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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 September 30, 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.
A Delaware Corporation IRS Employer No. 84-0926774
7800 East Orchard Road, Englewood, Colorado 80111-2526
Telephone Number 303-793-6500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X_ No __
The number of shares of each class of U S WEST, Inc.'s common stock outstanding
(net of shares held in treasury), at October 31, 1997, was:
U S WEST Communications Group Common Stock - 483,635,464 shares; U S WEST Media
Group Common Stock - 607,051,955 shares
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<PAGE>
U S WEST, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Page
PART I - FINANCIAL INFORMATION
<S> <C> <C>
1. U S WEST, Inc. Financial Information
Consolidated Statements of Operations -
Three and Nine Months Ended September 30, 1997 and 1996 3
Consolidated Balance Sheets -
September 30, 1997 and December 31, 1996 5
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 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 15
1. U S WEST Communications Group Financial Information
Combined Statements of Operations -
Three and Nine Months Ended September 30, 1997 and 1996 26
Combined Balance Sheets -
September 30, 1997 and December 31, 1996 28
Combined Statements of Cash Flows -
Nine Months Ended September 30, 1997 and 1996 30
Notes to Combined Financial Statements 31
2. U S WEST Communications Group Management's Discussion and
Analysis of Financial Condition and Results of Operations 35
1. U S WEST Media Group Financial Information
Combined Statements of Operations -
Three and Nine Months Ended September 30, 1997 and 1996 45
Combined Balance Sheets -
September 30, 1997 and December 31, 1996 46
Combined Statements of Cash Flows -
Nine Months Ended September 30, 1997 and 1996 48
Notes to Combined Financial Statements 49
2. U S WEST Media Group Management's Discussion and
Analysis of Financial Condition and Results of Operations 55
<CAPTION>
PART II - OTHER INFORMATION
<S> <C> <C>
1. Legal Proceedings 70
6. Exhibits and Reports on Form 8-K 70
</TABLE>
<PAGE>
Form 10-Q - Part I
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS U S WEST, Inc.
(Unaudited)
- -------------------------------------------- ------------------- ------------------
Three Months Ended Nine Months Ended
September 30, September 30,
Dollars in millions 1997 1996 1997 1996
- -------------------------------------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Sales and other revenues $3,918 $3,179 $11,471 $9,353
Operating expenses:
Employee-related expenses 1,269 1,105 3,632 3,246
Other operating expenses 910 623 2,572 1,823
Taxes other than income taxes 120 101 359 319
Depreciation and amortization 835 624 2,495 1,796
------------------- -----------------
Total operating expenses 3,134 2,453 9,058 7,184
------------------- -----------------
Income from operations 784 726 2,413 2,169
Interest expense 279 140 823 411
Equity losses in unconsolidated ventures 177 81 495 224
Gains on sales of investments 13 - 108 -
Gains on sales of rural telephone exchanges 30 2 77 51
Guaranteed minority interest expense 22 12 66 36
Other expense - net 16 1 66 47
------------------- -----------------
Income before income taxes, extraordinary
item and cumulative effect of change in
accounting 333 494 1,148 1,502
principle
Provision for income taxes 135 190 485 588
------------------- -----------------
Income before extraordinary item
and cumulative effect of change in
accounting principle 198 304 663 914
Extraordinary item:
Early extinguishment of debt - net of tax (6) - (3) -
------------------- -----------------
Income before cumulative effect of change
in accounting principle 192 304 660 914
Cumulative effect of change in accounting
principle - net of tax - - - 34
=================== =================
NET INCOME $ 192 $ 304 $ 660 $ 948
=================== =================
Dividends on preferred stock 14 1 39 3
------------------- -----------------
EARNINGS AVAILABLE FOR
COMMON STOCK $ 178 $ 303 $ 621 $ 945
=================== =================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
Form 10-Q - Part I
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS U S WEST, Inc.
(Unaudited), continued
- -------------------------------------------- -------------------- -------------------
Three Months Ended Nine Months Ended
September 30, September 30,
In thousands (except per share amounts) 1997 1996 1997 1996
- -------------------------------------------- -------------------- -------------------
<S> <C> <C> <C> <C>
COMMUNICATIONS GROUP EARNINGS
PER COMMON SHARE:
Income before extraordinary item and
cumulative effect of change in
accounting principle $0.70 $0.60 $2.09 $1.90
Extraordinary item:
Early extinguishment of debt (0.01) - (0.01) -
Cumulative effect of change in
accounting principle - - - 0.07
-------------------- -------------------
COMMUNICATIONS GROUP EARNINGS
PER COMMON SHARE $0.69 $0.60 $2.08 $1.97
==================== ===================
COMMUNICATIONS GROUP DIVIDENDS
PER COMMON SHARE $0.535 $0.535 $1.605 $1.605
==================== ===================
COMMUNICATIONS GROUP AVERAGE
COMMON SHARES OUTSTANDING 483,218 478,356 482,374 476,744
==================== ===================
MEDIA GROUP EARNINGS (LOSS) PER
COMMON SHARE $(0.26) $0.04 $(0.64) $0.01
==================== ===================
MEDIA GROUP AVERAGE COMMON
SHARES OUTSTANDING 606,729 473,902 606,568 473,501
==================== ===================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
Form 10-Q - Part I
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS U S WEST, Inc.
(Unaudited)
- -------------------------------------------------------------------------------------
September 30, December 31,
Dollars in millions 1997 1996
- -------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 259 $ 201
Accounts and notes receivable - net 2,107 2,113
Inventories and supplies 216 159
Deferred directory costs 250 259
Deferred tax asset 206 213
Prepaid and other 95 167
---------- ---------
Total current assets 3,133 3,112
---------- ---------
Gross property, plant and equipment 39,149 37,756
Accumulated depreciation 20,600 19,475
---------- ---------
Property, plant and equipment - net 18,549 18,281
Investment in Time Warner Entertainment 2,483 2,477
Net investment in international ventures 1,370 1,548
Intangible assets - net 12,385 12,595
Net investment in assets held for sale 410 409
Other assets 2,224 2,433
---------- ---------
Total assets $40,554 $40,855
========== =========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
Form 10-Q - Part I
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS U S WEST, Inc.
(Unaudited), continued
- ---------------------------------------------------------------------------------------
September 30, December 31,
Dollars in millions 1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Short-term debt $ 2,286 $ 1,051
Accounts payable 1,447 1,316
Due to Continental Cablevision shareowners - 1,150
Employee compensation 455 470
Dividends payable 267 263
Other 2,110 1,824
--------- ---------
Total current liabilities 6,565 6,074
--------- ---------
Long-term debt 13,422 14,300
Postretirement and other postemployment
benefit obligations 2,502 2,479
Deferred income taxes 4,308 4,349
Deferred credits and other 1,055 973
Contingencies (See Note F 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 100 51
Shareowners' equity:
Preferred stock 921 920
Common shares 10,800 10,741
Retained earnings (deficit) (45) 18
LESOP guarantee (72) (91)
Foreign currency translation adjustments (82) (39)
--------- ---------
Total shareowners' equity 11,522 11,549
--------- ---------
Total liabilities and shareowners' equity $40,554 $40,855
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
Form 10-Q - Part I
CONSOLIDATED STATEMENTS OF CASH FLOWS U S WEST, Inc.
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Nine Months Ended
September 30,
Dollars in millions 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 660 $ 948
Adjustments to net income:
Depreciation and amortization 2,495 1,796
Equity losses in unconsolidated ventures 495 224
Gains on sales of investments (108) -
Gains on sales of rural telephone exchanges (77) (51)
Cumulative effect of change in accounting principle - (34)
Deferred income taxes and amortization of investment
tax credits (110) (68)
Changes in operating assets and liabilities:
Restructuring payments (59) (126)
Postretirement medical and life costs, net of
cash fundings 21 (20)
Accounts and notes receivable (12) (87)
Inventories, supplies and other current assets (82) (9)
Accounts payable and accrued liabilities 378 171
Other adjustments - net 180 33
--------- --------
Cash provided by operating activities 3,781 2,777
--------- --------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment (2,394) (2,252)
Payment to Continental Cablevision shareowners (1,150) -
Investment in international ventures (315) (227)
Proceeds from sales of investments 703 -
Proceeds from disposals of property, plant
and equipment 80 129
Cash from net investment in assets held for sale 242 176
Other - net (256) (41)
--------- --------
Cash (used for) investing activities (3,090) (2,215)
--------- --------
FINANCING ACTIVITIES
Net (repayments of) proceeds from short-term debt (3,212) 187
Proceeds from issuance of long-term debt 4,123 346
Repayments of long-term debt (787) (561)
Dividends paid on common and preferred stock (769) (706)
Proceeds from issuance of common stock 65 140
Purchases of treasury stock (53) -
--------- --------
Cash (used for) financing activities (633) (594)
--------- --------
CASH AND CASH EQUIVALENTS
Increase (decrease) 58 (32)
Beginning balance 201 192
========= ========
Ending balance $ 259 $ 160
========= ========
</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 and Nine Months Ended September 30,
1997
(Dollars in millions)
(Unaudited)
A. Summary of Significant Accounting Policies
Basis of Presentation. U S WEST, Inc. ("U S WEST" or the "Company") has two
classes of common stock that are intended to reflect separately the performance
of its communications and multimedia businesses. One class of stock, U S WEST
Communications Group ("Communications Group"), reflects the communications
businesses of U S WEST and the other class of stock, U S WEST Media Group
("Media Group"), reflects the multimedia businesses of U S WEST.
The Consolidated Financial Statements have been prepared by U S WEST 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.
B. U S WEST Split
On October 27, 1997, the Company announced its intention to split Communications
Group and Media Group into separate public companies. Communications Group will
be renamed U S WEST, Inc. ("new U S WEST") and Media Group will be renamed
MediaOne Group, Inc. ("MediaOne Group"). Under the terms of the proposed
transaction, new U S WEST will include the telephone, data and wireless
operations of the Communications Group, as well as the Yellow Pages and
electronic directory businesses of U S WEST Dex, Inc. ("Dex"). Dex is currently
part of the Media Group and will be transferred to the Communications Group as
part of the proposed transaction (the "Dex Transfer"). MediaOne Group will
include the cable/broadband, wireless, and domestic and international
investments of the Media Group.
Under the terms of the proposed split, Communications Group shareowners will
receive one share of new U S WEST common stock for each share of Communications
Group common stock. Media Group shareowners will receive one share of MediaOne
Group common stock for each share of Media Group common stock. In addition,
Media Group shareowners will receive
<PAGE>
Form 10-Q - Part I
U S WEST, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
B. U S WEST Split (continued)
shares of new U S WEST common stock for each share of Media Group common stock
which represents their interest in Dex, totaling approximately $850. Under the
terms of the Dex Transfer, Media Group debt will be reduced and Communications
Group debt will be increased by $3.9 billion.
The transaction is subject to a number of approvals, including approvals by
regulators and both shareowner groups, and receipt of a favorable ruling from
the Internal Revenue Service. The split is expected to be complete in the second
half of 1998.
C. AirTouch Transaction
During 1994, U S WEST entered into a definitive agreement with AirTouch
Communications, Inc. ("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 cellular properties are
owned separately. A wireless management company has been formed and is providing
services to both companies, as requested, on a contract basis.
In February 1997, the King County Superior Court (the "Court") in Washington
state ruled that a subsidiary of Media Group violated the terms of its
partnership agreement with its minority partners in the Seattle cellular
partnership by entering into the AirTouch Joint Venture. The Company currently
is complying with the Court's order which requires the Company to issue a right
of first refusal to the minority partners with respect to the subsidiary's
limited partnership interest. The Court authorized the limited partners to take
legally appropriate steps to secure unanimous agreement for a substitute for the
Company as the general partner. A motion is pending before the Court to extend
the August 15, 1997 deadline for such agreement. The Company retains its right
to appeal unfavorable rulings before transferring any partnership interest in
the Seattle cellular partnership. Similar litigation has been filed in other
jurisdictions regarding other cellular partnerships by the same minority partner
that brought the Seattle litigation. The Company is also seeking declaratory
relief from the Delaware Chancery Court. The Company believes it will ultimately
be successful in all litigation asserting that the Company's entering into the
AirTouch Joint Venture violated its partnership agreements with its minority
partners.
Media Group and AirTouch have agreed not to proceed to Phase II of the AirTouch
Joint Venture before May 5, 1998. In Phase II of the AirTouch Joint Venture, the
partners will combine those domestic cellular properties for which
authorizations and partnership approvals have been obtained. 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)
D. Asset Sales and Restructurings
During the third quarter of 1997, Media Group sold 1,840,000 shares of Teleport
Communications Group, Inc. ("TCG") for a pretax gain of $13. In November 1997,
Media Group sold its remaining interest in TCG for net proceeds of $433.
Pursuant to a settlement agreement, Media Group transferred its investment in
Optus Vision, an Australian cable and telecommunications venture, to Optus
Communications Pty Ltd., ("Optus Communications"), an Australian
telecommunications carrier, in the third quarter of 1997. Media Group received a
convertible note which can be converted to shares of Optus Communications upon
satisfaction of various conditions, such as a public offering of Optus
Communications' shares. The settlement released the Company from litigation and
future claims.
E. Debt Extinguishment
During August 1997, U S WEST redeemed its Liquid Yield Option Notes ("LYONs").
The convertible zero coupon subordinated notes were due June 25, 2011. Upon
redemption, the notes had a recorded value of $571. The debt extinguishment
resulted in a loss of $6 (net of income tax benefits of $4) primarily related to
the write-off of deferred debt issuance costs. This loss is reflected as an
extraordinary charge in the accompanying Consolidated Statements of Operations.
U S WEST financed the redemption with floating rate commercial paper.
F. 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.
On May 1, 1996, the Oregon Public Utilities Commission ("OPUC") approved a
stipulation terminating prematurely U S WEST Communications' alternative form of
regulation ("AFOR") plan, and it then undertook a review of U S WEST
Communications' earnings. In May 1997, the OPUC ordered U S WEST Communications
to reduce its annual revenues by $97, effective May 1, 1997, and to issue a
one-time refund, including interest, of approximately $102 to reflect the
revenue reduction for the period May 1, 1996 through April 30, 1997. The
one-time refund is for interim rates which became subject to refund when U S
WEST Communications' AFOR plan was terminated on May 1, 1996.
<PAGE>
Form 10-Q - Part I
U S WEST, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
F. Contingencies (continued)
U S WEST Communications filed an appeal of the order and asked for an immediate
stay of the refund with the Oregon Circuit Court for the County of Marion
("Oregon Circuit Court"). On June 26, 1997, the Oregon Circuit Court granted U S
WEST Communications' request for a stay, pending a full review of the OPUC's
order. The Oregon Circuit Court is scheduled to hear arguments on the appeal in
December 1997. The one-time refund and cumulative amount of revenues collected
subject to refund, including interest, as of September 30, 1997, totals
approximately $150.
In 1996, the Washington State Utilities and Transportation Commission ("WUTC")
acted on U S WEST Communications' 1995 rate request. U S WEST Communications had
sought to increase revenues by raising rates primarily for basic residential
services over a four-year period. Instead of granting U S WEST Communications'
request, the WUTC ordered $91.5 in annual net revenue reductions, effective May
1, 1996.
Based on the WUTC 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. Oral arguments were heard
in June 1997. U S WEST Communications is waiting a decision by the State Supreme
Court.
Effective May 1, 1996, U S WEST Communications began collecting revenues subject
to refund. The cumulative amount of revenues collected subject to refund as of
September 30, 1997, including interest, is approximately $155.
In another proceeding, the Utah Supreme Court 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 potential exposure, including interest, at September 30, 1997,
is approximately $160.
<PAGE>
Form 10-Q - Part I
U S WEST, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
F. Contingencies (continued)
The Communications Group has accrued $125 at September 30, 1997, which
represents its estimated liability for state regulatory proceedings. It is
possible that the ultimate liability could exceed the recorded liability by an
amount up to approximately $340. The Communications Group continues to monitor
and evaluate the risks associated with its state regulatory environment, and
will adjust estimates as new information becomes available.
G. Subsequent Event
On October 27, 1997, Media Group sold its 90 percent interest in Fintelco, S.A.,
("Fintelco"), a cable and telecommunications venture located in Argentina, for
proceeds of approximately $640. Media Group acquired an additional 40 percent
interest in Fintelco in August 1997, to bring its total interest in Fintelco to
90 percent.
H. Net Investment in Assets Held for Sale
The capital assets segment is being accounted for in accordance with Staff
Accounting Bulletin No. 93, issued by the SEC, which requires discontinued
operations not disposed of within one year of the measurement date to be
accounted for prospectively in continuing operations as "net investment in
assets held for sale." The net realizable value of the assets is being evaluated
on an ongoing basis with adjustments to the existing reserve, if any, being
charged to continuing operations. 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.
