of the corporate expense of U S WEST. Transactions between the
Communications Group and the Media Group have not been eliminated.
<PAGE>
Form 10-Q - Part I
NOTES TO COMBINED FINANCIAL STATEMENTS, continued
(Dollars in millions)
(Unaudited)
Notwithstanding the allocation of assets and liabilities (including contingent
liabilities) and stockholders' equity between the Communications Group and the
Media Group for the purpose of preparing the respective financial statements
of such Group, holders of Communications Stock and Media Stock are subject to
risks associated with an investment in a single company and all of the
Company's businesses, assets and liabilities. Such allocation of assets and
liabilities and change in the equity structure of the Company does not result
in a distribution or spin-off to shareholders of any assets or liabilities of
the Company or any of its subsidiaries or otherwise affect responsibility for
the liabilities of the Company or such subsidiaries. As a result, the rights
of the holders of the Company's or any of its subsidiaries' debt are not
affected. Financial effects arising from either Group that affect the
Company's results of operations or financial condition could, if significant,
affect the results of operations or financial position of the other Group or
the market price of the class of common stock relating to the other Group.
Any net losses of the Communications Group or the Media Group, and dividends
or distributions on, or repurchases of Communications Stock, Media Stock or
Preferred Stock, will reduce the funds of the Company legally available for
payment of dividends on both the Communications Stock and Media Stock.
Accordingly, the Media Group Combined Financial Statements should be read in
conjunction with the Company's Consolidated Financial Statements and the
Communications Group Combined Financial Statements.
The Combined Financial Statements have been prepared by the 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 Combined
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 Combined Financial Statements
be read in conjunction with the financial statements and notes thereto
included in the Company's proxy statement mailed to all shareholders on
September 5, 1995.
Certain reclassifications within the Combined Financial Statements have been
made to conform to the current year presentation.
<PAGE>
Form 10-Q - Part I
NOTES TO COMBINED 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>
<S> <C> <C> <C> <C>
3 Mos. 3 Mos. 9 Mos. 9 Mos.
Ended Ended Ended Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1995 1994 1995 1994
Revenues $ 2,324 $ 2,203 $ 6,762 $ 6,177
Operating expenses* 2,056 1,968 6,037 5,512
Interest and other - net** 195 170 556 480
Income before income taxes
and extraordinary item $ 73 $ 65 $ 169 $ 185
Income before extraordinary 47 41 107 145
item
Extraordinary item, net of tax (24) - (24) -
Net income $ 23 $ 41 $ 83 $ 145
<FN>
<F1>
* Includes 1995 and 1994 depreciation and amortization of $260 and $254, and
$761 and $707 for the three and nine months ended, respectively.
<F2>
** Includes 1995 and 1994 corporate services of $17 and $15, and $47 and $45
for the three months and nine months ended, respectively.
</FN>
</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
Company's recorded share of TWE operating results before extraordinary item
was ($3) and $1, and ($14) and ($5) for the three months and nine months ended
September 30, 1995 and 1994, respectively. In addition, TWE recorded an
extraordinary loss for the early extinguishment of debt in third quarter 1995.
The Media Group's portion of this extraordinary loss was $4, net of an income
tax benefit of $2.
<PAGE>
Form 10-Q - Part I
NOTES TO COMBINED FINANCIAL STATEMENTS, continued
(Dollars in millions)
(Unaudited)
D. Company-Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trust Holding Solely Company Guaranteed Debentures
On September 11, 1995, U S WEST Financing I, a wholly-owned subsidiary of U S
WEST ("U S WEST Financing"), issued $600 million of 7.96 % Trust Originated
Preferred Securities (the "Preferred Securities") and $19 of common
securities. U S WEST holds all of the outstanding common securities of U S
WEST Financing. U S WEST Financing used the proceeds from such issuance to
purchase from U S WEST Capital Funding, Inc., a wholly-owned subsidiary of U S
WEST ("Capital Funding"), $619 principal amount of Capital Funding's 7.96%
Subordinated Deferrable Interest Notes due 2025 (the "Subordinated Debt
Securities"), the obligations under which are guaranteed by U S WEST. The
sole assets of U S WEST Financing are and will be the Subordinated Debt
Securities. In addition, U S WEST has guaranteed the payment of interest and
redemption amounts to holders of Preferred Securities when U S WEST Financing
has funds available for such payments as well as Capital Funding's undertaking
to pay all of U S WEST Financing's costs, expenses and other obligations. The
interest and other payment dates on the Subordinated Debt Securities
correspond to the distribution and other payment dates on the Preferred
Securities. Under certain circumstances, the Subordinated Debt Securities may
be distributed to the holders of Preferred Securities and common securities in
liquidation of U S WEST Financing. The Subordinated Debt Securities are
redeemable in whole or in part by Capital Funding at any time on or after
September 11, 2000, at a redemption price of $25.00 per Subordinated Debt
Security plus accrued and unpaid interest. If Capital Funding redeems the
Subordinated Debt Securities, U S WEST Financing is required to redeem the
Preferred Securities concurrently at $25.00 per share plus accrued and unpaid
distributions. As of September 30, 1995, 24,000,000 Preferred Securities were
outstanding.
E. Airtouch Joint Venture
Effective November 1, 1995, AirTouch and the Company have entered into Phase I
of their joint venture. In accordance with the closing agreement, during
Phase I the Media Group Combined Financial Statements will continue to reflect
the Company's existing ownership of the domestic cellular operations. The
newly formed Wireless Management Company will provide centralized services to
both companies on a contract basis. In Phase II, AirTouch and the Company
will contribute their domestic cellular assets to the newly formed venture.
This phase will occur within four years, upon obtaining interim regulatory
relief, or earlier, at AirTouch's option.
<PAGE>
Form 10-Q - Part I
NOTES TO COMBINED FINANCIAL STATEMENTS, continued
(Dollars in millions)
(Unaudited)
F. Investment in International Ventures
The Media Group's investments in international ventures increased $480 from
December 31, 1994. The increase primarily consists of a 20 percent investment
in Malaysia to provide local wireline and wireless communications, the
acquisition of a 50 percent interest in cable television systems in the
Netherlands and the acquisition of a 29 percent interest in cable television
systems in the Czech Republic.
