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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
--------------
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: 0-11258
________________________________
WorldCom, Inc.
(f/k/a MCI WORLDCOM, Inc.)
(Exact name of registrant as specified in its charter)
_______________________________
Georgia 58-1521612
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
500 Clinton Center Drive, Clinton, Mississippi 39056
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code : (601) 460-5600
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 outstanding shares of the registrant's Common Stock, par
value $.01 per share, was 2,863,057,354, net of treasury shares, on April 30,
2000.
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QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
March 31, 2000 and December 31, 1999.......................... 3
Consolidated Statements of Operations for the
three months ended March 31, 2000
and March 31, 1999............................................. 4
Consolidated Statements of Cash Flows for the
three months ended March 31, 2000 and
March 31, 1999................................................. 5
Notes to Consolidated Financial Statements..................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................. 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk..... 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 19
Item 2. Changes in Securities and Use of Proceeds...................... 19
Item 3. Defaults Upon Senior Securities................................ 19
Item 4. Submission of Matters to a Vote of Securities Holders.......... 19
Item 5. Other Information.............................................. 19
Item 6. Exhibits and Reports on Form 8-K............................... 19
Signature............................................................... 20
Exhibit Index........................................................... 21
2
WORLDCOM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited. In Millions, Except Share Data)
March 31, December 31,
2000 1999
---------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 601 $ 876
Accounts receivable, net of allowance for bad debts of $1,242 in 2000
and $1,122 in 1999 6,126 5,746
Deferred tax asset 2,569 2,565
Other current assets 1,814 1,137
--------- ----------
Total current assets 11,110 10,324
--------- ----------
Property and equipment:
Transmission equipment 16,462 14,689
Communications equipment 6,768 6,218
Furniture, fixtures and other 8,443 7,424
Construction in progress 4,981 5,397
---------- ----------
36,654 33,728
Accumulated depreciation (5,745) (5,110)
---------- ---------
30,909 28,618
---------- ---------
Goodwill and other intangible assets 47,169 47,308
Other assets 5,324 4,822
---------- ----------
$ 94,512 $ 91,072
========== ==========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current liabilities:
Short-term debt and current maturities of
long-term debt $ 6,185 $ 5,015
Accounts payable 1,985 2,557
Accrued line costs 3,765 3,721
Other current liabilities 5,719 5,916
---------- ---------
Total current liabilities 17,654 17,209
---------- ---------
Long-term liabilities, less current portion:
Long-term debt 13,514 13,128
Deferred tax liability 5,503 4,877
Other liabilities 1,109 1,223
---------- ---------
Total long-term liabilities 20,126 19,228
---------- ---------
Commitments and contingencies
Minority interests 2,882 2,599
Company obligated mandatorily redeemable preferred securities of subsidiary
trust holding solely junior subordinated deferrable interest debentures
of the Company and other redeemable preferred securities 798 798
Shareholders' investment:
Series B preferred stock, par value $.01 per share; authorized, issued and
outstanding: 10,920,972 shares in 2000 and 11,096,887 shares in 1999
(liquidation preference of $1.00 per share plus unpaid dividends) - -
Series C preferred stock, par value $.01 per share; authorized: 3,750,000
shares; issued and outstanding: none in 2000 and 3,750,000
shares in 1999 (liquidation preference of $50 per share) - -
Preferred stock, par value $.01 per share; authorized: 31,155,008 shares
in 2000 and 1999; none issued - -
Common stock, par value $.01 per share; authorized: 5,000,000,000 shares; issued
and outstanding: 2,865,703,217 shares in 2000 and 29 28
2,849,743,843 shares in 1999
Additional paid-in capital 52,340 52,108
Retained earnings (deficit) 356 (928)
Unrealized holding gain on marketable equity
securities 836 575
Cumulative foreign currency translation adjustment (324) (360)
Treasury stock, at cost, 6,765,316 shares in 2000
and 1999 (185) (185)
--------- ---------
Total shareholders' investment 53,052 51,238
--------- ---------
$ 94,512 $ 91,072
========= =========
The accompanying notes are an integral part of these statements.
3
WORLDCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited. In Millions, Except Per Share Data)
For the Three Months
Ended March 31,
---------------------------------
2000 1999
----------------------------------
Revenues $ 9,978 $ 9,122
--------- ---------
Operating expenses:
Line costs 4,092 4,137
Selling, general and administrative 2,299 2,374
Depreciation and amortization 1,147 1,101
--------- ---------
Total 7,538 7,612
--------- ---------
Operating income 2,440 1,510
Other income (expense):
Interest expense (218) (272)
Miscellaneous 111 (26)
--------- ---------
Income before income taxes and minority interests 2,333 1,212
Provision for income taxes 953 547
-------- --------
Income before minority interests 1,380 665
Minority interests (79) 65
-------- --------
Net income 1,301 730
Distributions on subsidiary trust and other mandatorily
redeemable preferred securities 16 16
Preferred dividend requirement 1 2
-------- --------
Net income applicable to common shareholders $ 1,284 $ 712
======== ========
Earnings per common share:
Net income applicable to common shareholders:
Basic $ 0.45 $ 0.25
========= =========
Diluted $ 0.44 $ 0.24
========= =========
The accompanying notes are an integral part of these statements.
4
WORLDCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited. In Millions)
For the Three Months
Ended March 31,
----------------------------------
2000 1999
----------- ---------
Cash flows from operating activities:
Net income $ 1,301 $ 730
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interests 79 (65)
Depreciation and amortization 1,147 1,101
Provision for losses on accounts receivable 269 228
Provision for deferred income taxes 626 50
Change in assets and liabilities, net of effect of
business combinations:
Accounts receivable (590) (684)
Other current assets (446) (225)
Accrued line costs (69) 96
Accounts payable and other current liabilities (426) 602
Other (97) 117
------- -------
Net cash provided by operating activities 1,794 1,950
------- -------
Cash flows from investing activities:
Capital expenditures (2,519) (1,649)
Acquisitions and related costs (7) (285)
Increase in intangible assets (110) (174)
Proceeds from disposition of marketable securities 188 79
and other long-term assets
Increase in other assets (386) (630)
Decrease in other liabilities (446) (161)
------- -------
Net cash used in investing activities (3,280) (2,820)
------- -------
Cash flows from financing activities:
Principal borrowings (repayments) on debt, net 1,162 (284)
Common stock issuance 268 448
Distributions on subsidiary trust mandatorily (16) (16)
redeemable preferred securities
Dividends paid on preferred stock (1) (2)
Redemption of Series C preferred stock (190) -
Other (17) -
------- --------
Net cash provided by financing activities 1,206 146
Effect of exchange rate changes on cash 5 (202)
------- -------
Net decrease in cash and cash equivalents (275) (926)
Cash and cash equivalents at beginning of period 876 1,727
------- -------
Cash and cash equivalents at end of period $ 601 $ 801
======= =======
The accompanying notes are an integral part of these statements.