<PAGE>
Form 10-Q - Part I
U S WEST, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
H. Net Investment in Assets Held for Sale (continued)
<TABLE>
<CAPTION>
The components of net investment in assets held for sale follow:
- ---------------------------------------------------------------------------------------
September 30, December 31,
1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 52 $ 21
Finance receivables - net 806 869
Investment in real estate - net of valuation allowance 158 182
Bonds, at market value 118 146
Investment in FSA 351 326
Other assets 179 165
--------- ---------
Total assets $1,664 $1,709
========= =========
LIABILITIES
Debt $ 421 $ 481
Deferred income taxes 685 671
Accounts payable, accrued liabilities and other 137 137
Minority interests 11 11
---------- ---------
Total liabilities 1,254 1,300
---------- ---------
Net investment in assets held for sale $ 410 $ 409
=======================================================================================
</TABLE>
Building sales and operating evenues of the capital assets segment were $13 and
$91 for the three- and nine-month periods ended September 30, 1997,
respectively, and $110 and $161 for the three- and nine-month periods ended
September 30, 1996, respectively.
<PAGE>
Form 10-Q - Part I
U S WEST, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
H. Net Investment in Assets Held for Sale (continued)
Revenues of U S WEST Financial Services, Inc. ("USWFS"), a member of the capital
assets segment, were $5 and $16 for the three- and nine-month periods ended
September 30, 1997, respectively, and $6 and $20 for the three- and nine-month
periods ended September 30, 1996, respectively. Selected financial data for
USWFS follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
September 30, December 31,
1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Net finance receivables $ 850 $ 859
Total assets 1,208 1,058
Total debt 397 236
Total liabilities 1,139 998
Equity 69 60
- -------------------------------------------------------------------------------
</TABLE>
In September 1997, USWFS pledged certain finance receivables as collateral for a
nonrecourse loan totaling $173. The loan bears interest at an annual rate of 7.2
percent and matures in the year 2009.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussio 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, telephone, 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, telephone, 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 - Three and Nine Months Ended September 30, 1997 Compare
with 1996
<TABLE>
<CAPTION>
Net Income (Loss)
- --------------------------------------------------------------------------------------------------
Three Months Ended Increase Nine Months Ended Increase
September 30, (Decrease) September 30, (Decrease)
1997 1996 $ % 1997 1996 $ %
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Communications Group $ 336 $286 $ 50 17.5 $1,007 $938 $ 69 7.4
Media Group (144) 18 (162) - (347) 10 (357) -
-----------------------------------------------------------------------
Total net income $ 192 $304 $(112) (36.8) $ 660 $948 $ (288) (30.4)
==================================================================================================
</TABLE>
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Result
of Operations (Dollars in millions, except per share amounts), continued
Communications Group Net Income
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>
- ----------------------------------------------------------------------------------------------------------------
Three Months Ended Increase Nine Months Ended Increase
September 30, (Decrease) September 30, (Decrease)
Net Income: 1997 1996 $ % 1997 1996 $ $
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Reported net income $336 $286 $50 17.5 $1,007 $938 $69 7.4
Adjustments to reported net
income:
Gains on sales of rural
telephone exchanges (19) (1) (18) - (48) (31) (17) 54.8
Early extinguishment of debt 3 - 3 - 3 - 3 -
Cumulative effect of change in
accounting principle (1) - - - - - (34) 34 -
Current year effect of change
in accounting principle (1) - (3) 3 - - (13) 13 -
---------------------------------------------------------------------------
Normalized income $320 $282 $38 13.5 $962 $860 $102 11.9
================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Three Months Ended Increase Nine Months Ended Increase
September 30, (Decrease) September 30, (Decrease)
Earnings per Share: 1997 1996 $ % 1997 1996 $ %
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Reported earnings per share $0.69 $0.60 $0.09 15.0 $2.08 $1.97 $0.11 5.6
Adjustments to reported
earnings per share:
Gains on sales of rural
telephone exchanges (0.04) - (0.04) - (0.10) (0.06) (0.04) 66.7
Early extinguishment of debt 0.01 - 0.01 - 0.01 - 0.01 -
Cumulative effect of change in
accounting principle (1)<F1> - - - - - (0.07) 0.07 -
Current year effect of change
in accounting principle (1)<F1> - (0.01) 0.01 - - (0.03) 0.03 -
------------------------------------------------------------------------
Normalized earnings per share $0.66 $0.59 $0.07 11.9 $1.99 $1.81 $0.18 9.9
=============================================================================================================
<FN>
<F1>
(1) 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>
The Communications Group's normalized income increased $38, or 13.5 percent, to
$320, and $102, or 11.9 percent, to $962, for the three- and nine-month periods
ended September 30, 1997, respectively. Normalized earnings per share was $0.66,
an increase of $0.07, or 11.9 percent, and $1.99, an increase of $0.18, or 9.9
percent for the three- and nine-month periods, respectively.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Result
of Operations (Dollars in millions, except per share amounts), continued
The increases are primarily due to higher demand for services and continued cost
control efforts in the core business which accelerated in the latter half of
1996. Partially offsetting the increases for both periods were additional
expenses related to interconnection. Accruals to recognize U S WEST
Communications' estimated state regulatory liability further reduced the
nine-month period increase. (See Note F - Contingencies - to the U S WEST
Consolidated Financial Statements.) The Communications Group anticipates that
spending increases related to interconnection requirements and entry into
wireless personal communications services ("PCS") and interLATA long-distance
markets, combined with rate reductions resulting from the Federal Communications
Commission's (the "FCC") price cap regulation, will partially offset future net
income growth.
During August 1997, the Communications Group incurred an extraordinary loss of
$3 (net of income tax benefits of $2), or $0.01 per share, related to the early
extinguishment of debt. See Note E - Debt Extinguishment - to the U S WEST
Consolidated Financial Statements.
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 1996
one-time gain of $34 (net of income tax expenses of $22), or $0.07 per share,
related to the cumulative effect of change in accounting principle.
Media Group Net Loss
Media Group net income decreased to a loss of $144 ($0.26 per share) for the
three-month period, and to $347 ($0.64 per share) for the nine-month period.
Excluding the after tax effects of the gains on sales of investments totaling $7
($0.01 per share) during the three-month period, and $63 ($0.10 per share)
during nine-month period, Media Group net income decreased $169 and $420 for the
three- and nine-month periods, respectively. The November 15, 1996, merger of
Continental Cablevison, Inc. ("Continental") into a wholly owned subsidiary of U
S WEST (the "Continental Merger" or "Merger") contributed approximately $118 of
the decrease during the three-month period, and $301 during the nine-month
period. The Continental Merger resulted in significant increases in interest and
depreciation and amortization charges. The remaining decrease in net income is
primarily due to greater losses from unconsolidated ventures, partially offset
by increased earnings from domestic cellular and directories operations.
During third-quarter 1997, Media Group incurred an extraordinary loss of $3 (net
of income tax benefits of $2) related to the early extinguishment of debt. See
Note E - Debt Extinguishment - to the U S WEST Consolidated Financial
Statements. During second-quarter 1997, Media Group incurred an extraordinary
gain of $3 (net of income tax expenses of $2) also related to the early
extinguishment of debt.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions), continued
Sales and Other Revenues
<TABLE>
<CAPTION>
- ---------------------------------- ----------------------------- ------------------ --- ------------- -----------------
Pro forma
Three Months Ended Increase Increase
September 30, (Decrease) Pro forma (Decrease)
1997 1996 $ % 1996 $ %
- ---------------------------------- -------------- ------------- -------- ---------- ------------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Communications Group $2,673 $2,515 $158 6.3 $2,515 $158 6.3
Media Group 1,270 694 576 83.0 1,161 109 9.4
Intergroup eliminations (25) (30) 5 (16.7) (30) 5 (16.7)
============== ============= ========= ========= ============= ========= ========
Total $3,918 $3,179 $739 23.2 $3,646 $272 7.5
================================== ============== ============= ========= ========= ============= ========= ========
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------- ----------------------------- ------------------ ------------- -----------------
Pro forma
Nine Months Ended Increase Increase
September 30, (Decrease) Pro forma (Decrease)
1997 1996 $ % 1996 $ %
- ---------------------------------- -------------- ------------- -------- ---------- ------------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Communications Group $7,803 $7,480 $323 4.3 $7,480 $323 4.3
Media Group 3,754 1,965 1,789 91.0 3,368 386 11.5
Intergroup eliminations (86) (92) 6 (6.5) (92) 6 (6.5)
============== ============= ========== ======== == ============= ========= =======
Total $11,471 $9,353 $2,118 22.6 $10,756 $715 6.6
================================== ============== ============= ========== ======== == ============= ========= =======
</TABLE>
Communications Group Sales and Other Revenues
The Communications Group's operating revenues increased 6.3 percent, to $2,673,
and 4.3 percent, to $7,803, during the three- and nine-month periods,
respectively, primarily as a result of access line growth and increased demand
for new product and service offerings and central office features. Higher demand
for private line services and increases in billed interstate and intrastate
minutes of use also contributed to the revenue growth. Partially offsetting the
increases for both periods were lower long-distance network service revenues
primarily due to the effects of competition and the implementation of multiple
toll carrier plans. Accruals to recognize U S WEST Communications' estimated
state regulatory liability also reduced operating revenues during the nine-month
period. (See Note F - Contingencies - to the U S WEST Consolidated Financial
Statements.) For a detailed discussion of Communications Group's operating
revenues, see U S WEST Communications Group Management's Discussion and Analysis
of Financial Condition and Results of Operations - Operating Revenues.
Media Group Sales and Other Revenues
Media Group sales and other revenues increased 83.0 percent, to $1,270, and 91.0
percent, to $3,754, for the three- and nine-month periods, respectively. On a
pro forma basis, Media Group sales and other revenues increased 9.4 percent and
11.5 percent, for the three- and nine-month periods, respectively. Growth in
domestic cable and broadband revenues and domestic cellular service revenues
accounts for the majority of the pro forma increase. The increase in domestic
<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 broadband is due to price increases of approximately 6 to 8 percent,
the addition of new channels and basic subscriber increases of approximately 2
percent. A 32.1 percent increase in cellular subscribers partially offset by a
10.2 percent decrease in average revenue per subscriber contributed to the
increase in domestic cellular service revenue. For a detailed discussion, see U
S WEST Media Group - Management's Discussion and Analysis of Financial Condition
and Results of Operations - Sales and Other Revenues.
Operating Income
<TABLE>
<CAPTION>
- -------------------------------------- -------------------------- ----------------- -- ------------- -----------------
Three Months Ended Pro forma
September 30, Increase Pro forma Increase
1997 1996 $ 1996 $ %
%
- ---------------------------------- -------------- ------------- -------- ---------- ------------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Communications Group $616 $574 $42 7.3 $574 $42 7.3
Media Group 168 152 16 10.5 137 31 22.6
============== ============= ========= ========= ============= ========= =======
Total operating income $784 $726 $58 8.0 $711 $73 10.3
================================== ============== ============= ========= ========= == ============= ========= =======
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------- ------------------------ ------------------- -- ------------- -----------------
Nine Months Ended Pro
September 30, Increase Pro forma forma
Increase
1997 1996 $ % 1996 $ %
- ---------------------------------- -------------- ------------- -------- ---------- ------------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Communications Group $1,880 $1,744 $136 7.8 $1,744 $136 7.8
Media Group 533 425 108 25.4 384 149 38.8
============== ============= ========= ========= ============= ========= =======
Total operating income $2,413 $2,169 $244 11.2 $2,128 $285 13.4
================================== ============== ============= ========= ========= == ============= ========= =======
</TABLE>
Communications Group Operating Income
The Communications Group's operating income increased 7.3 percent, to $616, and
7.8 percent, to $1,880, during the three- and nine-month periods, respectively.
Revenue increases combined with continued cost control efforts in the core
business, which accelerated in the latter half of 1996, contributed to the
increase in operating income. The growth in operating income was partially
offset in both periods by expenses related to interconnection. Accruals to
recognize U S WEST Communications' estimated state regulatory liability further
reduced the nine-month period increase (See Note F - Contingencies - to the U S
WEST Consolidated Financial Statements). For a detailed discussion of
Communications Group's costs and expenses, see U S WEST Communications Group -
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Costs and Expenses.
Media Group Operating Income
During the three- and nine-month periods ended September 30, 1997, Media Group
operating income increased 10.5 percent and 25.4 percent, to $168 and $533,
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions), continued
respectively. On a pro forma basis, operating income increased 22.6 percent and
38.8 percent, for the same periods. The pro forma increases were driven
primarily by growth in domestic wireless communications and domestic directory
operations. Domestic cellular revenue growth combined with a 19.8 percent
decrease in the costs to acquire and support customers contributed to growth in
operating income. Revenue increases in the domestic directory operations related
to price and volume increases, combined with cost savings as a result of
headcount reductions also contributed to growth in operating income. For a
detailed discussion, see U S WEST Media Group - Management's Discussion and
Analysis of Financial Condition and Results of Operations - Operating Income.
Interest Expense and Other
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, Increase September 30, Increase
1997 1996 $ % 1997 1996 $ %
- ------------------------------------ --------- --------- -------- --------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest expense $279 $140 $139 99.3 $823 $411 $412 -
Equity losses in
unconsolidated ventures 177 81 96 - 495 224 271 -
Gains on sales of investments 13 - 13 - 108 - 108 -
Gains on sales of rural
telephone exchanges 30 2 28 - 77 51 26 51.0
Guaranteed minority interest
expense 22 12 10 83.3 66 36 30 83.3
Other expense 16 1 15 - 66 47 19 40.4
- ------------------------------------ --------- --------- -------- --------- --------- ---------- --------- --------
</TABLE>
Interest expense increased $139 and $412 during the three- and nine-month
periods, respectively, 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.
Equity losses increased $96 and $271 for the three- and nine-month periods,
respectively, predominantly due to greater losses generated from international
ventures and the domestic investment in PrimeCo Personal Communications L.P.
("PrimeCo"). PrimeCo launched service in November 1996, and losses associated
with this venture have increased as a result of start-up and other costs.
The increase in international equity losses primarily relates to foreign
exchange transaction losses at the Malaysian and Indonesian operations, and
amortization of license fees related to a wireless investment in India. In
addition, costs associated with the significant increase in customers and
network coverage at One 2 One contributed to the increase in losses during the
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions), continued
nine-month period. Fluctuations in foreign exchange rates could impact future
equity losses.
During the third quarter of 1997, Media Group sold 1,840,000 million shares of
TCG for a pretax gain of $13. Also during the nine-month period, Media Group
sold its shares of Time Warner, Inc. acquired in the Continental Merger and its
5 percent interest in a wireless venture in France. These transactions resulted
in pretax gains totaling $108.
During the nine-month period, the Communications Group sold selected rural
telephone exchanges in Iowa, South Dakota, Nebraska, Idaho, and Minnesota for
pretax gains of $77. Certain Minnesota rural telephone exchanges were sold
during third-quarter 1997 for a pretax gain of $30. The 1996 gains were a result
of sales in Utah, North Dakota and South Dakota.
Guaranteed minority interest expense increased $10 and $30 for the three- and
nine-month periods, respectively. The increases were a result of the October
1996 issuance of Company-obligated mandatorily redeemable preferred securities
of subsidiary trust holding solely Company-guaranteed debentures ("Preferred
Securities") totaling $480.
Other expense increased $15, to $16, and $19, to $66, during the three- and
nine-month periods, respectively. The three-month period increase is partially
due to foreign exchange transaction losses related to receivables denominated in
foreign currencies. The nine-month period increase is primarily due to
additional interest expense associated with the Communications Group's
interstate sharing and state regulatory liabilities partially offset by a
second-quarter 1996 pretax charge of $31 associated with the sale of Media
Group's cable television interests in Norway, Sweden and Hungary.
Provision for Income Taxes
<TABLE>
<CAPTION>
- ------------------------------------------ ------------------------- ---------- ------------------------ ----------
Three Months Ended Nine Months Ended
September 30, Percent September 30, Percent
1997 1996 Change 1997 1996 Change
- ------------------------------------------ ------------ ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Provision for income taxes $135 $190 (28.9) $485 $588 (17.5)
Effective tax rate - - - 42.2% 39.1% -
- ------------------------------------------ ------------ ----------- ----------- ----------- ----------- -----------
</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.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions), continued
Liquidity and Capital Resources
Operating Activities
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Nine Months Ended
September 30,
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Communications Group $2,892 $2,357
Media Group 889 420
-----------------------------
Total cash provided by operating activities $3,781 $2,777
================================================================================
</TABLE>
Cash provided by operating activities increased $1,004 during the first nine
months of 1997. The increase is primarily due to growth in both Communications
Group and Media Group operations. The increase in the Communications Group's
operating cash flow reflects continued cost control efforts, lower restructuring
expenditures, and a decrease in the cash funding of postretirement benefits
during 1997. Operating cash flow at the Media Group increased primarily due to
the Continental Merger and growth in operations from the domestic cellular and
directories businesses. Partially offsetting the increase was higher financing
costs resulting from greater debt levels associated with the Continental Merger.