On October 2, 1995, TeleWest Communications' acquisition and share exchange
with SBC CableComms (UK) became effective. U S WEST and Tele-Communications,
Inc., the major shareholders, will each own 26.7 percent of the combined
company. In fourth quarter 1995, the Media Group will recognize an after tax
gain of approximately $100 in conjunction with the merger.
G. Debt
Subsequent to third quarter 1995, U S WEST refinanced $1.3 billion of
commercial paper, to take advantage of favorable long-term interest rates,
including $550 at the Media Group.
H. Contingencies
On September 22, 1995, the Company filed a lawsuit in Delaware Chancery Court
to prevent the proposed merger of Time Warner and Turner Broadcasting. The
Time Warner Entertainment partnership is, among other things, in competition
with Turner Broadcasting, and the Company believes that ownership of Turner by
Time Warner would constitute breach of contract and fiduciary duties by Time
Warner. Time Warner filed a countersuit against the Company on October 11,
1995, alleging misrepresentation, breach of contract and other misconduct on
the part of the Company. Time Warner's countersuit seeks a reformation of the
Time Warner Entertainment partnership agreement, an order that enjoins U S
WEST from breaching the partnership agreement, and unspecified compensatory
damages. U S WEST has denied each of the claims in Time Warner's countersuit.
A trial date of March 16,1996 has been set.
I. 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 $30
and $64, and $137 and $443 for the three months and nine months ended
September 30, 1995 and 1994, respectively. Included are the sale of
properties for approximately $52 and $253 for the nine months ended September
30, 1995 and 1994, respectively. The sales were in line with Company
estimates.
The components of net investment in assets held for sale follow:
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, December 31,
Dollars in millions 1995 1994
ASSETS
Cash $ 16 $ 7
Finance receivables - net 1,005 1,073
Investment in real estate - net of valuation allowance 420 465
Bonds, at market value 165 155
Investment in FSA 374 329
Other assets 198 362
Total assets 2,178 2,391
LIABILITIES
Debt 922 1,283
Deferred income taxes 700 693
Accounts payable, accrued liabilities and other 128 103
Minority interests 10 10
Total liabilities 1,760 2,089
Net investment in assets held for sale $ 418 $ 302
</TABLE>
Selected financial data for U S WEST Financial Services follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Three Nine Nine
Mos. Ended Mos. Ended Mos. Ended Mos. Ended
September 30, September 30, September 30, September 30,
1995 1994 1995 1994
Operating revenues $ 9 $ 15 $ 30 $ 45
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, December 31,
1995 1994
Net finance receivables $ 911 $ 981
Total assets 1,223 1,331
Total debt 419 533
Total liabilities 1,153 1,282
Shareowner's equity 70 49
</TABLE>
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions)
Results of Operations
Net income of the Media Group declined by $13, or 25 percent, in third quarter
1995 as compared with third quarter 1994, excluding expenses of $5 associated
with the Recapitalization Plan and an extraordinary loss of $4 for the early
retirement of debt by TWE. The decline is due primarily to increased interest
expense associated with the acquisition of cable systems in the Atlanta,
Georgia metropolitan area (the "Atlanta Systems") and interest expense
associated with expansion in international investments, partially offset by
improvement in the wireless communications business. The amortization of
goodwill associated with the Atlanta Systems acquisition also caused a
significant increase in the effective tax rate which contributed to lower
earnings. EBITDA increased by approximately 30 percent, to $207, due
primarily to improvement in the wireless communication business and the
acquisition of the Atlanta Systems. Excluding the effects of the acquisition,
EBITDA increased by approximately 14 percent.
Net income of the Media Group declined by $47, or 38 percent, for the nine
months ended September 30, 1995 as compared with 1994, excluding the effects
of the 1994 gain on sale of paging assets of $41 and the 1995 expenses of $5
associated with the Recapitalization Plan and the extraordinary loss of $4
for the early retirement of debt by TWE. The decline is due primarily to
increased interest expense associated with the Atlanta Systems acquisition,
expansion in international investments and higher equity losses related to
international growth initiatives, partially offset by improvement in the
wireless communications business. The amortization of intangible assets and
goodwill associated with the Atlanta Systems acquisition caused a significant
increase in the effective tax rate and also contributed to the decrease in
earnings.
EBITDA increased by approximately 29 percent, to $552, due primarily to
improvement in the wireless communication business and the acquisition of the
Atlanta Systems. Excluding the effects of the acquisition and the paging
sale, EBITDA increased by approximately 15 percent. The Media Group considers
EBITDA an important indicator of the operational strength and performance of
its businesses. EBITDA, however, should not be considered as an alternative
to operating or net income as an indicator of the performance of the Media
Group's businesses or as an alternative to cash flows from operating
activities as a measure of liquidity, in each case determined in accordance
with GAAP.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Following is a summary of income before extraordinary item by industry segment
and for significant unconsolidated, equity investments:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Three Three; Mos. Nine Nine
Mos. Ended Mos. Mos.
Ended Sept. 30, Ended Enced
Percent Sept. 30, 1994 Percent Sept. 30, Sept. 30, Percent
Ownership 1995 Change 1995 1994 (3) Change
Consolidated
Multimedia content and
services 100 $ 63 $ 63 - $ 179 $ 190 (5.8)
Wireless communications 100 24 11 - 56 62 (9.7)
Cable and
telecommunications 100 (1) - - (7) - -
Unconsolidated equity investments:
Time Warner Entertainment
Company, L.P. (1) 25.5 (3) (2) (50.0) (16) (13) (23.1)
TeleWest Communications 37.8 (11) (10) (10.0) (23) (24) 4.2
plc
Mercury One-2-One 50.0 (18) (16) (12.5) (57) (40) (42.5)
Other (2) (21) 5 - (59) (9) -
Income before extraordinary
item $ 33 $ 51 (35.3) $ 73 $ 166 (56.0)
<FN>
<F1>
(1) Percent ownership represents pro rata priority capital and residual equity interests.
<F2>
(2) Includes other unconsolidated equity investments and divisional expenses.