5
WORLDCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(A) General
- -----------
References herein to the "Company" or "WorldCom" refer to WorldCom, Inc., a
Georgia corporation, and its subsidiaries. Prior to May 1, 2000, the Company
was named MCI WORLDCOM, Inc.
The financial statements included herein, are unaudited and have been prepared
in accordance with generally accepted accounting principles for interim
financial reporting and Securities and Exchange Commission ("SEC") regulations.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. In the
opinion of management, the financial statements reflect all adjustments (of a
normal and recurring nature) which are necessary to present fairly the financial
position, results of operations and cash flows for the interim periods. These
financial statements should be read in conjunction with the Annual Report of the
Company on Form 10-K for the year ended December 31, 1999 (the "Form 10-K").
The results for the three-month period ended March 31, 2000 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2000.
(B) Business Combinations
- -------------------------
On October 5, 1999, WorldCom announced that it had entered into an Agreement and
Plan of Merger dated as of October 4, 1999, which was amended and restated on
March 8, 2000 (the "Sprint Merger Agreement"), between WorldCom and Sprint
Corporation ("Sprint"). Under the terms of the Sprint Merger Agreement, Sprint
will merge with and into WorldCom (the "Sprint Merger").
Sprint is a diversified telecommunications company, providing long distance,
local and wireless communications services. Sprint's business is organized in
two groups: the Sprint PCS group and Sprint FON group. Sprint built and
operates the United States' first nationwide all-digital, fiber-optic network
and is a leader in advanced data communications services. In 1999, Sprint had
$20 billion in annual revenues and served more than 20 million business and
residential customers.
Under the Sprint Merger Agreement, each outstanding share of Sprint FON common
stock will be exchanged for $76.00 of WorldCom common stock, par value $.01 per
share ("Common Stock"), subject to a collar. In addition, each share of Sprint
PCS common stock will be exchanged for one share of a new WorldCom PCS tracking
stock and 0.116025 shares of Common Stock. The terms of the WorldCom PCS
tracking stock will be virtually identical to the terms of Sprint's PCS common
stock and will be designed to track the performance of the PCS business of the
surviving company in the Sprint Merger. Holders of Sprint class A stock will
receive that amount of Common Stock and WorldCom PCS tracking stock as if such
class A stock had been converted into Sprint FON common stock and Sprint PCS
common stock immediately before the Sprint Merger. Holders of the other classes
or series of Sprint capital stock will receive one share of a class or series of
the Company's capital stock with virtually identical terms, which will be
established in connection with the Sprint Merger, for each share of Sprint
capital stock that they own. Sprint has announced that it will redeem for cash
each outstanding share of the Sprint first and second series preferred stock on
May 25, 2000. The Sprint Merger will be accounted for as a purchase and will be
tax-free to Sprint stockholders.
The actual number of shares of Common Stock to be exchanged for each share of
Sprint FON common stock will be determined based on the average trading prices
of Common Stock prior to the closing, but will not be less than 1.4100 shares
(if the average trading price of Common Stock equals or exceeds $53.9007) or
more than 1.8342 shares (if the average trading price of Common Stock equals or
is less than $41.4350).
6
Consummation of the Sprint Merger is subject to various conditions set forth in
the Sprint Merger Agreement, including the adoption of the Sprint Merger
Agreement by stockholders of Sprint, the approval of the Sprint Merger by
shareholders of WorldCom, the approval of the issuance of WorldCom capital stock
in the Sprint Merger by shareholders of WorldCom, certain U.S. and foreign
regulatory approvals and other customary conditions. On April 28, 2000, special
meetings of the shareholders of WorldCom and Sprint were held and the merger
proposals were adopted and approved. It is anticipated that the Sprint Merger
will close in the second half of 2000.
(C) Earnings Per Share
- ----------------------
The following is a reconciliation of the numerators and the denominators of the
basic and diluted earnings per share computations for the three months ended
March 31, 2000 and 1999 (in millions, except per share data):
2000 1999
------ ------
Basic
- -----
Net income $1,301 $ 730
Distributions on subsidiary trust
and other mandatorily
redeemable preferred securities 16 16
Preferred dividend requirement 1 2
------ ------
Net income applicable to common
shareholders $1,284 $ 712
====== ======
Weighted average shares outstanding 2,852 2,794
====== ======
Basic earnings per share $ 0.45 $ 0.25
====== ======
Diluted
- -------
Net income applicable to
common shareholders $1,284 $ 712
====== ======
Weighted average shares outstanding 2,852 2,794
Common stock equivalents 67 111
Common stock issuable upon
conversion of preferred stock 2 2
------ ------
Diluted shares outstanding 2,921 2,907
====== ======
Diluted earnings per share $ 0.44 $ 0.24
====== ======
(D) Supplemental Disclosure of Cash Flow Information
- ----------------------------------------------------
Interest paid by the Company during the three months ended March 31, 2000 and
1999, amounted to $278 million and $421 million, respectively. Income taxes
paid during the three months ended March 31, 2000 and 1999, totaled $19 million
and $29 million, respectively. In conjunction with business combinations during
the three months ended March 31, 2000 and 1999, assumed assets and liabilities
were as follows (in millions):
2000 1999
----- -----
Fair value of assets acquired $ - $ 12
Excess of cost over net tangible 7 416
assets acquired
Liabilities assumed - (143)
----- ------
Net cash paid $ 7 $ 285
===== ======
(E) Comprehensive Income
- ------------------------
The following table reflects the calculation of comprehensive income for
WorldCom for the three months ended March 31, 2000 and 1999 (in millions):
7
2000 1999
-------- --------
Net income applicable to
common shareholders $1,284 $ 712
------- -----
Other comprehensive income (loss):
Foreign currency translation gains
(losses) 36 (280)
Unrealized holding gains:
Unrealized holding gains during
the period 501 245
Reclassification adjustment for
(gains) losses included
in net income (83) -
------- -----
Other comprehensive income (loss)
before tax 454 (35)
Income tax expense (157) (92)
------ -----
Other comprehensive income (loss) 297 (127)
------ -----
Comprehensive income applicable to
common shareholders $1,581 $ 585
====== =====
(F) Segment Information
- -----------------------
Based on its organizational structure, the Company operates in six reportable
segments: Voice and data, Internet, International operations, Embratel
Participacoes S.A. ("Embratel"), Operations and technology and Other. The
Company's reportable segments represent business units that primarily offer
similar products and services; however, the business units are managed
separately due to the geographic dispersion of their operations. The voice and
data segment includes voice, data and other types of domestic communications
services. The Internet segment provides Internet services. International
operations provide voice, data, Internet and other similar types of
communications services to customers primarily in Europe and the Asia Pacific
region. Embratel provides communications services in Brazil. Operations and
technology includes network operations, information services, engineering and
technology, and customer service. Other includes primarily the operations of
MCI Systemhouse Corp. and SHL Systemhouse Co. (collectively, "SHL") and other
non-communications services. In April 1999, SHL was sold to Electronic Data
Systems Corporation ("EDS").