Investing Activities
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Nine Months Ended
September 30,
1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Communications Group $(1,286) $(1,762)
Media Group (1,804) (453)
---------------------------------
Total cash (used for) investing activities $(3,090) $(2,215)
===============================================================================
</TABLE>
Investing activities at Communications Group consists primarily of capital
expenditures of $1,307, on a cash basis, for the first nine months of 1997. The
majority of the 1997 expenditures related to access line growth and continued
improvement of the telecommunications network. Also included were
interconnection costs and expenditures associated with entering wireless
communications markets with the launch of PCS. The Communications Group
anticipates capital expenditures will accelerate during fourth quarter and will
include expenditures to launch PCS in additional markets and for interconnection
requirements related to the Telecommunications Act.
Investing activities of the Media Group include capital expenditures of $1,087,
on a cash basis, for the first nine months of 1997. The majority of expenditures
in 1997 were devoted to
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions), continued
upgrading the domestic cable network and expanding the domestic cellular
network. Media Group also invested $315 in international ventures during 1997,
primarily for an additional 40 percent interest in Fintelco, with the remainder
being primarily 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 nine months of 1997, Media Group received proceeds totaling
$945 related to asset sales as follows: (a) $246 from the sale of 7,915,000
shares of TCG stock, (b) $ 242 from asset sales and other proceeds from the
capital assets segment, which is held for sale, (c) $220 from the sale of Time
Warner, Inc. shares acquired in the Continental Merger, (d) $121 from the sale
of Thomson Directories, (e) $81 from the sale of Media Group's 5 percent
interest in a wireless venture in France, and (f) $35 from other miscellaneous
sales.
On October 27, 1997, Media Group sold its 90 percent interest in Fintelco for
proceeds of approximately $640. Also in October 1997, Media Group sold U S WEST
Polska, its wholly owned directory operation in Poland, for proceeds of
approximately $30. In November 1997, Media Group sold its remaining interest in
TCG for net proceeds of $433.
Financing Activities
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Nine Months Ended
September 30,
1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
Communications Group $(1,490) $ (661)
Media Group 857 67
-------------------------------
Total cash (used for) financing activities $ (633) $ (594)
==============================================================================
</TABLE>
On October 27, 1997, the Company announced its intention to split Communications
Group and Media Group into separate public companies. Under the terms of the
proposed transaction, new U S WEST will include the telephone, data and wireless
operations of the Communications Group, as well as the Yellow Pages and
electronic directory businesses of Dex. Dex is currently part of the Media Group
and will be transferred to the Communications Group as part of the proposed
transaction. MediaOne Group will include the cable/broadband, wireless and
domestic and international investments of the Media Group.
Under the terms of the Dex Transfer, Media Group shareowners will receive shares
of new U S WEST common stock for each share of Media Group common stock, which
represents their interest in Dex, totaling approximately $850. Also, Media Group
debt will be reduced and Communications Group debt will be increased by $3.9
billion.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions), continued
The transaction is subject to a number of approvals, including approvals by
regulators and both shareowner groups, and receipt of a favorable ruling from
the Internal Revenue Service. The split is expected to be complete in the second
half of 1998
As a result of the proposed split announcement, certain U S WEST credit ratings
are under review. Standard & Poor's placed U S WEST Communications' senior
unsecured debt rating on credit watch with positive implications and reaffirmed
U S WEST Communications' commercial paper ratings. Duffs & Phelps reaffirmed U S
WEST Communications' senior unsecured debt and commercial paper ratings. U S
WEST Communications' senior unsecured debt rating remains under review by
Moody's, which may result in a downgrading.
The credit ratings for U S WEST Capital Funding, Inc. and for Preferred
Securities are under review by Standard & Poor's (with negative implications),
Moody's and Duff & Phelps. Senior debt at MediaOne, Inc., (formerly
Continental), was downgraded by Moody's from Baa2 to Baa3 and subordinated debt
from Baa3 to Ba1, and is under review by Standard & Poor's, with negative
implications. The MediaOne, Inc. debt remains under review for further
downgrading by Moody's. For all outstanding debt securities issued or guaranteed
by U S WEST, Inc., the Company intends to take appropriate steps to preserve
bondholder value.
Total debt at September 30, 1997 was $15,708, an increase of $357 compared with
December 31, 1996. The Company incurred additional debt in 1997 to finance the
cash portion of the Continental 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 Media Group were partially offset by decreases in debt of $748 at
Communications Group. The decrease in debt at Communications Group was driven by
increased operating cash flows and lower capital expenditures.
During August, 1997, U S WEST redeemed its LYONs with a recorded value of $571.
During the second quarter of 1997, MediaOne, Inc. redeemed a 10 5/8 percent
senior subordinated note with a recorded value of $110, including a premium of
$10. U S WEST financed the redemptions with floating rate commercial paper.
During second quarter of 1997, Media Group acquired cable systems serving 40,000
subscribers in the state of Michigan for cash of $25 and approximately $50 of
Series E Convertible Preferred Stock (the "Preferred Stock") issued by U S WEST.
The Preferred Stock is redeemable at U S WEST's option starting five years from
the acquisition date, or upon dissolution of Media Group. The stockholders have
the right to elect cash upon redemption, or to convert their Preferred Stock
into Media Group common stock based on a predetermined formula.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions), continued
Excluding debt associated with the capital assets segment, the Company's
percentage of debt to total capital at September 30, 1997 was 55.3 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 was 60.0
percent at September 30, 1997, compared with 59.5 percent at December 31, 1996.
The percentage of debt to total capital has increased as a result of higher 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 Communications Group, see Note D -
Contingencies - to the U S WEST Communications Group Combined Financial
Statements.
Regulatory Environment
For a discussion of Communications Group's regulatory environment, see U S WEST
Communications Group Management's Discussion and Analysis of Financial Condition
and Results of Operations - Regulatory Environment.
<PAGE>
Form 10-Q - Part I
<TABLE>
<CAPTION>
COMBINED STATEMENTS OF U S WEST COMMUNICATIONS GROUP
OPERATIONS (Unaudited)
- --------------------------------------------- --------------------------- --------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
Dollars in millions 1997 1996 1997 1996
- --------------------------------------------- -------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Operating revenues:
Local service $1,314 $1,208 $3,739 $3,532
Interstate access service 663 606 2,028 1,854
Intrastate access service 208 192 608 571
Long-distance network services 231 272 721 840
Other services 257 237 707 683
-------------- ------------ ------------ -------------
Total operating revenues 2,673 2,515 7,803 7,480
Operating expenses:
Employee-related expenses 951 900 2,719 2,688
Other operating expenses 469 402 1,305 1,177
Taxes other than income taxes 103 94 308 291
Depreciation and amortization 534 545 1,591 1,580
-------------- ------------ ------------ -------------
Total operating expenses 2,057 1,941 5,923 5,736
-------------- ------------ ------------ -------------
Income from operations 616 574 1,880 1,744
Interest expense 100 111 303 332
Gains on sales of rural telephone exchanges 30 2 77 51
Other expense 11 10 52 22
-------------- ------------ ------------ -------------
Income before income taxes,
extraordinary item and cumulative
effect of change in accounting principle
535 455 1,602 1,441
Provision for income taxes 196 169 592 537
-------------- ------------ ------------ -------------
Income before extraordinary item
and cumulative effect of change in
accounting principle 339 286 1,010 904
Extraordinary item - early extinguishment
of debt - net of tax (3) - (3) -
-------------- ------------ ------------ -------------
Income before cumulative effect of change
in accounting principle 336 286 1,007 904
Cumulative effect of change in accounting
principle - net of tax - - - 34
-------------- ------------ ------------ -------------
NET INCOME $336 $286 $1,007 $938
============== ============ ============ =============
</TABLE>
See Notes to Combined Financial Statements.
<PAGE>
Form 10-Q - Part I
<TABLE>
<CAPTION>
COMBINED STATEMENTS OF U S WEST COMMUNICATIONS GROUP
OPERATIONS (Unaudited), continued
- -----------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
In thousands (except per share amounts) 1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
EARNINGS PER COMMON SHARE:
Income before extraordinary item and
cumulative effect of change in
accounting principle $ 0.70 $0.60 $ 2.09 $1.90
Extraordinary item - early
extinguishment of debt (0.01) - (0.01) -
Cumulative effect of change in
accounting principle - - - 0.07
-------------- ---------- ------------- --------------
EARNINGS PER COMMON SHARE $ 0.69 $0.60 $ 2.08 $1.97
============== ========== ============= ==============
DIVIDENDS PER COMMON SHARE $0.535 $0.535 $1.605 $1.605
============== ========== ============= ==============
AVERAGE COMMON SHARES
OUTSTANDING 483,218 478,356 482,374 476,744
============== ========== ============= ==============
</TABLE>
See Notes to Combined Financial Statements.
<PAGE>
Form 10-Q - Part I
<TABLE>
<CAPTION>
COMBINED BALANCE SHEETS U S WEST COMMUNICATIONS GROUP
(Unaudited)
- -------------------------------------------------------------------------------
September 30, December 31,
Dollars in millions 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 196 $ 80
Accounts and notes receivable - net 1,587 1,622
Inventories and supplies 195 144
Deferred tax asset 169 171
Prepaid and other 66 65
---------------- ----------------
Total current assets 2,213 2,082
---------------- ----------------
Gross property, plant and equipment 33,040 32,645
Less accumulated depreciation 19,253 18,639
---------------- ----------------
Property, plant and equipment - net 13,787 14,006
Other assets 921 827
---------------- ----------------
Total assets $16,921 $16,915
================ ================
</TABLE>
See Notes to Combined Financial Statements.
<PAGE>
Form 10-Q - Part I
<TABLE>
<CAPTION>
COMBINED BALANCE SHEETS U S WEST COMMUNICATIONS GROUP
(Unaudited), continued
- -------------------------------------------------------------------------------
September 30, December 31,
Dollars in millions 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND EQUITY
Current liabilities:
Short-term debt $ 726 $ 834
Accounts payable 1,193 989
Employee compensation 341 342
Dividends payable 259 257
Advanced billing and customer deposits 286 250
Other 940 795
---------------- ----------------
Total current liabilities 3,745 3,467
---------------- ----------------
Long-term debt 5,024 5,664
Postretirement and other postemployment
benefit obligations 2,400 2,387
Deferred income taxes 755 749
Deferred credits and other 756 731
Contingencies (See Note D to the Combined
Financial Statements)
Communications Group equity 4,241 3,917
---------------- ----------------
Total liabilities and equity $16,921 $16,915
================ ================
</TABLE>
See Notes to Combined Financial Statements.
<PAGE>
Form 10-Q - Part I
<TABLE>
<CAPTION>
COMBINED STATEMENTS OF U S WEST COMMUNICATIONS GROUP
CASH FLOWS (Unaudited)
- -------------------------------------------------------------------------------------------
Nine Months Ended
September 30,
Dollars in millions 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,007 $ 938
Adjustments to net income:
Depreciation and amortization 1,591 1,580
Gains on sales of rural telephone exchanges (77) (51)
Cumulative effect of change in accounting principle - (34)
Deferred income taxes and amortization
of investment tax credits (4) (11)
Changes in operating assets and liabilities:
Restructuring payments (55) (114)
Postretirement medical and life costs, net
of cash fundings 11 (28)
Accounts receivable 35 24
Inventories, supplies and other current assets (69) (14)
Accounts payable and accrued liabilities 332 72
Other adjustments - net 121 (5)
----------- -----------------
Cash provided by operating activities 2,892 2,357
----------- -----------------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment (1,307) (1,891)
Purchase of PCS wireless licenses (57) -
Proceeds from sales of rural telephone exchanges 51 130
Proceeds from (payments on) disposals of property,
plant and equipment 27 (1)
----------- -----------------
Cash (used for) investing activities (1,286) (1,762)
----------- -----------------
FINANCING ACTIVITIES
Net (repayments of) proceeds from short-term debt (397) 195
Proceeds from issuance of long-term debt - 16
Repayments of long-term debt (410) (278)
Dividends paid on common stock (733) (703)
Proceeds from issuance of common stock 50 109
----------- -----------------
Cash (used for) financing activities (1,490) (661)
----------- -----------------
CASH AND CASH EQUIVALENTS
Increase (decrease) 116 (66)
Beginning balance 80 172
=========== =================
Ending balance $ 196 $ 106
=========== =================
</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 and Nine Months Ended September 30, 1997 and 1996
(Dollars in millions)
(Unaudited)
A. Summary of Significant Accounting Policies
Basis of Presentation. U S WEST, Inc. ("U S WEST" or the "Company") has two
classes of common stock that are intended to reflect separately the performance
of its communications and multimedia businesses. One class of stock, U S WEST
Communications Group ("Communications Group"), reflects the communications
businesses of U S WEST and the other class of stock, U S WEST Media Group
("Media Group"), reflects the multimedia businesses of U S WEST.
The Combined Financial Statements have been prepared by U S WEST 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.
B. U S WEST Split
On October 27, 1997, the Company announced its intention to split Communications
Group and Media Group into separate public companies. Communications Group will
be renamed U S WEST, Inc. ("new U S WEST") and Media Group will be renamed
MediaOne Group, Inc. ("MediaOne Group"). Under the terms of the proposed
transaction, new U S WEST will include the telephone, data and wireless
operations of the Communications Group, as well as the Yellow Pages and
electronic directory businesses of U S WEST Dex, Inc. ("Dex"). Dex is currently
part of the Media Group and will be transferred to the Communications Group as
part of the proposed transaction (the "Dex Transfer"). MediaOne Group will
include the cable/broadband, wireless, and domestic and international
investments of the Media Group.
Under the terms of the proposed split, Communications Group shareowners will
receive one share of new U S WEST common stock for each share of Communications
Group common stock. Media Group shareowners will receive one share of MediaOne
Group common stock for each share of Media Group common stock. In addition,
Media Group shareowners will receive shares
<PAGE>
Form 10-Q - Part I
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)
(Unaudited)
B. U S WEST Split (continued)
of new U S WEST common stock for each share of Media Group common stock which
represents their interest in Dex, totaling approximately $850. Under the terms
of the Dex Transfer, Media Group debt will be reduced and Communications Group
debt will be increased by $3.9 billion.
The transaction is subject to a number of approvals, including approvals by
regulators and both shareowner groups, and receipt of a favorable ruling from
the Internal Revenue Service. The split is expected to be complete in the second
half of 1998.
C. Debt Extinguishment
During August 1997, U S WEST redeemed its Liquid Yield Option Notes ("LYONs").
The convertible zero coupon subordinated notes were due June 25, 2011. Upon
redemption, the recorded value of the notes attributed to the Communications
Group was $303. The debt extinguishment resulted in a loss of $3 (net of income
tax benefits of $2), or $0.01 per share, primarily related to the write-off of
deferred debt issuance costs. This loss is reflected as an extraordinary charge
in the accompanying Combined Statements of Operations. U S WEST allocated
floating-rate debt, due on demand, to the Communications Group to finance the
redemption.
D. 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.
On May 1, 1996, the Oregon Public Utilities Commission ("OPUC") approved a
stipulation terminating prematurely U S WEST Communications' alternative form of
regulation ("AFOR") plan, and it then undertook a review of U S WEST
Communications' earnings. In May 1997, the OPUC ordered U S WEST Communications
to reduce its annual revenues by $97, effective May 1, 1997, and to issue a
one-time refund, including interest, of approximately $102 to reflect the
revenue reduction for the period May 1, 1996 through April 30, 1997. The
one-time refund is for interim rates which became subject to refund when U S
WEST Communications' AFOR plan was terminated on May 1, 1996.
<PAGE>
Form 10-Q - Part I
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
D. Contingencies (continued)
U S WEST Communications filed an appeal of the order and asked for an immediate
stay of the refund with the Oregon Circuit Court for the County of Marion
("Oregon Circuit Court"). On June 26, 1997, the Oregon Circuit Court granted U S
WEST Communications' request for a stay, pending a full review of the OPUC's
order. The Oregon Circuit Court is scheduled to hear arguments on the appeal in
December 1997. The one-time refund and cumulative amount of revenues collected
subject to refund, including interest, as of September 30, 1997, totals
approximately $150.
In 1996, the Washington State Utilities and Transportation Commission ("WUTC")
acted on U S WEST Communications' 1995 rate request. U S WEST Communications had
sought to increase revenues by raising rates primarily for basic residential
services over a four-year period. Instead of granting U S WEST Communications'
request, the WUTC ordered $91.5 in annual net revenue reductions, effective May
1, 1996.
Based on the WUTC 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. Oral arguments were heard
in June 1997. U S WEST Communications is waiting a decision by the State Supreme
Court.
Effective May 1, 1996, U S WEST Communications began collecting revenues subject
to refund. The cumulative amount of revenues collected subject to refund as of
September 30, 1997, including interest, is approximately $155.
In another proceeding, the Utah Supreme Court 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 potential exposure, including interest, at September 30, 1997,
is approximately $160.
