<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1997
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.
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A Delaware Corporation IRS Employer No. 84-0926774
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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 of each class of U S WEST, Inc.'s common stock
outstanding (net of shares held in treasury), at April 30, 1997, was:
U S WEST Communications Group Common Stock - 482,048,863 shares;
U S WEST Media Group Common Stock - 606,397,667 shares
<PAGE>
U S WEST, Inc.
Form 10-Q
TABLE OF CONTENTS
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Item Page
- ---- ----
PART I - FINANCIAL INFORMATION
1. U S WEST, Inc. Financial Information
Consolidated Statements of Operations -
Three Months Ended March 31, 1997 and 1996 3
Consolidated Balance Sheets -
March 31, 1997 and December 31, 1996 5
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1997 and 1996 7
Notes to Consolidated Financial Statements 8
2. U S WEST, Inc. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
1. U S WEST Communications Group Financial Information
Combined Statements of Operations -
Three Months Ended March 31, 1997 and 1996 26
Combined Balance Sheets -
March 31, 1997 and December 31, 1996 27
Combined Statements of Cash Flows -
Three Months Ended March 31, 1997 and 1996 29
Notes to Combined Financial Statements 30
2. U S WEST Communications Group Management's Discussion and
Analysis of Financial Condition and Results of Operations 32
1. U S WEST Media Group Financial Information
Combined Statements of Operations -
Three Months Ended March 31, 1997 and 1996 39
Combined Balance Sheets -
March 31, 1997 and December 31, 1996 40
Combined Statements of Cash Flows -
Three Months Ended March 31, 1997 and 1996 42
Notes to Combined Financial Statements 43
2. U S WEST Media Group Management's Discussion and
Analysis of Financial Condition and Results of Operations 48
PART II - OTHER INFORMATION
1. Legal Proceedings 59
6. Exhibits and Reports on Form 8-K 59
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<PAGE>
Form 10-Q - Part I
CONSOLIDATED STATEMENTS OF OPERATIONS U S WEST, Inc.
(Unaudited)
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Three Three
Months Months
Ended Ended
March 31, March 31,
Dollars in millions 1997 1996
Sales and other revenues $ 3,766 $ 3,050
Operating expenses:
Employee-related expenses 1,148 1,043
Other operating expenses 842 591
Taxes other than income taxes 124 107
Depreciation and amortization 830 584
---------- ----------
Total operating expenses 2,944 2,325
---------- ----------
Income from operations 822 725
Interest expense 278 135
Equity losses in unconsolidated ventures 165 66
Gain on sale of investment 51 -
Gain on sale of rural telephone exchanges 18 -
Guaranteed minority interest expense 22 12
Other expense - net 26 23
---------- ----------
Income before income taxes and cumulative effect of
change in accounting principle 400 489
Provision for income taxes 170 192
---------- ----------
Income before cumulative effect of change in
accounting principle 230 297
Cumulative effect of change in accounting principle - net of tax - 34
---------- ----------
NET INCOME $ 230 $ 331
========== ==========
Dividends on preferred stock 13 1
---------- ----------
EARNINGS AVAILABLE FOR COMMON STOCK $ 217 $ 330
========== ==========
See Notes to Consolidated Financial Statements.
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<PAGE>
Form 10-Q - Part I
CONSOLIDATED STATEMENTS OF OPERATIONS U S WEST, Inc.
(Unaudited), continued
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Three Three
Months Months
Ended Ended
March 31, March 31,
In thousands (except per share amounts) 1997 1996
COMMUNICATIONS GROUP EARNINGS PER
COMMON SHARE:
Income before cumulative effect of change
in accounting principle $ 0.70 $ 0.62
Cumulative effect of change in accounting principle - 0.07
----------- ----------
COMMUNICATIONS GROUP EARNINGS PER
COMMON SHARE $ 0.70 $ 0.69
=========== ==========
COMMUNICATIONS GROUP DIVIDENDS PER
COMMON SHARE $ 0.535 $ 0.535
=========== ==========
COMMUNICATIONS GROUP AVERAGE
COMMON SHARES OUTSTANDING 481,341 475,056
=========== ==========
MEDIA GROUP LOSS PER
COMMON SHARE $ (0.20) $ -
=========== ==========
MEDIA GROUP AVERAGE COMMON
SHARES OUTSTANDING 606,527 473,003
=========== ==========
See Notes to Consolidated Financial Statements.
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<PAGE>
Form 10-Q - Part I
CONSOLIDATED BALANCE SHEETS U S WEST, Inc.
(Unaudited)
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March 31, December 31,
Dollars in millions 1997 1996
ASSETS
Current assets:
Cash and cash equivalents $ 164 $ 201
Accounts and notes receivable - net 2,059 2,113
Inventories and supplies 171 159
Deferred directory costs 269 259
Deferred tax asset 186 213
Prepaid and other 130 167
---------- -------------
Total current assets 2,979 3,112
---------- -------------
Gross property, plant and equipment 38,152 37,756
Accumulated depreciation 19,944 19,475
---------- -------------
Property, plant and equipment - net 18,208 18,281
Investment in Time Warner Entertainment 2,483 2,477
Net investment in international ventures 1,427 1,548
Intangible assets - net 12,597 12,595
Net investment in assets held for sale 403 409
Other assets 2,236 2,433
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Total assets $ 40,333 $ 40,855
========== =============
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
Form 10-Q - Part I
CONSOLIDATED BALANCE SHEETS U S WEST, Inc.
(Unaudited), continued
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March 31, December 31,
Dollars in millions 1997 1996
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Short-term debt $ 1,795 $ 1,051
Accounts payable 1,249 1,316
Due to Continental Cablevision shareholders - 1,150
Employee compensation 344 470
Dividends payable 266 263
Other 2,159 1,824
----------- --------------
Total current liabilities 5,813 6,074
----------- --------------
Long-term debt 14,260 14,300
Postretirement and other postemployment
benefit obligations 2,473 2,479
Deferred income taxes 4,269 4,349
Deferred credits and other 902 973
Contingencies (See Note E to the Consolidated
Financial Statements)
Company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely
Company-guaranteed debentures 1,080 1,080
Preferred stock subject to mandatory redemption 51 51
Shareowners' equity:
Preferred stock 921 920
Common shares 10,739 10,741
Retained earnings (deficit) (57) 18
LESOP guarantee (91) (91)
Foreign currency translation adjustments (27) (39)
----------- --------------
Total shareowners' equity 11,485 11,549
----------- --------------
Total liabilities and shareowners' equity $ 40,333 $ 40,855
=========== ==============
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
Form 10-Q - Part I
CONSOLIDATED STATEMENTS OF CASH FLOWS U S WEST, Inc.
(Unaudited)
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Three Three
Months Months
Ended Ended
March 31, March 31,
Dollars in millions 1997 1996
OPERATING ACTIVITIES
Net income $ 230 $ 331
Adjustments to net income:
Depreciation and amortization 830 584
Equity losses in unconsolidated ventures 165 66
Gain on sale of investment (51) -
Gain on sale of rural telephone exchanges (18) -
Cumulative effect of change in accounting principle - (34)
Deferred income taxes and amortization of investment tax (27) 7
credits
Changes in operating assets and liabilities:
Restructuring payments (33) (46)
Postretirement medical and life costs, net of cash fundings (6) (44)
Accounts and notes receivable 108 92
Inventories, supplies and other current assets (51) (60)
Accounts payable and accrued liabilities 194 41
Other - net 5 (22)
----------- -----------
Cash provided by operating activities 1,346 915
----------- -----------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment (764) (757)
Investment in Continental Cablevision (1,150) -
Investment in international ventures (48) (104)
Proceeds from sales of investments 149 -
Payments on disposals of property, plant and equipment (7) (7)
Cash from net investment in assets held for sale 29 3
Other - net (17) (24)
----------- -----------
Cash (used for) investing activities (1,808) (889)
----------- -----------
FINANCING ACTIVITIES
Proceeds from (repayments of ) short-term debt - net (3,339) 60
Proceeds from issuance of long-term debt 4,090 76
Repayments of long-term debt (55) (121)
Dividends paid on common and preferred stock (248) (234)
Proceeds from issuance of common stock 30 71
Purchases of treasury stock (53) -
Cash provided by (used for) financing activities 425 (148)
----------- -----------
CASH AND CASH EQUIVALENTS
Decrease (37) (122)
Beginning balance 201 192
----------- -----------
Ending balance $ 164 $ 70
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
Form 10-Q - Part I
U S WEST, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 1997
(Dollars in millions)
(Unaudited)
A. Summary of Significant Accounting Policies
Basis of Presentation
The Consolidated Financial Statements have been prepared by U S WEST, Inc. ("U
S WEST" or the "Company") pursuant to the interim reporting 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 ("GAAP") have been condensed or omitted pursuant to such SEC rules
and regulations. In the opinion of U S WEST'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 1996 U S WEST Consolidated
Financial Statements and notes thereto included in U S WEST's proxy statement
mailed to all shareowners on April 7, 1997.
Certain reclassifications within the Consolidated Financial Statements have
been made to conform to the current year presentation.
New Accounting Standard
In fourth-quarter 1997, U S WEST will adopt SFAS No. 128, "Earnings Per
Share." This standard specifies new computation, presentation and disclosure
requirements for earnings per share. Among other things, SFAS No. 128
requires presentation of basic and diluted earnings per share on the face of
the income statement. Adoption of the new standard will not have a material
impact on Communications Group or Media Group earnings per share.
B. AirTouch Transaction
During 1994, the Company signed a definitive agreement with AirTouch
Communications ("AirTouch") to combine their domestic cellular properties into
a partnership in a multi-phased transaction (the "AirTouch Joint Venture").
During Phase I, which commenced on November 1, 1995, the partners are
operating their cellular properties separately. A Wireless Management Company
has been formed and is providing services to both companies on a contract
basis.
<PAGE>
Form 10-Q - Part I
U S WEST, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
In February 1997, the King County Superior Court in Washington state ruled
that Media Group violated the terms of its partnership agreement with its
minority partners in the Seattle market by entering into the AirTouch Joint
Venture. The Company has obtained a stay of the ruling pending its appeal.
Similar litigation has been filed in other jurisdictions regarding other
cellular partnerships by the same minority partner that brought the Seattle
litigation. The Company believes it will ultimately be successful in all such
litigation.
In April 1997, Media Group and AirTouch signed a letter of intent to merge
Media Group's domestic cellular business and its interest in PrimeCo Personal
Communications ("PrimeCo") into AirTouch (the "AirTouch Merger"). The
AirTouch Merger would replace the AirTouch Joint Venture. Under the
agreement, AirTouch will assume $2.2 billion of Media Group debt and Media
Group shareowners will receive AirTouch stock in a tax-free transaction.
Media Group shareowners will receive 84.8 million AirTouch shares if AirTouch
stock is trading at $33 or higher at closing. If AirTouch is trading at $30
or lower, Media Group shareowners will receive 93.3 million AirTouch shares.
If the stock is trading between $30 and $33, the number of shares will be
adjusted to a total value of $2.8 billion. In the event Media Group is unable
to transfer certain of its cellular interests, because of the pending
litigation, the amount of debt to be assumed by AirTouch and the amount of
stock to be issued by AirTouch will be reduced proportionately.
Closing of the AirTouch Merger requires, among other things, a definitive
agreement, approval by the AirTouch and U S WEST boards of directors, a
favorable ruling from the Internal Revenue Service, Hart-Scott-Rodino review,
approval by shareowners of Media Group and Communications Group, and
satisfaction of other conditions. The Company believes this transaction
should close by late 1997 or early 1998, but "Morris Trust" legislation
introduced in Congress would block this transaction if passed in its current
form. In that event, Media Group and AirTouch would continue with the
AirTouch Joint Venture.
In the event the AirTouch Merger agreement is terminated, proceeding to Phase
II would be delayed by nine months from the termination date. In Phase II of
the AirTouch Joint Venture, the partners will combine their domestic
properties subject to obtaining certain authorizations and partnership
approvals. Media Group has the right under Phase III of the AirTouch Joint
Venture agreement to convert its joint venture interest into AirTouch stock.
<PAGE>
Form 10-Q - Part I
U S WEST, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
C. Debt Offering
On November 15, 1996, Continental Cablevision, Inc. ("Continental") was merged
into a wholly owned subsidiary of U S WEST (the "Merger" or the "Continental
Merger"). In January 1997, U S WEST issued senior unsecured notes and
debentures totaling $4.1 billion, at a weighted average coupon rate of 7.47
percent. The proceeds were used to refinance debt incurred in conjunction with
the Continental Merger.
The components of the debt issue follow:
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Description Face Value
6.85% Notes due January 15, 2002 $ 600
7.30% Notes due January 15, 2007 1,100
7.90% Debentures due February 1, 2027 1,100
8.15% Debentures due February 1, 2032 200
6.95% Debentures due January 15, 2037 600
7.95% Debentures due February 1, 2097 500
-----------
$ 4,100
===========
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The notes and debentures are generally not redeemable prior to maturity. At
the option of U S WEST, the 8.15 percent debentures are redeemable after
February 1, 2007 and at the option of the holders, the 6.95 percent debentures
are redeemable on January 15, 2004. The notes and debentures are
unconditionally guaranteed by U S WEST.
D. Asset Sales
In January and February 1997, Media Group sold 4,075,000 shares of Teleport
Communications Group, Inc. ("TCG") for proceeds of approximately $120. Media
Group is required by a consent decree with the United States Department of
Justice to dispose of its interest in TCG by December 31, 1998. This sale
reduced Media Group's interest in TCG to approximately 9 percent from 11
percent. The Media Group is also required by the Federal Communications
Commission (the "FCC") to divest the cable television systems located in the U
S WEST Communications Group service territory.