<F3>
(3) Wireless communications includes the $41 gain on sale of paging assets.
</FN>
</TABLE>
Multimedia Content and Services. Income related to Yellow Pages directory
advertising increased by approximately 7 percent and 8 percent in third
quarter and the nine months ended September 30, 1995 as compared with 1994, to
$75 and $225, respectively. The increase is due to pricing, product
enhancements and the effect of improved marketing programs on business volume.
However, Yellow Pages income growth was offset by losses related to
international directory publishing operations and the effect of increased
expenditures related to new products and other growth initiatives, including
development of interactive services.
Second quarter 1995 includes an after tax charge of approximately $9 related
to the exit of certain product lines. This charge is part of the Media
Group's ongoing efforts to evaluate each product for financial and market
feasibility. The Media Group views new service offerings as an important part
of its growth strategy. Accordingly, the Media Group anticipates that
investments in new products and services in 1995 will continue to offset
expected income growth related to the Yellow Pages business.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Wireless Communication. Wireless communications income increased $13 and $35
in third quarter and for the nine months ended September 30, 1995 as compared
with 1994, excluding the 1994 gain on sale of paging assets of $41. The
increase in wireless communications income is attributable to continued strong
growth in cellular subscribers. The domestic cellular subscriber base reached
1,269,000 at September 30, 1995, a 55 percent increase as compared with
September 30, 1994. Cellular service EBITDA approximated $85 and $217 for
third quarter and the nine months ended September 30, 1995, increases of $28
and $79, or 49 percent and 58 percent, respectively, compared to 1994.
Cellular service revenue growth, in addition to economies of scale and expense
controls, resulted in a third quarter 1995 cellular service EBITDA margin of
38.0 percent compared to 33.8 percent in 1994 and EBITDA margin for the nine
months ended September 30, 1995 was 35.3 percent compared to 30.4 percent in
1994.
Effective November 1, 1995, AirTouch and the Company have entered into Phase I
of their joint venture. In accordance with the closing agreement, during
Phase I the Media Group Combined Financial Statements will continue to reflect
the Company's existing ownership of the domestic cellular operations. The
newly formed Wireless Management Company will provide centralized services to
both companies on a contract basis. In Phase II, AirTouch and the Company
will contribute their domestic cellular assets to the newly formed venture.
This phase will occur within four years, upon obtaining interim regulatory
relief, or earlier, at AirTouch's option.
Cable and Telecommunication. The 1995 loss in cable and telecommunications
operations is the result of amortization of intangible assets related to the
December 1994 acquisition of the Atlanta Systems. The Atlanta Systems
contributed EBITDA of approximately $26 and $74 in third quarter and the nine
months ended September 30, 1995, respectively. The subscriber base of the
Atlanta Systems increased 7.5 percent during the last twelve months, to
517,000 at September 30, 1995.
Operating Results of Unconsolidated Equity Investments. The loss before
extraordinary item related to the Media Group's interests in TWE increased in
third quarter and the nine months ended September 30, 1995 compared to 1994
due primarily to higher TWE financing costs, minority interest expense and
depreciation charges, partially offset by increased EBITDA related to cable,
programming and filmed entertainment. Cable subscribers served by TWE
increased by 6 percent compared to a year ago excluding the impact of recent
cable transactions.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
On September 22, 1995, the Company filed a lawsuit in Delaware Chancery Court
to prevent the proposed merger of Time Warner and Turner Broadcasting. The
Time Warner Entertainment partnership is, among other things, in competition
with Turner Broadcasting, and the Company believes that ownership of Turner by
Time Warner would constitute breach of contract and fiduciary duties by Time
Warner. Time Warner filed a countersuit against the Company on October 11,
1995, alleging misrepresentation, breach of contract and other misconduct on
the part of the Company. Time Warner's countersuit seeks a reformation of the
Time Warner Entertainment partnership agreement, an order that enjoins U S
WEST from breaching the partnership agreement, and unspecified compensatory
damages. U S WEST has denied each of the claims in Time Warner's countersuit.
A trial date of March 16,1996 has been set.
International businesses are experiencing rapid growth, and will continue to
incur near term start-up losses. New investments in 1995 include a 20 percent
investment in Malaysia to provide local wireline and wireless communications,
the acquisition of a 50 percent interest in cable television systems in the
Netherlands and the acquisition of a 29 percent interest in cable television
systems in the Czech Republic.
On October 2, 1995, TeleWest Communications' acquisition and share exchange
with SBC CableComms (UK) became effective. U S WEST and Tele-Communications,
Inc., the major shareholders, will each own 26.7 percent of the combined
company. In fourth quarter 1995, the Media Group will recognize an after tax
gain of approximately $100 in conjunction with the merger. The new entity
will be the largest cable television and cable telephony operator in the
United Kingdom.
Subscribers to U S WEST's international cable joint venture operations in the
United Kingdom, Norway, Sweden and Hungary grew to 854,000, a 12.8 percent
increase from a year ago. Including the recent acquisitions in the Czech
Republic and Netherlands, international cable subscribers total approximately
1,720,000 at September 30, 1995.
Subscribers to U S WEST's international wireless joint venture operations in
the United Kingdom, Hungary, the Czech Republic, Slovakia and Russia grew to
579,000 at September 30, 1995, which is more than two times the customer base
at September 30, 1994. Mercury One 2 One ("One 2 One") added 135,000
customers during the nine months ended September 30, 1995, a 65.9 percent
increase since December 31, 1994. One 2 One served 340,000 customers at
September 30, 1995, compared with 139,000 customers at September 30, 1994.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Sales and Other Revenues
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
3 Mos. 3 Mos. 9 Mos. 9 Mos.
Ended Ended Ended Ended
Sept. 30, Sept. 30, Percent Sept. 30, Sept. 30, Percent
1995 1994 Change 1995 1994 Change
Multimedia content and services:
Domestic $ 264 $ 246 7.3 $ 784 $ 732 7.1
International 28 31 (9.7) 72 42 71.4
292 277 5.4 856 774 10.6
Wireless communications:
Cellular service 223 168 32.7 616 454 35.7
Cellular equipment 23 30 (23.3) 60 81 (25.9)
Paging sales & service (1) - - - - 28 -
246 198 24.2 676 563 20.1
Cable and telecommunications 56 - - 165 - -
Other 10 7 42.9 28 22 27.3
Sales and other revenues $ 604 $ 482 25.3 $ 1,725 $ 1,359 26.9
<FN>
____________________
(1) The paging business was sold in June 1994. Results reflect operations for the six months
ending
June 30, 1994.