<PAGE>
Form 10-Q - Part I
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
D. Contingencies (continued)
The Communications Group has accrued $125 at September 30, 1997, which
represents its estimated liability for state regulatory proceedings. It is
possible that the ultimate liability could exceed the recorded liability by an
amount up to approximately $340. The Communications Group continues to monitor
and evaluate the risks associated with its state regulatory environment, and
will adjust estimates as new information becomes available.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Result
of Operations (Dollars in millions, except per share amounts)
Results of Operations - Three and Nine Months Ended September 30, 1997 Compared
with 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>
- -------------------------------------------------------------------------------------------------------------------
Three Months Ended Increase Nine Months Ended Increase
September 30, (Decrease) September 30, (Decrease)
Net Income: 1997 1996 $ % 1997 1996 $ %
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Reported net income $336 $286 $50 17.5 $1,007 $938 $69 7.4
Adjustments to reported net
income:
Gains on sales of rural
telephone exchanges (19) (1) (18) - (48) (31) (17) 54.8
Early extinguishment of debt 3 - 3 - 3 - 3 -
Cumulative effect of change in
accounting principle (1) - - - - - (34) 34 -
Current year effect of change
in accounting principle (1) - (3) 3 - - (13) 13 -
--------- --------- -------- --------- --------- --------- -------- ----------
Normalized income $320 $282 $38 13.5 $962 $860 $102 11.9
==================================== ========= ========= ======== ========= ========== ========= ======== ==========
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Three Months Ended Increase Nine Months Ended Increase
September 30, (Decrease) September 30, (Decrease)
Earnings per Share: 1997 1996 $ % 1997 1996 $ %
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Reported earnings per share $0.69 $0.60 $0.09 15.0 $2.08 $1.97 $0.11 5.6
Adjustments to reported
earnings per share:
Gains on sales of rural
telephone exchanges (0.04) - (0.04) - (0.10) (0.06) (0.04) 66.7
Early extinguishment of debt 0.01 - 0.01 - 0.01 - 0.01 -
Cumulative effect of change in
accounting principle (1)<F1> - - - - - (0.07) 0.07 -
Current year effect of change
in accounting principle (1)<F1> - (0.01) 0.01 - - (0.03) 0.03 -
--------- --------- -------- -------- -------- ---------- -------- ------
Normalized earnings per share $0.66 $0.59 $0.07 11.9 $1.99 $1.81 $0.18 9.9
===============================================================================================================
<FN>
<F1>
(1) 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>
The Communications Group's normalized income increased $38, or 13.5 percent, to
$320, and $102, or 11.9 percent, to $962, for the three- and nine-month periods
ended September 30, 1997, respectively. Normalized earnings per share was $0.66,
an increase of $0.07, or 11.9 percent, and $1.99, an increase of $0.18, or 9.9
percent for the three- and nine-month periods, respectively.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions, except per share amounts), continued
The increases are primarily due to higher demand for services and continued cost
control efforts in the core business which accelerated in the latter half of
1996. Partially offsetting the increases for both periods were additional
expenses related to interconnection. Accruals to recognize U S WEST
Communications' estimated state regulatory liability further reduced the
nine-month period increase. (See Note D - Contingencies - to the U S WEST
Communications Group Combined Financial Statements.) The Communications Group
anticipates that spending increases related to interconnection requirements and
entry into wireless personal communications services ("PCS") and interLATA
long-distance markets, combined with rate reductions resulting from the Federal
Communications Commission's (the "FCC") price cap regulation, will partially
offset future net income growth.
During August 1997, the Communications Group incurred an extraordinary loss of
$3 (net of income tax benefits of $2), or $0.01 per share, related to the early
extinguishment of debt. See Note C - Debt Extinguishment - to the U S WEST
Communications Group Combined Financial Statements.
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 1996
one-time gain of $34 (net of income tax expenses of $22), or $0.07 per share,
related to the cumulative effect of change in accounting principle.
<TABLE>
<CAPTION>
Operating Revenues
- ----- ---------------------------------------------------------------------------------------------------------------
Three Months Ended Increase Nine Months Ended Increase
September 30, (Decrease) September 30, (Decrease)
1997 1996 $ % 1997 1996 $ %
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Local service $1,314 $1,208 $106 8.8 $3,739 $3,532 $207 5.9
Interstate access service 663 606 57 9.4 2,028 1,854 174 9.4
Intrastate access service 208 192 16 8.3 608 571 37 6.5
Long-distance network services 231 272 (41) (15.1) 721 840 (119) (14.2)
Other services 257 237 20 8.4 707 683 24 3.5
--------- --------- -------- -------- --------- ---------- -------- ---------
Total $2,673 $2,515 $158 6.3 $7,803 $7,480 $323 4.3
==================================== ========= ========= ======== ======== == ========= ========== ======== =========
</TABLE>
Local Service Revenues. Local service revenues increased during the three- and
nine-month periods predominately 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 576,000, or 3.8 percent,
during the past 12 months, of which 274,000 was attributable to second lines.
Second-line installations increased 28 percent during the past 12 months. Access
lines grew 663,000, or 4.3 percent, when adjusted for sales of approximately
87,000 rural telephone access lines during the past 12 months. Also contributing
to the revenue increase for both periods were rate increases in various states
and interim compensation revenue from interexchange carriers as a result of the
FCC's payphone orders which took effect in April 1997.
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions), continued
Partially offsetting the increases were lower wireless interconnection access
prices mandated by the Telecommunications Act of 1996 (the "Telecommunications
Act"). Local service revenue growth was also partially offset during the
nine-month period by accruals of approximately $100 to recognize U S WEST
Communications' estimated state regulatory liabilities. (See Note D -
Contingencies - to the U S WEST Communications Group Combined Financial
Statements.)
Interstate Access Service Revenues. Higher interstate access service revenues
resulted from increased demand for private line services, access line growth and
increases of 6.0 and 6.2 percent in billed interstate access minutes of use for
the three- and nine-month periods, respectively. Also contributing to the
increases were the effects of sharing-related accruals for refunds to
interexchange carriers recorded in 1996. These increases were partially offset
by 1997 price reductions. Beginning July 1, 1997, the Communications Group
reduced prices for interstate services as a result of the FCC's current price
cap plan. The access rate reductions have an on-going annual revenue impact of
approximately $165 which is reflected in lower interstate rates over twelve
months beginning July 1, 1997.
Intrastate Access Service Revenues. Intrastate access service revenues increased
largely as a result of increases of 13.3 and 11.4 percent in billed intrastate
minutes of use for the three- and nine-month periods, respectively, and
increased demand for private line services.
Long-Distance Network Service Revenues. Long-distance network service revenues
decreased 15.1 and 14.2 percent for the three- and nine-month periods,
respectively, primarily due to the effects of competition and the implementation
of multiple toll carrier plans ("MTCPs") in Iowa and Nebraska in 1996, and in
several states in 1997. The MTCPs essentially allow independent telephone
companies to act as toll carriers and are net income neutral with the reduction
in toll revenues largely offset by increased intrastate access revenues and
lower access expense.
Excluding the effects of the MTCPs, long-distance network service revenues
decreased by 11.0 and 9.4 percent for the three- and nine-month periods,
respectively. The Communications Group believes that erosion of long-distance
network service revenues will continue due to the loss of exclusivity of 1+
dialing in Minnesota and Arizona, effective in February and April 1996,
respectively, and continued competitive dial-around activity in other states
within the Communications Group's 14 state region. The Communications Group is
responding to competition through competitive pricing of intraLATA long-distance
services and increased promotional efforts to retain customers.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions), continued
Other Services Revenues. Other services revenues increased primarily as a result
of continued market penetration of voice messaging services and greater sales of
inside wire maintenance and other unregulated products and services. Partially
offsetting these increases was a reduction in contract revenues due to the
completion of a large federal government telephony project in 1996.
Revenue growth at U S WEST Communications may be affected by pending regulatory
actions in federal and local regulatory jurisdictions.
<TABLE>
<CAPTION>
Costs and Expenses
- ----------------------------------------------------------------------------------------------------------------
Three Months Ended Increase Nine Months Ended Increase
September 30, (Decrease) September 30, (Decrease)
1997 1996 $ % 1997 1996 $ %
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Employee-related expenses $951 $900 $51 5.7 $2,719 $2,688 $31 1.2
Other operating expenses 469 402 67 16.7 1,305 1,177 128 10.9
Taxes other than income taxes 103 94 9 9.6 308 291 17 5.8
Depreciation and amortization 534 545 (11) (2.0) 1,591 1,580 11 0.7
Interest expense 100 111 (11) (9.9) 303 332 (29) (8.7)
Gains on sales of rural telephone
exchanges 30 2 28 - 77 51 26 51.0
Other expense 11 10 1 10.0 52 22 30 -
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Employee-Related Expenses. Employee-related expenses increased $51, or 5.7
percent, and $31, or 1.2 percent, during the three- and nine-month periods,
respectively. The increases are primarily a result of higher contract labor
costs. The contract labor increase reflects increased marketing and sales
efforts, systems development work (which include expenses related to
interconnection), and the launch of new products and services. Higher overtime
costs also contributed to the employee-related expense increase during the
three-month period; however, for the nine-month period, overtime costs decreased
compared to the prior year. Additionally, during both periods lower salaries and
wages related to employee reductions, which totaled 3,134 during the last 12
months, and lower conference and travel expenses were offset by increases in
certain employee-related benefit costs.
Other Operating Expenses. Other operating expenses increased $67, or 16.7
percent, and $128, or 10.9 percent, during the three- and nine-month periods,
respectively. The increases are predominantly a result of increased network
software purchases (which include expenses related to interconnection),
advertising costs and professional fees. Additionally, for the nine-month
period, operating expenses increased as a result of a reserve adjustment
associated with billing and collection activities performed for interexchange
carriers and repair costs associated with flooding in North Dakota.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions), continued
Partially offsetting the increases were reduced access expenses (primarily
related to the implementation of the MTCPs in 1996 and 1997), completion of a
large federal government telephony project in 1996 and a 1996 charge to
discontinue the Omaha broadband video service trial. Lower materials and
supplies expense also reduced other operating expenses during the nine-month
period.
Taxes Other Than Income Taxes. Taxes other than income taxes increased $9, or
9.6 percent, and $17, or 5.8 percent, for the three- and nine-month periods,
respectively. The increase for the three-month period is a result of property
tax true-ups in 1996. In addition to the property tax true-ups, the nine-month
period increase was largely attributed to increased 1997 use taxes.
Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA").
EBITDA increased 2.8 percent, to $1,150, and 4.4 percent, to $3,471, for the
three- and nine-month periods, respectively. The increases are primarily due to
higher demand for services and continued cost control efforts in the core
business which accelerated in the latter half of 1996. Partially offsetting the
increases for both periods were additional expenses related to interconnection.
Accruals to recognize U S WEST Communications' estimated state regulatory
liability further reduced the nine-month period increase. (See Note D -
Contingencies - to the U S WEST Communications Group Combined Financial
Statements.) EBITDA excludes gains on sales of certain rural telephone
exchanges. 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 GAAP.
Depreciation and Amortization. Depreciation expense decreased for the
three-month period and increased during the nine-month period. During the
three-month period, the effects of a higher depreciable asset base were offset
by a third-quarter 1996 depreciation adjustment.
Interest Expense. Interest expense decreased $11, or 9.9 percent, and $29, or
8.7 percent, for the three- and nine-month periods, respectively, due to lower
average debt levels as compared to 1996. Partially offsetting the decrease for
the nine-month period was a reduction in the amount of interest capitalized
resulting from a lower average balance of telecommunications plant under
construction.
Gains on Sales of Rural Telephone Exchanges. During the nine-month period, the
Communications Group sold selected rural telephone exchanges in Iowa, South
Dakota, Nebraska, Idaho, and Minnesota for pretax gains of $77. Certain
Minnesota rural telephone exchanges were sold during third-quarter 1997 for a
pretax gain of $30. The 1996 gains were a result of sales in Utah, North Dakota
and South Dakota.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions), continued
Other Expense. Other expense for the nine-month period increased primarily due
to additional interest expense associated with the Communications Group's
interstate sharing and state regulatory liabilities.
<TABLE>
<CAPTION>
Provision for Income Taxes
- ------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, Percent September 30, Percent
1997 1996 Change 1997 1996 Change
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Provision for income taxes $196 $169 16.0 $592 $537 10.2
Effective tax rate - - - 37.0% 37.3% -
- ------------------------------------------------------------------------------------------------
</TABLE>
The increase in the provision for income taxes resulted primarily from higher
pretax earnings and lower amortization of investment tax credits.
Restructuring Charge
During the nine-month period ended September 30, 1997, the restructuring reserve
decreased $55 to a balance of $68. Reserve usage is primarily a result of
expenditures for 492 employee separations during the first nine months of 1997
and systems development costs. The restructuring plan is expected to be
substantially complete by the end of 1997. Management continues to evaluate the
remaining reserve balance and employee separations.
Liquidity and Capital Resources
Operating Activities
Cash provided by operations increased $535, to $2,892, for the nine-month period
ended September 30, 1997, compared with the same period in 1996. The increase in
operating cash flow is primarily due to business growth and continued cost
control efforts in the core business, including efforts to manage working
capital. Lower restructuring expenditures along with a decrease in the cash
funding of postretirement benefits also contributed to the increase. Higher tax
payments partially offset these increases.
Investing Activities
The Communications Group's capital expenditures were $1,307, on a cash basis,
during the first nine months of 1997. The majority of the 1997 expenditures
related to access line growth and continued improvement of the
telecommunications network. Also included were interconnection costs and
expenditures associated with entering wireless communications markets with the
launch of PCS. The Communications Group anticipates capital expenditures will
accelerate during fourth quarter and will include expenditures to launch PCS in
additional markets and for interconnection requirements related to the
Telecommunications Act.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in, millions), continued
Financing Activities
On October 27, 1997, the Company announced its intention to split Communications
Group and Media Group into separate public companies. Under the terms of the
proposed transaction, new U S WEST will include the telephone, data and wireless
operations of the Communications Group, as well as the Yellow Pages and
electronic directory businesses of Dex. Dex is currently part of the Media Group
and will be transferred to the Communications Group as part of the proposed
transaction. MediaOne Group will include the cable/broadband, wireless, and
domestic and international investments of the Media Group.
Under the terms of the Dex Transfer, Media Group shareowners will receive shares
of new U S WEST common stock for each share of Media Group common stock which
represents their interest in Dex, totaling approximately $850. Also, Media Group
debt will be reduced and Communications Group debt will be increased by $3.9
billion.
The transaction is subject to a number of approvals, including approvals by
regulators and both shareowner groups, and receipt of a favorable ruling from
the Internal Revenue Service. The split is expected to be complete in the second
half of 1998.
In connection with the Company's announcement of its intention to split the
Communications Group and the Media Group into separate public companies,
Standard & Poor's placed U S WEST Communications' senior unsecured debt rating
on credit watch with positive implications and reaffirmed U S WEST
Communications' commercial paper ratings. Duffs & Phelps reaffirmed U S WEST
Communications' senior unsecured debt and commercial paper ratings. U S WEST
Communications' senior unsecured debt rating remains under review by Moody's,
which may result in a downgrading.
During the first nine months of 1997, debt decreased $748 and the percentage of
debt to total capital decreased from 62.4 percent at December 31, 1996, to 57.6
percent, at September 30, 1997. The decrease in the percentage of debt to total
capital is primarily a result of increased equity balances and lower debt
levels. The lower debt levels have been partially driven by increased operating
cash flows and lower capital expenditures.
During August 1997, U S WEST redeemed its LYONs. The convertible zero coupon
subordinated notes had a recorded value of $303 attributed to the Communications
Group. U S WEST allocated floating-rate debt, due on demand, to the
Communications Group to finance the redemption.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions), continued
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 interest, 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
discussion will result in the consummation of any such transaction.
Contingencies
At U S WEST Communications there are pending regulatory actions in local
regulatory jurisdictions that call for price decreases, refunds or both. For a
discussion of the specific pending regulatory items, see Note D Contingencies -
to the U S WEST Communications Group Combined Financial Statements.
The Communications Group has accrued $125 at September 30, 1997, which
represents its estimated liability for state regulatory proceedings. It is
possible that the ultimate liability could exceed the recorded liability by an
amount up to approximately $340. The Communications Group continues to monitor
and evaluate the risks associated with its state regulatory environment, and
will adjust estimates as new information becomes available.
Regulatory Environment
Interconnection
In August 1996, the FCC issued an order (the "FCC Order") establishing a
framework of mandatory national rules that would enable the states and the FCC
to begin implementing the local competition provisions of the Telecommunications
Act. Among other things, the FCC Order established rigid costing and pricing
rules which, from U S WEST's perspective, significantly impeded negotiations
with new entrants to the local exchange market, state public utility commission
("PUC") interconnection rulemakings, and interconnection arbitration
proceedings.
On July 18, 1997, the Eighth Circuit Court of Appeals (the "Eighth Circuit")
vacated significant portions of the FCC Order. Most significantly, the Eighth
Circuit ruled that jurisdiction over local interconnection prices rests with the
states, not the FCC. The effect of the Eighth Circuit's decision is to have
interconnection and unbundled network element pricing be resolved through
negotiations or state PUC arbitration proceedings. Some of the FCC's unbundling
rules, as well as its "pick and choose" provision, were also vacated by the
Eighth Circuit.