<PAGE>
Form 10-Q - Part I
U S WEST, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
During the first quarter of 1997, Media Group sold its 5 percent interest in a
French wireless venture, Bouygues Telecom, for total proceeds of $82. The
proceeds consisted of cash and a note receivable due in the second quarter of
1997. Media Group recognized a pretax gain on the sale of $51 during the
quarter.
During the first quarter of 1997, the Media Group reached a tentative
settlement to transfer its investment in Optus Vision, an Australian cable and
telecommunications venture acquired in the Continental Merger, to Optus
Communications Pty Ltd, an Australian telecommunications carrier. Upon
satisfaction of various pre-conditions, Media Group will receive convertible
notes which can be converted to shares of Optus Communications upon public
offering of its shares. The settlement releases the Company from current
litigation and any future claims and is subject to the consent of bankers and
approval from the foreign investment review board.
E. Contingencies
At U S WEST Communications, Inc. ("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
hearing, 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. The range of possible
risk is $0 to $160 at March 31, 1997.
In 1996, the Washington State Utilities and Transportation Commission ("WUTC"
or the "Commission") acted on U S WEST Communications' 1995 rate request. U S
WEST Communications had sought to increase revenues by primarily raising
rates for basic residential services over a four-year period. The two major
issues in this proceeding involve U S WEST Communications' request for
improved capital recovery and elimination of the imputation of Yellow Pages
revenue. Instead of granting U S WEST Communications' rate request, the
Commission ordered approximately $91.5 in annual net revenue reductions,
effective May 1, 1996.
Based on the above ruling, U S WEST Communications filed a lawsuit with the
King County Superior Court (the "Court") for an appeal of the order, a
temporary stay of the ordered rate reduction and an authorization to implement
a revenue increase. The Court declined to change the WUTC order. U S WEST
Communications appealed the Court's decision to the Washington State Supreme
Court (the "State Supreme Court") which, on January 22, 1997, granted a stay
of the order, pending the State Supreme Court's full review of the appeal
which will begin in the second quarter of 1997.
Effective May 1, 1996, U S WEST Communications began collecting revenues
subject to refund with interest. The cumulative amount of revenues collected
subject to refund as of March 31, 1997, is approximately $95. U S WEST
Communications expects its appeal to be successful and has not accrued any of
the amounts subject to refund. However, an adverse judgment on the appeal
would have a significant impact on the future results of operations.
<PAGE>
Form 10-Q - Part I
U S WEST, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
F. 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 a "net investment in assets held for sale." The net
realizable value of the assets is reevaluated on an ongoing basis with
adjustments to the existing reserve, if any, charged to continuing operations.
To date, no such adjustment has been required. 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.
Building sales and operating revenues of the capital assets segment were $57
and $30 for the three months ended March 31, 1997 and 1996, respectively.
The components of net investment in assets held for sale follow:
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March 31, December 31,
1997 1996
ASSETS
Cash $ 23 $ 21
Finance receivables - net 817 869
Investment in real estate - net of valuation allowance 191 182
Bonds, at market value 145 146
Investment in FSA 333 326
Other assets 172 165
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Total assets $ 1,681 $ 1,709
========== =============
LIABILITIES
Debt $ 461 $ 481
Deferred income taxes 679 671
Accounts payable, accrued liabilities and other 127 137
Minority interests 11 11
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Total liabilities 1,278 1,300
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Net investment in assets held for sale $ 403 $ 409
========== =============
</TABLE>
Form 10-Q - Part I
U S WEST, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
Revenues of U S WEST Financial Services, Inc., a member of the capital assets
segment, were $5 and $7 for the three months ended March 31, 1997 and 1996,
respectively. Selected financial data for U S WEST Financial Services
follows:
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March 31, December 31,
1997 1996
Net finance receivables $ 856 $ 859
Total assets 1,058 1,058
Total debt 252 236
Total liabilities 999 998
Equity 59 60
</TABLE>
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions)
Some of the information presented in or in connection with this report
constitutes "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Although the Company believes that
its expectations are based on reasonable assumptions within the bounds of its
knowledge of its business and operations, there can be no assurance that
actual results will not differ materially from its expectations. Factors that
could cause actual results to differ from expectations include: (i) greater
than anticipated competition from new entrants into the local exchange,
intraLATA toll, cable, telephony, wireless and directories markets, (ii)
changes in demand for the Company's products and services, including optional
custom calling features, (iii) different than anticipated employee levels,
capital expenditures, and operating expenses at the Communications Group as a
result of unusually rapid, in-region growth, (iv) the gain or loss of
significant customers, (v) pending regulatory actions in state jurisdictions,
(vi) regulatory changes affecting the cable and telecommunications industries,
including changes that could have an impact on the competitive environment in
the local exchange market, (vii) a change in economic conditions in the
various markets served by the Company's operations that could adversely affect
the level of demand for cable, wireless, directories or other services offered
by the Company, (viii) greater than anticipated competitive activity requiring
new pricing for services, (ix) higher than anticipated start-up costs
associated with new business opportunities, (x) increases in fraudulent
activity with respect to wireless services, or (xi) delays in the development
of anticipated technologies, or the failure of such technologies to perform
according to expectations.
RESULTS OF OPERATIONS - FIRST QUARTER 1997 COMPARED WITH FIRST QUARTER 1996
NET INCOME (LOSS)
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Three Three Increase Increase
Months Months (Decrease) (Decrease)
Ended Ended
March 31, March 31,
1997 1996 Dollar Percent
Communications Group $ 339 $ 328 $ 11 3.4
Media Group (109) 3 (112) -
----------- ---------- ----------- ----------
Total net income $ 230 $ 331 $ (101) (30.5)
=========== ========== =========== ==========
</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 Net Income
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Net Net Net Net Earnings Earnings Earnings Earnings
Income Income Income Income Per Per Per Share Per Share
Share Share
Increase Increase Increase Increase
(Decrease) (Decrease) (Decrease) (Decrease)
Three Months Ended March 31, 1997 1996 Dollar Percent 1997 1996 Dollar Percent
Reported net income $ 339 $ 328 $ 11 3.4 $ 0.70 $ 0.69 $ 0.01 1.4
Adjustments to reported net income:
Gain on sale of rural telephone
exchanges (1)<F1> (11) - (11) - (0.02) - (0.02) -
Cumulative effect of change in
accounting principle (2)<F2> - (34) 34 - - (0.07) 0.07 -
Current year effect of change in
accounting principle (2)<F2> - (5) 5 - - (0.01) 0.01 -
-------- -------- ----------- ---------- ---------- ---------- ----------- ----------
Normalized income $ 328 $ 289 $ 39 13.5 $ 0.68 $ 0.61 $ 0.07 11.5
======== ======== =========== ========== ========== ========== =========== ==========
<FN>
<F1>
(1) In first-quarter 1997, the Company sold certain rural telephone exchanges in Nebraska for a pretax gain of $18 and an after
tax gain of $11.
<F2>
(2) Effective January 1, 1996, U S WEST adopted Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
</FN>
</TABLE>
During 1997, the Communications Group's normalized income increased $39, or
13.5 percent, to $328. Normalized earnings per share was $0.68 per
Communications share, an increase of $0.07, or 11.5 percent. The increase in
normalized income is primarily due to higher demand for services and continued
cost control efforts, which accelerated in the latter half of 1996. The
Communications Group anticipates net income growth will be partially offset by
increased costs related to growth initiatives and interconnection
requirements.
Effective January 1, 1996, U S WEST adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
which, among other things, requires that companies no longer record
depreciation expense on assets held for sale. Adoption of SFAS No. 121
resulted in a one-time gain of $34 (net of tax of $22), or $0.07 per
Communications share, related to the cumulative effect of change in accounting
principle.
Media Group Net Income (Loss)
In 1997, the Media Group reported a net loss of $109, ($0.20 per Media share),
compared with net income of $3 ($0.00 per Media share), in 1996. Excluding
the after tax effects of a gain on sale of investment totaling $31 ($0.05 per
Media share), Media Group net income declined $143 in 1997. Approximately $113
of the decline in net income is a
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
result of the November 15, 1996 Continental Merger, which caused a significant
increase in interest, depreciation and amortization expenses. The remaining
decline in net income is a result of an increase in losses generated by
unconsolidated ventures partially offset by increased earnings produced by the
domestic cellular operations.
SALES AND OTHER REVENUES
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Three Three
Months Months Pro Pro
Ended Ended Pro forma forma
March 31, March 31, Increase Increase forma Increase Increase
1997 1996 Dollar Percent 1996 Dollar Percent
Communications Group $ 2,587 $ 2,465 $ 122 5.0 $2,465 $ 122 5.0
Media Group 1,207 613 594 96.9 1,075 132 12.3
Intergroup eliminations (28) (28) - - (28) - -
----------- ----------- --------- -------- ------- --------- --------
Total $ 3,050 $ 3,766 23.5 $3,512 $ 254 7.2
=========== ========= ======== ======= ========= ========
</TABLE>
Communications Group Sales and Other Revenues
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Increase Increase
Three Months Ended Price Lower (Decrease (Decrease)
March 31, 1997 1996 Demand Changes Refunds Other Dollar Percent
Local service $1,231 $1,145 $ 101 $ (10) $ 5 $ (10) $ 86 7.5
Interstate access 687 622 64 (5) 10 (4) 65 10.5
Intrastate access 200 190 9 2 - (1) 10 5.3
Long-distance 250 290 (22) (1) - (17) (40) (13.8)
network
Other services 219 218 - - - 1 1 0.5
------ ------ -------- --------- -------- ------- ----------- ----------
Total $2,587 $2,465 $ 152 $ (14) $ 15 $ (31) $ 122 5.0
====== ====== ======== ========= ======== ======= =========== ==========
</TABLE>
Local service revenues increased $86, or 7.5 percent, to $1,231, primarily as
a result of access line growth and increased demand for new product and
service offerings, and existing central office features. Total reported
access lines increased 562,000, or 3.7 percent, during the past 12 months, of
which 250,000 was attributable to second lines. Second line installations
increased 28.6 percent. Access lines grew 688,000, or 4.6 percent, when
adjusted for sales of approximately 126,000 rural telephone access lines
during the past twelve months. Partially offsetting the increase in local
service revenues was the effect of lower wireless interconnection access
prices as mandated by the Telecommunications Act of 1996, which reduced local
service revenues by $16.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Higher interstate access revenues are primarily attributable to access line
growth, a 6.6 percent increase in billed interstate access minutes of use and
increased demand for private line services. True-ups of $18 to the 1996
sharing related accruals for refunds to interexchange carriers also
contributed to the increase in interstate access revenues. These true-ups
more than offset the current year sharing related accruals. The increase in
intrastate access revenues was primarily attributable to a 8.5 percent
increase in billed intrastate access minutes of use and increased demand for
private line services.
Long-distance network service revenues decreased $40, or 13.8 percent, as
compared with 1996, primarily due to the effects of competition and the
implementation of multiple toll carrier plans ("MTCPs") in Iowa and Nebraska
in 1996, and in Oregon and Washington in first-quarter 1997. The MTCPs
essentially allow independent telephone companies to act as toll carriers.
During 1997, the MTCPs reduced long-distance revenues by $17, which was offset
by increased intrastate access revenues of $2 and decreased other operating
expenses (i.e., access expense) of $14.
Excluding the effects of the MTCPs, long-distance network service revenues
decreased 7.9 percent. Erosion of long-distance network service revenues will
continue due to the loss of exclusivity of 1+ dialing in Minnesota and
Arizona, and continued dial-around activity in other states within the
Communications Group's 14 state region. The Communications Group is partially
mitigating competitive losses through competitive pricing of intraLATA
long-distance services and increased promotional efforts to retain customers.
During 1997, revenues from other services remained relatively flat. Continued
market penetration in voice messaging services, and increased inside wire
maintenance services and billing and collection service revenues were almost
entirely offset by a reduction in nonrecurring contract revenues due to the
completion of a large wire installation project in 1996.
Future revenues at U S WEST Communications may be affected by pending
regulatory actions in federal and local regulatory jurisdictions.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Media Group Sales and Other Revenues
An analysis of the Media Group's sales and other revenues follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Three Three
Months Months
Ended Ended Pro forma Increase Pro forma Increase
March 31, March 31, Increase Increase Pro forma
1997 1996 Dollar Percent 1996 Dollar Percent
Cable and telecommunications:
Domestic $ 551 $ 57 $ 494 - $ 519 $ 32 6.2
International 4 - 4 - - 4 -
---------- ---------- --------- -------- ---------- ------------------- ------------------
555 57 498 - 519 36 6.9
Wireless communications:
Cellular service 303 239 64 26.8 239 64 26.8
Cellular equipment 32 25 7 28.0 25 7 28.0
---------- ---------- --------- -------- ---------- ------------------- ------------------
335 264 71 26.9 264 71 26.9
Directory and information
services:
Domestic 287 271 16 5.9 271 16 5.9
International 22 17 5 29.4 17 5 29.4
---------- ---------- --------- -------- ---------- ------------------- ------------------
309 288 21 7.3 288 21 7.3
Other 8 4 4 - 4 4 -
---------- ---------- --------- -------- ---------- ------------------- ------------------
Total $ 1,207 $ 613 $ 594 96.9 $ 1,075 $ 132 12.3
========== ========== ========= ======== ========== =================== ==================
</TABLE>
Media Group sales and other revenues increased 96.9 percent to $1,207 in 1997,
primarily as a result of the Continental Merger. On a pro forma basis, which
gives effect to the Continental Merger as though it had occurred as of January
1, 1996, Media Group sales and other revenues increased 12.3 percent. The
increase was primarily due to growth in cellular service revenue.