</FN>
</TABLE>
Multimedia Content and Services. Revenues related to Yellow Pages directory
advertising increased approximately $17, or 7.3 percent, and $50, or 7.1
percent, in third quarter and the nine months ended September 30, 1995,
respectively, as compared with 1994, due to pricing and an increase in Yellow
Pages advertising volume. Product enhancements and the effect of improved
marketing programs on business volume also contributed to the increase in
revenues. Excluding the sale of certain non-strategic operations, non-Yellow
Pages revenues increased by $4 and $8 in third quarter and the nine months
ended September 30, 1995, respectively, as compared with 1994.
International directory publishing revenue decreased by $3 in third quarter
1995 as compared with 1994, primarily due to a delay in publication of certain
directories. Revenue for the nine months ended September 30, 1995 increased
by $30 compared to 1994 due to the May 1994 purchase of Thomson Directories.
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Wireless Communications. Cellular service revenues increased $55, or 32.7
percent, and $162, or 35.7 percent, in third quarter and the nine months ended
September 30, 1995, respectively, as compared with 1994. This increase is due
to a 55 percent increase in subscribers during the last twelve months,
partially offset by a 13 percent drop in average revenue per subscriber to
$62.00 per month for the nine months ended September 30, 1995 as compared with
1994. The increase in subscribers relates to lower costs for cellular phone
equipment and enhanced service offerings, which has resulted in additional
penetration into the consumer user market. The decrease in average revenue
per subscriber is due to continuing competitive pressures and price
sensitivity of non-business users.
Cellular equipment revenues decreased by $7, or 23.3 percent, and $21, or 25.9
percent, in third quarter and the nine months ended September 30, 1995,
respectively, as compared with 1994. This decrease is primarily due to a
decrease in unit sales and price per unit due to the impacts of competition.
Cable and Telecommunications. Domestic cable and telecommunications revenues
reflect the December 1994 acquisition of the Atlanta Systems.
Cost of Sales and Other Revenues
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Three Three Nine Nine
Mos. Mos. Mos. Mos.
Ended Ended Ended Ended
Sept. 30, Sept. 30, Percent Sept. 30, Sept. 30, Percent
1995 1994 Change 1995 1994 Change
Multimedia content and services:
Domestic $ 99 $ 86 15.1 $ 285 $ 254 12.2
International 20 21 (4.8) 50 29 72.4
119 107 11.2 335 283 18.4
Wireless communications:
Cost of cellular service 30 24 25.0 91 63 44.4
Cost of cellular equipment 29 30 (3.3) 71 81 (12.3)
Cost of paging sales & service (1) - - - - 6 -
59 54 9.3 162 150 8.0
Cable and telecommunications 15 - - 42 - -
Costs of sales and other revenues $ 193 $ 161 19.9 $ 539 $ 433 24.5
<FN>
____________________
(1) The paging business was sold in June 1994. Results reflect operations for six months ending
June 30,
1994.
</FN>
</TABLE>
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Multimedia Content and Services. Cost of sales related to domestic publishing
operations increased primarily due to product enhancements and increased
printing and delivery costs associated with growth in the Yellow Pages
directory business. The decrease in third quarter 1995 cost of sales for
international directory publishing operations as compared with 1994 is
primarily due to a delay in publication of certain directories. The increase
in cost of sales in the nine months ended September 30, 1995 is a result of
the 1994 acquisition of Thomson Directories.
Wireless Communications. Network maintenance expenses increased by $2 in third
quarter 1995 as compared with 1994 due primarily to additional network usage
and expansion of the wireless network. Billing and other expenses increased
by $4, due primarily to a larger average customer base.
Land-line telecommunications and network maintenance expenses increased by $11
for the nine months ended September 30, 1995 as compared with 1994 due
primarily to additional network usage and expansion of the wireless network.
Billing expenses increased by $10, due primarily to a larger average customer
base. Costs associated with fraudulent activity and roaming costs increased
by $7.
During 1995, the cellular equipment margin has declined as a result of
increased equipment concessions associated with the direct marketing channel.
The cellular equipment margin is expected to continue to decline as a result
of this change in distribution mix.
Cable and Telecommunications. Cable and telecommunications costs reflect the
December 1994 acquisition of the Atlanta Systems.
Selling, General and Administrative Expenses
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
Sept. 30, Sept. 30, Percent Sept. 30, Sept. 30, Percent
1995 1994 Change 1995 1994 Change
Multimedia content and services:
Domestic $ 57 $ 53 7.5 $ 182 $ 161 13.0
International 7 3 - 22 8 -
64 56 14.3 204 169 20.7
Wireless communications (1) 102 87 17.2 297 264 12.5
Cable and telecommunications 16 - - 50 - -
Other 22 19 15.8 83 65 27.7
$ 204 $ 162 25.9 $ 634 $ 498 27.3
<FN>
___________________
(1) The paging business was sold in June 1994. Results reflect operations for six months ending
June 30, 1994.
</FN>
</TABLE>
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Multimedia Content and Services. In domestic operations, costs related to the
development of new database marketing and interactive services increased by $5
in third quarter 1995 as compared with 1994. Partially offsetting these cost
increases was the effect of the sale of certain non-strategic operations.
In domestic operations, costs related to the development of new database
marketing and interactive services increased by $15 in the nine months ended
September 30, 1995 as compared with 1994. Additionally, a charge of $14 was
incurred to recognize costs associated with exiting certain product lines.
Other selling, general and administrative expenses decreased by $8, primarily
related to the effect of the sale of certain non-strategic operations.
The increase in selling, general and administrative expenses related to
international directory publishing operations in third quarter 1995 as
compared with 1994 is due to a reclassification and increased marketing,
salary and wage expenses. The increase for the nine months ended September 30,
1995 as compared with 1994 is primarily due to the May 1994 acquisition of
Thomson Directories.