<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 October 14, 1997, the Eighth Circuit clarified that incumbent
telecommunications providers are not required to make rebundled service
offerings available to competitors at unbundled element pricing. This decision
substantially reduces new entrants' ability to arbitrage between resale of
finished services and the pricing of unbundled network elements.
The Eighth Circuit is reviewing the FCC's August 1997 order that required shared
transport be made available in combination with local switching as an unbundled
element. This review is pending.
Number Portability
Among other things, the Telecommunications Act requires all local exchange
carriers ("LECs") to provide permanent number portability to facilitate local
exchange competition. The FCC has established a schedule for deployment of
number portability during 1998. This schedule includes 10 markets in U S WEST
Communications' 14 state region. The FCC, however, has not issued cost recovery
rules as required by the Telecommunications Act. On October 23, 1997, U S WEST
filed a petition in the Tenth Circuit Court of Appeals (the "Tenth Circuit"),
seeking an order which would require the FCC to issue its cost recovery rules. U
S WEST Communications will also seek cost recovery through state ratemaking
proceedings and interconnection cost recovery dockets. U S WEST Communications
expects its estimated costs to deploy number portability will be significant
over the next few years. Due to legal and regulatory uncertainties, U S WEST
Communications cannot provide assurance the one-time costs of deploying number
portability will ultimately be recovered.
Universal Service, Access Reform and Price Cap
On May 7, 1997, the FCC announced three decisions that will establish rules to
implement the Universal Service provision of the Telecommunications Act (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
On July 17, 1997, U S WEST filed a petition with the FCC for reconsideration and
clarification of certain issues in the Universal Service Order. Among other
things, the Company requested the FCC to reconsider: 1) establishing a national
fund to ensure high-cost support is sufficient, and 2) assessing contributions
as explicit end-user surcharges. Appeals of other issues addressed by the
Universal Service Order have been filed by various other companies.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions), continued
Federal Access Reform
The FCC has ordered a substantial restructuring of interstate access pricing. A
significant portion of the services that have been charged using minutes-of-use
pricing will now be charged using a combination of minutes-of-use rates,
presubscribed interexchange carrier charges ("PICCs") and subscriber line
charges ("SLCs"). Although an increase in the SLC to multi-line business users
occurred on July 1, 1997, the bulk of the mandated pricing changes will occur on
January 1, 1999. Additional mandated pricing changes will also occur on January
1, 1999 through 2001. The net effect of these changes will be to decrease
minutes-of-use charges up to 60 percent and increase flat-rate charges (i.e.
PICCs and SLCs). Although the effects of the mandated pricing changes beginning
January 1, 1998 will initially be revenue neutral, the Access Reform Order
coupled with the Price Cap Order, will over time reduce the revenues the Company
derives from interstate access charges. Competition from competitive LECs will
also affect the Company's access revenues.
U S WEST and other incumbent LECs have appealed the Access Reform Order. U S
WEST's primary challenge is that the FCC acted unlawfully by exempting
purchasers of unbundled network elements from payment of interstate access
charges, while not providing for the immediate replacement of subsidies
contained within those same access charges. This case is pending in the Eighth
Circuit and will be heard in January 1998.
Price Cap Order
The FCC's Price Cap Order requires LECs that are subject to price cap regulation
to increase their price cap index productivity factor to 6.5 percent. The order
eliminated the lower productivity factor options (i.e. 4.0 percent and 4.7
percent) that required sharing of earnings above a specified level and required
LECs to set their 1997 price cap index assuming that the 6.5 percent factor had
been in effect at the time of the 1996 tariff filing.
As mandated by the Price Cap Order, the price cap index in U S WEST
Communications' 1997 interstate access tariff filing was established assuming
that the 6.5 percent productivity factor had been in effect at the time of the
1996 tariff filing. The access rate reductions have an on-going annual revenue
impact of approximately $165 which are being reflected through lower interstate
rates over twelve months beginning July 1, 1997.
On June 23, 1997, U S WEST petitioned the Tenth Circuit for a review of the
Price Cap Order. The Tenth Circuit has transferred review of the Price Cap Order
to the District of Columbia Court of Appeals. Among other things, U S WEST and
other appellants are requesting the District of Columbia Court of Appeals to
review the use of a 6.5 percent productivity factor and the retroactive
application of the 6.5 percent productivity factor to July 1, 1996 when
determining the price cap index for the 1997 price cap filing. This case will be
heard in 1998.
<PAGE>
Form 10-Q - Part I
<TABLE>
<CAPTION>
COMBINED STATEMENTS OF OPERATIONS U S WEST MEDIA GROUP
(Unaudited)
- ---------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
Dollars in millions (except per share amounts) 1997 1996 1997 1996
- ---------------------------------------------------------------------------------------- --------------
<S> <C> <C> <C> <C>
Sales and other revenues:
Cable and broadband $590 $ 60 $1,735 $176
Wireless communications 373 315 1,071 869
Directory and information services 299 316 927 908
Other 8 3 21 12
--------- ----------- --------------- --------------
Total sales and other revenues 1,270 694 3,754 1,965
Operating expenses:
Cost of sales and other revenues 416 221 1,252 626
Selling, general and administrative expenses 385 242 1,065 698
Depreciation and amortization 301 79 904 216
--------- ----------- --------------- --------------
Total operating expenses 1,102 542 3,221 1,540
--------- ----------- --------------- --------------
Income from operations 168 152 533 425
Interest expense 179 30 520 80
Equity losses in unconsolidated ventures 177 81 495 224
Gains on sales of investments 13 - 108 -
Guaranteed minority interest expense 22 12 66 36
Other income (expense) - net (5) 10 (14) (24)
--------- ----------- --------------- --------------
Income (loss) before income taxes and
extraordinary item (202) 39 (454) 61
Provision (benefit) for income taxes (61) 21 (107) 51
--------- ----------- --------------- --------------
Income (loss) before extraordinary item (141) 18 (347) 10
Extraordinary item:
Early extinguishment of debt, net of tax (3) - - -
--------- ----------- --------------- --------------
NET INCOME (LOSS) $(144) $18 $(347) $10
========= =========== =============== ==============
Dividends on preferred stock 14 1 39 3
--------- ----------- --------------- --------------
EARNINGS (LOSS) AVAILABLE FOR
COMMON STOCK $(158) $17 $(386) $7
========= =========== =============== ==============
EARNINGS (LOSS) PER COMMON SHARE $(0.26) $0.04 $(0.64) $0.01
========= =========== =============== ==============
AVERAGE COMMON SHARES
OUTSTANDING (thousands) 606,729 473,902 606,568 473,501
</TABLE>
See Notes to Combined Financial Statements.
<PAGE>
Form 10-Q - Part I
<TABLE>
<CAPTION>
COMBINED BALANCE SHEETS U S WEST MEDIA GROUP
(Unaudited)
- -------------------------------------------------------------------------------
September 30, December 31,
Dollars in millions 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 63 $ 121
Accounts and notes receivable - net 533 508
Deferred directory costs 250 259
Receivable from Communications Group 90 92
Marketable securities - 58
Other 87 101
---------------- ----------------
Total current assets 1,023 1,139
---------------- ----------------
Gross property, plant and equipment 6,109 5,111
Accumulated depreciation 1,347 836
---------------- ----------------
Property, plant and equipment - net 4,762 4,275
Investment in Time Warner Entertainment 2,483 2,477
Net investment in international ventures 1,370 1,548
Intangible assets - net 12,327 12,595
Net investment in assets held for sale 410 409
Other assets 1,372 1,618
---------------- ----------------
Total assets $23,747 $24,061
================ ================
</TABLE>
See Notes to Combined Financial Statements.
<PAGE>
Form 10-Q - Part I
<TABLE>
<CAPTION>
COMBINED BALANCE SHEETS U S WEST MEDIA GROUP
(Unaudited), continued
- ---------------------------------------------------------------------------------------------
September 30, December 31,
Dollars in millions 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND EQUITY
Current liabilities:
Short-term debt $ 1,560 $ 217
Due to Continental Cablevision shareowners - 1,150
Accounts payable 347 425
Deferred revenue and customer deposits 126 129
Other 890 795
------------ -----------------
Total current liabilities 2,923 2,716
---------------- -----------------
Long-term debt 8,398 8,636
Deferred income taxes 3,553 3,600
Deferred credits and other 412 346
Company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely Company-
guaranteed debentures 1,080 1,080
Preferred stock subject to mandatory redemption 100 51
Media Group equity 7,281 7,632
---------------- -----------------
Total liabilities and equity $23,747 $24,061
================ =================
</TABLE>
See Notes to Combined Financial Statements.
<PAGE>
Form 10-Q - Part I
<TABLE>
<CAPTION>
COMBINED STATEMENTS OF CASH FLOWS U S WEST MEDIA GROUP
(Unaudited)
- -------------------------------------------------------- -----------------------
Nine Months Ended
September 30,
Dollars in millions 1997 1996
- -------------------------------------------------------- ---------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (347) $ 10
Adjustments to net income (loss):
Depreciation and amortization 904 216
Equity losses in unconsolidated ventures 495 224
Gains on sales of investments (108) -
Deferred income taxes (106) (57)
Provision for uncollectibles 70 46
Changes in operating assets and liabilities:
Accounts and notes receivable (111) (115)
Deferred directory costs and other (14) 5
Accounts payable and accrued liabilities 41 45
Other adjustments - net 65 46
---------- ---------
Cash provided by operating activities 889 420
---------- ---------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment (1,087) (361)
Payment to Continental Cablevision shareowners (1,150) -
Investment in international ventures (315) (227)
Proceeds from sales of investments 703 -
Cash from net investment in assets held for sale 242 176
Other - net (197) (41)
---------- ---------
Cash (used for) investing activities (1,804) (453)
---------- ---------
FINANCING ACTIVITIES
Repayments of short-term debt - net (2,815) (8)
Proceeds from issuance of long-term debt 4,123 330
Repayments of long-term debt (377) (283)
Dividends paid on preferred stock (36) (3)
Proceeds from issuance of common stock 15 31
Purchases of treasury stock (53) -
---------- ---------
Cash provided by financing activities 857 67
---------- ---------
CASH AND CASH EQUIVALENTS
Increase (decrease) (58) 34
Beginning balance 121 20
========== =========
Ending balance $ 63 $ 54
========== =========
</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 and Nine Months Ended September 30, 1997 and 1996
(Dollars in millions)
(Unaudited)
A. Summary of Significant Accounting Policies
Basis of Presentation. U S WEST, Inc. ("U S WEST" or the "Company") has two
classes of common stock that are intended to reflect separately the performance
of its communications and multimedia businesses. One class of stock, U S WEST
Communications Group ("Communications Group"), reflects the communications
businesses of U S WEST and the other class of stock, U S WEST Media Group
("Media Group"), reflects the multimedia businesses of U S WEST.
The Combined Financial Statements have been prepared by U S WEST 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 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.
B. U S WEST Split
On October 27, 1997, the Company announced its intention to split Communications
Group and Media Group into separate public companies. Communications Group will
be renamed U S WEST, Inc. ("new U S WEST") and Media Group will be renamed
MediaOne Group, Inc. ("MediaOne Group"). Under the terms of the proposed
transaction, new U S WEST will include the telephone, data and wireless
operations of Communications Group, as well as the Yellow Pages and electronic
directory businesses of U S WEST Dex, Inc. ("Dex"). Dex is currently part of
Media Group and will be transferred to Communications Group as part of the
proposed transaction (the "Dex Transfer"). MediaOne Group will include the
cable/broadband, wireless, and domestic and international investments of Media
Group.
Under the terms of the proposed split, Communications Group shareowners will
receive one share of new U S WEST common stock for each share of Communications
Group common stock. Media Group shareowners will receive one share of MediaOne
Group common stock for each share of Media Group common stock. In addition,
Media Group shareowners will receive shares of new U S WEST common stock for
each share of Media Group common stock which represents their interest in Dex,
totaling approximately $850. Under the terms of the Dex Transfer, Media Group
debt will be reduced and Communications Group debt will be increased by $3.9
billion.
<PAGE>
Form 10-Q - Part I
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
B. U S WEST Split (continued)
The transaction is subject to a number of approvals, including approvals by
regulators and both shareowner groups, and receipt of a favorable ruling from
the Internal Revenue Service. The split is expected to be complete in the second
half of 1998.
C. AirTouch Transaction
During 1994, U S WEST entered into a definitive agreement with AirTouch
Communications, Inc. ("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 cellular properties are
owned separately. A wireless management company has been formed and is providing
services to both companies, as requested, on a contract basis.
In February 1997, the King County Superior Court (the "Court") in Washington
state ruled that a subsidiary of Media Group violated the terms of its
partnership agreement with its minority partners in the Seattle cellular
partnership by entering into the AirTouch Joint Venture. The Company currently
is complying with the Court's order which requires the Company to issue a right
of first refusal to the minority partners with respect to the subsidiary's
limited partnership interest. The Court authorized the limited partners to take
legally appropriate steps to secure unanimous agreement for a substitute for the
Company as the general partner. A motion is pending before the Court to extend
the August 15, 1997 deadline for such agreement. The Company retains its right
to appeal unfavorable rulings before transferring any partnership interest in
the Seattle cellular partnership. Similar litigation has been filed in other
jurisdictions regarding other cellular partnerships by the same minority partner
that brought the Seattle litigation. The Company is also seeking declaratory
relief from the Delaware Chancery Court. The Company believes it will ultimately
be successful in all litigation asserting that the Company's entering into the
AirTouch Joint Venture violated its partnership agreements with its minority
partners.
Media Group and AirTouch have agreed not to proceed to Phase II of the AirTouch
Joint Venture before May 5, 1998. In Phase II of the AirTouch Joint Venture, the
partners will combine those domestic cellular properties for which
authorizations and partnership approvals have been obtained. 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
(Dollars in millions)
(Unaudited)
D. Asset Sales and Restructurings
Marketable Securities and Investments. During the third quarter of 1997, Media
Group sold 1,840,000 shares of Teleport Communications Group, Inc. ("TCG") for a
pretax gain of $13. In November 1997, Media Group sold its remaining interest in
TCG for net proceeds of $433.
Pursuant to a settlement agreement, Media Group transferred its investment in
Optus Vision, an Australian cable and telecommunications venture, to Optus
Communications Pty Ltd., ("Optus Communications"), an Australian
telecommunications carrier, in the third quarter of 1997. Media Group received a
convertible note which can be converted to shares of Optus Communications upon
satisfaction of various conditions, such as a public offering of Optus
Communications' shares. The settlement released the Company from litigation and
future claims.
Cable Systems. During the second quarter of 1997, Media Group reached definitive
agreements to sell its cable systems in Minnesota and Idaho. The system sales
are subject to federal and local regulatory approvals, including the transfer of
franchises, and are scheduled to close in early 1998. In accordance with SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," the Company has stopped depreciating the systems held
for sale. These cable systems contributed $12 and $19 of operating income during
the three- and nine-month periods ended September 30, 1997, respectively.
E. Debt Extinguishment
During August 1997, U S WEST redeemed its Liquid Yield Option Notes ("LYONs").
The convertible zero coupon subordinated notes were due June 25, 2011. Upon
redemption, the recorded value of the notes attributed to Media Group was $268.
The debt extinguishment resulted in a loss of $3 (net of income tax benefits of
$2) primarily related to the write-off of deferred debt issuance costs. This
loss is reflected as an extraordinary charge in the accompanying Combined
Statements of Operations. U S WEST financed the redemption with floating rate
commercial paper.
<PAGE>
Form 10-Q - Part I
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
F. Media Group Equity
<TABLE>
<CAPTION>
Following is a reconciliation of Media Group equity:
<S> <C>
Beginning balance, January 1, 1997 $7,632
Net loss (347)
Market value adjustment for debt and equity securities 88
Treasury stock purchases (53)
Foreign currency translation (43)
Preferred dividends (39)
Company LESOP guarantee 19
Common stock issuances 15
Other 9
---------
Ending balance, September 30, 1997 $7,281
=========
</TABLE>
Market value adjustments of $88 (net of income tax expenses of $69) result
primarily from recording TCG equity securities at market value.
The foreign currency translation adjustment of $43 (net of income tax benefits
of $28) is primarily related to investments in Malaysia and Hungary.
G. MediaOne, Inc. Relocation
On August 6, 1997, Media Group announced it will relocate the corporate offices
of its domestic cable operations, MediaOne, Inc., from Boston to Denver. The
move is designed to improve operations through better alignment and focus, and
will occur in phases through mid-1998. Media Group incurred a pretax charge of
$30 ($18 after tax) in third-quarter 1997 for costs related to the move and
management changes.
H. Subsequent Events
Fintelco, S.A. On October 27, 1997, Media Group sold its 90 percent interest in
Fintelco, S.A., ("Fintelco"), a cable and telecommunications venture located in
Argentina, for proceeds of approximately $640. Media Group acquired an
additional 40 percent interest in Fintelco in August 1997, to bring its total
interest in Fintelco to 90 percent.
International Directories. On October 1, 1997, Media Group sold U S WEST Polska,
its wholly owned directory operation in Poland, for proceeds of approximately
$30. This sale combined with the second-quarter 1997 sale of Thomson Directories
has resulted in the disposition of Media Group's wholly owned international
directory operations.