Cable and Telecommunications On a pro forma basis, domestic cable and
telecommunications revenues increased $32, or 6.2 percent. The increase is
primarily a result of a 2.2 percent increase in basic subscribers and a 3.7
percent increase in total revenue per basic subscriber. Price increases of 6
to 8 percent, implemented during the quarter, and the introduction of new
services contributed to the increase in revenue per basic subscriber.
Wireless Communications Cellular service revenues increased $64, or 26.8
percent, in 1997. This increase is due to a 38 percent increase in
subscribers during the last twelve months, partially offset by an 8.7 percent
drop in average revenue per subscriber to $48.00 per month. The increase in
subscribers relates to continued growth in demand for wireless services.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Cellular equipment revenues increased $7, or 28.0 percent in 1997. This
increase is primarily due to an increase in units sold, which was somewhat
offset by lower equipment prices. A 27 percent increase in customers added
during the quarter and the implementation of a phone exchange program for
existing customers led to the increase in units sold.
In April 1997, Media Group and AirTouch signed a letter of intent to merge
Media Group's domestic cellular business and its interest in PrimeCo into
AirTouch (the "AirTouch Merger"). The AirTouch Merger would replace the
AirTouch Joint Venture. Under the agreement, AirTouch will assume $2.2
billion of Media Group debt and Media Group shareowners will receive AirTouch
stock in a tax-free transaction. Media Group shareowners will receive 84.8
million AirTouch shares if AirTouch stock is trading at $33 or higher at
closing. If AirTouch is trading at $30 or lower, Media Group shareowners will
receive 93.3 million AirTouch shares. If the stock is trading between $30 and
$33, the number of shares will be adjusted to a total value of $2.8 billion.
In the event Media Group is unable to transfer certain of its cellular
interests, because of the pending litigation, the amount of debt to be assumed
by AirTouch and the amount of stock to be issued by AirTouch will be reduced
proportionately.
Closing of the AirTouch Merger requires, among other things, a definitive
agreement, approval by the AirTouch and U S WEST boards of directors, a
favorable ruling from the Internal Revenue Service, Hart-Scott-Rodino review,
approval by shareowners of Media Group and Communications Group, and
satisfaction of other conditions. The Company believes this transaction
should close by late 1997 or early 1998, but "Morris Trust" legislation
introduced in Congress would block this transaction if passed in its current
form. In that event, Media Group and AirTouch would continue with the
AirTouch Joint Venture. See Note B - AirTouch Transaction - to the
Consolidated Financial Statements.
Directory and Information Services Revenues related to Yellow Pages directory
advertising represent 99 percent of domestic directory and information
services revenues. Yellow Pages directory advertising revenues increased $19,
or 7.2 percent. The increase is driven by a 7.4 percent increase in revenue
per local advertiser primarily resulting from price increases of 5.0 percent.
This increase was partially offset by a revenue decrease of $3 associated with
exited product lines.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
OPERATING INCOME
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Three Three
Months Months
Ended Ended Pro forma Pro forma
March 31, March 31, Increase Increase Pro forma Increase Increase
1997 1996 Dollar Percent 1996 Dollar Percent
Communications Group $ 644 $ 596 $ 48 8.1 $ 596 $ 48 8.1
Media Group 178 129 49 38.0 112 66 58.9
---------- ---------- --------- -------- ---------- ---------- ---------
Total operating income $ 822 $ 725 $ 97 13.4 $ 708 $ 114 16.1
========== ========== ========= ======== ========== ========== =========
</TABLE>
Communications Group Operating Income
The Communications Group's operating income increased $48, or 8.1 percent, to
$644 during 1997. Revenues increased $122, or 5.0 percent, partially offset
by an increase of $74, or 4.0 percent, in operating costs. The increase in
operating income is primarily due to higher demand for services and continued
cost control efforts, which accelerated in the latter half of 1996.
Media Group Operating Income
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Three Three Pro forma Pro forma
Months Month Increase Increase
Ended Ended Increase Increase (Decrease) (Decrease)
March 31, March 31, (Decrease) (Decrease) Pro forma
1997 1996 Dollar Percent 1996 Dollar Percent
Cable and telecommunications:
Domestic $ (15) $ 8 $ (23) - $ (9) $ (6) (66.7)
International (4) - (4) - - (4) -
----------- ----------- ----------- ---------- ----------- ----------- ----------
(19) 8 (27) - (9) (10) -
Wireless communications:
Domestic 95 50 45 90.0 50 45 90.0
International (3) - (3) - - (3) -
----------- ----------- ----------- ---------- ----------- ----------- ----------
92 50 42 84.0 50 42 84.0
Directory and information services:
Domestic 130 110 20 18.2 110 20 18.2
International (7) (8) 1 (12.5) (8) 1 12.5
----------- ----------- ----------- ---------- ----------- ----------- ----------
123 102 21 20.6 102 21 20.6
Other (see Note 1) (18) (31) 13 (41.9) (31) 13 41.9
----------- ----------- ----------- ---------- ----------- -----------
Total operating income $ 178 $ 129 $ 49 38.0 $ 112 $ 66 58.9
=========== =========== =========== ========== =========== =========== ==========
</TABLE>
Note 1 - Primarily includes headquarters expenses for shared services and
divisional expenses associated with equity investments.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
During 1997, Media Group operating income increased 38.0 percent, to $178. On
a pro forma basis, which gives effect to the Continental Merger as though it
had occurred as of January 1, 1996, operating income increased 58.9 percent.
The increases were primarily due to strong growth in wireless communications
operations.
Cable and Telecommunications On a pro forma basis, cable and
telecommunications operating income decreased $10, to $(19), in 1997.
Domestic cable operating income declined $6. Revenue increases were partially
offset by increases in programming costs associated with introducing new
channels, costs related to the development of new services, and increased
depreciation expense. The increase in depreciation expense is related to
system upgrade activities. The remaining decrease is attributed to the
third-quarter 1996 consolidation of Kabel Plus, a cable company in the Czech
Republic.
Wireless Communications Domestic cellular operating income increased 90
percent, to $95 during 1997. The increase in operating income is a result of
revenue increases associated with the rapidly expanding subscriber base
combined with efficiency gains. On a per subscriber basis, the 1997 decline
in revenue of 8.7 percent has been more than offset by the 23.0 percent
decrease in costs incurred to acquire and support customers.
Directory and Information Services During 1997, operating income related to
domestic Yellow Pages directory advertising increased $8, or 6.2 percent.
Revenue increases of 7.2 percent were partially offset by increases in
printing and paper costs. The increases are primarily associated with an
increase in premium advertising. Operating losses associated with on-going
product development activities reduced domestic directory and information
services operating income by $7 in 1997, compared with a reduction of $19 in
1996. The decrease in these operating losses is primarily the result of
exiting various product development activities.
Other Other operating losses decreased $13 primarily due to the timing of
billing corporate costs to operating companies and a one-time reduction in
corporate expenses.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
INTEREST EXPENSE AND OTHER
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Three Three
Months Months Pro forma Pro Forma
Ended Ended Increase Increase
March 31, March 31, Increase Increase Pro forma (Decrease) (Decrease)
1997 1996 Dollar Percent 1996 Dollar Percent
Interest expense $ 278 $ 135 $ 143 - $ 281 $ (3) (1.1)
Equity losses in unconsolidated
ventures 165 66 99 - 75 90 -
Gain on sale of investment 51 - 51 - - 51 -
Gain on sale of rural telephone
exchanges 18 - 18 - - 18 -
Guaranteed minority interest 22 12 10 83.3 12 10 83.3
expense
Other expense - net 26 23 3 13.0 27 (1) (3.7)
</TABLE>
Interest expense increased $143 in 1997, primarily as a result of the
Continental Merger. U S WEST assumed Continental debt totaling $6,525 (at
market value) and incurred debt of $1,150 to finance the cash portion of the
Merger consideration. On a pro forma basis, interest expense decreased $3
primarily due to lower average debt levels at the Communications Group and
lower interest rates as compared to 1996. Partially offsetting this decrease
were lower capitalized interest costs at the Communications Group and
increased debt levels at the Media Group. The increase in debt at the Media
Group is primarily associated with an increase in capital expenditures to
upgrade the domestic cable network.
Equity losses increased $99 in 1997. This increase is primarily due to
increased losses from international ventures and the domestic investment in
PrimeCo. The increase in international losses relate to expansion of the
network and additional financing at TeleWest; costs associated with the
significant increase in customers at One 2 One; and license fees related to a
wireless venture in India. Domestically, PrimeCo launched service in November
1996, and losses associated with this venture have increased as a result of
start-up and other costs. The Company expects equity losses will continue to
be significant as expansion activities continue.
In 1997, the Company sold its 5 percent interest in a wireless venture in
France for proceeds of $82, and a pretax gain of $51. The proceeds consisted
of cash and a note receivable due in the second quarter of 1997.
In first-quarter 1997, the Company sold certain rural telephone exchanges in
Nebraska for a pretax gain of $18 and an after tax gain of $11.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Guaranteed minority interest expense reflects an increase of $10 related to
the October 1996 issuance of Company-obligated mandatorily redeemable
preferred securities of subsidiary trust holding solely Company-guaranteed
debentures ("Preferred Securities") totaling $480.
INCOME TAX PROVISION
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Three Three
Months Months
Ended Ended Pro forma Pro forma
March 31, March 31, (Decrease) (Decrease) Pro forma Increase Increase
1997 1996 Dollar Percent 1996 Dollar Percent
Income tax provision $ 170 $ 192 $ (22) (11.5) $ 130 $ 40 30.8
Effective tax rate 42.5% 39.3% - - 41.5% - -
</TABLE>
The increase in the effective tax rate is primarily a result of lower pretax
earnings and additional goodwill amortization associated with the Continental
Merger.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
<TABLE>
<CAPTION>
<S> <C> <C>
Three Months Three Months
Ended Ended
March 31, March 31,
1997 1996
Communications Group $ 1,097 $ 805
Media Group 249 110
------------- -------------
Total cash provided by operating activities $ 1,346 $ 915
============= =============
</TABLE>
During first quarter 1997, cash provided by operating activities increased
$431 primarily due to growth in Communications Group's operations. The
increase in Communications Group's operating cash flow also reflects continued
cost control efforts, a decrease in the cash funding of postretirement
benefits and lower restructuring payments. Operating cash flow at the Media
Group increased due to growth in operations from the domestic cellular
business and the Continental Merger. The increase was partially offset by an
increase in financing costs associated with increased debt levels resulting
from the Continental Merger.
<PAGE>
10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Investing Activities
<TABLE>
<CAPTION>
<S> <C> <C>
Three Months Three Months
Ended Ended
March 31, March 31,
1997 1996
Communications Group $ 400 $ 647
Media Group 1,408 242
------------- -------------
Total cash used for investing activities $ 1,808 $ 889
============= =============
</TABLE>
Investing activities at the Communications Group consists primarily of capital
expenditures. The decline in first-quarter 1997 capital expenditures is
primarily a result of timing. The Company anticipates the capital
expenditures will accelerate during the remainder of 1997.
Investing activities of the Media Group include investments of $48 in
international ventures in 1997, primarily additional capital contributions to
a wireless venture in India. Other investing activities include an investment
in Continental of $1,150 which represents payment of the cash portion of the
Merger consideration
During the first quarter of 1997, the Media Group reached a tentative
settlement to transfer its investment in Optus Vision, an Australian cable and
telecommunications venture acquired in the Continental Merger, to Optus
Communications Pty Ltd, an Australian telecommunications carrier. Upon
satisfaction of various pre-conditions, Media Group will receive convertible
notes which can be converted to shares of Optus Communications upon public
offering of its shares. The settlement releases the Company from current
litigation and any future claims and is subject to the consent of bankers and
approval from the foreign investment review board.
During 1997, the Media Group received proceeds of $149 from the sale of
4,075,000 shares of Teleport Communications Group stock and partial proceeds
from the sale of the Media Group's 5 percent interest in a wireless venture in
France.
Financing Activities
<TABLE>
<CAPTION>
<S> <C> <C>
Three Months Three Months
Ended Ended
March 31, March 31,
1997 1996
Communications Group $ (696) $ (287)
Media Group 1,121 139
-------------- --------------
Total cash provided by (used for) financing activities $ 425 $ (148)
============== ==============
</TABLE>
<PAGE>
10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Total debt at March 31, 1997 was $16,055, an increase of $704 compared with
December 31, 1996. The Company incurred additional debt in 1997 to finance
the cash portion of the Merger consideration which totaled $1,150. In January
1997, the Company issued medium- and long-term debt totaling $4.1 billion, at
a weighted average rate of 7.47 percent. The proceeds were used to refinance
debt incurred in conjunction with the Continental Merger. Increases in debt at
the Media Group were partially offset by a decrease in debt of $466 at the
Communications Group. The Communications Group's debt decrease was partially
driven by lower capital expenditures.
On March 31, 1997, Standard and Poor's lowered U S WEST Communications' senior
unsecured debt rating from A plus to A. This down-grading is a result of a
modified rating criteria implemented by Standard and Poor's to reflect the
changes in the telecommunications regulatory environment.