Wireless Communications. Selling, general and administrative expenses
increased by $15, or 17.2 percent, in third quarter 1995 as compared with
1994. Commissions paid to retailers increased by $10, primarily as a result
of a 39 percent increase in gross customer additions. Other selling, general
and administrative expenses increased by $5, primarily due to increased
advertising expenditures and bad debts.
Excluding the effects of the sale of the paging business in 1994, selling,
general and administrative expenses increased by $44, or 17.5 percent, in the
nine months ended September 30, 1995 as compared with 1994. Commissions paid
to retailers increased by $33, primarily as a result of a 47 percent increase
in gross customer additions. Other selling, general and administrative
expenses increased by $11, primarily due to increased advertising expenditures
and bad debts.
Cable and Telecommunications. Cable and telecommunications costs reflect the
December 1994 acquisition of the Atlanta Systems.
Other. The increase in these other selling, general and administrative
expenses is primarily attributable to additional resources being allocated to
accommodate growth in domestic and international operations.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Depreciation and Amortization
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
Sept. 30, Sept. 30, Percent Sept. 30, Sept. 30, Percent
1995 1994 Change 1995 1994 Change
Multimedia content and services $ 8 $ 7 14.3 $ 26 $ 18 44.4
Wireless communications (1) 29 24 20.8 86 74 16.2
Cable and telecommunications 19 - - 59 - -
Other 4 2 100.0 10 7 42.9
$ 60 $ 33 81.8 $ 181 $ 99 82.8
<FN>
____________________
(1) The paging business was sold in June 1994. Results reflect operations for six months ending
June 30, 1994.
</FN>
</TABLE>
Depreciation and amortization related to wireless operations increased by $17
in the nine months ended September 30, 1995 as compared with 1994, excluding
the effects of the sale of the paging business in 1994. Multimedia content
and services depreciation and amortization increased principally due to the
effects of the May 1994 acquisition of Thomson Directories. Cable and
telecommunications depreciation and amortization reflect the December 1994
acquisition of the Atlanta Systems.
Interest Expense and Other
Interest expense increased by $19 and $43 in third quarter and the nine months
ended September 30, 1995, respectively, as compared with 1994. The increase
in interest expense is primarily a result of incremental financing costs
associated with the December 1994 acquisition of the Atlanta Systems, new
international investments and a reclassification of debt from net investment
in assets held for sale.
Equity losses increased by $12 and $45 in third quarter and the nine months
ended September 30, 1995, respectively, as compared with 1994. The increases
were primarily due to costs related to the expansion of the customer base at
One 2 One in the nine months ended September 30, 1995, as compared with 1994.
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Provision for Income Taxes
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Three Three Nine Nine
Months Months Mos. Mos.
Ended Ended Ended Ended
Sept. 30, Sept. 30, Percent Sept. 30, Sept. 30, Percent
1995 1994 Change 1995 1994 Change
Provision for income taxes $ 51 $ 41 24.4 $ 103 $ 134 (23.1)
Effective tax rate 60.7 44.6 - 58.5 44.7 -
</TABLE>
The increase in the effective tax rate reflects the impact of lower pretax
income, the effects of goodwill amortization related to the acquisition of the
Atlanta Systems, a benefit recorded in 1994 related to the sale of the paging
assets, higher state and foreign income taxes and expenses associated with the
Recapitalization Plan.
Liquidity and Capital Resources
Operating Activities
During the nine months ended September 30, 1995, cash provided by operating
activities of the Media Group increased by $83 as compared with 1994. Cash
provided by operating activities for the nine months ended September 30, 1995
includes an income tax payment of approximately $60 related to the 1994
partial sale of the Media Group's joint venture interest in TeleWest.
Adjusted for the income tax payment, operating cash flow of the Media Group
increased by $143. Growth in operating cash flow from wireless communication
services and the acquisition of the Atlanta Cable systems contributed to the
increase.
Investing Activities
Total capital expenditures of the Media Group were $240 for the nine months
ended September 30, 1995 as compared with $199 for the nine months ended
September 30, 1995 of 1994, the majority of which were devoted to the
enhancement and expansion of the cellular network.
Investments in international ventures were $576 for the nine months ended
September 30, 1995 as compared with $214 for 1994. Significant 1995 Media
Group investing activities include equity investments in Malaysia to provide
local wireline and wireless communications, the acquisitions of cable
television systems in the Netherlands and Czech Republic and additional
capital contributions to One 2 One in the U.K.
In March 1995, PCS PrimeCo was awarded PCS licenses in 11 markets. The Media
Group's share of the cost of the licenses was approximately $268 all of which
was funded by June 30, 1995. Under the PCS PrimeCo partnership agreement, the
Company is required to fund 25 percent of PCS PrimeCo's operating and capital
costs, including licensing costs. The Company anticipates that its total
funding obligations to PCS PrimeCo during the next four years will be
significant.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Cash provided to the net investment in assets held for sale of $108 for the
nine months ended September 30, 1995 primarily reflects the payment of debt.
At September 30, 1995, the Company guaranteed debt associated with its
international investments in the principal amount of approximately $165.
Financing Activities
Debt increased by $132 due to new international investments, cash funding of
the PCS licenses and a reclassification of debt from net investment in assets
held for sale. These increases were largely offset by reductions of debt
related to the investment in TWE and a reduction of commercial paper by
issuing Preferred Securities. The Company issued $600 of Trust Originated
Preferred Securities (the "Preferred Securities") in third quarter 1995. U S
WEST has fully and unconditionally guaranteed the payment of interest and
redemption amounts to holders of the Preferred Securities. The Preferred
Securities are redeemable in whole or in part by U S WEST at any time on or
after September 11, 2000, at a redemption price of $25.00 per Preferred
Security. As of September 30, 1995, 24,000,000 Preferred Securities were
outstanding.
