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, 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 2,879,100,271 net of treasury shares, on October 31,
2000.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 2000 and December 31, 1999.................... 3
Consolidated Statements of Operations for the
three and nine months ended September 30, 2000
and September 30, 1999...................................... 4
Consolidated Statements of Cash Flows for the
nine months ended September 30, 2000 and
September 30, 1999.......................................... 5
Notes to Consolidated Financial Statements.................. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............... 17
Item 3. Quantitative and Qualitative Disclosures about Market Risk.. 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 25
Item 2. Changes in Securities and Use of Proceeds................... 25
Item 3. Defaults Upon Senior Securities............................. 25
Item 4. Submission of Matters to a Vote
of Securities Holders....................................... 25
Item 5. Other Information........................................... 25
Item 6. Exhibits and Reports on Form 8-K............................ 25
Signature............................................................ 26
Exhibit Index........................................................ 27
2
WORLDCOM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited. In Millions, Except Share Data)
September 30, December 31,
2000 1999
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 916 $ 876
Accounts receivable, net of allowance for bad debts of $1,867 in 2000
and $1,122 in 1999 6,645 5,746
Deferred tax asset 2,612 2,565
Other current assets 1,911 1,137
-------- --------
Total current assets 12,084 10,324
-------- --------
Property and equipment:
Transmission equipment 18,243 14,689
Communications equipment 7,531 6,218
Furniture, fixtures and other 8,877 7,424
Construction in progress 7,360 5,397
-------- --------
42,011 33,728
Accumulated depreciation (6,707) (5,110)
-------- --------
35,304 28,618
-------- --------
Goodwill and other intangible assets 46,670 47,308
Other assets 5,835 4,822
-------- --------
$99,893 $91,072
======== ========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current liabilities:
Short-term debt and current maturities of long-term debt $ 4,289 $ 5,015
Accounts payable 2,065 2,557
Accrued line costs 3,003 3,721
Other current liabilities 6,329 5,916
-------- -------
Total current liabilities 15,686 17,209
-------- -------
Long-term liabilities, less current portion:
Long-term debt 18,700 13,128
Deferred tax liability 5,646 4,877
Other liabilities 1,090 1,223
-------- -------
Total long-term liabilities 25,436 19,228
-------- -------
Commitments and contingencies
Minority interests 2,696 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: 10,756,601 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: 2,883,302,668 shares in 2000 and 2,849,743,843 shares in 1999 29 28
Additional paid-in capital 52,731 52,108
Retained earnings (deficit) 2,581 (928)
Unrealized holding gain on marketable equity securities 839 575
Cumulative foreign currency translation adjustment (718) (360)
Treasury stock, at cost, 6,765,316 shares in 2000 and 1999 (185) (185)
-------- -------
Total shareholders' investment 55,277 51,238
-------- -------
$99,893 $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 For the Nine Months
Ended September 30, Ended September 30,
-------------------- ---------------------
2000 1999 2000 1999
------- ------- ------- -------
Revenues $10,047 $8,996 $29,483 $26,586
------- ------ ------- -------
Operating expenses:
Line costs 3,867 3,593 11,376 11,089
Selling, general and administrative 3,069 2,125 7,810 6,740
Depreciation and amortization 1,237 1,079 3,570 3,266
------- ------ ------- -------
Total 8,173 6,797 22,756 21,095
------- ------ ------- -------
Operating income 1,874 2,199 6,727 5,491
Other income (expense):
Interest expense (245) (228) (699) (748)
Miscellaneous 107 31 327 53
------- ------ ------- -------
Income before income taxes and minority interests 1,736 2,002 6,355 4,796
Provision for income taxes 697 793 2,580 1,994
------- ------ ------- -------
Income before minority interests 1,039 1,209 3,775 2,802
Minority interests (72) (112) (216) (92)
------- ------ ------- -------
Net income 967 1,097 3,559 2,710
Distributions on subsidiary trust and other mandatorily
redeemable preferred securities 16 16 48 47
Preferred dividend requirement - 2 1 7
------- ------ ------- -------
Net income applicable to common shareholders $ 951 $1,079 $ 3,510 $ 2,656
======= ====== ======= =======
Earnings per common share:
Net income applicable to common shareholders:
Basic $ 0.33 $ 0.38 $ 1.23 $ 0.94
======= ====== ======= =======
Diluted $ 0.33 $ 0.37 $ 1.20 $ 0.91
======= ====== ======= =======
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 Nine Months
Ended September 30,
--------------------
2000 1999
------ ------
Cash flows from operating activities:
Net income $ 3,559 $ 2,710
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interests 216 92
Depreciation and amortization 3,570 3,266
Provision for losses on accounts receivable 1,515 674
Provision for deferred income taxes 850 1,727
Change in assets and liabilities, net of effect of
business combinations:
Accounts receivable (2,405) (995)