Excluding debt associated with the capital assets segment, the Company's
percentage of debt to total capital at March 31, 1997, was 56.0 percent
compared with 54.8 percent at December 31, 1996. Including debt associated
with the capital assets segment, Preferred Securities and mandatorily
redeemable preferred stock, the Company's percentage of debt to total capital
at March 31, 1997, was 60.6 percent compared with 59.5 percent at December 31,
1996. The increase in debt related to total capital is a result of increased
debt associated with the Continental Merger.
U S WEST from time to time engages in preliminary discussions regarding
restructurings, dispositions and other similar transactions. Any such
transaction may include, among other things, the transfer of certain assets,
businesses or interests, or the incurrence or assumption of indebtedness, and
could be material to the financial condition and results of operations of U S
WEST. There is no assurance that any such discussions will result in the
consummation of any such transaction.
CONTINGENCIES
For a discussion of contingencies at the Communications Group, see
Management's Discussion and Analysis of Financial Condition and Results of
Operations - "Contingencies."
REGULATORY ENVIRONMENT
For a discussion of Communications Group's regulatory environment, see
Management's Discussion and Analysis of Financial Condition and Results of
Operations - "Regulatory Environment."
<PAGE>
Form 10-Q - Part I
COMBINED STATEMENTS OF OPERATIONS U S WEST COMMUNICATIONS GROUP
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
Three Three
Months Months
Ended Ended
March 31, March 31,
Dollars in millions (except per share amounts) 1997 1996
Operating revenues:
Local service $ 1,231 $ 1,145
Interstate access service 687 622
Intrastate access service 200 190
Long-distance network services 250 290
Other services 219 218
---------- ----------
Total operating revenues 2,587 2,465
Operating expenses:
Employee-related expenses 864 867
Other operating expenses 445 388
Taxes other than income taxes 107 97
Depreciation and amortization 527 517
---------- ----------
Total operating expenses 1,943 1,869
---------- ----------
Income from operations 644 596
Interest expense 103 111
Gain on sale of rural telephone exchanges 18 -
Other expense - net 22 16
---------- ----------
Income before income taxes and cumulative effect of
change in accounting principle 537 469
Provision for income taxes 198 175
---------- ----------
Income before cumulative effect of change in
accounting principle 339 294
Cumulative effect of change in accounting principle - net of tax - 34
---------- ----------
NET INCOME $ 339 $ 328
========== ==========
EARNINGS PER COMMON SHARE:
Income before cumulative effect of change in
accounting principle $ 0.70 $ 0.62
Cumulative effect of change in accounting principle - 0.07
EARNINGS PER COMMON SHARE $ 0.70 $ 0.69
========== ==========
DIVIDENDS PER COMMON SHARE $ 0.535 $ 0.535
========== ==========
AVERAGE COMMON SHARES
OUTSTANDING (thousands) 481,341 475,056
========== ==========
See Notes to Combined Financial Statements.
</TABLE>
Form 10-Q - Part I
COMBINED BALANCE SHEETS U S WEST COMMUNICATIONS GROUP
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
March 31, December 31,
Dollars in millions 1997 1996
ASSETS
Current assets:
Cash and cash equivalents $ 81 $ 80
Accounts and notes receivable - net 1,540 1,622
Inventories and supplies 155 144
Deferred tax asset 142 171
Prepaid and other 83 65
---------- -------------
Total current assets 2,001 2,082
---------- -------------
Gross property, plant and equipment 32,766 32,645
Less accumulated depreciation 18,961 18,639
---------- -------------
Property, plant and equipment - net 13,805 14,006
Other assets 856 827
---------- -------------
Total assets $ 16,662 $ 16,915
========== =============
See Notes to Combined Financial Statements.
</TABLE>
<PAGE>
Form 10-Q - Part I
COMBINED BALANCE SHEETS U S WEST COMMUNICATIONS GROUP
(Unaudited), continued
<TABLE>
<CAPTION>
<S> <C> <C>
March 31, December 31,
Dollars in millions 1997 1996
LIABILITIES AND EQUITY
Current liabilities:
Short-term debt $ 375 $ 834
Accounts payable 1,025 989
Employee compensation 266 342
Dividends payable 258 257
Advanced billing and customer deposits 259 250
Accrued property taxes 244 193
Other 768 602
---------- -------------
Total current liabilities 3,195 3,467
---------- -------------
Long-term debt 5,657 5,664
Postretirement and other postemployment
benefit obligations 2,377 2,387
Deferred income taxes 742 749
Deferred credits and other 648 731
Contingencies (See Note B to the Combined
Financial Statements)
Communications Group equity 4,043 3,917
---------- -------------
Total liabilities and equity $ 16,662 $ 16,915
========== =============
See Notes to Combined Financial Statements.
</TABLE>
<PAGE>
Form 10-Q - Part I
COMBINED STATEMENTS OF U S WEST COMMUNICATIONS GROUP
CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
Three Months Three Months
Ended Ended
March 31, March 31,
Dollars in millions 1997 1996
OPERATING ACTIVITIES
Net income $ 339 $ 328
Adjustments to net income:
Depreciation and amortization 527 517
Gain on sale of rural telephone exchanges (18) -
Cumulative effect of change in accounting principle - (34)
Deferred income taxes and amortization
of investment tax credits 18 24
Changes in operating assets and liabilities:
Restructuring payments (29) (42)
Postretirement medical and life costs, net
of cash fundings (10) (44)
Accounts receivable 82 109
Inventories, supplies and other current assets (34) (48)
Accounts payable and accrued liabilities 222 14
Other - net - (19)
-------------- --------------
Cash provided by operating activities 1,097 805
-------------- --------------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment (400) (640)
Proceeds from sale of rural telephone exchanges 7 -
Payments on disposals of property, plant
and equipment (7) (7)
Cash (used for) investing activities (400) (647)
-------------- --------------
FINANCING ACTIVITIES
Repayments of short-term debt - net (429) (79)
Repayments of long-term debt (54) (24)
Dividends paid on common stock (237) (234)
Proceeds from issuance of common stock 24 50
Cash (used for) financing activities (696) (287)
-------------- --------------
CASH AND CASH EQUIVALENTS
Increase (decrease) 1 (129)
Beginning balance 80 172
-------------- --------------
Ending balance $ 81 $ 43
============== ==============
</TABLE>
See Notes to Combined Financial Statements.
<PAGE>
Form 10-Q - Part I
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 1997
(Dollars in millions)
(Unaudited)
A. Summary of Significant Accounting Policies
Basis of Presentation
The Combined Financial Statements have been prepared by U S WEST, Inc. ("U S
WEST" or the "Company") pursuant to the interim reporting 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 ("GAAP") have been condensed or omitted pursuant to such SEC rules
and regulations. In the opinion of U S WEST'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 1996 U S WEST Consolidated Financial
Statements, the U S WEST Communications Group Combined Financial Statements
and the U S WEST Media Group Combined Financial Statements and notes thereto
included in U S WEST's proxy statement mailed to all shareowners on April 7,
1997.
Certain reclassifications within the Combined Financial Statements have been
made to conform to the current year presentation.
New Accounting Standard
In fourth-quarter 1997, U S WEST will adopt SFAS No. 128, "Earnings Per
Share." This standard specifies new computation, presentation and disclosure
requirements for earnings per share. Among other things, SFAS No. 128
requires presentation of basic and diluted earnings per share on the face of
the income statement. Adoption of the new standard will not have a material
impact on Communications Group earnings per share.
B. Contingencies
At U S WEST Communications, Inc. ("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
hearing, 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. The range of possible
risk is $0 to $160 at March 31, 1997.
<PAGE>
Form 10-Q - Part I
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
In 1996, the Washington State Utilities and Transportation Commission ("WUTC"
or the "Commission") acted on U S WEST Communications' 1995 rate request. U S
WEST Communications had sought to increase revenues by primarily raising
rates for basic residential services over a four-year period. The two major
issues in this proceeding involve U S WEST Communications' request for
improved capital recovery and elimination of the imputation of Yellow Pages
revenue. Instead of granting U S WEST Communications' rate request, the
Commission ordered approximately $91.5 in annual net revenue reductions,
effective May 1, 1996.
Based on the above ruling, U S WEST Communications filed a lawsuit with the
King County Superior Court (the "Court") for an appeal of the order, a
temporary stay of the ordered rate reduction and an authorization to implement
a revenue increase. The Court declined to change the WUTC order. U S WEST
Communications appealed the Court's decision to the Washington State Supreme
Court (the "State Supreme Court") which, on January 22, 1997, granted a stay
of the order, pending the State Supreme Court's full review of the appeal
which will begin in the second quarter of 1997.
Effective May 1, 1996, U S WEST Communications began collecting revenues
subject to refund with interest. The cumulative amount of revenues collected
subject to refund as of March 31, 1997, is approximately $95. U S WEST
Communications expects its appeal to be successful and has not accrued any of
the amounts subject to refund. However, an adverse judgment on the appeal
would have a significant impact on the future results of 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)
RESULTS OF OPERATIONS - FIRST QUARTER 1997 COMPARED WITH FIRST QUARTER 1996
Following are details of the Communications Group's reported net income and
earnings per common share ("earnings per share"), normalized to exclude the
effects of certain nonoperating items.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Net Net Net Net Earnings Earnings Earnings
Income Income Income Income Per Share Per Share Per Share
Increase Increase Increase
(Decrease) (Decrease) (Decrease)
Three Months Ended March 31, 1997 1996 Dollar Percent 1997 1996 Dollar
Reported net income $ 339 $ 328 $ 11 3.4 $ 0.70 $ 0.69 $ 0.01
Adjustments to reported net income:
Gain on sale of rural telephone
exchanges (1)<F1> (11) - (11) - (0.02) - (0.02)
Cumulative effect of change in
accounting principle (2)<F2> - (34) 34 - - (0.07) 0.07
Current year effect of change in
accounting principle (2)<F2> - (5) 5 - - (0.01) 0.01
-------- -------- ----------- ---------- ----------- ----------- -----------
Normalized income $ 328 $ 289 $ 39 13.5 $ 0.68 $ 0.61 $ 0.07
======== ======== =========== ========== =========== =========== ===========
<S> <C>
Earnings
Per Share
Increase
(Decrease)
Three Months Ended March 31, Percent
Reported net income 1.4
Adjustments to reported net income:
Gain on sale of rural telephone
exchanges (1)<F1> -
Cumulative effect of change in
accounting principle (2)<F2> -
Current year effect of change in
accounting principle (2)<F2> -
----------
Normalized income 11.5
==========
<FN>
<F1>
(1) In first-quarter 1997, the Company sold certain rural telephone exchanges in Nebraska for a pretax gain of $18 and
an after tax gain of $11.
<F2>
(2) Effective January 1, 1996, U S WEST adopted Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
</FN>
</TABLE>
During 1997, the Communications Group's normalized income increased $39, or
13.5 percent, to $328. Normalized earnings per share was $0.68, an increase of
$0.07, or 11.5 percent. Earnings before interest, taxes, depreciation,
amortization and other ("EBITDA") increased $58, or 5.2 percent, to $1,171.
EBITDA also excludes the gain on sale of certain rural telephone exchanges in
1997. The increases are primarily due to higher demand for services and
continued cost control efforts, which accelerated in the latter half of 1996.
The Communications Group anticipates net income growth will be partially
offset by increased costs related to growth initiatives and interconnection
requirements.
The Communications Group believes EBITDA is an important indicator of the
operational 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 Communications Group's business or as an alternative to
cash flows from operating activities as a measure of liquidity, in each case
determined in accordance with generally accepted accounting principles.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in million), continued
Effective January 1, 1996, U S WEST adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
which, among other things, requires that companies no longer record
depreciation expense on assets held for sale. Adoption of SFAS No. 121
resulted in a one-time gain of $34 (net of tax of $22), or $0.07 per share,
related to the cumulative effect of change in accounting principle.
Operating Revenues
An analysis of operating revenues follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Three Months Increase Increase
Ended Price Lower (Decrease) (Decrease)
March 31, 1997 1996 Demand Changes Refunds Other Dollar Percent
Local service $1,231 $1,145 $ 101 $ (10) $ 5 $ (10) $ 86 7.5
Interstate access 687 622 64 (5) 10 (4) 65 10.5
Intrastate access 200 190 9 2 - (1) 10 5.3
Long-distance network 250 290 (22) (1) - (17) (40) (13.8)
Other services 219 218 - - - 1 1 0.5
------ ------ -------- --------- -------- ------- ----------- ----------
Total $2,587 $2,465 $ 152 $ (14) $ 15 $ (31) $ 122 5.0
====== ====== ======== ========= ======== ======= =========== ==========
</TABLE>
Local service revenues increased $86, or 7.5 percent, to $1,231, primarily as
a result of access line growth and increased demand for new product and
service offerings, and existing central office features. Total reported
access lines increased 562,000, or 3.7 percent, during the past 12 months, of
which 250,000 was attributable to second lines. Second line installations
increased 28.6 percent. Access lines grew 688,000, or 4.6 percent, when
adjusted for sales of approximately 126,000 rural telephone access lines
during the past twelve months. Partially offsetting the increase in local
service revenues was the effect of lower wireless interconnection access
prices as mandated by the Telecommunications Act of 1996, which reduced local
service revenues by $16.