Excluding debt included in net investment in assets held for sale, the Media
Group's percentage of debt to total capital at September 30, 1995, was 27.5
percent compared to 30.1 percent at December 31, 1994. Including debt related
to net investment in assets held for sale, the Media Group's percentage of
debt to total capital was 35.8 and 42.4 percent at September 30, 1995, and
December 31, 1994, respectively. The percentage of debt to total capital has
decreased at September 30, 1995, as compared with December 31, 1994 primarily
as a result of issuing the Preferred Securities which are included as a
component of total capital.
The Media Group reinvests earnings, if any, for future growth and does not
expect to pay dividends on the Media Stock in the foreseeable future.
The Media group expects that cash from operations will not be adequate to fund
expected cash requirements in the foreseeable future. Additional financing
will primarily come from a combination of new debt and equity. The Media
Group will also continue to employ strategic alliances in executing its
business strategies.
The Media Group from time to time engages in discussions regarding
acquisitions. The Company may fund any such acquisitions, if consummated,
with internally generated funds, debt or equity. The incurrence of
indebtedness to fund such acquisitions and/or the assumption of indebtedness
in connection with such acquisitions could result in a downgrading of the
Company's credit rating.
During the nine months ended September 30, 1995, the Media Group received a
$105 transfer of equity from the Communications Group.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Union Contract
On October 15, 1995, U S WEST Direct and the CWA reached a tentative agreement
on their contract, subject to ratification by the CWA membership. This
contract would provide for salary increases of 10.5 percent over three years
and provides employees with a lump sum payment of $850.
Regulatory
On October 11, 1995, the U.S. Justice Department recommended that U S WEST be
allowed to offer long-distance telephone service outside its 14-state region.
The agreement, among U S WEST, the Justice Department and AT&T, must be
approved by U.S. District Court Judge Harold Greene, who oversees the consent
decree that broke up AT&T in 1984, and barred the Regional Holding Companies
from a number of businesses, including interLATA long distance.
If approved by Judge Greene, U S WEST will be able to offer long-distance
service outside U S WEST's local service territory. Such an approval would
mean that U S WEST would be the first Regional Holding Company allowed to
offer interLATA long-distance service outside its region.
Selected Proportionate Data
The following table is not required by GAAP or intended to replace the
Combined Financial Statements prepared in accordance with GAAP. It is
presented supplementally because the Company believes that proportionate data
facilitates the understanding and assessment of its Combined Financial
Statements. The following table includes allocations of Media Group corporate
activity. The table does not reflect financial data of the capital assets
segment, which had net assets of $418 at September 30, 1995 and $302 at
December 31, 1994. The financial information included below departs materially
from GAAP because it aggregates the revenues and operating income of entities
not controlled by the Media Group with those of the consolidated operations of
the Media group.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Selected Proportionate Data, continued
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Cable & Cable & Wireless Wireless Multimedia Multimedia
Telecommu- Telecommu-nications Commu- Commu- Content &
Content &
nications International nications nications Services Services
Dollars in millions Domestic (3) Domestic International Domestic
International Total
(1) (3)
THREE MONTHS ENDED
SEPTEMBER 30, 1995
Revenue $ 655 $ 32 $ 223 $ 75 $ 267 $ 28 $1,280
Operating income (loss) 59 (21) 50 (16) 104 (6) 170
Net income (loss) (14) (23) 23 (16) 65 (6) 29
EBITDA (2) $ 162 $ (10) $ 77 $ - $ 111 $ (3) $ 337
Subscribers (thousands) 2,825 599 1,162 271 NA NA
4,857
THREE MONTHS ENDED
SEPTEMBER 30, 1994
Revenue $ 566 $ 21 $ 166 $ 52 $ 248 $ 31 $1,084
Operating income (loss) 41 (23) 29 (28) 102 4 125
Net income (loss) (1) (14) 15 (12) 63 - 51
EBITDA (2) $ 123 $ (13) $ 48 $ (15) $ 108 $ 7 $
258
Subscribers (thousands) 2,349 232 694 124 NA NA
3,399
NINE MONTHS ENDED
SEPTEMBER 30, 1995
Revenue $ 1,906 $ 82 $ 584 $ 200 $ 791 $ 72
$3,635
Operating income (loss) 136 (64) 112 (62) 302 (15)
409
Net income (loss) (46) (36) 54 (76) 184 (11) 69
EBITDA (2) $ 440 $ (34) $ 189 $ (25) $ 322 $ (7) $
885
NINE MONTHS ENDED
SEPTEMBER 30, 1994
Revenue $ 1,589 $ 64 $ 479 $ 121 $ 738 $ 42
$3,033
Operating income (loss) 110 (58) 65 (68) 300 1 350
Net income (loss) (15) (32) 69 (47) 193 (2) 166
EBITDA (2) $ 343 $ (33) $ 125 $ (38) $ 318 $ 5 $
720
<FN>
<F1>
(1) The proportionate results are based on the Media Group's 25.51 percent pro rata priority and
residual equity interests in
reported TWE results. The reported TWE results are prepared in accordance with GAAP and
have not been adjusted to report TWE
investments accounted for under the equity method on a proportionate basis.
<F2>
(2) Proportionate EBITDA represents the Media Group's equity interest in the entities multiplied
by the entity's EBITDA. As
such, proportionate EBITDA does not represent cash available to the Media Group. The Media
Group considers EBITDA an important
indicator of the operational strength and performance of its businesses. EBITDA, however, should
not be considered as an
alternative to operating or net income as an indicator of the performance of the Media Group's
businesses or as an alternative
to cash flows from operating activities as a measure of liquidity, in each case determined in
accordance with GAAP.
<F3>
(3) Previously reported amounts have been reclassified to conform with the current presentation.
</FN>
</TABLE>
<PAGE>
Form 10-Q - Part II
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On September 22, 1995, the Company filed a lawsuit in Delaware Chancery Court
to prevent the proposed merger of Time Warner and Turner Broadcasting. The
Time Warner Entertainment partnership is, among other things, in competition
with Turner Broadcasting, and the Company believes that ownership of Turner by
Time Warner would constitute breach of contract and fiduciary duties by Time
Warner. Time Warner filed a countersuit against the Company on October 11,
1995, alleging misrepresentation, breach of contract and other misconduct on
the part of the Company. Time Warner's countersuit seeks a reformation of the
Time Warner Entertainment partnership agreement, an order that enjoins U S
WEST from breaching the partnership agreement, and unspecified compensatory
damages. U S WEST has denied each of the claims in Time Warner's countersuit.