The Company's chief operating decision maker utilizes revenue information in
assessing performance and making overall operating decisions and resource
allocations. Communications services are generally provided utilizing the
Company's fiber optic networks, which do not make a distinction between the
types of services. As a result, the Company does not allocate line costs or
assets by segment. Profit and loss information is reported only on a
consolidated basis to the chief operating decision maker and the Company's Board
of Directors.
Information about the Company's segments for the three months ended March 31,
2000 and 1999, is as follows (in millions):
Revenues Selling, General
From External and Administrative
Customers Expenses
--------------------- ----------------------------
2000 1999 2000 1999
------ ------ ------ ------
Voice and data $7,509 $6,918 $1,164 $1,170
Internet 1,104 758 209 173
International operations 537 357 142 116
Operations and technology - - 546 563
Other - 403 - 129
Corporate - - 48 49
------ ------ ------ ------
Total before Embratel $9,150 $8,436 $2,109 $2,200
Embratel 863 686 199 174
Elimination of intersegment revenues (35) - (9) -
------ ------ ------ ------
Total $9,978 $9,122 $2,299 $2,374
====== ====== ====== ======
8
The following is a reconciliation of the segment information to income before
income taxes and minority interests for the three months ended March 31, 2000
and 1999 (in millions):
2000 1999
------ ------
Revenues $9,978 $9,122
Operating expenses 7,538 7,612
------ ------
Operating income 2,440 1,510
Other income (expense):
Interest expense (218) (272)
Miscellaneous 111 (26)
------ ------
Income before income taxes
and minority interests $2,333 $1,212
====== ======
(G) Contingencies -
---------------
The Company is involved in legal and regulatory proceedings generally incidental
to its business and has included loss contingencies in other current liabilities
and other liabilities for certain of these matters. In some instances, rulings
by federal and state regulatory authorities may result in increased operating
costs to the Company. Except as described herein, and while the results of
these various legal and regulatory matters contain an element of uncertainty,
WorldCom believes that the probable outcome of these matters should not have a
material adverse effect on the Company's consolidated results of operations or
financial position.
General. WorldCom is subject to varying degrees of federal, state, local and
international regulation. In the United States, the Company's subsidiaries are
most heavily regulated by the states, especially for the provision of local
exchange services. The Company must be certified separately in each state to
offer local exchange and intrastate long distance services. No state, however,
subjects WorldCom to price cap or rate of return regulation, nor is the Company
currently required to obtain Federal Communications Commission ("FCC")
authorization for installation or operation of its network facilities used for
domestic services, other than licenses for specific terrestrial microwave and
satellite earth station facilities that utilize radio frequency spectrum. FCC
approval is required, however, for the installation and operation of its
international facilities and services. WorldCom is subject to varying degrees of
regulation in the foreign jurisdictions in which it conducts business, including
authorization for the installation and operation of network facilities. Although
the trend in federal, state and international regulation appears to favor
increased competition, no assurance can be given that changes in current or
future regulations adopted by the FCC, state or foreign regulators or
legislative initiatives in the United States or abroad would not have a material
adverse effect on WorldCom.
In implementing the Telecommunications Act of 1996 (the "Telecom Act"), the FCC
established nationwide rules designed to encourage new entrants to participate
in the local services markets through interconnection with the incumbent local
exchange carriers ("ILECs"), resale of ILECs' retail services and use of
individual and combinations of unbundled network elements. Appeals of the FCC
order adopting those rules have been in litigation since August 1996. On
November 5, 1999, the FCC implemented a remand, from the U.S. Supreme Court, of
the FCC's original unbundling rules. The FCC required two additional network
elements, as well as most of the previously identified elements, to be made
available to new entrants. That order is subject to various reconsideration
petitions at the FCC and has been appealed by the ILECs to the United States
Court of Appeals for the District of Columbia Circuit. The United States Court
of Appeals for the Eighth Circuit is now considering the ILECs' challenges to
the substance of the FCC's pricing rules.
On May 21, 1999, the United States Court of Appeals for the District of Columbia
Circuit reversed and remanded to the FCC its decision to adjust its price cap
regulation of ILECs to require access charges to fall 6.5% per year adjusted for
inflation. On June 22, 1999, that court stayed the effect of its decision
pending a further order by the FCC justifying or modifying its decision in
response to the court's opinion. On April 13, 2000, the court extended the stay
at the request of the FCC to allow the FCC to consider a proposal for access
charge reform and universal service, which is discussed below.
9
On November 4, 1999, the FCC's Pricing Flexibility Order, which allowed price-
cap regulated ILECs to offer customer specific pricing in contract tariffs, took
effect. Price-cap regulated ILECs can now offer access arrangements with
contract-type pricing in competition with long distance carriers and other
competitive access providers, who have previously been able to offer such
pricing for access arrangements. As ILECs experience increasing competition in
the local services market, the FCC will grant increased pricing flexibility and
relax tariffing requirements for access services. The FCC is also conducting a
proceeding to consider additional pricing flexibility for a wider range of
access services. The Company has appealed the Pricing Flexibility Order to the
United States Court of Appeals for the District of Columbia Circuit.
On July 30, 1999, the United States Court of Appeals for the Fifth Circuit
issued a decision reversing in part the May 1997 FCC universal service decision.
Among other things, the court held that the FCC may collect universal service
contributions from interstate carriers based on only interstate revenues, and
that the FCC could not force the ILECs to recover their universal service
contributions through interstate access charges. Various parties, including
WorldCom, have filed petitions for certiorari at the U.S. Supreme Court
challenging certain aspects of this decision. On November 1, 1999, the FCC
implemented the court's decision. AT&T has appealed this FCC order to the
United States Court of Appeals for the Fifth Circuit, and WorldCom has
intervened in support of AT&T. Pending reconsideration petitions seek
retroactive treatment for implementation of the remand order. On November 2,
1999, the FCC released two additional universal service orders, which provide
for federal support for non-rural high cost areas. Both orders were appealed to
the United States Court of Appeals for the Tenth Circuit.
In August 1998, in response to petitions filed by several ILECs under the guise
of Section 706 of the Telecom Act, the FCC issued its Advanced Services Order.
This order clarifies that the interconnection, unbundling, and resale
requirements of Section 251(c) of the Telecom Act, and the interLATA
restrictions of Section 271 of the Telecom Act, apply fully to so-called
"advanced telecommunications services," such as Digital Subscriber Line ("DSL")
technology. US West Communications Group ("US West") appealed this order to the
United States Court of Appeals for the District of Columbia Circuit. At the
request of the FCC, the court remanded the case for further administrative
proceedings, and on December 23, 1999, the FCC issued its Order on Remand. In
that order, the FCC reaffirmed its earlier decision that ILECs are subject to
the obligations of Section 251(c) of the Telecom Act in connection with the
offering of advanced telecommunications services such as DSL. The order
reserved ruling on whether such obligations extend to traffic jointly carried by
an ILEC and a competitive local exchange carrier ("CLEC") to an Internet service
provider ("ISP") where the ISP self-provides the transport component of its
Internet access service. The Order on Remand also found that DSL-based advanced
services that are used to connect ISPs to their subscribers to facilitate
Internet-bound traffic typically constitute exchange access service. On January
3, 2000, the Company filed a petition for review of this aspect of the Order on
Remand with the United States Court of Appeals for the District of Columbia
Circuit.