Higher interstate access revenues are primarily attributable to access line
growth, a 6.6 percent increase in billed interstate access minutes of use and
increased demand for private line services. True-ups of $18 to the 1996
sharing related accruals for refunds to interexchange carriers also
contributed to the increase in interstate access revenues. These true-ups
more than offset the current year sharing related accruals. The increase in
intrastate access revenues was primarily attributable to a 8.5 percent
increase in billed intrastate access minutes of use and increased demand for
private line services.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Long-distance network service revenues decreased $40, or 13.8 percent, as
compared with 1996, primarily due to the effects of competition and the
implementation of multiple toll carrier plans ("MTCPs") in Iowa and Nebraska
in 1996, and in Oregon and Washington in first-quarter 1997. The MTCPs
essentially allow independent telephone companies to act as toll carriers.
During 1997, the MTCPs reduced long-distance revenues by $17, which was offset
by increased intrastate access revenues of $2 and decreased other operating
expenses (i.e., access expense) of $14.
Excluding the effects of the MTCPs, long-distance network service revenues
decreased 7.9 percent. Erosion of long-distance network service revenues will
continue due to the loss of exclusivity of 1+ dialing in Minnesota and
Arizona, and continued dial-around activity in other states within the
Communications Group's 14 state region. The Communications Group is partially
mitigating competitive losses through competitive pricing of intraLATA
long-distance services and increased promotional efforts to retain customers.
During 1997, revenues from other services remained relatively flat. Continued
market penetration in voice messaging services, and increased inside wire
maintenance services and billing and collection service revenues were almost
entirely offset by a reduction in nonrecurring contract revenues due to the
completion of a large wire installation project in 1996.
Future revenues at U S WEST Communications may be affected by pending
regulatory actions in federal and local regulatory jurisdictions.
Costs and Expenses
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Three Months Increase Increase
Ended Ended (Decrease) (Decrease)
March 31, March 31,
1997 1996 Percent Dollar
Employee-related expenses $ 864 $ 867 (3) (0.3)
Other operating expenses 445 388 57 14.7
Taxes other than income taxes 107 97 10 10.3
Depreciation and amortization 527 517 10 1.9
Interest expense 103 111 (8) (7.2)
Other expense - net 22 16 6 37.5
</TABLE>
Employee-related expenses decreased slightly in 1997, primarily due to lower
salaries and wages, and overtime. Salaries and wages decreased primarily as a
result of employee reductions totaling 3,994 during the last twelve months.
However, this decrease was largely offset by the effects of inflation-driven
wage increases. The reduction in overtime is primarily the result of
continued cost
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
control efforts which accelerated in the latter half of 1996. Partially
offsetting these decreases were higher contract labor costs and an increase in
the postretirement benefits accrual. The contract labor increase primarily
relates to marketing and sales efforts associated with a special advertising
promotion of caller identification and additional costs related to systems
development.
The increase in other operating expenses is primarily due to higher
advertising expenses, of which approximately $30 is attributable to a special
advertising promotion of caller identification. Also contributing to the
increase was a reserve adjustment associated with billing and collection
activities performed for interexchange carriers, and increased consulting and
professional fees primarily related to new business opportunities. Partially
offsetting these increases were lower costs due to the completion of a large
wire installation project in 1996.
The increase in taxes other than income taxes is primarily due to increased
use and gross receipts tax.
The decrease in interest expense is primarily due to lower average debt levels
and lower interest rates as compared to 1996. Partially offsetting the
decrease in interest expense was a decrease in the amount of interest
capitalized resulting from a lower average balance of telecommunications plant
under construction.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations increased $292 to $1,097 in first quarter 1997,
compared with 1996. The increase was primarily attributable to business
growth and continued cost control efforts, a decrease in the cash funding of
postretirement benefits and lower restructuring payments.
On March 31, 1997, Standard and Poor's lowered U S WEST Communications' senior
unsecured debt rating from A plus to A. This down-grading is a result of a
modified rating criteria implemented by Standard and Poor's to reflect the
changes in the telecommunications regulatory environment.
In January 1997, the Company purchased personal communications service
licenses in the Federal Communications Commission's ("FCC") block auction of D
and E spectrum. The purchase price of approximately $57 will be paid as the
licenses are granted.
During the first quarter, debt decreased $466 and the percentage of debt to
total capital decreased from 62.4 at December 31, 1996, to 59.9 percent at
March 31, 1997. The decrease in the percentage of debt to total capital is
primarily a result of lower debt levels, partially driven by lower capital
expenditures. The Company anticipates capital expenditures will accelerate
during the remainder of 1997.
Communications Group from time to time engages in preliminary discussions
regarding restructurings, dispositions and other similar transactions. Any
such transaction may include, among other things, the transfer of certain
assets, businesses or interests, or the incurrence or assumption of
indebtedness, and could be material to the financial condition and results of
operations of U S WEST and the Communications Group. There is no assurance
that any such discussions will result in the consummation of any such
transaction.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
RESTRUCTURING CHARGE
In 1993, the Communications Group incurred an $880 restructuring charge
(pretax). The related restructuring plan, which is expected to be
substantially complete by the end of 1997, is designed to provide faster, more
responsive customer services, while reducing the costs of providing these
services.
During the first quarter, the restructuring reserve decreased $29 to a balance
of $94 at March 31, 1997. Reserve usage is primarily a result of expenditures
for employee separation and systems development costs. First-quarter 1997
employee separations were 207, bringing the cumulative employee separations
under the restructuring plan to 7,379.
CONTINGENCIES
At U S WEST Communications, Inc. 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 hearing, 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. The range of possible risk is $0 to
$160 at March 31, 1997.
In 1996, the Washington State Utilities and Transportation Commission ("WUTC"
or the "Commission") acted on U S WEST Communications' 1995 rate request. U S
WEST Communications had sought to increase revenues by primarily raising
rates for basic residential services over a four-year period. The two major
issues in this proceeding involve U S WEST Communications' request for
improved capital recovery and elimination of the imputation of Yellow Pages
revenue. Instead of granting U S WEST Communications' rate request, the
Commission ordered approximately $91.5 in annual net revenue reductions,
effective May 1, 1996.
Based on the above ruling, U S WEST Communications filed a lawsuit with the
King County Superior Court (the "Court") for an appeal of the order, a
temporary stay of the ordered rate reduction and an authorization to implement
a revenue increase. The Court declined to change the WUTC order. U S WEST
Communications appealed the Court's decision to the Washington State Supreme
Court (the "State Supreme Court") which, on January 22, 1997, granted a stay
of the order, pending the State Supreme Court's full review of the appeal
which will begin in the second quarter of 1997.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Effective May 1, 1996, U S WEST Communications began collecting revenues
subject to refund with interest. The cumulative amount of revenues collected
subject to refund as of March 31, 1997, is approximately $95. U S WEST
Communications expects its appeal to be successful and has not accrued any of
the amounts subject to refund. However, an adverse judgment on the appeal
would have a significant impact on the future results of operations.
REGULATORY ENVIRONMENT
On May 7, 1997, the FCC announced three decisions that will establish rules
to implement the Universal Service provision of the Telecommunications Act of
1996 ("the Universal Service Order"), as well as rules to restructure the
access charge system ("the Access Reform Order") and the FCC's current price
cap plan (the "Price Cap Order").
Universal Service
Under the Universal Service Order, all providers of interstate
telecommunications services will contribute to universal service funding,
which will be based on assessments against these service providers' end-user
revenues. The Universal Service Order deferred defining a new explicit
mechanism to support high-cost service in areas served by non-rural telephone
companies such as U S WEST Communications until January 1, 1999. Until the
explicit mechanism is put in place, the existing universal service support
mechanisms were left intact, except to the extent modified by the FCC's Access
Reform and Price Cap Orders discussed below.
The FCC's Universal Service Order also includes the establishment of two
separate funds to help connect eligible schools, libraries and rural health
care providers to the global telecommunications network.
Federal Access Reform
The FCC rejected proposals to immediately base access rates on total service
long run incremental costs. The FCC will instead rely on market forces to
bring access rates to competitive levels over time. The FCC will issue
detailed rules at a later date.
The Access Reform Order will generally remove non-traffic sensitive costs from
minutes-of-use access charges. The FCC concluded these non-traffic sensitive
costs should be generally recovered through flat-rate charges against
interexchange carriers, multi-line business users and additional residential
lines. The Access Reform Order will also affirm the tentative conclusions
reached in the Notice of Proposed Rulemaking issued in December 1996 that
incumbent local exchange carriers ("LECs") may not assess interstate access
charges on information service providers and purchasers of unbundled network
elements. The FCC will separately address
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
issues surrounding information service providers' usage of the public switched
network in a related Notice of Inquiry. The impacts of access reform will
occur over a number of years and the effects on the Company cannot be
evaluated until the order and accompanying rules are issued. Competition from
new entrant local exchange carriers will also affect the Company's access
revenues.
Price Cap Order
The FCC's Price Cap Order will require LECs that are subject to price cap
regulation to increase their price cap index productivity factor to 6.5
percent. The order will eliminate the lower productivity factor options
(i.e., 4.0 percent and 4.7 percent) that required sharing of earnings above a
specified level and will require LECs to set their 1997 price cap index
assuming that the 6.5 factor had been in effect at the time of the 1996 tariff
filing. The Price Cap Order will require price cap incumbent LECs to file
revisions to their interstate access tariffs in compliance with the new rules
to be effective July 1, 1997. The effects of the Price Cap Order on the
Company cannot be evaluated until a later date when the FCC releases its order
and new rules.
Form 10-Q - Part I
COMBINED STATEMENTS OF OPERATIONS U S WEST MEDIA GROUP
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
Three Three
Months Months
Ended Ended
March 31, March 31,
Dollars in millions (except per share amounts) 1997 1996
Sales and other revenues:
Cable and telecommunications $ 555 $ 57
Wireless communications 335 264
Directory and information services 309 288
Other 8 4
----------- ----------
Total sales and other revenues 1,207 613
Operating expenses:
Cost of sales and other revenues 406 199
Selling, general and administrative expenses 320 218
Depreciation and amortization 303 67
----------- ----------
Total operating expenses 1,029 484
----------- ----------
Income from operations 178 129
Interest expense 175 24
Equity losses in unconsolidated ventures 165 66
Gain on sale of investment 51 -
Guaranteed minority interest expense 22 12
Other expense - net 4 7
----------- ----------
Net income (loss) before income taxes (137) 20
Provision (benefit) for income taxes (28) 17
----------- ----------
NET INCOME (LOSS) $ (109) $ 3
=========== ==========
Dividends on preferred stock 13 1
----------- ----------
EARNINGS (LOSS) AVAILABLE FOR COMMON STOCK $ (122) $ 2
=========== ==========
LOSS PER COMMON SHARE $ (0.20) $ -
=========== ==========
AVERAGE COMMON SHARES OUTSTANDING (thousands)
606,527 473,003
=========== ==========
</TABLE>
See Notes to Combined Financial Statements.
<PAGE>
Form 10-Q - Part I
COMBINED BALANCE SHEETS U S WEST MEDIA GROUP
(Unaudited)
March 31, December 31,
Dollars in millions 1997 1996
ASSETS
Current assets:
Cash and cash equivalents $ 83 $ 121
Accounts and notes receivable - net 533 508
Deferred directory costs 269 259
Receivable from Communications Group 88 92
Marketable securities - 58
Other 107 101
Total current assets 1,080 1,139
Property, plant and equipment - net 4,403 4,275
Investment in Time Warner Entertainment 2,483 2,477
Net investment in international ventures 1,427 1,548
Intangible assets - net 12,543 12,595
Net investment in assets held for sale 403 409
Other assets 1,446 1,618
Total assets $23,785 $24,061
See Notes to Combined Financial Statements.
<PAGE>
Form 10-Q - Part I
COMBINED BALANCE SHEETS U S WEST MEDIA GROUP
(Unaudited), continued
<TABLE>
<CAPTION>
<S> <C> <C>
March 31, December 31,
Dollars in millions 1997 1996
LIABILITIES AND EQUITY
Current liabilities:
Short-term debt $ 1,420 $ 217
Due to Continental Cablevision shareholders - 1,150
Accounts payable 317 425
Deferred revenue and customer deposits 147 129
Other 836 795
---------- -------------
Total current liabilities 2,720 2,716
---------- -------------
Long-term debt 8,603 8,636
Deferred income taxes 3,526 3,600
Deferred credits and other 363 346
Company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely Company-
guaranteed debentures 1,080 1,080
Preferred stock subject to mandatory redemption 51 51
Media Group equity 7,442 7,632
---------- -------------
Total liabilities and equity $ 23,785 $ 24,061
========== =============
See Notes to Combined Financial Statements.