<PAGE>
Form 10-Q - Part I
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
I. Net Investment in Assets Held for Sale
The capital assets segment is being accounted for in accordance with Staff
Accounting Bulletin No. 93, issued by the SEC, which requires discontinued
operations not disposed of within one year of the measurement date to be
accounted for prospectively in continuing operations as "net investment in
assets held for sale." The net realizable value of the assets is being evaluated
on an ongoing basis with adjustments to the existing reserve, if any, being
charged to continuing operations. 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.
<TABLE>
<CAPTION>
The components of net investment in assets held for sale follow:
- ------------------------------------------------------- --------------- ---------------
September 30, December 31,
1997 1996
- ------------------------------------------------------- --------------- ---------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 52 $ 21
Finance receivables - net 806 869
Investment in real estate - net of valuation allowance 158 182
Bonds, at market value 118 146
Investment in FSA 351 326
Other assets 179 165
--------------- ---------------
Total assets $1,664 $1,709
=============== ===============
LIABILITIES
Debt $ 421 $ 481
Deferred income taxes 685 671
Accounts payable, accrued liabilities and other 137 137
Minority interests 11 11
--------------- ---------------
Total liabilities 1,254 1,300
--------------- ---------------
Net investment in assets held for sale $ 410 $ 409
======================================================= =============== ===============
</TABLE>
Building sales and operating revenues of the capital assets segment were $13 and
$91 for the three- and nine-month periods ended September 30, 1997,
respectively, and $110 and $161 for the three- and nine-month periods ended
September 30, 1996, respectively.
<PAGE>
Form 10-Q - Part I
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
I. Net Investment in Assets Held for Sale (continued)
Revenues of U S WEST Financial Services, Inc. ("USWFS"), a member of the capital
assets segment, were $5 and $16 for the three- and nine-month periods ended
September 30, 1997, respectively, and $6 and $20 for the three- and nine-month
periods ended September 30, 1996, respectively. Selected financial data for
USWFS follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
September 30, December 31,
1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Net finance receivables $ 850 $ 859
Total assets 1,208 1,058
Total debt 397 236
Total liabilities 1,139 998
Equity 69 60
- ---------------------------------------------------------- ---------------------
</TABLE>
In September 1997, USWFS pledged certain finance receivables as collateral for a
nonrecourse loan totaling $173. The loan bears interest at an annual rate of 7.2
percent and matures in the year 2009.
<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. On
November 15, 1996, Continental Cablevision, Inc. ("Continental") was merged into
a wholly owned subsidiary of U S WEST (the "Continental Merger"). Pro forma
discussions give effect to the Continental Merger as though it had occurred as
of January 1, 1996. A discussion of Media Group's operations on a proportionate
basis follows the GAAP discussion.
Results of Operations - Three and Nine Months Ended September 30, 1997 Compared
with 1996
<TABLE>
<CAPTION>
Sales and Other Revenues
- -----------------------------------------------------------------------------------------
Pro forma
Percent Pro forma Percent
Three Months Ended September 30, 1997 1996 Change 1996 Change
- -------------------------------------- -------- --------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Cable and broadband:
Domestic $ 584 $ 60 - $ 527 10.8
International 6 - - - -
-------- --------- -------- ---------- ---------
590 60 - 527 12.0
Wireless communications:
Domestic:
Cellular service 331 286 15.7 286 15.7
Cellular equipment 42 29 44.8 29 44.8
-------- --------- -------- ---------- ---------
373 315 18.4 315 18.4
Directory and information services:
Domestic 296 276 7.2 276 7.2
International 3 40 (92.5) 40 (92.5)
-------- --------- -------- ---------- ---------
299 316 (5.4) 316 (5.4)
Other 8 3 - 3 -
-------- --------- -------- ---------- ---------
Sales and other revenues $1,270 $694 83.0 $1,161 9.4
====================================== ======== ========= ======== ========== =========
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Pro forma
Percent Pro forma Percent
Nine Months Ended September 30, 1997 1996 Change 1996 Change
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cable and broadband:
Domestic $1,721 $ 176 - $1,579 9.0
International 14 - - - -
-------- --------- -------- ---------- ---------
1,735 176 - 1,579 9.9
Wireless communications:
Domestic:
Cellular service 961 792 21.3 792 21.3
Cellular equipment 110 77 42.9 77 42.9
-------- --------- -------- ---------- ---------
1,071 869 23.2 869 23.2
Directory and information services:
Domestic 879 826 6.4 826 6.4
International 48 82 (41.5) 82 (41.5)
-------- --------- -------- ---------- ---------
927 908 2.1 908 2.1
Other 21 12 75.0 12 75.0
-------- --------- -------- ---------- ---------
Sales and other revenues $3,754 $1,965 91.0 $3,368 11.5
=======================================================================================
</TABLE>
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions), continued
Media Group sales and other revenues increased 83.0 percent, to $1,270, and 91.0
percent, to $3,754, for the three- and nine-month periods ended September 30,
1997, respectively. On a pro forma basis, Media Group sales and other revenues
increased 9.4 percent and 11.5 percent, for the three- and nine-month periods,
respectively. The pro forma increases were primarily a result of growth in
domestic cable and broadband revenues, and domestic cellular service revenues.
Cable and Broadband. On a pro forma basis, domestic cable and broadband revenues
increased 10.8 percent, to $584, and 9.0 percent, to $1,721, for the three- and
nine-month periods ended September 30, 1997, respectively. The increases
resulted primarily from price increases of approximately 6 to 8 percent, the
addition of new channels and basic subscriber increases of approximately 2
percent. Increases in direct broadcast satellite ("DBS") service, and equipment
and installation revenues also contributed to the increases in revenue. DBS
service revenues increased primarily as a result of a 41.9 percent increase in
DBS customers in 1997. During the nine-month period, pay-per-view revenues also
contributed to the revenue increase.
Results for 1997 international cable and broadband revenues reflect the
fourth-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 15.7 percent, to
$331, and 21.3 percent, to $961, for the three- and nine-month periods ended
September 30, 1997, respectively. These increases are a result of a 32.1 percent
increase in subscribers during the last twelve months, partially offset by a
10.2 percent decrease (12.7 percent decrease in the three-month period) in
average revenue per subscriber to $47.99 per month. The increase in subscribers
relates to continued growth in demand for wireless services, as well as the 1997
introduction of digital wireless services in several major markets. Media Group
believes that increasing competition in Media Group wireless markets, including
new market entrants offering personal communication services ("PCS") technology,
will contribute to continued decreases in revenue per subscriber and slowing
subscriber growth.
Cellular equipment revenues increased 44.8 percent, to $42, and 42.9 percent, to
$110, for the three- and nine-month periods ended September 30, 1997,
respectively. These increases are primarily a result of an increase in unit
sales associated with increased gross customer additions during 1997 and the
introduction of digital handsets. These volume increases were partially offset
by a decrease in selling price per analog unit.
In Phase II of the AirTouch Joint Venture, Media Group and AirTouch will combine
those domestic cellular properties for which authorizations and partnership
approvals have been obtained. Media Group has the right under Phase III of the
AirTouch Joint Venture agreement to convert its joint venture interest into
AirTouch stock. See Note C - AirTouch Transaction - to the U S WEST Media Group
Combined Financial Statements.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions), continued
Directory and Information Services. Revenues related to Yellow Pages directory
advertising represent 99 percent of domestic directory and information services.
Yellow Pages directory advertising revenues increased 6.9 percent, to $293 and
$868, during the three-and nine-month periods ended September 30, 1997,
respectively. The increases are largely a result of a 7.2 percent increase in
revenue per local advertiser, on a comparable basis, primarily resulting from
price increases of 4.6 percent and an increase in volume and complexity of
advertisements sold. These increases are offset slightly by decreased revenue
associated with exited product lines which were nonstrategic to the directory
business. Revenues related to interactive and other services comprise the
remaining domestic directory and information services revenues and totaled $3
and $11 for the three- and nine-month periods, respectively.
In October 1997, U S WEST announced its intention to split Media Group and
Communications Group into separate public companies. Concurrently, the Yellow
Pages and electronic directory businesses of Dex will be transferred from Media
Group to Communications Group. See Note B - U S WEST Split - to the U S WEST
Media Group Combined Financial Statements.
In October 1997, Media Group sold U S WEST Polska, its directory operation in
Poland. In June 1997, Media Group sold Thomson Directories, its directory
operation in the United Kingdom. These transactions have resulted in the
disposition of Media Group's wholly owned international directory operations.
See Note H - Subsequent Events - to the U S WEST Media Group Combined Financial
Statements.
<TABLE>
<CAPTION>
Operating Income
- -----------------------------------------------------------------------------------------
Pro forma
Percent Pro forma Percent
Three Months Ended September 30, 1997 1996 Change 1996 Change
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cable and broadband:
Domestic $(16) $ (5) - $(20) (20.0)
International (2) - - - -
-------- -------- --------- ---------- ----------
(18) (5) - (20) (10.0)
Wireless communications:
Domestic 107 90 18.9 90 18.9
International (3) - - - -
-------- -------- ---------- --------- ----------
104 90 15.6 90 15.6
Directory and information services:
Domestic 135 101 33.7 101 33.7
International (2) 3 - 3 -
-------- -------- ---------- --------- ----------
133 104 27.9 104 27.9
Other (see Note 1)<F1> (51) (37) 37.8 (37) 37.8
-------- -------- ---------- --------- ----------
Operating income $168 $152 10.5 $137 22.6
============================================== ======== ========== ========= ==========
<FN>
<F1>
Note 1 - Primarily includes headquarters expenses for shared services and
divisional expenses associated with international equity investments.
</FN>
</TABLE>
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions), continued
<TABLE>
<CAPTION>
Operating Income (continued)
- --------------------------------------- --------------------------- ---------- ------------- ------------
Pro forma
Percent Pro forma Percent
Nine Months Ended September 30, 1997 1996 Change 1996 Change
- --------------------------------------- ------------- ------------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Cable and broadband:
Domestic $(35) $ 3 - $(38) (7.9)
International (9) - - - -
------------- ------------- ---------- ------------- ------------
(44) 3 - (38) 15.8
Wireless communications:
Domestic 302 200 51.0 200 51.0
International (12) - - - -
------------- ------------- ---------- ------------- ------------
290 200 45.0 200 45.0
Directory and information services:
Domestic 397 326 21.8 326 21.8
International (11) (8) 37.5 (8) 37.5
------------- ------------- ---------- ------------- ------------
386 318 21.4 318 21.4
Other (see Note 1)<F1> (99) (96) 3.1 (96) 3.1
------------- ------------- ---------- ------------- ------------
Operating income $533 $425 25.4 $384 38.8
======================================= ============= ============= ========== ============= ============
<FN>
Note 1 - Primarily includes headquarters expenses for shared services and
divisional expenses associated with international equity investments.
</FN>
</TABLE>
During the three- and nine-month periods ended September 30, 1997, Media Group
operating income increased 10.5 percent and 25.4 percent, to $168 and $533,
respectively. On a pro forma basis, operating income increased 22.6 percent and
38.8 percent, for the same periods. The pro forma increases were due primarily
to growth in domestic wireless and domestic directory operations.
Media Group EBITDA more than doubled in 1997, to $469 and $1,437, for the three-
and nine-month periods ended September 30, 1997, respectively, due primarily to
the Continental Merger. On a pro forma basis, Media Group EBITDA increased 9.1
percent and 15.8 percent, for the same periods, due primarily to growth in
domestic wireless and domestic directory operations. Media Group considers
EBITDA an important indicator of the operational strength and performance of its
businesses. EBITDA, however, should not be considered an alternative to
operating or net income as an indicator of the performance of Media Group's
businesses, nor as an alternative to cash flows from operating activities as a
measure of liquidity, in each case determined in accordance with GAAP.
Cable and Broadband. On a pro forma basis, cable and broadband operating losses
decreased $2, to $18, and increased $6, to $44, for the three- and nine-month
periods ended September 30, 1997, respectively. International cable and
broadband results contributed operating losses of $2 and $9, for the three- and
nine-month periods, respectively. Consolidated results for Kabel Plus are
reflected in Media Group's results beginning in fourth-quarter of 1996.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions), continued
Domestic cable and broadband operating losses decreased $4 for the three-month
period compared with pro forma 1996. The decrease was a result of a $3 increase
in EBITDA, to $227, and a $1 decrease in depreciation and amortization expense.
An increase of $12, or 5.1 percent, in core cable EBITDA was partially offset by
increased costs of $9, primarily related to the deployment of high-speed data
services and change in brand name to "MediaOne". The core cable EBITDA increase
is primarily a result of increased revenues, partially offset by higher
programming fees resulting from rate increases and subscriber growth. Increased
personnel costs related to customer service initiatives also offset the growth
in EBITDA.
During the nine-month period, domestic cable and broadband operating losses
decreased $3, to $35, compared with pro forma 1996. The decrease was a result of
a $15 increase in EBITDA, to $687, offset by a $12 increase in depreciation and
amortization expense. Increases of $42, or 6.1 percent, in core cable EBITDA and
$5 in DBS service EBITDA were partially offset by increased costs of $32.
Deployment of high-speed data services and the brand name change contributed to
cost increases. Core cable EBITDA growth is primarily a result of increased
revenues, partially offset by higher programming fees resulting from rate
increases and subscriber growth. Increased personnel costs related to customer
service initiatives also offset the growth in EBITDA. Media Group expects to
incur additional costs related to the brand name change during the remainder of
1997, as well as for the deployment of high-speed data.
Wireless Communications. Domestic wireless communications operating income
increased 18.9 percent, to $107, and 51.0 percent, to $302, for the three- and
nine-month periods, respectively. These increases are a result of revenue
increases associated with 32.1 percent subscriber growth, combined with
efficiency gains. These increases were somewhat offset by decreased revenue per
subscriber, caused primarily by promotional pricing to retain subscribers and
remain competitive with other wireless service providers. On a per subscriber
basis, the 1997 decline in revenue of 10.2 percent has been more than offset by
a 19.8 percent decrease in the costs to acquire and support customers. During
third-quarter 1997, marketing and related costs to launch digital services in
three markets combined with the promotional pricing contributed to slowing
growth in operating income and EBITDA. Domestic cellular EBITDA increased 20.5
percent, to $153, and 41.7 percent, to $435, for the three- and nine-month
periods, respectively. Efficiencies have contributed to an increase in 1997
domestic cellular EBITDA margins to 46.2 percent and 45.3 percent for the three-
and nine-month periods, respectively, compared with 44.4 percent and 38.8
percent in 1996. Media Group believes that increasing competition in Media Group
wireless markets, including new market entrants offering PCS technology, will
contribute to continued decreases in revenue per subscriber and slowing
subscriber growth.
Domestic cellular depreciation increased 18.9 percent, to $44, and 22.4 percent,
to $131, respectively, for the three- and nine-month periods. These increases
are largely a result of network upgrades.
<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 wireless communications operating losses of $3 and $12 for the
three- and nine-month periods, respectively, reflect the fourth-quarter 1996
consolidation of Russian Telecommunications Development Corporation, ("RTDC"), a
Russian venture, which holds wireless investments.
Directory and Information Services. During the three- and nine-month periods
ended September 30, 1997, operating income related to domestic Yellow Pages
directory advertising increased 9.0 percent, to $145, and 6.8 percent, to $422,
respectively, excluding the one-time effect of a third-quarter 1996 charge of
$25 to reorganize and reduce headcount. Revenue increases and cost savings
associated with headcount reductions (primarily in the nine-month period) were
partially offset by increased printing, paper and sales support costs. These
cost increases were associated with an increase in the volume and complexity of
advertisements sold.
Operating losses associated with ongoing product development activities, which
include development costs for internet content services, are included in
domestic directory and information services operating income. For the
three-month period, the operating losses increased $3, to $10, partially a
result of developing internet content services in 1997. For the nine-month
period operating losses decreased $18, to $25, primarily the result of
discontinuing various product development activities in 1996.
EBITDA related to domestic Yellow Pages directory advertising service increased
10.2 percent, to $151, and 9.6 percent, to $446, for the three- and nine-month
periods, respectively, excluding the one-time effect of the third-quarter 1996
charge of $25 to reorganize and reduce headcount. The EBITDA margin for both the
three- and nine-month periods ended September 30, 1997 was 51 percent compared
to 50 percent for the same periods in 1996, on a comparable basis.
Other. During the three- and nine-month periods, other operating losses
increased $14, to $51, and $3, to $99, respectively. The increases were due
primarily to a third-quarter 1997 charge of $30 for management changes and
moving costs related to the MediaOne, Inc. move from Boston to Denver. This
charge was partially offset by savings associated with lower international staff
levels in 1997, combined with a third-quarter 1996 charge of $10 related to the
staff reductions.