In a companion notice to the original order, the FCC sought comment on how to
implement Section 706 of the Telecom Act, which directs the FCC to (1) encourage
the deployment of advanced telecommunications capability to Americans on a
reasonable and timely basis, and (2) complete an inquiry concerning the
availability of such services no later than February 8, 1999. The Commission's
rulemaking notice included a proposal that, if adopted, would allow the ILECs
the option of providing advanced services via a separate subsidiary free from
the unbundling and resale obligations of Section 251(c), as well as other
dominant carrier regulatory requirements. In early February 1999, the FCC
issued its report to Congress, concluding that the deployment of advanced
services is proceeding at a reasonable and timely pace. The FCC has not yet
issued its Section 706 rulemaking order.
In February 1999, the FCC sought public comments on its tentative conclusion
that loop spectrum standards should be set in a competitively neutral process.
In November 1999, the FCC concluded that ILECs should be required to share
primary telephone lines with CLECs, and identified the high frequency portion of
the loop as a network element. In February 2000, US West and the United States
Telephone Association appealed this order to the United States Court of Appeals
for the District of Columbia Circuit.
On February 26, 1999, the FCC issued a Declaratory Ruling and Notice of Proposed
Rulemaking regarding the regulatory treatment of calls to ISPs. Prior to the
FCC's order, approximately thirty Public Utility Commissions ("PUCs") issued
orders unanimously finding that carriers, including WorldCom, are entitled to
collect reciprocal compensation for completing calls to ISPs under the terms of
their interconnection agreements with ILECs. Many of these PUC decisions have
been appealed by the ILECs and, since the FCC's order, many have filed new cases
at the
10
PUCs or in court. Moreover, WorldCom appealed the FCC's order to the
United States Court of Appeals for the District of Columbia Circuit. On March
24, 2000, the court vacated the FCC's order and remanded the case to the FCC for
further proceedings. WorldCom cannot predict the outcome of the cases filed by
the ILECs, the FCC's rulemaking proceeding, or the FCC's proceedings on remand,
nor can it predict whether or not the result(s) will have a material adverse
impact upon its consolidated financial position or future results of operations.
Several bills have been introduced during the 106th Congress that would exclude
the transmission of data services or high-speed Internet access from the Telecom
Act's bar on the transmission of in-region interLATA services by the Bell
operating companies ("BOCs"). These bills would also make it more difficult for
competitors to resell the high-speed Internet access services of the ILECs or to
lease a portion of the network components used for the provision of such
services.
In 1996 and 1997, the FCC issued orders that would require non-dominant
telecommunications carriers to eliminate interstate service tariffs, except in
limited circumstances. These orders were stayed pending judicial review. On
April 28, 2000, the United States Court of Appeals for the District of Columbia
Circuit issued a decision upholding the FCC's orders and thereafter lifted the
stay. The parties to this appeal, including WorldCom, are considering whether
to seek further judicial review. As written, the FCC's orders will prevent
WorldCom from relying on its federal tariff to limit liability or to establish
its interstate rates for customers. Accordingly, WorldCom would need to develop
a new means to establish contractual relationships with its customers.
BOCs must file an application conforming to the requirements of Section 271 of
the Telecom Act for each state in their service area in order to offer in-region
long distance service in that state. To be granted by the FCC, an application
must demonstrate, among other things, that the BOC has met a 14-point
competitive checklist to open its local network to competition and demonstrate
that its application is in the public interest. Since enactment of the Telecom
Act, the FCC has rejected five Section 271 applications filed by BOCs and
granted one; Bell Atlantic Corporation's application for New York was granted on
December 21, 1999. On April 5, 2000, SBC Communications ("SBC") filed a Section
271 application for the state of Texas. A decision is expected on SBC's
application by July 3, 2000. WorldCom cannot predict the outcome of this
proceeding or whether or not the results will have a material adverse impact on
its consolidated financial position or future results of operations.
The FCC is currently reviewing a proposal for access charge and universal
service reform that has been filed by the Coalition for Affordable Local and
Long Distance Service ("CALLS"), a group of regional Bell operating companies
("RBOCs"), GTE Corporation ("GTE") and two long distance companies. The
principal aspects of the plan are (1) residential Subscriber Line Charges would
be increased to $4.35 in 2000, $5.00 in 2001, $6.00 in 2002, and $6.50 in 2003;
(2) residential Presubscribed Interexchange Carrier Charges ("PICCs") would be
eliminated in 2000; (3) carrier access charges would be reduced for the industry
by $2.1 billion on July 1, 2000, with minimal additional reductions in later
years; and (4) the RBOCs and GTE would benefit from a new $650 million universal
service fund. In addition, WorldCom believes the FCC may have made other
commitments to the RBOCs concerning the disposition and/or timing of other
regulatory proceedings that may be related to the RBOCs' decision to offer the
CALLS plan. This might include, for example, restrictions on CLECs' ability to
use unbundled network elements to offer special access services. Finally,
interexchange carriers participating in the CALLS plan are committing to
eliminate PICC-pass through charges, eliminate minimum charges for basic
schedule customers, and flow through reductions in access charges. WorldCom
cannot predict either the outcome of this proposal or whether or not the results
will have a material adverse impact upon its consolidated financial position or
future results of operations.
International. In February 1997, the United States entered into a World Trade
Organization Agreement (the "WTO Agreement") that is designed to have the effect
of liberalizing the provision of switched voice telephone and other
telecommunications services in scores of foreign countries over the next several
years. The WTO Agreement became effective in February 1998. In light of the
United States commitments to the WTO Agreement, the FCC implemented new rules in
February 1998 that liberalize existing policies regarding (1) the services that
may be provided by foreign affiliated United States international common
carriers, including carriers controlled or more than 25 percent owned by foreign
carriers that have market power in their home markets, and (2) the provision of
alternative traffic routing. The new rules make it much easier for foreign
affiliated carriers to enter the United States market for the provision of
international services.
11
In August 1997, the FCC adopted mandatory settlement rate benchmarks. These
benchmarks are intended to reduce the rates that United States carriers pay
foreign carriers to terminate traffic in their home countries. The FCC will
also prohibit a United States carrier affiliated with a foreign carrier from
providing facilities-based service to the foreign carrier's home market until
and unless the foreign carrier has implemented a settlement rate at or below the
benchmark. The FCC also adopted new rules that will liberalize the provision of
switched services over private lines to World Trade Organization member
countries. These rules allow such services on routes where 50% or more of
United States billed traffic is being terminated in the foreign country at or
below the applicable settlement rate benchmark or where the foreign country's
rules concerning provision of international switched services over private lines
are deemed equivalent to United States rules. On January 12, 1999, the FCC's
benchmark rules were upheld in their entirety by the United States Court of
Appeals for the District of Columbia Circuit. On March 11, 1999 the District of
Columbia Circuit denied petitions for rehearing of the case.