</TABLE>
<PAGE>
Form 10-Q - Part I
COMBINED STATEMENTS OF CASH FLOWS U S WEST MEDIA GROUP
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
Three Months Three Months
Ended Ended
March 31, March 31,
Dollars in millions 1997 1996
OPERATING ACTIVITIES
Net income (loss) $ (109) $ 3
Adjustments to net income (loss):
Depreciation and amortization 303 67
Equity losses in unconsolidated ventures 165 66
Deferred income taxes (45) (17)
Provision for uncollectibles 25 14
Gain on sale of investment (51) -
Changes in operating assets and liabilities:
Accounts and notes receivable 8 (10)
Deferred directory costs, prepaid and other (17) (12)
Accounts payable and accrued liabilities (36) 6
Other - net 6 (7)
-------------- --------------
Cash provided by operating activities 249 110
-------------- --------------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment (364) (117)
Investment in Continental Cablevision (1,150) -
Investment in international ventures (48) (104)
Proceeds from the sale of investments 149 -
Proceeds from assets held for sale 29 3
Other - net (24) (24)
-------------- --------------
Cash (used for) investing activities (1,408) (242)
-------------- --------------
FINANCING ACTIVITIES
Net (repayments of) proceeds from issuance
of short-term debt (2,910) 139
Repayments of long-term debt (1) (97)
Proceeds from issuance of long-term debt 4,090 76
Proceeds from issuance of common stock 6 21
Purchase of treasury stock (53) -
Dividends paid on preferred stock (11) -
-------------- --------------
Cash provided by financing activities 1,121 139
-------------- --------------
CASH AND CASH EQUIVALENTS
Increase (decrease) (38) 7
Beginning balance 121 20
-------------- --------------
Ending balance $ 83 $ 27
============== ==============
</TABLE>
See Notes to Combined Financial Statements
<PAGE>
Form 10-Q - Part I
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 1997
(Dollars in millions)
(Unaudited)
A. Summary of Significant Accounting Policies
Basis of Presentation
The Combined Financial Statements have been prepared by U S WEST, Inc. ("U S
WEST" or the "Company") pursuant to the interim reporting 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 U S WEST'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 1996 U S WEST Consolidated Financial Statements, the U S
WEST Media Group Combined Financial Statements and the U S WEST Communications
Group Combined Financial Statements and notes thereto included in U S WEST's
proxy statement mailed to all shareowners on April 7, 1997.
Certain reclassifications within the Combined Financial Statements have been
made to conform to the current year presentation.
New Accounting Standard
In fourth-quarter 1997, U S WEST will adopt SFAS No. 128, "Earnings Per
Share." This standard specifies new computation, presentation and disclosure
requirements for earnings per share. Among other things, SFAS No. 128
requires presentation of basic and diluted earnings per share on the face of
the income statement. Adoption of the new standard will not have a material
impact on Media Group earnings per share.
B. AirTouch Transaction
During 1994, U S WEST signed a definitive agreement with AirTouch
Communications ("AirTouch") to combine their domestic cellular properties into
a partnership in a multi-phased transaction (the "AirTouch Joint Venture").
During Phase I, which commenced on November 1, 1995, the partners are
operating their cellular properties separately. A Wireless Management Company
has been formed and is providing services to both companies on a contract
basis.
In February 1997, the King County Superior Court in Washington state ruled
that Media Group violated the terms of its partnership agreement with its
minority partners in the Seattle market by entering into the AirTouch Joint
Venture. The Company has obtained a stay of the ruling pending its appeal.
Similar litigation has been filed in other jurisdictions regarding other
cellular partnerships by the same minority partner that brought the Seattle
litigation. The Company believes it will ultimately be successful in all such
litigation.
<PAGE>
Form 10-Q - Part I
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS, continued
(Dollars in millions)
(Unaudited)
In April 1997, Media Group and AirTouch signed a letter of intent to merge
Media Group's domestic cellular business and its interest in PrimeCo Personal
Communications ("PrimeCo") into AirTouch (the "AirTouch Merger"). The
AirTouch Merger would replace the AirTouch Joint Venture. Under the
agreement, AirTouch will assume $2.2 billion of Media Group debt and Media
Group shareowners will receive AirTouch stock in a tax-free transaction.
Media Group shareowners will receive 84.8 million AirTouch shares if AirTouch
stock is trading at $33 or higher at closing. If AirTouch is trading at $30
or lower, Media Group shareowners will receive 93.3 million AirTouch shares.
If the stock is trading between $30 and $33, the number of shares will be
adjusted to a total value of $2.8 billion. In the event Media Group is unable
to transfer certain of its cellular interests because of the pending
litigation, the amount of debt to be assumed by AirTouch and the amount of
stock to be issued by AirTouch will be reduced proportionately.
Closing of the AirTouch Merger requires, among other things, a definitive
agreement, approval by the AirTouch and U S WEST boards of directors, a
favorable ruling from the Internal Revenue Service, Hart-Scott-Rodino review,
approval by shareowners of Media Group and Communications Group, and
satisfaction of other conditions. The Company believes this transaction
should close by late 1997 or early 1998, but "Morris Trust" legislation
introduced in Congress would block this transaction if passed in its current
form. In that event, Media Group and AirTouch would continue with the
AirTouch Joint Venture.
In the event the AirTouch Merger agreement is terminated, proceeding to Phase
II would be delayed by nine months from the termination date. In Phase II of
the AirTouch Joint Venture, the partners will combine their domestic
properties subject to obtaining certain authorizations and partnership
approvals. Media Group has the right under Phase III of the AirTouch Joint
Venture agreement to convert its joint venture interest into AirTouch stock.
<PAGE>
Form 10-Q - Part I
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS, continued
(Dollars in millions)
(Unaudited)
C. Debt Offering
In January 1997, U S WEST issued senior unsecured notes and debentures
totaling $4.1 billion, at a weighted average coupon rate of 7.47 percent. The
proceeds were used to refinance debt incurred in conjunction with the merger,
on November 15, 1996, of Continental Cablevision, Inc. ("Continental") into a
wholly owned subsidiary of U S WEST (the "Merger" or the "Continental
Merger").
The components of the debt issue follow:
<TABLE>
<CAPTION>
<S> <C>
Description Face Value
6.85% Notes due January 15, 2002 $ 600
7.30% Notes due January 15, 2007 1,100
7.90% Debentures due February 1, 2027 1,100
8.15% Debentures due February 1, 2032 200
6.95% Debentures due January 15, 2037 600
7.95% Debentures due February 1, 2097 500
-----------
$ 4,100
===========
</TABLE>
The notes and debentures are generally not redeemable prior to maturity. At
the option of U S WEST, the 8.15 percent debentures are redeemable after
February 1, 2007, and at the option of the holders, the 6.95 percent
debentures are redeemable on January 15, 2004. The notes and debentures are
unconditionally guaranteed by U S WEST.
D. Asset Sales
In January and February 1997, Media Group sold 4,075,000 shares of Teleport
Communications Group, Inc. ("TCG") for proceeds of approximately $120. Media
Group is required by a consent decree with the United States Department of
Justice to dispose of its interest in TCG by December 31, 1998. This sale
reduced Media Group's interest in TCG to approximately 9 percent from 11
percent. The Media Group is also required by the Federal Communications
Commission to divest the cable television systems located in the U S WEST
Communications Group service territory.
<PAGE>
Form 10-Q - Part I
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS, continued
(Dollars in millions)
(Unaudited)
During the first quarter of 1997, Media Group sold its 5 percent interest in a
French wireless venture, Bouygues Telecom, for total proceeds of $82. The
proceeds consisted of cash and a note receivable due in the second quarter of
1997. Media Group recognized a pretax gain on the sale of $51 during the
quarter.
During the first quarter of 1997, the Media Group reached a tentative
settlement to transfer its investment in Optus Vision, an Australian cable and
telecommunications venture acquired in the Continental Merger, to Optus
Communications Pty Ltd, an Australian telecommunications carrier. Upon
satisfaction of various pre-conditions, Media Group will receive convertible
notes which can be converted to shares of Optus Communications upon public
offering of its shares. The settlement releases the Company from current
litigation and any future claims, and is subject to the consent of bankers and
approval from the foreign investment review board.
E. Net Investment in Assets Held for Sale
Effective January 1, 1995, the capital assets segment has been accounted for
in accordance with Staff Accounting Bulletin No. 93, issued by the Securities
Exchange Commission, which requires discontinued operations not disposed of
within one year of the measurement date to be accounted for prospectively in
continuing operations as a "net investment in assets held for sale." The net
realizable value of the assets is reevaluated on an ongoing basis with
adjustments to the existing reserve, if any, charged to continuing operations.
To date, no such adjustment has been required. 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.
Building sales and operating revenues of the capital assets segment were $57
and $30 for the three months ended March 31, 1997 and 1996, respectively.
<PAGE>
Form 10-Q - Part I
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS, continued
(Dollars in millions)
(Unaudited)
The components of net investment in assets held for sale follow:
<TABLE>
<CAPTION>
<S> <C> <C>
March 31, December 31,
1997 1996
ASSETS
Cash $ 23 $ 21
Finance receivables - net 817 869
Investment in real estate - net of valuation allowance 191 182
Bonds, at market value 145 146
Investment in FSA 333 326
Other assets 172 165
---------- -------------
Total assets $ 1,681 $ 1,709
========== =============
LIABILITIES
Debt $ 461 $ 481
Deferred income taxes 679 671
Accounts payable, accrued liabilities and other 127 137
Minority interests 11 11
---------- -------------
Total liabilities 1,278 1,300
---------- -------------
Net investment in assets held for sale $ 403 $ 409
========== =============
</TABLE>
Revenues of U S WEST Financial Services, Inc., a member of the capital assets
segment, were $5 and $7 for the three months ended March 31, 1997 and 1996,
respectively. Selected financial data for U S WEST Financial Services
follows:
<TABLE>
<CAPTION>
<S> <C> <C>
March 31, December 31,
1997 1996
Net finance receivables $ 856 $ 859
Total assets 1,058 1,058
Total debt 252 236
Total liabilities 999 998
Equity 59 60
</TABLE>
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions)
The following discussion is based on the U S WEST Media Group Combined
Financial Statements prepared in accordance with GAAP. The discussion should
be read in conjunction with the U S WEST, Inc. Consolidated Financial
Statements. A discussion of the Media Group's operations on a proportionate
basis follows the GAAP discussion.
RESULTS OF OPERATIONS - FIRST QUARTER 1997 COMPARED WITH FIRST QUARTER 1996
Sales and Other Revenues
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Three Three
Months Months
Ended Ended Pro Forma Pro forma
March 31, March 31, Percent Percent
1997 1996 Change 1996 Change
Cable and telecommunications:
Domestic $ 551 $ 57 - $ 519 6.2
International 4 - - - -
---------- ---------- ------- ---------- ---------
555 57 - 519 6.9
Wireless communications:
Cellular service 303 239 26.8 239 26.8
Cellular equipment 32 25 28.0 25 28.0
---------- ---------- ------- ---------- ---------
335 264 26.9 264 26.9
Directory and information services:
Domestic 287 271 5.9 271 5.9
International 22 17 29.4 17 29.4
---------- ---------- ------- ---------- ---------
309 288 7.3 288 7.3
Other 8 4 - 4 -
Sales and other revenues $ 1,207 $ 613 96.9 $ 1,075 12.3
========== ========== ======= ========== =========
</TABLE>
Media Group sales and other revenues increased 96.9 percent to $1,207 in 1997,
primarily as a result of the Continental Merger. On a pro forma basis, which
gives effect to the Continental Merger as though it had occurred as of January
1, 1996, Media Group sales and other revenues increased 12.3 percent. The
increase was primarily due to growth in cellular service revenue.
Cable and Telecommunications On a pro forma basis, domestic cable and
telecommunications revenues increased $32, or 6.2 percent. The increase is
primarily a result of a 2.2 percent increase in basic subscribers and a 3.7
percent increase in total revenue per basic subscriber. Price increases of 6
to 8 percent, implemented during the quarter, and the introduction of new
services contributed to the increase in revenue per basic subscriber.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
International cable and telecommunications revenues reflect the third-quarter
1996 consolidation of Kabel Plus a.s. ("Kabel Plus"), Media Group's cable
operation in the Czech Republic.
Wireless Communications Cellular service revenues increased $64, or 26.8
percent, in 1997. This increase is due to a 38 percent increase in
subscribers during the last twelve months, partially offset by an 8.7 percent
drop in average revenue per subscriber to $48.00 per month. The increase in
subscribers relates to continued growth in demand for wireless services.
Cellular equipment revenues increased $7, or 28.0 percent in 1997. This
increase is primarily due to an increase in units sold, which was somewhat
offset by lower equipment prices. A 27 percent increase in customers added
during the quarter and the implementation of a phone exchange program for
existing customers led to the increase in units sold.
In April 1997, Media Group and AirTouch signed a letter of intent to merge
Media Group's domestic cellular business and its interest in PrimeCo into
AirTouch (the "AirTouch Merger"). The AirTouch Merger would replace the
AirTouch Joint Venture. Under the agreement, AirTouch will assume $2.2
billion of Media Group debt and Media Group shareowners will receive AirTouch
stock in a tax-free transaction. Media Group shareowners will receive 84.8
million AirTouch shares if AirTouch stock is trading at $33 or higher at
closing. If AirTouch is trading at $30 or lower, Media Group shareowners will
receive 93.3 million AirTouch shares. If the stock is trading between $30 and
$33, the number of shares will be adjusted to a total value of $2.8 billion.
In the event Media Group is unable to transfer certain of its cellular
interests, because of the pending litigation, the amount of debt to be assumed
by AirTouch and the amount of stock to be issued by AirTouch will be reduced
proportionately.
Closing of the AirTouch Merger requires, among other things, a definitive
agreement, approval by the AirTouch and U S WEST boards of directors, a
favorable ruling from the Internal Revenue Service, Hart-Scott-Rodino review,
approval by shareowners of Media Group and Communications Group, and
satisfaction of other conditions. The Company believes this transaction
should close by late 1997 or early 1998, but "Morris Trust" legislation
introduced in Congress would block this transaction if passed in its current
form. In this event, Media Group and AirTouch would continue with the
AirTouch Joint Venture. See Note B - AirTouch Transaction - to the Combined
Financial Statements.
Directory and Information Services Revenues related to Yellow Pages directory
advertising represent 99 percent of domestic directory and information
services revenues. Yellow Pages directory advertising revenues increased $19,
or 7.2 percent. The increase is driven by a 7.4 percent increase in revenue
per local advertiser primarily resulting from price increases of 5.0 percent.