<TABLE>
<CAPTION>
Interest Expense and Other
- ----------------------------------------------------------------------------------------------------------
Pro forma
Percent Pro forma Percent
Three Months Ended September 30, 1997 1996 Change 1996 Change
- ------------------------------------------- --------- ----------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Interest expense $ 179 $ 30 - $176 1.7
Equity losses in unconsolidated ventures 177 81 - 94 88.3
Gains on sales of investments 13 - - - -
Guaranteed minority interest expense 22 12 83.3 12 83.3
Other income (expense) - net (5) 10 - 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
Interest Expense and Other (continued)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Pro forma
Percent Pro forma Percent
Nine Months Ended September 30, 1997 1996 Change 1996 Change
- ------------------------------------------ --------- --------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Interest expense $ 520 $ 80 - $516 0.8
Equity losses in unconsolidated ventures 495 224 - 260 90.4
Gains on sales of investments 108 - - - -
Guaranteed minority interest expense 66 36 83.3 36 83.3
Other expense - net 14 24 (41.7) 32 (56.3)
- ------------------------------------------ --------- --------- ---------- ----------- ----------
</TABLE>
Interest expense increased $149 and $440 during the three- and nine-month
periods, respectively, 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 Continental Merger consideration.
Equity losses increased $96 and $271 for the three- and nine-month periods,
respectively, predominantly due to greater losses generated from international
ventures and the domestic investment in PrimeCo Personal Communications L.P.
("PrimeCo"). PrimeCo launched service in November 1996, and losses associated
with this venture have increased as a result of start-up and other costs.
The increase in international equity losses primarily relates to foreign
exchange transaction losses at the Malaysian and Indonesian operations, and
amortization of license fees related to a wireless investment in India. In
addition, costs associated with the significant increase in customers and
network coverage at One 2 One contributed to the increase in losses during the
nine-month period. Fluctuations in foreign exchange rates could impact future
equity losses.
During the third quarter of 1997, Media Group sold 1,840,000 million shares of
Teleport Communications Group for a pretax gain of $13. Also during the
nine-month period, Media Group sold its shares of Time Warner, Inc. and its 5
percent interest in a wireless venture in France. These transactions resulted in
pretax gains totaling $108.
Guaranteed minority interest expense increased $10 and $30 for the three- and
nine-month periods, respectively. The increases were a result of the October
1996 issuance of Company-obligated mandatorily redeemable preferred securities
of subsidiary trust holding solely Company-guaranteed debentures ("Preferred
Securities") totaling $480.
Other income decreased $15, to a loss of $5, and other expense decreased $10, to
$14, during the three- and nine-month periods, respectively. The three-month
period decrease is due partially to foreign exchange transaction losses. The
nine-month period decrease is due primarily to a second-quarter 1996 pretax
charge of $31 associated with the sale of Media Group's cable television
interests in Norway, Sweden and Hungary, partially offset by the increased
foreign exchange transaction losses in 1997.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions, except per share amounts), continued
<TABLE>
<CAPTION>
Income Tax Provision (Benefit)
- -----------------------------------------------------------------------------------------------
Pro forma Pro forma
Three Months Ended September 30, 1997 1996 (Decrease) 1996 Increase
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income tax provision (benefit) $ (61) $ 21 $ (82) $ (28) $ 33
- ----------------------------------- --------- --------- ------------- ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------- ------------------- ------------- ------------ ------------
Pro forma Pro forma
Nine Months Ended September 30, 1997 1996 (Decrease) 1996 (Decrease)
- ----------------------------------- --------- --------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Income tax provision (benefit) $ (107) $ 51 $ (158) $(121) $ (14)
Effective tax rate 23.6% 83.6% - 26.3% -
- ----------------------------------- --------- --------- ------------- ------------ ------------
</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)
Media Group net income decreased to a loss of $144 ($0.26 per share) for the
three-month period, and to $347 ($0.64 per share) for the nine-month period.
Excluding the after tax effects of the gains on sales of investments totaling $7
($0.01 per share) during the three-month period, and $63 ($0.10 per share)
during the nine-month period, Media Group net income decreased $169 and $420 for
the three- and nine-month periods, respectively. The Continental Merger
contributed approximately $118 of the decrease during the three-month period,
and $301 during the nine-month period. The Continental Merger resulted in
significant increases in interest and depreciation and amortization charges. The
remaining decrease in net income is primarily due to greater losses from
unconsolidated ventures, partially offset by increased earnings from domestic
cellular and directories operations.
During third-quarter 1997, Media Group incurred an extraordinary loss of $3 (net
of income tax benefits of $2) related to the early extinguishment of debt. See
Note E - Debt Extinguishment - to the U S WEST Media Group Combined Financial
Statements. During second-quarter 1997, Media Group incurred an extraordinary
gain of $3 (net of income tax expenses of $2) also related to the early
extinguishment of debt.
Liquidity and Capital Resources
Operating Activities
Cash provided by operating activities of the Media Group increased $469 in the
first nine months of 1997, compared with 1996. The Continental Merger and growth
in operations from the domestic cellular and directories businesses contributed
to the increase. Also contributing were decreased tax payments during 1997.
Partially offsetting the increase were higher financing costs resulting from
greater debt levels associated with the Continental Merger.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions), continued
Investing Activities
Media Group capital expenditures were $1,087 for the first nine months of 1997.
The majority of expenditures in 1997 were devoted to upgrading the domestic
cable network and expanding the domestic cellular network. Media Group also
invested $315 in international ventures during 1997, primarily for an additional
40 percent interest in Fintelco, and 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 Continental Merger
consideration.
During the first nine months of 1997, Media Group received proceeds totaling
$945 related to asset sales as follows: (a) $246 from the sale of 7,915,000
shares of Teleport Communications Group stock, (b) $242 from asset sales and
other proceeds from the capital assets segment, which is held for sale, (c) $220
from the sale of Time Warner, Inc. shares acquired in the Continental Merger,
(d) $121 from the sale of Thomson Directories, (e) $81 from the sale of Media
Group's 5 percent interest in a wireless venture in France, and (f) $35 from
other miscellaneous sales.
On October 27, 1997, Media Group sold its 90 percent interest in Fintelco for
proceeds of approximately $640. Also in October 1997, Media Group sold U S WEST
Polska, its wholly owned directory operation in Poland, for proceeds of
approximately $30. In November 1997, Media Group sold its remaining interest in
TCG for net proceeds of $433.
Financing Activities
On October 27, 1997, the Company announced its intention to split Communications
Group and Media Group into separate public companies. Under the terms of the
proposed transaction, new U S WEST will include the telephone, data and wireless
operations of Communications Group, as well as the Yellow Pages and electronic
directory businesses of Dex. Dex is currently part of Media Group and will be
transferred to Communications Group as part of the proposed transaction.
MediaOne Group will include the cable/broadband, wireless, and domestic and
international investments of Media Group.
Under the terms of the Dex Transfer, Media Group shareowners will receive shares
of new U S WEST common stock for each share of Media Group common stock, which
represents their interest in Dex, totaling approximately $850. Also, Media Group
debt will be reduced and Communications Group debt will be increased by $3.9
billion.
The transaction is subject to a number of approvals, including approvals by
regulators and both shareowner groups, and receipt of a favorable ruling from
the Internal Revenue Service. The split is expected to be complete in the second
half of 1998.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions), continued
As a result of the proposed split announcement, credit ratings for U S WEST
Capital Funding, Inc. and for Preferred Securities are under review by Standard
& Poor's (with negative implications), Moody's, and Duff & Phelps. Senior debt
at MediaOne, Inc. (formerly Continental) was downgraded by Moody's from Baa2 to
Baa3 and subordinated debt from Baa3 to Ba1, and is under review by Standard &
Poor's, with negative implications. The MediaOne, Inc. debt remains under review
for further downgrading by Moody's. For all outstanding debt securities issued
or guaranteed by U S WEST, Inc., the Company intends to take appropriate steps
to preserve bondholder value.
Media Group debt at September 30, 1997 was $9,958, an increase of $1,105
compared with December 31, 1996. In 1997, Media Group incurred additional debt
to finance the cash portion of the Continental 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.
During August 1997, U S WEST redeemed its Liquid Yield Option Notes. The
convertible zero coupon subordinated notes had a recorded value of $268
attributed to Media Group. During the second quarter of 1997, MediaOne, Inc.
redeemed a 10 5/8 percent senior subordinated note with a recorded value of
$110, including a premium of $10. U S WEST financed the redemptions with
floating rate commercial paper.
During second quarter of 1997, Media Group acquired cable systems serving 40,000
subscribers in the state of Michigan for cash of $25 and approximately $50 of
Series E Convertible Preferred Stock (the "Preferred Stock") issued by U S WEST.
The Preferred Stock is redeemable at U S WEST's option starting five years from
the acquisition date, or upon dissolution of Media Group. The stockholders have
the right to elect cash upon redemption, or to convert their Preferred Stock
into Media Group common stock based on a predetermined formula.
Excluding debt associated with the capital assets segment, the Media Group's
percentage of debt to total capital at September 30, 1997, was 54.1 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 was 61.4
percent at September 30, 1997, compared with 57.8 percent at December 31, 1996.
The percentage of debt to total capital has increased as a result of higher debt
associated with the Continental Merger.
Due to the significant capital requirements associated with the domestic cable
upgrade, 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 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 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 $410 and $409 at September 30,
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 Media Group with those of the
consolidated operations of Media Group.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Pro forma Percent
Nine Months Ended September 30, 1997 1996 (1) Change
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Cable and broadband:
Domestic (2) $3,808 $3,571 6.6
International 365 256 42.6
Wireless communications:
Domestic 1,009 787 28.2
International 522 298 75.2
Directory and information services:
Domestic 881 826 6.7
International 91 131 (30.5)
Corporate and other 12 9 33.3
--------------- --------- -----------
Total revenues $6,688 $5,878 13.8
======================================= =============== ========= ===========
EBITDA (3)
Cable and broadband:
Domestic (2) $1,196 $1,116 7.2
International 38 (13) -
Wireless communications:
Domestic 330 253 30.4
International 20 1 -
Directory and information services:
Domestic 419 349 20.1
International 1 5 (80.0)
Corporate and other (60) (30) -
--------------- --------- -----------
Total EBITDA $1,944 $1,681 15.6
======================================= =============== ========= ===========
</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>
- --------------------------------------- ---------- -------------- -------------
Pro forma Percent
Nine Months Ended September 30, 1997 1996 (1) Change
- --------------------------------------- ---------- -------------- -------------
<S> <C> <C> <C>
Operating Income
Cable and broadband:
Domestic (2) $ 172 $ 131 31.3
International (117) (106) 10.4
Wireless communications:
Domestic 183 154 18.8
International (122) (63) 93.7
Directory and information services:
Domestic 386 327 18.0
International (8) (7) 14.3
Corporate and other (68) (37) 83.8
---------- -------------- ------------
Total operating income $ 426 $ 399 6.8
==============================================================================
Net Income (Loss)
Cable and broadband:
Domestic (2) $ (344) $ (375) (8.3)
International (198) (157) 26.1
Wireless communications:
Domestic 76 88 (13.6)
International (108) (70) 54.3
Directory and information services:
Domestic 229 193 18.7
International (9) (9) -
Corporate and other 7 (9) -
---------- -------------- ------------
Total net loss $(347) $(339) 2.4
==============================================================================
</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
<TABLE>
<CAPTION>
Selected Proportionate Data, continued
- ------------------------------------- --------- ------------- -------------
Nine Months Ended September 30, Pro forma Percent
(in thousands) 1997 1996 (1) Change
- ------------------------------------- --------- ------------- -------------
<S> <C> <C> <C>
Subscribers/advertisers:
Cable and broadband:
Domestic (2) 7,696 7,462 3.1
International 1,483 961 54.3
Wireless communications:
Domestic 2,263 1,664 36.0
International 871 419 107.9
Directory and information services:
Domestic 481 482 (0.2)
International 42 264 (84.1)
--------- ----------- -----------
Total subscribers/advertisers 12,836 11,252 14.1
===================================== ========= =========== ===========
<FN>
(1) 1996 pro forma proportionate results reflect the following for the nine
months: (i) Media Group historical proportionate results; (ii) the
Continental Merger; (iii) Continental's acquisition of the remaining
interest in Meredith/New Heritage; (iv) the reclassification of the Teleport
Communications Group investment to equity method; and (v) Continental's
cable investments in Argentina and Singapore.
(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) 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>
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions), continued
Proportionate Results of Operations - Nine Months Ended September 30, 1997
Compared with Pro Forma 1996
For the first nine months of 1997, proportionate Media Group revenues increased
13.8 percent, to $6.7 billion, EBITDA increased 15.6 percent, to $1.9 billion,
and subscribers/advertisers increased 14.1 percent, to $12.8 million. Strong
growth in domestic and international wireless and cable and broadband operations
contributed to the increase in proportionate revenue and growth in subscribers.
Strong growth in domestic wireless and cable contributed to the increase in
proportionate EBITDA.
Cable and Broadband. During the first nine months of 1997, proportionate
revenues for the domestic cable and broadband operations increased 6.6 percent,
to $3.8 billion. This is a result of increases in subscribers and revenue per
subscriber mainly due to price increases. Proportionate EBITDA increased 7.2
percent, to $1.2 billion. Proportionate EBITDA related to the domestic cable and
broadband operations of MediaOne, increased 2.2 percent to $687, primarily as a
result of higher revenues, partially offset by higher programming fees,
increased personnel costs related to customer service initiatives, costs
associated with deployment of high speed data services, and to change the
domestic cable brand name to "MediaOne". Proportionate EBITDA related to TWE
operations increased 14.6 percent to $509. TWE's results benefited from improved
cable and programming operations and gains realized by asset sales.
During the first nine months of 1997, international cable and broadband
proportionate revenues increased 42.6 percent, to $365, and proportionate EBITDA
increased $51, to $38. Customer growth at Telewest Communications, Inc.
("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 improved operations at Telewest and Malaysia contributed
to the increase in proportionate EBITDA.
Proportionate international cable subscribers totaled approximately 1.5 million
at September 30, 1997, a 9 percent increase, on a comparable basis. Telewest's
cable television subscribers increased 27 percent compared with last year.
Wireless Communications. During the first nine months of 1997, domestic wireless
proportionate revenues increased 28.2 percent, to $1.0 billion, and
proportionate EBITDA increased 30.4 percent, to $330. Excluding revenue and
losses generated by the start-up of PrimeCo, domestic cellular proportionate
revenue increased 24.3 percent and proportionate EBITDA increased 41.8 percent.
The increase in proportionate revenue is a result of revenue increases
associated with strong domestic cellular subscriber growth. The increase in
proportionate EBITDA is a result of revenue increases combined with efficiency
gains.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Result
of Operations (Dollars in millions), continued
During the first nine months of 1997, proportionate revenues for the
international wireless operations increased 75.2 percent, to $522, and
proportionate EBITDA increased $19 to $20. The increase in proportionate revenue
and EBITDA is the result of the international wireless subscriber base more than
doubling to 871,000. The digital wireless operations in Hungary, Czech Republic,
Slovakia, Malaysia and Poland contributed significantly to the increase. The
personal communications services venture in the United Kingdom, One 2 One, added
174,000 proportionate customers, a 76 percent increase, from a year ago.
Directory and Information Services. Proportionate revenues for domestic
directory and information services increased 6.7 percent, to $881, and
proportionate EBITDA increased 20.1 percent, to $419. The increases are due to
price and volume increases, reduction in new product development activities and
employee reductions.
Media Group sold its wholly owned international directory operations in the
United Kingdom and Poland on June 4, 1997, and October 1, 1997, respectively.
These two operations comprise the majority of proportionate international
directories results.
<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
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.
27 Financial Data Schedule
(b) Reports on Form 8-K filed during the Third Quarter of 1997
(i) Form 8-K report dated July 25, 1997 concerning the releases of
earnings issued on July 25, 1997 by U S WEST Communications Group
and on July 29, 1997 by U S WEST Media Group, for the second
quarter ended June 30, 1997.
(ii) Form 8-K report dated August 7, 1997 concerning the press release
issued August 7, 1997 entitled "Jan Peters Named MediaOne CEO;
Corporate Offices Moving to Denver."
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
/S/ Michael P. Glinsky
November 13, 1997 U S WEST, Inc.