In April 1999, the FCC modified its rules to permit United States international
carriers to exchange international public switched voice traffic on many routes
to and from the United States outside of the traditional settlement rate and
proportionate return regimes.
On June 3, 1999, the FCC enforced the benchmark rates on two non-compliant
routes. Settlement rates have fallen to the benchmarks or below on many other
routes.
Although the FCC's new policies and implementation of the WTO Agreement may
result in lower settlement payments by WorldCom to terminate international
traffic, there is a risk that the payments that WorldCom will receive from
inbound international traffic may decrease to an even greater degree. The
implementation of the WTO Agreement may also make it easier for foreign carriers
with market power in their home markets to offer United States and foreign
customers end-to-end services to the disadvantage of WorldCom. The Company may
continue to face substantial obstacles in obtaining from foreign governments and
foreign carriers the authority and facilities to provide such end-to-end
services.
Embratel. The 1996 General Telecommunications Law (the "General Law") provides
a framework for telecommunications regulation for Embratel. Article 8 of the
General Law created Agencia Nacional de Telecomunicacoes ("Anatel") to implement
the General Law through development of regulations and to enforce such
regulations. According to the General Law, companies wishing to offer
telecommunications services to consumers are required to apply to Anatel for a
concession or an authorization. Concessions are granted for the provision of
services under the public regime (the "Public Regime") and authorizations are
granted for the provision of services under the private regime (the "Private
Regime"). Service providers subject to the Public Regime (concessionaires) are
subject to obligations concerning network expansion and continuity of service
provision and are subject to rate regulation. These obligations and the tariff
conditions are provided in the General Law and in each company's concession
contract. The network expansion obligations are also provided in the Plano
Geral de Universalizacao ("General Plan on Universal Service").
The only services provided under the Public Regime are the switched fixed
telephone services ("SFTS") -local and national and international long distance
- - provided by Embratel and the three regional Telebras holding companies
("Teles"). All other telecommunications companies, including other companies
providing SFTS, operate in the Private Regime and, although they are not subject
to the Public Regime, individual authorizations may contain certain specific
expansion and continuity obligations.
The main restriction imposed on carriers by the General Plan on Universal
Service is that, until December 31, 2003, the three Teles are prohibited from
offering inter-regional and international long distance service, while Embratel
is prohibited from offering local services. These companies can start providing
those services two years sooner if they meet their network expansion obligations
by December 31, 2001.
Embratel and the three Teles were granted their concessions at no fee, until
2005. After 2005, the concessions may be renewed for a period of 20 years, upon
the payment, every two years, of a fee equal to 2% of annual net revenues
calculated based on the provision of SFTS in the prior year, excluding taxes and
social contributions.
Embratel also offers a number of ancillary telecommunications services pursuant
to authorizations granted in the Private Regime. Such services include the
provision of dedicated analog and digital lines, packet switched network
12
services, circuit switched network services, mobile marine telecommunications,
telex and telegraph, radio signal satellite retransmission and television signal
satellite retransmission. Some of these services are subject to some specific
continuity obligations and rate conditions.
All providers of telecommunications services are subject to quality and
modernization obligations provided in the Plan Geral de Qualidade ("General Plan
on Quality").
Litigation. On November 4, 1996, and thereafter, and on August 25, 1997, and
thereafter, MCI Communications Corporation ("MCI") and all of its directors were
named as defendants in a total of 15 complaints filed in the Court of Chancery
in the State of Delaware. British Telecommunications plc ("BT") was named as a
defendant in 13 of the complaints. The complaints were brought by alleged
stockholders of MCI, individually and purportedly as class actions on behalf of
all other stockholders of MCI. In general, the complaints allege that MCI's
directors breached their fiduciary duty in connection with the MCI BT Merger
Agreement, dated November 3, 1996 (the "MCI BT Merger Agreement"), that BT aided
and abetted those breaches of duty, that BT owes fiduciary duties to the other
stockholders of MCI and that BT breached those duties in connection with the MCI
BT Merger Agreement. The complaints seek damages and injunctive and other
relief.
One of the purported stockholder class actions pending in Delaware Chancery
Court has been amended, one of the purported class actions has been dismissed
with prejudice, and plaintiffs in four of the other purported stockholder class
actions have moved to amend their complaints to name WorldCom and a WorldCom
subsidiary as additional defendants. These plaintiffs generally allege that the
defendants breached their fiduciary duties to stockholders in connection with
the MCI merger and the agreement to pay a termination fee to WorldCom. They
further allege discrimination in favor of BT in connection with the MCI merger.
The plaintiffs seek, inter alia, damages and injunctive relief prohibiting the
consummation of the MCI merger and the payment of the inducement fee to BT.
Three complaints were filed in the U.S. District Court for the District of
Columbia, as class actions on behalf of purchasers of MCI shares. The three
cases were consolidated on April 1, 1998. On or about May 8, 1998, the
plaintiffs in all three cases filed a consolidated amended complaint alleging,
on behalf of purchasers of MCI's shares between July 11, 1997 and August 21,
1997, inclusive, that MCI and certain of its officers and directors failed to
disclose material information about MCI, including that MCI was renegotiating
the terms of the MCI BT Merger Agreement. The consolidated amended complaint
seeks damages and other relief. The Company and the other defendants have moved
to dismiss the consolidated amended complaint.
At least nine class action complaints have been filed that arise out of the
FCC's decision in Halprin, Temple, Goodman and Sugrue v. MCI Telecommunications
-------------------------------------------------------------
Corp., and allege that WorldCom has improperly charged "Pre-Subscribed"
- -----
customers "Non-Subscriber" or so-called "casual" rates for certain direct-dialed
calls. Plantiffs further challenge WorldCom's credit policies for this "non-
subscriber" traffic. Plaintiffs assert that WorldCom's conduct violates the
Communications Act and various state laws; they seek rebates to all affected
customers and punitive damages and other relief. In response to a motion filed
by WorldCom, the Judicial Panel on Multi-District Litigation has consolidated
these matters in the United States District Court for the Southern District of
Illinois. That Court denied the Company's motion to dismiss the state law
claims, and the parties are now engaged in discovery. On February 4, 2000, the
Company filed a petition for review of the FCC's Halprin decision with the
-------
United States Court of Appeals for the District of Columbia Circuit. Oral
argument is scheduled for October 12, 2000.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Management's Discussion and Analysis of Financial Condition and Results of
Operations may be deemed to include forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, that involve risk and
uncertainty, including financial, regulatory environment and trend projections,
estimated costs to complete or possible future revenues from in-process research
and development programs, the likelihood of successful completion of such
programs, and the outcome of Euro conversion efforts, as well as any statements
preceded by, followed by, or that include the words "intends," "estimates,"
"believes," "expects," "anticipates," "should," "could," or similar expressions;
and other statements contained herein regarding matters that are not historical
facts.