This increase was partially offset by a revenue decrease of $3 associated with
exited product lines.
International directory publishing revenues increased $5 in 1997, primarily
due to an increase in revenue per advertiser. This increase was achieved by
selling more and higher priced advertisements to existing advertisers.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Operating Income
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Three Three
Months Months
Ended Ended Pro forma
March 31, March 31, Percent Pro forma Percent
1997 1996 Change 1996 Change
Cable and telecommunications:
Domestic $ (15) $ 8 - $ (9) (66.7)
International (4) - - - -
----------- ----------- -------- ----------- ----------
(19) 8 (9) -
Wireless communications:
Domestic 95 50 90.0 50 90.0
International (3) - - - -
----------- ----------- -------- ----------- ----------
92 50 84.0 50 84.0
Directory and information services:
Domestic 130 110 18.2 110 18.2
International (7) (8) (12.5) (8) 12.5
----------- ----------- -------- ----------- ----------
123 102 20.6 102 20.6
Other (see Note 1) (18) (31) (41.9) (31) 41.9
----------- ----------- -------- ----------- ----------
Operating income $ 178 $ 129 38.0 $ 112 58.9
----------- ----------- -------- ----------- ----------
</TABLE>
Note 1 - Primarily includes headquarters expenses for shared services and
divisional expenses associated with equity investments.
During 1997, Media Group operating income increased 38.0 percent, to $178. On
a pro forma basis, which gives effect to the Continental Merger as though it
had occurred as of January 1, 1996, operating income increased 58.9 percent.
The increases were primarily due to strong growth in wireless communications
operations.
During 1997, EBITDA more than doubled to $481, which was primarily a result of
the Continental Merger. Pro forma EBITDA increased 22.7 percent, which was a
result of strong growth in wireless communications operations. The Media Group
considers EBITDA an important indicator of the operating performance 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.
Cable and Telecommunications On a pro forma basis, cable and
telecommunications operating income decreased $10, to $(19), in 1997.
Domestic cable operating income contributed $6 to the decline, primarily as a
result of increased depreciation expense related to system upgrade activities.
The remaining decrease is attributed to the third-quarter 1996 consolidation
of Kabel Plus.
<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 a pro forma basis, cable and telecommunications EBITDA increased $2, to
$221, during 1997. Domestic cable and telecommunications EBITDA increased $4,
to $223. Revenue increases were partially offset by increases in programming
costs associated with introducing new channels and costs related to the
development of new services. International cable and telecommunications
EBITDA loss of $2 reflects the third-quarter 1996 consolidation of Kabel Plus.
Wireless Communications Domestic cellular operating income increased 90
percent, to $95 during 1997. The increase in operating income is a result of
revenue increases associated with the rapidly expanding subscriber base
combined with efficiency gains. On a per subscriber basis, the 1997 decline
in revenue of 8.7 percent has been more than offset by the 23.0 percent
decrease in costs to acquire and support customers. International wireless
communications operating loss of $3 reflects the third-quarter 1996
consolidation of Russian Telecommunications Development Corporation, a Russian
venture which holds wireless investments.
Domestic cellular EBITDA increased 63.1 percent, to $137 during 1997. The
business is continuing to realize operating scale efficiencies resulting in
lower costs on a per subscriber basis. The efficiencies have contributed to
an increase in 1997 domestic cellular service EBITDA margin to 45.2 percent,
compared with 35.1 percent in 1996.
Directory and Information Services During 1997, operating income related to
domestic Yellow Pages directory advertising increased $8, or 6.2 percent.
Revenue increases of 7.2 percent were partially offset by increases in
printing and paper costs. The increases are primarily associated with an
increase in premium advertising.
Operating losses associated with on-going product development activities are
included in domestic directory and information services. Such losses reduced
domestic directory and information services operating income by $7 in 1997,
compared with a reduction of $19 in 1996. The decrease in these operating
losses is primarily the result of exiting various product development
activities.
EBITDA related to domestic Yellow Pages directory advertising service
increased 9.8 percent, to $146 during 1997. The EBITDA margin increased to
51.4 percent in 1997, compared with 50.2 percent in 1996.
Other Other operating losses decreased $13 primarily due to the timing of
billing corporate costs to operating companies and a one-time reduction in
corporate expenses.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Interest Expense and Other
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Three Three
Months Months
Ended Ended Pro forma
March 31, March 31, Percent Pro Forma Percent
1997 1996 Change 1996 Change
Interest expense $ 175 $ 24 - $ 170 2.9
Equity losses in unconsolidated ventures 165 66 - 75 -
Gain on sale of investment 51 - - - -
Guaranteed minority interest expense 22 12 83.3 12 83.3
Other expense - net 4 7 (42.9) 11 (63.6)
</TABLE>
Interest expense increased $151 in 1997, primarily as a result of the
Continental Merger. U S WEST assumed Continental debt totaling $6,525 (at
market value) and incurred debt of $1,150 to finance the cash portion of the
Merger consideration. On a pro forma basis, interest expense increased $5,
primarily related to increased capital expenditures to upgrade the domestic
cable network.
Equity losses increased $99 in 1997. This increase is primarily due to
increased losses from international ventures and the domestic investment in
PrimeCo. The increase in international losses relate to expansion of the
network and additional financing at TeleWest; costs associated with the
significant increase in customers at One 2 One; and license fees related to a
wireless venture in India. Domestically, PrimeCo launched service in November
1996, and losses associated with this venture have increased as a result of
start-up and other costs. The Media Group expects equity losses will continue
to be significant as expansion activities continue.
In 1997, the Media Group sold its 5 percent interest in a wireless venture in
France for proceeds of $82, and a pretax gain of $51. The proceeds consisted
of cash and a note receivable due in the second quarter of 1997.
Guaranteed minority interest expense reflects an increase of $10 related to
the October 1996 issuance of Company-obligated mandatorily redeemable
preferred securities of subsidiary trust holding solely Company-guaranteed
debentures ("Preferred Securities") totaling $480.
<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
Income Tax Provision (Benefit)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Three Three
Months Months
Ended Ended
March 31, March 31, Pro forma Pro forma
1997 1996 (Decrease) 1996 Increase
Income tax provision (benefit) $ (28) $ 17 $ (45) $ (45) $ 17
Effective tax rate 20.4% 85.0% - 28.8% -
</TABLE>
The decrease in the effective tax rate is primarily a result of a shift from
pretax earnings to pretax losses and additional goodwill amortization
associated with the Continental Merger.
Net Income (Loss)
In 1997, the Media Group reported a net loss of $109, ($0.20 per share),
compared with net income of $3 ($0.00 per share), in 1996. Excluding the
after tax effects of the gain on sale of investment totaling $31 ($0.05 per
share), Media Group net income declined $143 in 1997. Approximately $113 of
the decline in net income is a result of the Continental Merger, which caused
a significant increase in interest, depreciation and amortization expenses.
The remaining decline in net income is a result of an increase in losses
generated by unconsolidated ventures partially offset by increased earnings
produced by the domestic cellular operations.
Liquidity and Capital Resources
Operating Activities
Cash provided by operating activities of the Media Group increased $139 in
1997. Growth in operations from the domestic cellular business and the
Continental Merger contributed to the increase. This increase was partially
offset by an increase in financing costs associated with increased debt levels
resulting from the Continental Merger.
Investing Activities
Capital expenditures of the Media Group were $364 in 1997. The majority of
expenditures were devoted to upgrading the domestic cable network and
expansion of the cellular network. The Media Group also invested $48 in
international ventures in 1997, primarily additional capital contributions to
a wireless venture in India. Other investing activities include an investment
in Continental of $1,150 which represents payment of the cash portion of the
Merger consideration.
<PAGE>
10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
During the first quarter of 1997, the Media Group reached a tentative
settlement to transfer its investment in Optus Vision, an Australian cable and
telecommunications venture acquired in the Continental Merger, to Optus
Communications Pty Ltd, an Australian telecommunications carrier. Upon
satisfaction of various pre-conditions, Media Group will receive convertible
notes which can be converted to shares of Optus Communications upon public
offering of its shares. The settlement releases the Company from current
litigation and any future claims, and is subject to the consent of bankers and
approval from the foreign investment review board.
During 1997, the Media Group received proceeds of $149 from the sale of
4,075,000 shares of Teleport Communications Group stock and partial proceeds
from the sale of the Media Group's 5 percent interest in a wireless venture in
France.
Financing Activities
Media Group debt at March 31, 1997 was $10,023, an increase of $1,170 compared
with December 31, 1996. The Media Group incurred additional debt in 1997 to
finance the cash portion of the Merger consideration which totaled $1,150. In
January 1997, the Company issued medium- and long-term debt totaling $4.1
billion, at a weighted average rate of 7.47 percent. The proceeds were used
to refinance debt incurred in conjunction with the Continental Merger.
Excluding debt associated with the capital assets segment, the Media Group's
percentage of debt to total capital at March 31, 1997, was 53.9 percent
compared with 50.3 percent at December 31, 1996. Including debt associated
with the capital assets segment, Preferred Securities and mandatorily
redeemable preferred stock, the Media Group's percentage of debt to total
capital at March 31, 1997, was 60.9 percent compared with 57.8 percent at
December 31, 1996. The percentage of debt to total capital has increased as
a result of increased debt associated with the Continental Merger.
Due to the significant capital requirements associated with the domestic cable
upgrade, the Media group expects that cash from operations will not be
adequate to fund expected cash requirements in the next several years.
Additional financing will come primarily from new debt.
Media Group from time to time engages in preliminary discussions regarding
restructurings, dispositions and other similar transactions. Any such
transaction may include, among other things, the transfer of certain assets,
businesses or interests, or the incurrence or assumption of indebtedness, and
could be material to the financial condition and results of operations of U S
WEST and the Media Group. There is no assurance that any such discussions
will result in the consummation of any such transaction.
<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
The following table and discussion is not required by GAAP or intended to
replace the Combined Financial Statements prepared in accordance with GAAP.
It is presented supplementally because the Media Group believes that
proportionate financial and operating data facilitate the understanding and
assessment of its Combined Financial Statements. The table does not reflect
financial data of the capital assets segment, which had net assets of $403 and
$409 at March 31, 1997 and December 31, 1996, respectively. 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.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Three Months Three Months
Ended Ended
March 31, March 31,
Pro forma Percent
1997 1996 (1) Change
REVENUES
Cable and telecommunications:
Domestic (2) $ 1,215 $ 1,153 5.4
International 108 82 31.7
Wireless communications:
Domestic 309 240 28.8
International 144 88 63.6
Directory and information services:
Domestic 287 271 5.9
International 29 32 (9.4)
Corporate and other 5 3 66.7
-------------- -------------- --------
Total revenues $ 2,097 $ 1,869 12.2
============== ============== ========
EBITDA (3)
Cable and telecommunications:
Domestic (2) $ 390 $ 361 8.0
International 9 (2) -
Wireless communications:
Domestic 101 69 46.4
International (10) 1 -
Directory and information services:
Domestic 139 117 18.8
International (6) (4) 50.0
Corporate and other (3) (9) (66.7)
-------------- -------------- --------
Total EBITDA $ 620 $ 533 16.3
============== ============== ========
</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
Selected Proportionate Data, continued
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Three Months Three Months
Ended Ended
March 31, March 31,
Pro forma Percent
1997 1996 (1) Change
OPERATING INCOME
Cable and telecommunications:
Domestic (2) $ 50 $ 41 22.0
International (39) (28) 39.3
Wireless communications:
Domestic 53 38 39.5
International (55) (22) -
Directory and information services:
Domestic 130 110 18.2
International (10) (7) 42.9
Corporate and other (6) (12) (50.0)
-------------- -------------- --------
Total operating income $ 123 $ 120 2.5
============== ============== ========
NET INCOME (LOSS)
Cable and telecommunications:
Domestic (2) $ (119) $ (117) 1.7
International (57) (37) 54.1
Wireless communications:
Domestic 22 17 29.4
International (24) (24) -
Directory and information services:
Domestic 77 66 16.7
International (10) (7) 42.9
Corporate and other 2 (9) -
-------------- -------------- --------
Total net loss $ (109) $ (111) (1.8)
============== ============== ========
</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
Selected Proportionate Data, continued
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Three Months Ended
March 31,
Pro forma Percent
1997 1996 (1) Change
SUBSCRIBERS/ADVERTISERS:
Cable and telecommunications:
Domestic (2) 7,595 7,305 4.0
International 1,166 919 26.9
Wireless communications:
Domestic 1,984 1,437 38.1
International 612 334 83.2
Directory and information services:
Domestic 482 482 -
International 205 282 (27.3)
------------------ ---------- --------
Total subscribers/advertisers 12,044 10,759 11.9
================== ========== ========
<FN>
<F1>
(1) 1996 pro forma proportionate results reflect the following for the
quarter: 1) Media Group historical proportionate results; 2) the Continental
Merger; 3) Continental's acquisition of the remaining interest in Meredith/New
Heritage; 4) the reclassification of the Teleport Communications Group
investment to equity method; and 5) Continental's cable investments in
Argentina and Singapore.
<F2>
(2) The proportionate results are based on the Media Group's 25.51 percent
pro rata priority and residual equity interests in reported Time Warner
Entertainment Company L.P. ("TWE") results. The reported TWE results are
prepared in accordance with GAAP and have not been adjusted to report TWE
results on a proportionate basis.
<3>
(3) 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.