A trial date of March 16,1996 has been set.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11 Statement regarding computation of earnings per share of U S WEST, Inc.
12 Statement regarding computation of earnings to fixed charges ratio of U S
WEST, Inc.
(b) Reports on Form 8-K filed during the third quarter
(i) Form 8-K/A report dated July 12, 1995, to Form 8-K filed May 23, 1995,
concerning the consolidated financial statements of Time Warner Entertainment
Company, L.P. for the years ended December 31, 1994, 1993 and 1992 and for the
three month periods ended March 31, 1995 and 1994; the financial statements of
Mercury One 2 One for the year ended March 31, 1995; the combined financial
statements of Georgia Cable Holdings and subsidiary partnerships for the years
ended December 31, 1993 and 1992; and the consolidated financial statements of
Wometco Cable Corp. and subsidiaries for the years ended December 31, 1993 and
1992;
(ii) report dated July 28, 1995, concerning the release of earnings for the
second quarter ended June 30, 1995, and related exhibits;
(iii) Form 8-K/A report dated August 24, 1995, to Form 8-K filed May 23,
1995, concerning the consolidated financial statements of Time Warner
Entertainment Company, L.P. for the years ended December 31, 1994, 1993 and
1992 and for the three month periods ended March 31, 1995 and 1994; the
financial statements of Mercury One 2 One for the year ended March 31, 1995;
the combined financial statements of Georgia Cable Holdings and subsidiary
partnerships for the years ended December 31, 1993 and 1992; and the
consolidated financial statements of Wometco Cable Corp. and subsidiaries for
the years ended December 31, 1993 and 1992;
(iv) report dated September 22, 1995, concerning U S WEST's announcement
entitled "U S WEST Files to Stop Time Warner-Turner Merger"; and
(v) report dated September 28, 1995, concerning U S WEST's proposal to
reincorporate in Delaware and create two classes of common stock that are
intended to reflect separately the performance of U S WEST's communications
and multimedia businesses, including the Proxy Statement and Prospectus mailed
to shareholders of U S WEST in connection with the Special Meeting of
Shareholders held October 31, 1995.
<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.
U S WEST, Inc.
By: /S/ James T. Anderson
James T. Anderson
Acting Executive Vice President
and Chief Financial Officer
November 13, 1995
EXHIBIT 11
U S WEST, Inc.
Computation of Earnings Per Common Share
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
<S> <C> <C> <C> <C>
1995 1994 1995 1994
--------- ---------- --------- ----------
Income before extraordinary item $ 324,765 $ 318,427 $ 972,441 $ 1,016,982
Extraordinary item (net of tax):
Early extinguishment of debt (8,650) - (8,650) -
---------- ---------- ---------- ----------
Net income 316,115 318,427 963,791 1,016,982
Less preferred dividends 855 292 2,536 292
Net income available for ---------- ---------- ---------- ----------
common share calculation $ 315,260 $ 318,135 $ 961,255 $ 1,016,690
========== ========== ========== ==========
Weighted average common shares 471,229 454,997 470,076 451,037
outstanding ========== ========== ========== ==========
Income available for common before
extraordinary item $ 0.69 $ 0.70 $ 2.06 $ 2.25
Extraordinary item (net of tax):
Early extinguishment of debt (0.02) - (0.02) -
---------- ---------- ---------- ----------
Earnings per common share $ 0.67 $ 0.70 $ 2.04 $ 2.25
========== ========== ========== ==========
</TABLE>
EXHIBIT 11
U S WEST, Inc.
Computation of Earnings Per Common Share
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
EQUIVALENT SHARE: Sept 30, Sept 30,
<S> <C> <C> <C> <C>
1995 1994 1995 1994
--------- ---------- --------- ----------
Income before extraordinary item $ 324,765 $ 318,427 $ 972,441 $ 1,016,982
Extraordinary item (net of tax):
Early extinguishment of debt (8,650) - (8,650) -
---------- ---------- ---------- ----------
Net income 316,115 318,427 963,791 1,016,982
Less preferred dividends 855 292 2,536 292
Net income available for ---------- ---------- ---------- ----------
common share calculation $ 315,260 $ 318,135 $ 961,255 $ 1,016,690
========== ========== ========== ==========
Weighted average common shares 471,229 454,997 470,076 451,037
outstanding
Incremental shares from assumed
exercise of stock options 806 493 616 504
---------- ---------- ---------- ----------
Total common shares 472,035 455,490 470,692 451,541
========== ========== ========== ==========
Income available for common before
extraordinary item $ 0.69 $ 0.70 $ 2.06 $ 2.25
Extraordinary item (net of tax):
Early extinguishment of debt (0.02) - (0.02) -
---------- ---------- ---------- ----------
Earnings per common and $ 0.67 $ 0.70 $ 2.04 $ 2.25
common equivalent share ========== ========== ========== ==========
</TABLE>
EXHIBIT 11
U S WEST, Inc.
Computation of Earnings Per Common Share
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
FULL DILUTION: Sept. 30, Sept. 30,
<S> <C> <C> <C> <C>
1995 1994 1995 1994
--------- ---------- --------- ----------
Income before extraordinary item $ 324,765 $ 318,427 $ 972,441 $ 1,016,982
Interest on Convertible Liquid Yield
Option Notes (LYONS) 5,545 5,440 16,707 16,215
---------- ---------- ---------- ----------
Adjusted income before
extraordinary item 330,310 323,867 989,148 1,033,197
Extraordinary item (net of tax):
Early extinguishment of debt (8,650) - (8,650) -
---------- ---------- ---------- ----------
Adjusted net income 321,660 323,867 980,498 1,033,197
Less preferred dividends 855 292 2,536 292
---------- ---------- ---------- ----------
Adjusted net income available for
common share calculation $ 320,805 $ 323,575 $ 977,962 $ 1,032,905
========== ========== ========== ==========
Weighted average common shares
outstanding 471,229 454,997 470,076 451,037
Incremental shares from assumed
exercise of stock options 1,057 493 1,042 504
Shares issued upon conversion of LYONS 9,634 9,894 9,800 10,112
---------- ---------- ---------- ----------
Total common shares 481,920 465,384 480,918 461,653
========== ========== ========== ==========
Adjusted income available for common
before extraordinary item $ 0.68 $ 0.70 $ 2.05 $ 2.24
Extraordinary item (net of tax):
Early extinguishment of debt (0.02) - (0.02) -
---------- ---------- ---------- ----------
Earnings per common share - $ 0.66 $ 0.70 $ 2.03 $ 2.24
assuming full dilution ========== ========== ========== ==========
</TABLE>
EXHIBIT 12
<TABLE>
<CAPTION>
U S WEST, Inc.