13
Although the Company believes that its expectations are based on reasonable
assumptions, it can give no assurance that its expectations will be achieved.
The important factors that could cause actual results to differ materially from
those in the forward-looking statements herein (the "Cautionary Statements")
include, without limitation: (1) whether the Sprint Merger is completed and the
ability to integrate the operations of the Company and Sprint, including their
respective products and services; (2) the effects of vigorous competition in the
markets in which the Company operates; (3) the impact of technological change on
the Company's business, new entrants and alternative technologies, and
dependence on availability of transmission facilities; (4) uncertainties
associated with the success of other acquisitions and the integration thereof;
(5) risks of international business; (6) regulatory risks, including the impact
of the Telecom Act; (7) contingent liabilities; (8) the impact of competitive
services and pricing; (9) risks associated with Euro conversion efforts; (10)
risks associated with debt service requirements and interest rate fluctuations;
(11) the Company's degree of financial leverage; and (12) other risks referenced
from time to time in the Company's filings with the SEC, including the Form 10-
K. All subsequent written and oral forward-looking statements attributable to
the Company or persons acting on its behalf are expressly qualified in their
entirety by the Cautionary Statements. The Company does not undertake any
obligation to release publicly any revisions to such forward-looking statements
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
The following discussion and analysis relates to the financial condition and
results of operations of the Company for the three months ended March 31, 2000
and 1999. This information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
consolidated financial statements and notes thereto contained herein and in the
Form 10-K.
Unless otherwise defined, capitalized terms used herein have the meanings
assigned to them in the Notes to Consolidated Financial Statements contained
herein.
Results of Operations
The following table sets forth for the periods indicated the Company's statement
of operations as a percentage of its revenues for the three months ended March
31, 2000 and 1999:
2000 1999
----- -----
Revenues..................................................... 100.0% 100.0%
Line costs................................................... 41.0 45.3
Selling, general and administrative.......................... 23.0 26.0
Depreciation and amortization................................ 11.5 12.1
----- -----
Operating income............................................. 24.5 16.6
Other income (expense):
Interest expense........................................... (2.2) (3.0)
Miscellaneous.............................................. 1.1 (0.3)
----- -----
Income before income taxes and minority interests............ 23.4 13.3
Provision for income taxes................................... 9.6 6.0
----- -----
Income before minority interests............................. 13.8 7.3
Minority interests........................................... (0.8) 0.7
----- -----
Net income................................................... 13.0 8.0
Distributions on subsidiary trust and other mandatorily
redeemable preferred securities............................. 0.1 0.2
Preferred dividend requirement............................... - -
----- -----
Net income applicable to common shareholders................. 12.9% 7.8%
===== =====
Three months ended March 31, 2000 vs.
Three months ended March 31, 1999
Revenues for the three months ended March 31, 2000, increased 9.4% to $10.0
billion as compared to $9.1 billion for the three months ended March 31, 1999.
The increase in total revenues is attributable to internal growth of the
Company.
14
Reported revenues by category for the three months ended March 31, 2000 and 1999
reflect the following changes by category (dollars in millions):
Percent
2000 1999 Change
------ ------ --------
Revenues
Voice $5,363 $5,216 2.8%
Data 2,146 1,702 26.1%
Internet 1,104 758 45.6%
International 1,365 1,043 30.9%
------ ------ ----
9,978 8,719 14.4%
Communication services
Other - 403 N/A
------ ------ ----
Total revenues $9,978 $9,122 9.4%
====== ====== ====
Communications services revenues for the three months ended March 31, 2000
increased 14.4% to $10.0 billion as compared to $8.7 billion for the three
months ended March 31, 1999. Excluding WorldCom's interest in the Brazilian
telecommunications company, Embratel, communications services revenues were $9.2
billion for the three months ended March 31, 2000 or a 13.9% increase from the
prior year period.
Voice revenues for the quarter ended March 31, 2000 experienced a 2.8% increase
over the prior year period, driven by a gain of 14% in traffic, as a result of
customers purchasing "all-distance" voice services from the Company. Local
voice services account for more than 55% of the Company's incremental voice
growth as compared to the first quarter of 1999. These revenue gains were
offset partially by anticipated year-over-year declines in carrier wholesale
traffic. Access charge reforms along with declining network costs have
facilitated the reduction in pricing, without impacting gross margins. Voice
revenues include both long distance and local domestic switched revenues.
Data revenues for the three months ended March 31, 2000, increased 26.1% over
the same period of the prior year. Data includes both long distance and local
dedicated bandwidth sales. The revenue growth for data services was driven by
steady growth in private line customers, new customer applications and upgrades
within existing customer base of frame relay services and increased demand in
asynchronous transfer mode ("ATM") services. As of March 31, 2000, the Company
had approximately 38.6 million domestic local voice grade equivalents, an
increase of 95% from the prior year amount.
Internet revenues for the three months ended March 31, 2000 increased 45.6% over
the prior year amounts. Growth was driven by both dial up and dedicated
connectivity to the Internet as more and more business customers migrated their
data networks and applications to Internet-based technologies with greater
amounts of bandwidth. This revenue growth was offset by the American Online,
Inc. ("AOL") contract repricing which occurred in the first quarter of 2000.
The AOL contract extended existing agreements for dial-up services in the United
States. The new AOL contract has a five-year term with lower unit pricing, but
increased volume commitments.
The Company is upgrading its domestic Internet backbone to OC-192c speeds, or 10
gigabits per second, in response to the increasing backbone transport
requirements of both its commercial and wholesale accounts. The Company is also
implementing Multi Protocol Label Switching ("MPLS") technology along with the
deployment of OC-192c. MPLS technology allows packet prioritization to improve
latency. The Company's dial access network has grown over 88% to over 2 million
modems, compared with the same period in the prior year. Additionally, Internet
connect hours increased 66% to 1.5 billion hours versus the first quarter of
1999.
International revenues - those revenues originating outside of the United States
- - for the first quarter of 2000 were $1.4 billion, an increase of 31% as
compared with $1.0 billion for the same period of the prior year. Excluding
Embratel, international revenues for the first quarter of 2000 increased 50.4%
to $537 million from $357 million for the prior year period. The increase is
attributable to additional sales force and network infrastructure established to
pursue international opportunities. During the first quarter of 2000 the
Company continued to extend the reach of its end-to-end networks, adding nearly
1,000 buildings for a total of 11,000 buildings connected on the network.
15
Other revenues which, prior to April 1999, primarily consisted of the operations
of SHL, were zero for the first quarter of 2000 and $403 million for the prior
year period. In April 1999, the Company completed the sale of SHL to EDS for
$1.6 billion.
Line costs. Line costs as a percentage of revenues for the first quarter of
2000 were 41.0% as compared to 45.3% reported for the same period of the prior
year. This improvement is a result of more traffic and revenues that have no
associated access charges, declining access and settlement costs, improved
interconnection terms in Europe and network efficiencies associated with the MCI
merger and sale of SHL. Additionally, access charge reductions that occurred in
July 1999 and January 2000 reduced total line cost expense by approximately $124
million for the first quarter of 2000. While access charge reductions were
primarily passed through to customers, line costs as a percentage of revenues
were positively affected by over half a percentage point for the first quarter
of 2000.