</FN>
</TABLE>
PROPORTIONATE RESULTS OF OPERATIONS - FIRST QUARTER 1997 COMPARED WITH FIRST
QUARTER 1996
Proportionate Media Group revenues increased 12 percent, to $2.1 billion,
EBITDA increased 16 percent, to $620, and subscribers/advertisers increased 12
percent to 12 million. Strong growth in domestic wireless communications
contributed to the increases in proportionate revenue and EBITDA, and
international cable and telecommunications and wireless operations contributed
to the growth in subscribers.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Cable and Telecommunications During 1997, proportionate revenues for the
domestic cable and telecommunications operations increased 5 percent to
$1,215. This is a result of increases in subscribers and revenue per
subscriber mainly due to price increases. Proportionate EBITDA increased 8
percent, to $390. Proportionate EBITDA related to TWE operations increased 18
percent. TWE's results benefited from improved operations and by a one-time
gain on the sale of TWE's interest in E! Entertainment.
During 1997, international cable and telecommunications proportionate revenues
increased 32 percent, to $108, and proportionate EBITDA increased $11, to $9.
Customer growth at TeleWest and new investments in Malaysia, and Indonesia
contributed to the increase in proportionate revenue. A reduction in Media
Group international staff costs as well as growth in operations at TeleWest
and Malaysia contributed to the increase in proportionate EBITDA.
Proportionate international cable subscribers total approximately 1.2 million
at March 31, 1997, a 14 percent increase, on a comparable basis.
Wireless Communications During 1997, domestic wireless proportionate revenues
increased 29 percent, to $309, and proportionate EBITDA increased 46 percent,
to $101. Excluding losses generated by the start-up of PrimeCo, domestic
cellular proportionate EBITDA increased 64 percent. The increase in EBITDA is
a result of revenue increases associated with the rapidly expanding domestic
cellular subscriber base combined with efficiency gains.
During 1997, proportionate revenues for the international wireless operations
increased 64 percent, to $144, and proportionate EBITDA decreased $11 to
($10). The increase in proportionate revenue is primarily a result of a 50
percent increase in subscribers at One 2 One. EBITDA losses increased
primarily as a result of costs associated with increasing the subscriber base
at One 2 One.
Proportionate international wireless subscribers grew to 612,000 at March 31,
1997, an 83 percent increase from a year ago.
Directory and Information Services Proportionate revenues for domestic
directory and information services increased 6 percent in 1997, to $287, and
proportionate EBITDA increased 19 percent, to $139. The increases are due to
price and volume increases, reduction in new product development activities
and employee reductions.
Proportionate revenues for international directories businesses decreased $3
in 1997, to $29, and proportionate EBITDA decreased $2, to ($6). A delay in
publishing a large directory contributed to the decreases.
<PAGE>
Form 10-Q - Part II
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
U S WEST and its subsidiaries are subject to claims and proceedings arising in
the ordinary course of business. While complete assurance cannot be given as
to the outcome of any contingent liabilities, in the opinion of U S WEST, any
financial impact to which U S WEST and its subsidiaries are subject is not
expected to be material in amount to U S WEST's operating results or its
financial position.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number
<TABLE>
<CAPTION>
<C> <S>
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.
and U S WEST Financial Services, Inc.
</TABLE>
(b) Reports on Form 8-K filed during the first quarter
<TABLE>
<CAPTION>
<C> <S>
(i) Form 8-K report dated January 22, 1997, filing a Form of Underwriting Agreement and
Form of Notes and Debentures Concerning U S WEST Capital Funding, Inc.,
unconditionally guaranteed as to payment of principal premium, if any, and interest by
U S WEST, Inc.;
(ii) Form 8-K report dated February 12, 1997, concerning the release of earnings for the
year ended December 31, 1996; and
(iii) Form 8-K report dated March 28, 1997, concerning the Unaudited Pro Forma
Condensed Combined Financial Statements of U S WEST, Inc. and U S WEST Media
Group for the year ended December 31, 1996.
</TABLE>
<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.
May 14, 1997
/S/ Michael P. Glinsky
U S WEST, Inc.
Michael P. Glinsky
Executive Vice President and
Chief Financial Officer
<PAGE>
EXHIBIT 11
<TABLE>
<CAPTION>
U S WEST COMMUNICATIONS GROUP
Computation of Earnings Per Common Share
(In Thousands, Except Per Share Amounts)
<S> <C> <C>
Three Months Ended
March 31,
EARNINGS PER COMMON SHARE 1997 1996
--------- ----------
Income before cumulative
effect of change in
accounting principle $339,370 $294,295
Cumulative effect of
change in accounting
principle - net of tax - 34,158
Net income for per ---------- ----------
share calculation $339,370 $328,453
========== ==========
Weighted average common
shares outstanding 481,341 475,056
========== ==========
Income before cumulative
effect of change in
accounting principle $0.70 $0.62
Cumulative effect of
change in accounting
principle - net of tax - 0.07
---------- ----------
Earnings per common share $0.70 $0.69
========== ==========
</TABLE>
<PAGE>
EXHIBIT 11
<TABLE>
<CAPTION>
U S WEST COMMUNICATIONS GROUP
Computation of Earnings Per Common Share
(In Thousands, Except Per Share Amounts)
<S> <C> <C>
Three Months Ended
March 31,
EARNINGS PER COMMON AND COMMON 1997 1996
EQUIVALENT SHARE: --------- ----------
Income before cumulative
effect of change in
accounting principle $339,370 $294,295
Cumulative effect of
change in accounting
principle - net of tax - 34,158
Net income for per ---------- ----------
share calculation $339,370 $328,453
========== ==========
Weighted average common
shares outstanding 481,341 475,056
Incremental shares from assumed
exercise of stock options 1,667 1,786
---------- ----------
Total common shares 483,008 476,842
========== ==========
Income before cumulative
effect of change in
accounting principle $0.70 $0.62
Cumulative effect of
change in accounting
principle - net of tax - 0.07
Earnings per common and common ---------- ----------
equivalent share $0.70 $0.69
========== ==========
</TABLE>
<PAGE>
EXHIBIT 11
<TABLE>
<CAPTION>
U S WEST COMMUNICATIONS GROUP
Computation of Earnings Per Common Share
(In Thousands, Except Per Share Amounts)
<S> <C> <C>
Three Months Ended
March 31,
EARNINGS PER COMMON SHARE - 1997 1996
ASSUMING FULL DILUTION: --------- ---------
Income before cumulative
effect of change in
accounting principle $339,370 $294,295
Interest on Convertible Liquid
Yield Option Notes (LYONS) 3,337 3,162
---------- ----------
Adjusted income before cumulative
effect of change in
accounting principle 342,707 297,457
Cumulative effect of
change in accounting
principle - net of tax - 34,158
---------- ----------
Adjusted net income for per
share calculation $342,707 $331,615
========== ==========
Weighted average common
shares outstanding 481,341 475,056
Incremental shares from assumed
exercise of stock options 1,770 1,789
Shares issued upon conversion
of LYONS 9,386 9,634
---------- ----------
Total common shares 492,497 486,479
========== ==========
Adjusted income before cumulative
effect of change in
accounting principle $0.70 $0.61
Cumulative effect of
change in accounting
principle - net of tax - 0.07
Earnings per common share - ---------- ----------
assuming full dilution $0.70 $0.68
========== ==========
</TABLE>
<PAGE>
EXHIBIT 11
<TABLE>
<CAPTION>
U S WEST MEDIA GROUP
Computation of Earnings Per Common Share
(In Thousands, Except Per Share Amounts)
<S> <C> <C>
Three Months Ended
March 31,
1997 1996
EARNINGS PER COMMON SHARE: --------- ---------
Net income (loss) ($109,003) $2,917
Less preferred dividends 12,703 854
Net income (loss) available for ---------- ---------
common share calculation ($121,706) $2,063
========== =========
Weighted average common
shares outstanding 606,527 473,003
========== =========
Earnings (loss) per common share ($0.20) $ -
========== =========
</TABLE>
<PAGE>
EXHIBIT 11
<TABLE>
<CAPTION>
U S WEST MEDIA GROUP
Computation of Earnings Per Common Share
(In Thousands, Except Per Share Amounts)
<S> <C> <C>
Three Months Ended
March 31,
EARNINGS PER COMMON AND COMMON 1997 1996
EQUIVALENT SHARE: --------- ----------
Net income (loss) ($109,003) $2,917
Less preferred dividends 12,703 854
Net income (loss) available for --------- ----------
common share calculation ($121,706) $2,063
========= ==========
Weighted average common
shares outstanding 606,527 473,003
Incremental shares from assumed
exercise of stock options 1,268 1,446
---------- ----------
Total common shares 607,795 474,449
========== ==========
Earnings (loss) per common and
common equivalent share ($0.20) $ -
========== ==========
</TABLE>
<PAGE>
EXHIBIT 11
<TABLE>
<CAPTION>
U S WEST MEDIA GROUP
Computation of Earnings Per Common Share
(In Thousands, Except Per Share Amounts)
<S> <C> <C>
Three Months Ended
March 31,
EARNINGS PER COMMON SHARE - 1997 1996
ASSUMING FULL DILUTION: (1)<F1> --------- ----------
Net income (loss) ($109,003) $2,917
Less preferred dividends 12,703 854
Net income (loss) available for --------- ----------
common share calculation ($121,706) $2,063
========= ==========
Weighted average common
shares outstanding 606,527 473,003
Incremental shares from assumed
exercise of stock options 1,268 1,459
---------- ----------
Total common shares 607,795 474,462
========== ==========
Earnings (loss) per common share -
assuming full dilution ($0.20) $ -
========== ==========
<FN>
<F1>
(1) The effects of converting the Liquid Yield Option
Notes (LYONS) are excluded from the fully diluted
earnings per common share calculation due to
their anti-dilutive effect.
</FN>
</TABLE>
6
<PAGE>
EXHIBIT 12
U S WEST, Inc.
RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Millions)
<TABLE>
<CAPTION>
Quarter Ended
3/31/97 3/31/96
- -------------------------------------------------- --------
<S> <C> <C>
Income before income taxes, extra-
ordinary item and cumulative effect
of change in accounting principles $400 $489
Interest expense (net of amounts
capitalized) 278 135
Interest factor on rentals (1/3) 25 22
Equity losses in unconsolidated
ventures (less than 50% owned) 105 27
Guaranteed minority interest expense 22 12
-------- --------
Earnings $830 $685
Interest expense $288 $159
Interest factor on rentals (1/3) 25 22
Guaranteed minority interest expense 22 12
-------- --------
Fixed charges $335 $193
Ratio of earnings to fixed charges 2.48 3.55
- -------------------------------------------------- --------
</TABLE>
<PAGE>
EXHIBIT 12
<TABLE>
<CAPTION>
U S WEST, Inc.
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS
(Dollars in Millions)
<S> <C> <C>
Quarter Ended
3/31/97 3/31/96
- -------------------------------------------------- --------
Income before income taxes, extra-
ordinary item and cumulative effect
of change in accounting principles $400 $489
Interest expense (net of amounts
capitalized) 278 135
Interest factor on rentals (1/3) 25 22
Equity losses in unconsolidated
ventures (less than 50% owned) 105 27
Guaranteed minority interest expense 22 12
-------- --------
Earnings $830 $685
Interest expense $288 $159
Interest factor on rentals (1/3) 25 22
Guaranteed minority interest expense 22 12
Preferred stock dividends (pre-tax
equivalent) 22 2
-------- --------
Fixed charges $357 $195
Ratio of earnings to combined fixed
charges and preferred stock dividends 2.32 3.51
- -------------------------------------------------- --------
</TABLE>
<PAGE>
EXHIBIT 12
<TABLE>
<CAPTION>
U S WEST Financial Services, Inc.
RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Thousands)
<S> <C> <C>
Quarter Ended
3/31/97 3/31/96
- ------------------------------------------ -------- --------
Income before income taxes $6,671 $1,300
Interest expense 5,424 5,378
Interest factor on rentals (1/3) 21 17
-------- --------
Earnings $12,116 $6,695
Interest expense $5,424 $5,378
Interest factor on rentals (1/3) 21 17
-------- --------
Fixed charges $5,445 $5,395
Ratio of earnings to fixed charges 2.23 1.24
- ------------------------------------------ -------- --------
</TABLE>
A Termination Agreement and Guarantee was entered into on
June 24, 1994 between U S WEST, Inc. and U S WEST Capital
Corporation and U S WEST Financial Services, Inc. (USWFS).
The Agreement terminates the Support Agreement dated
January 5, 1990 whereby U S WEST, Inc. agreed to provide
financial support to USWFS. The Agreement provides
replacement financial support in the form of a direct
guarantee by U S WEST of all outstanding indebtedness of
USWFS.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000732718
<NAME> U S WEST, INC.
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 164
<SECURITIES> 0
<RECEIVABLES> 2,059
<ALLOWANCES> 0
<INVENTORY> 171
<CURRENT-ASSETS> 2,979
<PP&E> 38,152
<DEPRECIATION> 19,944
<TOTAL-ASSETS> 40,333
<CURRENT-LIABILITIES> 5,813
<BONDS> 14,260
1,131
921
<COMMON> 10,739
<OTHER-SE> (175)
<TOTAL-LIABILITY-AND-EQUITY> 40,333
<SALES> 3,766
<TOTAL-REVENUES> 3,766
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,944
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 278
<INCOME-PRETAX> 400
<INCOME-TAX> 170
<INCOME-CONTINUING> 230
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 230
<EPS-PRIMARY> 0.70
<EPS-DILUTED> 0.70
</TABLE>