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
(Dollars in Millions)
Quarter Ended
9/30/95 9/30/94
<S> <C> <C>
Income before income taxes $ 538 $ 514
Interest expense (net of amounts capitalized) 137 104
Interest factor on rentals (1/3) 22 23
Equity losses in unconsolidated ventures 2 -
Guaranteed minority interest expense 2 -
-------- --------
Earnings $ 701 $ 641
Interest expense 156 114
Interest factor on rentals (1/3) 22 23
Guaranteed minority interest expense 2 -
Preferred stock dividends 2 -
-------- --------
Fixed charges $ 182 $ 137
Ratio of earnings to fixed charges 3.85 4.68
- ------------------------------------------ -------- --------
</TABLE>
<TABLE>
<CAPTION>
Year-to-Date
9/30/95 9/30/94
<S> <C> <C>
Income before income taxes $ 1,590 $ 1,645
Interest expense (net of amounts capitalized) 404 323
Interest factor on rentals (1/3) 71 70
Equity losses in unconsolidated ventures 28 -
Guaranteed minority interest expense 2 -
-------- --------
Earnings $ 2,095 $ 2,038
Interest expense 448 348
Interest factor on rentals (1/3) 71 70
Guaranteed minority interest expense 2 -
Preferred stock dividends 5 -
-------- --------
Fixed charges $ 526 $ 418
Ratio of earnings to fixed charges 3.98 4.88
- ------------------------------------------- -------- --------
</TABLE>
EXHIBIT 12
<TABLE>
U S WEST, Inc.
RATIO OF EARNINGS TO FIXED CHARGES
Dollars in Millions)
<CAPTION>
Quarter Ended
9/30/95 9/30/94
-------- --------
<S> <C> <C>
Income before income taxes $ 538 $ 514
Interest expense (net of amounts capitalized) 137 104
Interest factor on rentals (1/3) 22 23
Equity losses in unconsolidated ventures 2 -
Guaranteed minority interest expense 2 -
-------- --------
Earnings $ 701 $ 641
Interest expense 156 114
Interest factor on rentals (1/3) 22 23
Guaranteed minority interest expense 2 -
-------- --------
Fixed charges $ 180 $ 137
Ratio of earnings to fixed charges 3.89 4.68
- -------------------------------------------- -------- --------
<CAPTION>
Year-to-Date
9/30/95 9/30/94
-------- --------
<S> <C> <C>
Income before income taxes $ 1,590 $ 1,645
Interest expense (net of amounts capitalized) 404 323
Interest factor on rentals (1/3) 71 70
Equity losses in unconsolidated ventures 28 -
Guaranteed minority interest expense 2 -
-------- --------
Earnings $ 2,095 $ 2,038
Interest expense 448 348
Interest factor on rentals (1/3) 71 70
Guaranteed minority interest expense 2 -
-------- --------
Fixed charges $ 521 $ 418
Ratio of earnings to fixed charges 4.02 4.88
-------------------------------------------- -------- --------
</TABLE>
EXHIBIT 12
<TABLE>
<CAPTION>
U S WEST Financial Services, Inc.
RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Thousands)
Quarter Ended
9/30/95 9/30/94
<S> <C> <C>
Income before income taxes $2,297 $ 2,539
Interest expense 7,113 9,655
Interest factor on rentals (1/3) 5 21
- -
Earnings $9,415 $12,215
Interest expense 7,113 9,655
Interest factor on rentals (1/3) 5 21
- -
Fixed charges $7,118 $ 9,676
Ratio of earnings to fixed charges 1.32 1.26
- ------------------------------------------ - -
<CAPTION>
Year-to-Date
9/30/95 9/30/94
<S> <C> <C>
Income before income taxes $ 7,677 $ 4,639
Interest expense 23,682 32,428
Interest factor on rentals (1/3) 36 98
- -
Earnings $31,395 $37,165
Interest expense 23,682 32,428
Interest factor on rentals (1/3) 36 98
- -
Fixed charges $23,718 $32,526
Ratio of earnings to fixed charges 1.32 1.14
- ------------------------------------------ - -
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000732718
<NAME> U S WEST, INC.
<MULTIPLIER> 1,000,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1995
<PERIOD-END> SEP-30-1995 SEP-30-1995
<CASH> 108 108
<SECURITIES> 0 0
<RECEIVABLES> 1,932 1,932
<ALLOWANCES> 0 0
<INVENTORY> 248 248
<CURRENT-ASSETS> 2,937 2,937
<PP&E> 32,278 32,278
<DEPRECIATION> 17,936 17,936
<TOTAL-ASSETS> 24,761 24,761
<CURRENT-LIABILITIES> 6,936 6,936
<BONDS> 5,144 5,144
<COMMON> 8,161 8,161
651 651
0 0
<OTHER-SE> (397) (397)
<TOTAL-LIABILITY-AND-EQUITY> 24,761 24,761
<SALES> 2,964 8,686
<TOTAL-REVENUES> 2,964 8,686
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 2,275 6,668
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 137 404
<INCOME-PRETAX> 538 1,590
<INCOME-TAX> 213 617
<INCOME-CONTINUING> 325 973
<DISCONTINUED> 0 0
<EXTRAORDINARY> (9) (9)
<CHANGES> 0 0
<NET-INCOME> 316 964
<EPS-PRIMARY> .67 2.04
<EPS-DILUTED> .66 2.03
</TABLE>