The principal components of line costs are access charges and transport charges.
Regulators have historically permitted access charges to be set at levels that
are well above ILECs' costs. As a result, access charges have been a source of
universal service subsidies that enable local exchange rates to be set at levels
that are affordable. WorldCom has actively participated in a variety of state
and federal regulatory proceedings with the goal of bringing access charges to
cost-based levels and to fund universal service using explicit subsidies funded
in a competitively neutral manner. WorldCom cannot predict the outcome of these
proceedings or whether or not the result(s) will have a material adverse impact
on its consolidated financial position or results of operations. However, the
Company's goal is to manage transport costs through effective utilization of its
network, favorable contracts with carriers and network efficiencies made
possible as a result of expansion of the Company's customer base by acquisitions
and internal growth.
Selling, general and administrative. Selling, general and administrative
expenses for the first quarter of 2000 were $2.3 billion or 23.0% of revenues as
compared to $2.4 billion or 26.0% of revenues for the first quarter of 1999.
The improvement in selling, general and administrative expenses is a result of a
better mix of revenues, having scale in the Company network and the Company's
ability to leverage certain staff areas such as information technology and
engineering groups over a larger base of revenues.
Depreciation and amortization. Depreciation and amortization expense for the
first quarter of 2000 increased to $1.15 billion or 11.5% of revenues from $1.10
billion or 12.1% of revenues for the comparable quarter of 1999. This increase
reflects increased amortization and depreciation from 1999 acquisitions as well
as additional depreciation related to capital expenditures. As a percentage of
revenues, these costs decreased due to the higher revenue base.
Interest expense. Interest expense in the first quarter of 2000 was $218
million or 2.2% of revenues, as compared to $272 million or 3.0% of revenues
reported in the first quarter of 1999. For the three months ended March 31,
2000 and 1999, weighted average annual interest rates on the Company's long-term
debt were 7.0% and 7.3%, respectively, while weighted average annual levels of
borrowings were $18.9 billion and $20.6 billion, respectively. The decrease in
interest expense is attributable to lower interest rates as a result of certain
tender offers for outstanding debt in the fourth quarter of 1999 offset by
slightly higher interest rates on the Company's variable rate debt. Interest
expense for the three months ended March 31, 2000 was also favorably impacted as
a result of SHL sale proceeds, investment sale proceeds and proceeds from the
increase in the Company's receivables purchase program in the third quarter of
1999 used to repay indebtedness under the Company's credit facilities and
commercial paper program.
Miscellaneous income and expense. Miscellaneous income for the first quarter of
2000 was $111 million or 1.1% of revenues as compared to miscellaneous expense
of $26 million or 0.3% of revenues for the first quarter of 1999. Miscellaneous
income includes investment income, interest income, equity in income and losses
of affiliated companies, the effects of fluctuations in exchange rates for
transactions denominated in foreign currencies, gains and losses on the sale of
assets and other nonoperating items.
Net income applicable to common shareholders. For the quarter ended March 31,
2000, the Company reported net income applicable to common shareholders of $1.3
billion as compared to $712 million reported in the first quarter of 1999.
Diluted income per common share was $0.44 compared to income per share of $0.24
for the comparable 1999 period.
16
Liquidity and Capital Resources
As of March 31, 2000, the Company's total debt was $19.7 billion, an increase of
$1.6 billion from December 31, 1999. Additionally, at March 31, 2000, the
Company had available liquidity of $7.0 billion under its credit facilities and
commercial paper program, which are described in the Form 10-K, and from
available cash.
In January 2000, each share of WorldCom Series C Preferred Stock was redeemed by
the Company for $50.75 in cash, or approximately $190 million in the aggregate.
The funds required to pay all amounts under the redemption were obtained by
WorldCom from available liquidity under the Company's credit facilities and
commercial paper program.
In the first quarter of 2000, $200 million of senior notes with an interest rate
of 7.13% matured. The funds utilized to repay these senior notes were obtained
from available liquidity under the Company's credit facilities and commercial
paper program.
In the third quarter of 1999, the Company amended its $500 million receivables
purchase agreement to $2 billion. As of March 31, 2000, the purchaser owned an
undivided interest in a $4.0 billion pool of receivables, which includes the
$1.97 billion sold.
For the three months ended March 31, 2000, the Company's cash flow from
operations was $1.8 billion versus $1.9 billion for the comparable 1999 period.
The Company's improved operating results were more than offset by a $375 million
first quarter of 2000 increase in accounts receivable at Embratel primarily due
to Embratel's direct billing of customers and the implementation of this new
billing system during the first quarter of 2000. Additionally, there were
decreases in accounts payable and other current liabilities of $1.0 billion
versus the prior year period.
Cash used in investing activities for the three months ended March 31, 2000,
totaled $3.3 billion. Primary capital expenditures include purchases of
switching, transmission, communications and other equipment. The Company
anticipates that approximately $5.3 billion will be spent during the remainder
of 2000 for transmission and communications equipment, construction and other
capital expenditures without regard to Embratel.
Increases in interest rates on WorldCom's variable rate debt would have an
adverse effect upon WorldCom's reported net income and cash flow. The Company
believes that it will generate sufficient cash flow to service WorldCom's debt
and capital requirements; however, economic downturns, increased interest rates
and other adverse developments, including factors beyond WorldCom's control,
could impair its ability to service its indebtedness. In addition, the cash
flow required to service WorldCom's debt may reduce its ability to fund internal
growth, additional acquisitions and capital improvements. Additionally, if the
Sprint Merger is consummated, the integration and consolidation of Sprint will
require substantive management and financial resources and involve a number of
risks, including potential difficulties in assimilating technologies and
services of Sprint and in achieving anticipated synergies and cost reductions.
The development of the businesses of WorldCom and the installation and expansion
of its domestic and international networks will continue to require significant
capital expenditures. Failure to have access to sufficient funds for capital
expenditures on acceptable terms or the failure to achieve capital expenditure
synergies may require WorldCom to delay or abandon some of its plans, which
could have a material adverse effect on the success of WorldCom. The Company
has historically utilized a combination of cash flow from operations and debt to
finance capital expenditures and a mixture of cash flow, debt and stock to
finance acquisitions. Additionally, the Company expects to experience increased
capital intensity due to network expansion and merger related expenses as noted
above and believes that funding needs in excess of internally generated cash
flow and credit facilities and commercial paper program will be met by accessing
the debt markets. The Company has filed a shelf registration statement on Form
S-3 with the SEC for the sale, from time to time, of one or more series of
unsecured debt securities having an aggregate value of $15 billion. The shelf
registration statement offers the Company flexibility, as the market permits, to
refinance mainly existing debt balances under the Company's commercial paper
program. Additionally, if the Sprint Merger is consummated, the shelf
registration will be utilized, as markets permit, to simplify and maintain a
lower cost of capital for the combined company. No assurance can be given that
any public financing will be available on terms acceptable to the Company.