Michael P. Glinsky
Executive Vice President and
Chief Financial Officer
<PAGE>
EXHIBIT 11
U S WEST COMMUNICATIONS GROUP
Computation of Earnings Per Common Share
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1997 1996
EARNINGS PER COMMON SHARE --------- ----------
<S> <C> <C>
Income before extraordinary item $ 338,550 $ 285,730
Extraordinary item:
Early extinguishment of debt - net of tax (3,238) -
---------- ----------
Net income for per share calculation $ 335,312 $ 285,730
========== ==========
Weighted average common shares outstanding 483,218 478,356
========== ==========
Income before extraordinary item $ 0.70 $ 0.60
Extraordinary item:
Early extinguishment of debt - net of tax (0.01) -
---------- ----------
Earnings per common share $ 0.69 $ 0.60
========== ==========
</TABLE>
<PAGE>
EXHIBIT 11
U S WEST COMMUNICATIONS GROUP
Computation of Earnings Per Common Share
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1997 1996
EARNINGS PER COMMON SHARE --------- ----------
<S> <C> <C>
Income before extraordinary item and cumulative
effect of change in accounting principle $1,010,155 $ 903,983
Extraordinary item:
Early extinguishment of debt - net of tax (3,238) -
Cumulative effect of change in
accounting principle - net of tax - 34,158
---------- ----------
Net income for per share calculation $1,006,917 $ 938,141
========== ==========
Weighted average common shares outstanding 482,374 476,744
========== ==========
Income before extraordinary item and cumulative
effect of change in accounting principle $ 2.09 $ 1.90
Extraordinary item:
Early extinguishment of debt - net of tax (0.01) -
Cumulative effect of change in
accounting principle - net of tax - 0.07
---------- ----------
Earnings per common share $ 2.08 $ 1.97
========== ==========
</TABLE>
<PAGE>
EXHIBIT 11
U S WEST COMMUNICATIONS GROUP
Computation of Earnings Per Common Share
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
EARNINGS PER COMMON AND COMMON 1997 1996
EQUIVALENT SHARE: --------- ----------
<S> <C> <C>
Income before extraordinary item $ 338,550 $ 285,730
Extraordinary item:
Early extinguishment of debt - net of tax (3,238) -
---------- ----------
Net income for per share calculation $ 335,312 $ 285,730
========== ==========
Weighted average common shares outstanding 483,218 478,356
Incremental shares from assumed
exercise of stock options 2,474 1,320
---------- ----------
Total common shares 485,692 479,676
========== ==========
Income before extraordinary item $ 0.70 $ 0.60
Extraordinary item:
Early extinguishment of debt - net of tax (0.01) -
---------- ----------
Earnings per common and common $ 0.69 $ 0.60
equivalent share ========== ==========
</TABLE>
<PAGE>
EXHIBIT 11
U S WEST COMMUNICATIONS GROUP
Computation of Earnings Per Common Share
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
EARNINGS PER COMMON AND COMMON 1997 1996
EQUIVALENT SHARE: --------- ----------
<S> <C> <C>
Income before extraordinary item and cumulative
effect of change in accounting principle $1,010,155 $ 903,983
Extraordinary item:
Early extinguishment of debt - net of tax (3,238) -
Cumulative effect of change in
accounting principle - net of tax - 34,158
---------- ----------
Net income for per share calculation $1,006,917 $ 938,141
========== ==========
Weighted average common shares outstanding 482,374 476,744
Incremental shares from assumed
exercise of stock options 2,006 1,615
---------- ----------
Total common shares 484,380 478,359
========== ==========
Income before extraordinary item and cumulative
effect of change in accounting principle $ 2.09 $ 1.89
Extraordinary item:
Early extinguishment of debt - net of tax (0.01) -
Cumulative effect of change in
accounting principle - net of tax - 0.07
---------- ----------
Earnings per common and common $ 2.08 $ 1.96
equivalent share ========== ==========
</TABLE>
<PAGE>
EXHIBIT 11
U S WEST COMMUNICATIONS GROUP
Computation of Earnings Per Common Share
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
EARNINGS PER COMMON SHARE - ASSUMING 1997 1996
FULL DILUTION: --------- ----------
<S> <C> <C>
Income before extraordinary item $ 338,550 $ 285,730
Interest on Convertible Liquid Yield
Option Notes (LYONS) 2,308 3,202
---------- ----------
Adjusted income before extraordinary item 340,858 288,932
Extraordinary item:
Early extinguishment of debt - net of tax (3,238) -
---------- ----------
Adjusted net income for per share calculation $ 337,620 $ 288,932
========== ==========
Weighted average common shares outstanding 483,218 478,356
Incremental shares from assumed
exercise of stock options 2,744 1,320
Shares issued upon conversion of LYONS 5,715 9,386
---------- ----------
Total common shares 491,677 489,062
========== ==========
Adjusted income before extraordinary item $ 0.69 $ 0.59
Extraordinary item:
Early extinguishment of debt - net of tax (0.01) -
---------- ----------
Earnings per common share -
assuming full dilution $ 0.68 $ 0.59
========== ==========
</TABLE>
<PAGE>
EXHIBIT 11
U S WEST COMMUNICATIONS GROUP
Computation of Earnings Per Common Share
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
EARNINGS PER COMMON SHARE - ASSUMING 1997 1996
FULL DILUTION: --------- ----------
<S> <C> <C>
Income before extraordinary item $1,010,155 $ 903,983
Interest on Convertible Liquid Yield
Option Notes (LYONS) 8,954 9,501
---------- ----------
Adjusted income before extraordinary item
and cumulative effect of change in
accounting principle 1,019,109 913,484
Extraordinary item:
Early extinguishment of debt - net of tax (3,238) -
Cumulative effect of change in
accounting principle - net of tax - 34,158
---------- ----------
Adjusted net income for per share calculation $1,015,871 $ 947,642
========== ==========
Weighted average common shares outstanding 482,374 476,744
Incremental shares from assumed
exercise of stock options 2,580 1,615
Shares issued upon conversion of LYONS 8,149 9,633
---------- ----------
Total common shares 493,103 487,992
========== ==========
Adjusted income before extraordinary item
and cumulative effect of change in
accounting principle $ 2.07 $ 1.87
Extraordinary item:
Early extinguishment of debt - net of tax (0.01) -
Cumulative effect of change in
accounting principle - net of tax - 0.07
---------- ----------
Earnings per common share -
assuming full dilution $ 2.06 $ 1.94
========== ==========
</TABLE>
<PAGE>
EXHIBIT 11
U S WEST MEDIA GROUP
Computation of Earnings Per Common Share
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1997 1996
EARNINGS (LOSS) PER COMMON SHARE ---------- ----------
<S> <C> <C>
Income (loss) before extraordinary item $ (141,422) $ 18,531
Extraordinary item:
Early extinguishment of debt - net of tax (2,872) -
---------- ----------
Net income (loss) (144,294) 18,531
Less preferred dividends 13,440 854
---------- ----------
Earnings (loss) available for common
share calculation $ (157,734)$ 17,677
========== ==========
Weighted average common shares outstanding 606,729 473,902
========== ==========
Earnings (loss) per common share $ (0.26)$ 0.04
========== ==========
<CAPTION>
Nine Months Ended
September 30,
1997 1996
EARNINGS (LOSS) PER COMMON SHARE --------- ----------
<S> <C> <C>
Net income (loss) $ (347,595) $ 10,456
Less preferred dividends 38,785 2,563
---------- ----------
Earnings (loss) available for common
share calculation $ (386,380) $ 7,893
========== ==========
Weighted average common shares outstanding 606,568 473,501
========== ==========
Earnings (loss) per common share $ (0.64) $ 0.01
========== ==========
</TABLE>
<PAGE>
EXHIBIT 11
U S WEST MEDIA GROUP
Computation of Earnings Per Common Share
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
EARNINGS (LOSS) PER COMMON AND COMMON 1997 1996
EQUIVALENT SHARE: (1) --------- ----------
<S> <C> <C>
Income (loss) before extraordinary item $ (141,422) $ 18,531
Extraordinary item:
Early extinguishment of debt - net of tax (2,872) -
---------- ----------
Net income (loss) (144,294) 18,531
Less preferred dividends 13,440 854
---------- ----------
Earnings (loss) available for common
share calculation $ (157,734) $ 17,677
========== ==========
Weighted average common shares outstanding 606,729 473,902
Incremental shares from assumed
exercise of stock options - 923
---------- ----------
Total common shares 606,729 474,825
========== ==========
Earnings (loss) per common and common
equivalent share $ (0.26) $ 0.04
========== ==========
<FN>
<F1>
(1) The effects of converting stock options are excluded from the 1997 earnings
per common share calculation due to their anti-dilutive effect.
</FN>
</TABLE>
<PAGE>
EXHIBIT 11
U S WEST MEDIA GROUP
Computation of Earnings Per Common Share
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
EARNINGS (LOSS) PER COMMON AND COMMON 1997 1996
EQUIVALENT SHARE: (1) --------- ----------
<S> <C> <C>
Net income (loss) $ (347,595) $ 10,456
Less preferred dividends 38,785 2,563
---------- ----------
Earnings (loss) available for common
share calculation $ (386,380) $ 7,893
========== ==========
Weighted average common shares outstanding 606,568 473,501
Incremental shares from assumed
exercise of stock options - 1,192
---------- ----------
Total common shares 606,568 474,693
========== ==========
Earnings (loss) per common and common
equivalent share $ (0.64) $ 0.01
========== ==========
<FN>
<F1>
(1) The effects of converting stock options are excluded from the 1997 earnings
per common share calculation due to their anti-dilutive effect.
</FN>
</TABLE>
<PAGE>
EXHIBIT 11
U S WEST MEDIA GROUP
Computation of Earnings Per Common Share
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
EARNINGS (LOSS) PER COMMON SHARE - ASSUMING 1997 1996
FULL DILUTION: (1) (2) --------- ----------
<S> <C> <C>
Income (loss) before extraordinary item $ (141,422) $ 18,531
Extraordinary item:
Early extinguishment of debt - net of tax (2,872) -
---------- ----------
Net income (loss) (144,294) 18,531
Less preferred dividends 13,440 854
---------- ----------
Earnings (loss) available for common
share calculation $ (157,734) $ 17,677
========== ==========
Weighted average common shares outstanding 606,729 473,902
Incremental shares from assumed
exercise of stock options - 923
---------- ----------
Total common shares 606,729 474,825
========== ==========
Earnings (loss) per common share - assuming
full dilution $ (0.26) $ 0.04
========== ==========
<FN>
<F1>
(1) The effects of converting the Liquid Yield Option Notes
(LYONS) are excluded from the 1997 and 1996 fully diluted earnings
per common share calculations due to their anti-dilutive effect.
<F2>
(2) The effects of converting stock options are excluded from the
1997 fully diluted earnings per common share calculation due
to their anti-dilutive effect.
</FN>
</TABLE>
<PAGE>
EXHIBIT 11
U S WEST MEDIA GROUP
Computation of Earnings Per Common Share
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
EARNINGS (LOSS) PER COMMON SHARE - ASSUMING 1997 1996
FULL DILUTION: (1) (2) --------- ----------
<S> <C> <C>
Net income (loss) $ (347,595) $ 10,456
Less preferred dividends 38,785 2,563
---------- ----------
Earnings (loss) available for common
share calculation $ (386,380)$ 7,893
========== ==========
Weighted average common shares outstanding 606,568 473,501
Incremental shares from assumed
exercise of stock options - 1,191
---------- ----------
Total common shares 606,568 474,692
========== ==========
Earnings (loss) per common share - assuming
full dilution $ (0.64)$ 0.01
========== ==========
<FN>
<F1>
(1) The effects of converting the Liquid Yield Option Notes (LYONS) are
excluded from the 1997 and 1996 fully diluted earnings per common share
calculations due to their anti-dilutive effect.
<F2>
(2) The effects of converting stock options are excluded from the
1997 fully diluted earnings per common share calculation due
to their anti-dilutive effect.
</FN>
</TABLE>
EXHIBIT 12 U S WEST, Inc.
RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Millions)
<TABLE>
<CAPTION>
Quarter Ended
9/30/97 9/30/96
- ------------------------------------------ -------- --------
<S> <C> <C>
Income before income taxes and
extraordinary item $ 333 $ 494
Interest expense (net of amounts
capitalized) 279 140
Interest factor on rentals (1/3) 26 22
Equity losses in unconsolidated
ventures (less than 50% owned) 132 41
Guaranteed minority interest expense 22 12
-------- --------
Earnings $ 792 $ 709
Interest expense $ 285 $ 156
Interest factor on rentals (1/3) 26 22
Guaranteed minority interest expense 22 12
-------- --------
Fixed charges $ 333 $ 190
Ratio of earnings to fixed charges 2.38 3.73
- ------------------------------------------ -------- --------
</TABLE>
<PAGE>
EXHIBIT 12 U S WEST, Inc.
RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Millions)
<TABLE>
<CAPTION>
Year-to-Date
9/30/97 9/30/96
- ------------------------------------------ -------- --------
<S> <C> <C>
Income before income taxes, extra-
ordinary item and cumulative effect
of change in accounting principle $ 1,148 $ 1,502
Interest expense (net of amounts
capitalized) 823 411
Interest factor on rentals (1/3) 75 69
Equity losses in unconsolidated
ventures (less than 50% owned) 349 111
Guaranteed minority interest expense 66 36
-------- --------
Earnings $ 2,461 $ 2,129
Interest expense $ 848 $ 471
Interest factor on rentals (1/3) 75 69
Guaranteed minority interest expense 66 36
-------- --------
Fixed charges $ 989 $ 576
Ratio of earnings to fixed charges 2.49 3.70
- ------------------------------------------ -------- --------
</TABLE>
<PAGE>
EXHIBIT 12 U S WEST, Inc.
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS
(Dollars in Millions)
<TABLE>
<CAPTION>
Quarter Ended
9/30/97 9/30/96
- ------------------------------------------ -------- --------
<S> <C> <C>
Income before income taxes and
extraordinary item $ 333 $ 494
Interest expense (net of amounts
capitalized) 279 140
Interest factor on rentals (1/3) 26 22
Equity losses in unconsolidated
ventures (less than 50% owned) 132 41
Guaranteed minority interest expense 22 12
-------- --------
Earnings $ 792 $ 709
Interest expense $ 285 $ 156
Interest factor on rentals (1/3) 26 22
Guaranteed minority interest expense 22 12
Preferred stock dividends (pre-tax
equivalent) 23 1
-------- --------
Fixed charges $ 356 $ 191
Ratio of earnings to combined fixed
charges and preferred stock dividends 2.22 3.71
- ------------------------------------------ -------- --------
</TABLE>
<PAGE>
EXHIBIT 12 U S WEST, Inc.
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS
(Dollars in Millions)
<TABLE>
<CAPTION>
Year-to-Date
9/30/97 9/30/96
- ------------------------------------------ -------- --------
<S> <C> <C>
Income before income taxes, extra-
ordinary item and cumulative effect
of change in accounting principle $ 1,148 $ 1,502
Interest expense (net of amounts
capitalized) 823 411
Interest factor on rentals (1/3) 75 69
Equity losses in unconsolidated
ventures (less than 50% owned) 349 111
Guaranteed minority interest expense 66 36
-------- --------
Earnings $ 2,461 $ 2,129
Interest expense $ 848 $ 471
Interest factor on rentals (1/3) 75 69
Guaranteed minority interest expense 66 36
Preferred stock dividends (pre-tax
equivalent) 67 4
-------- --------
Fixed charges $ 1,056 $ 580
Ratio of earnings to combined fixed
charges and preferred stock dividends 2.33 3.67
- ------------------------------------------ -------- --------
</TABLE>
<PAGE>
EXHIBIT 12 U S WEST Financial Services, Inc.
RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Thousands)
<TABLE>
<CAPTION>
Quarter Ended
9/30/97 9/30/96
- ------------------------------------------ -------- --------
<S> <C> <C>
Income before income taxes $ 147 $ 9,368
Interest expense 5,739 5,447
Interest factor on rentals (1/3) 9 13
-------- --------
Earnings $ 5,895 $ 14,828
Interest expense $ 5,739 $ 5,447
Interest factor on rentals (1/3) 9 13
-------- --------
Fixed charges $ 5,748 $ 5,460
Ratio of earnings to fixed charges 1.03 2.72
- ------------------------------------------ -------- --------
<CAPTION>
Year-to-Date
9/30/97 9/30/96
- ------------------------------------------ -------- --------
<S> <C> <C>
Income before income taxes $ 9,609 $ 18,091
Interest expense 16,679 16,158
Interest factor on rentals (1/3) 52 44
-------- --------
Earnings $ 26,340 $ 34,293
Interest expense $ 16,679 $ 16,158
Interest factor on rentals (1/3) 52 44
-------- --------
Fixed charges $ 16,731 $ 16,202
Ratio of earnings to fixed charges 1.57 2.12
- ------------------------------------------ -------- --------
</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> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997
<CASH> 259 259
<SECURITIES> 0 0
<RECEIVABLES> 2,107 2,107
<ALLOWANCES> 0 0
<INVENTORY> 216 216
<CURRENT-ASSETS> 3,133 3,133
<PP&E> 39,149 39,149
<DEPRECIATION> 20,600 20,600
<TOTAL-ASSETS> 40,554 40,554
<CURRENT-LIABILITIES> 6,565 6,565
<BONDS> 13,422 13,422
1,180 1,180
921 921
<COMMON> 10,800 10,800
<OTHER-SE> (199) (199)
<TOTAL-LIABILITY-AND-EQUITY> 40,554 40,554
<SALES> 3,918 11,471
<TOTAL-REVENUES> 3,918 11,471
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 3,134 9,058
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 279 823
<INCOME-PRETAX> 333 1,148
<INCOME-TAX> 135 485
<INCOME-CONTINUING> 198 663
<DISCONTINUED> 0 0
<EXTRAORDINARY> (6) (3)
<CHANGES> 0 0
<NET-INCOME> 192 660
<EPS-PRIMARY> 0.69 2.08
<EPS-DILUTED> 0.69 2.06
</TABLE>