17
The Company believes that, if consummated, the Sprint Merger will create
substantial opportunities for cost savings and operating efficiencies. These
savings are anticipated to result primarily from economies of scale and
procurement efficiencies. There can, however, be no assurance that any specific
level of cost savings or other operating efficiencies will be achieved.
Additionally, the Company expects that, after consummation of the proposed
Sprint Merger, the WorldCom PCS group will continue to build its network and
expand its customer base, causing it to continue to incur significant operating
losses and to generate significant negative cash flow from operating activities
for the next 12 to 24 months, which could adversely affect the results and
financial condition of the combined company as a whole. There can be no
assurance that the WorldCom PCS group will achieve or sustain operating
profitability or positive cash flow from operating activities in the future.
Absent significant capital requirements for other acquisitions, the Company
believes that cash flow from operations and available liquidity, including the
Company's credit facilities and commercial paper program and available cash will
be sufficient to meet the Company's capital needs for the next twelve months.
However, the Company continues to diversify its funding sources, and under
existing credit conditions, believes that funding needs in excess of internally
generated cash flow and availability under the Company's credit facilities and
commercial paper program could be met by accessing debt markets.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. This statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires a company to formally document,
designate and assess the effectiveness of transactions that receive hedge
accounting. This statement is currently effective for fiscal years beginning
after June 15, 2000 and cannot be applied retroactively, although earlier
adoption is encouraged. SFAS No. 133 must be applied to (a) derivative
instruments and (b) certain derivative instruments embedded in hybrid contracts
that were issued, acquired, or substantively modified after December 31, 1997
(and, at the Company's election, before January 1, 1998). The Company believes
that the adoption of this standard will not have a material effect on the
Company's consolidated results of operations or financial position.
Euro Conversion
On January 1, 1999, certain member countries of the European Union established
fixed conversion rates between their existing currencies and the European
Union's common currency ("Euro"). The transition period for the introduction of
the Euro will be between January 1, 1999 to July 1, 2002. All of the final
rules and regulations have not yet been identified by the European Commission
with regard to the Euro. The Company is currently evaluating methods to address
the many issues involved with the introduction of the Euro, including the
conversion of information technology systems, recalculating currency risk,
recalibrating derivatives and other financial instruments, strategies concerning
continuity of contracts, and impacts on the processes for preparing taxation and
accounting records. At this time, the Company has not yet determined the cost
related to addressing this issue, and there can be no assurance as to the effect
of the Euro on the consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to the impact of interest rate changes, foreign currency
fluctuations and changes in market values of investments.
The Company's policy is to manage interest rates through the use of a
combination of fixed and variable rate debt. Currently, the Company does not use
derivative financial instruments to manage its interest rate risk. The Company
has minimal cash flow exposure due to general interest rate changes for its
fixed rate, long-term debt obligations. The Company does not believe a
hypothetical 10% adverse rate change in the Company's variable rate debt
obligations would be material to the Company's results of operations.
18
The Company is exposed to foreign exchange rate risk primarily due to the
Company's international operations holding approximately $991 million in U.S.
dollar denominated debt, and approximately $210 million of indebtedness indexed
in other currencies including the French Franc, Deutsche Mark, Japanese Yen and
Brazilian real as of March 31, 2000. The potential immediate loss to the
Company that would result from a hypothetical 10% change in foreign currency
exchange rates based on this position would be approximately $33 million (after
elimination of minority interests).
The Company is also subject to risk from changes in foreign exchange rates for
its international operations which use a foreign currency as their functional
currency and are translated into U.S. dollars. Additionally, the Company has
designated the note payable in local currency installments, resulting from the
Embratel investment, as a hedge of its investment in Embratel. As of March 31,
2000, the Company recorded the change in value of the note as a reduction to the
note payable with the offset through foreign currency translation adjustment in
shareholders' investment.
The Company believes its market risk exposure with regard to its marketable
equity securities is limited to changes in quoted market prices for such
securities. Based upon the composition of the Company's marketable equity
securities at March 31, 2000, the Company does not believe a hypothetical 10%
adverse change in quoted market prices would be material to net income.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There have been no material changes in the legal proceedings reported
in the Company's Annual Report on Form 10-K for the year ended December
31, 1999, except as may be reflected in the discussion under Note G of
the Notes to Consolidated Financial Statements in Part I, Item 1,
above, which is hereby incorporated by reference herein.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Securities Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
See Exhibit Index.
B. Reports on Form 8-K
None
19
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report on Form 10-Q to be signed on its behalf
by Scott D. Sullivan, thereunto duly authorized to sign on behalf of the
registrant and as the principal financial officer thereof.
WorldCom, Inc.
By: /s/ Scott D. Sullivan
-----------------------
Scott D. Sullivan
Chief Financial Officer
Dated: May 15, 2000.
20
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
2.1 Amended and Restated Agreement and Plan of Merger dated as of March
8, 2000, between WorldCom, Inc. and Sprint Corporation (filed as
Annex 1 to the Proxy Statement/Prospectus dated March 9, 2000
included in WorldCom's Registration Statement on Form S-4,
Registration No. 333-90421 and incorporated herein by reference)*
4.1 Second Amended and Restated Articles of Incorporation of WorldCom,
Inc. (including preferred stock designations), as amended as of May
1, 2000
4.2 Restated Bylaws of WorldCom, Inc. (incorporated herein by reference
to Exhibit 3.2 to the Company's Current Report on Form 8-K dated
September 14, 1998 (filed September 29, 1998) (File No. 0-11258))
4.3 Rights Agreement dated as of August 25, 1996, between the Company and
The Bank of New York, which includes the form of Certificate of
Designations, setting forth the terms of the Series 3 Junior
Participating Preferred Stock, par value $.01 per share, as Exhibit
A, the form of Rights Certificate as Exhibit B and the Summary of
Preferred Stock Purchase Rights as Exhibit C (incorporated herein by
reference to Exhibit 4 to the Current Report on Form 8-K dated August
26, 1996 (as amended on Form 8-K/A filed August 31, 1996) filed by
the Company with the Securities and Exchange Commission on August 26,
1996 (as amended on Form 8-K/A filed on August 31, 1996) (File No. 0-
11258))
4.4 Amendment No. 1 to Rights Agreement dated as of May 22, 1997, by and
between WorldCom, Inc. and The Bank of New York, as Rights Agent
(incorporated herein by reference to Exhibit 4.2 of the Company's
Current Report on Form 8-K dated May 22, 1997 (filed June 5, 1997)
(File No. 0-11258))
12.1 Statement re Computation of Ratio of Earnings to Fixed Charges
27.1 Financial Data Schedule - for the three months ended March 31, 2000
27.2 Restated Financial Data Schedule - for the three months ended March
31, 1999
* The registrant hereby agrees to furnish supplementally a copy of any
omitted schedules to this Agreement to the SEC upon request.
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