Other current assets (661) (217)
Accrued line costs (787) (47)
Accounts payable and other current liabilities 438 540
Other (372) 101
------- -------
Net cash provided by operating activities 5,923 7,851
------- -------
Cash flows from investing activities:
Capital expenditures (8,777) (5,888)
Acquisitions and related costs (14) (769)
Increase in intangible assets (725) (528)
Proceeds from disposition of marketable securities and other long-term assets 617 2,910
Increase in other assets (1,020) (1,297)
Decrease in other liabilities (672) (265)
------- -------
Net cash used in investing activities (10,591) (5,837)
------- -------
Cash flows from financing activities:
Principal borrowings (repayments) on debt, net 4,467 (3,941)
Common stock issuance 551 814
Distributions on subsidiary trust mandatorily redeemable preferred securities (48) (47)
Dividends paid on preferred stock (1) (7)
Redemption of Series C preferred stock (190) -
Other (75) -
------- -------
Net cash provided by (used in) financing activities 4,704 (3,181)
Effect of exchange rate changes on cash 4 (242)
------- -------
Net increase (decrease) in cash and cash equivalents 40 (1,409)
Cash and cash equivalents at beginning of period 876 1,727
------- -------
Cash and cash equivalents at end of period $ 916 $ 318
======== =======
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" 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 and nine-month periods ended September 30, 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, the Company 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"), with Sprint Corporation
("Sprint"). On July 13, 2000, the Company and Sprint announced that they had
agreed to terminate the Sprint Merger Agreement, effective immediately.
On September 5, 2000, the Company announced that it had entered into an
Agreement and Plan of Merger dated as of September 1, 2000 (the "Intermedia
Merger Agreement"), between the Company, Wildcat Acquisition Corp., a wholly
owned subsidiary of the Company, and Intermedia Communications Inc.
("Intermedia"). As a result of the merger (the "Intermedia Merger"), the
Company will acquire a controlling interest in Digex, Incorporated ("Digex"), a
leading provider of managed web and application hosting services for some of the
world's fastest growing companies.
Under the Intermedia Merger Agreement, each outstanding share of Intermedia
common stock will be exchanged for common stock, par value, $.01 per share of
the Company ("Common Stock") valued at $39.00, subject to a collar. The actual
number of shares of Common Stock to be exchanged for each share of Intermedia
common stock will be determined based on the average closing price of Common
Stock for the 15 days randomly selected from the 30 trading days ending on the
third trading day prior to closing, but will not be less than 0.8904 (if the
average trading price of Common Stock exceeds $43.80) or more than 1.1872 (if
the average trading price of Common Stock equals or is less than $32.85). If the
Common Stock falls below $36.50, the Company may exercise a cash election right
to cause the exchange ratio to be fixed at 1.0685 and pay the value in cash of
the difference between what the exchange ratio otherwise would have been and
1.0685. On November 1, 2000, there were 54,724,625 shares of Intermedia common
stock outstanding. Holders of Intermedia preferred stock, other than Intermedia
series B preferred stock, will receive one share of a class or series of the
Company's preferred stock, with substantially identical terms, which will be
established in connection with the Intermedia Merger. The Intermedia Merger will
be accounted for as a purchase.
Consummation of the Intermedia Merger is subject to various conditions set forth
in the Intermedia Merger Agreement, including adoption of the Intermedia Merger
Agreement by stockholders of Intermedia, certain U.S. regulatory approvals and
other customary conditions. It is anticipated that the Intermedia Merger will
close in the first half of 2001. This Form 10-Q does not constitute an offer to
sell or the solicitation of an offer to buy any securities.
(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 and nine months
ended September 30, 2000 and 1999 (in millions, except per share data):
6
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
-------------------- --------------------
2000 1999 2000 1999
------ ------ ------ ------
Basic
- -----
Net income $ 967 $1,097 $3,559 $2,710
Distributions on subsidiary trust and other mandatorily
redeemable preferred securities 16 16 48 47
Preferred dividend requirement - 2 1 7
------ ------ ------ ------
Net income applicable to common shareholders $ 951 $1,079 $3,510 $2,656
====== ====== ====== ======
Weighted average shares outstanding 2,874 2,834 2,864 2,815
====== ====== ====== ======
Basic earnings per share $ 0.33 $ 0.38 $ 1.23 $ 0.94
====== ====== ====== ======
Diluted
- --------
Net income applicable to common shareholders $ 951 $1,079 $3,510 $2,656
====== ====== ====== ======
Weighted average shares outstanding 2,874 2,834 2,864 2,815
Common stock equivalents 38 95 53 106
Common stock issuable upon conversion of preferred stock 2 2 2 2
------ ------ ------ ------
Diluted shares outstanding 2,914 2,931 2,919 2,923
====== ====== ====== ======
Diluted earnings per share $ 0.33 $ 0.37 $ 1.20 $ 0.91
====== ====== ====== ======
(D) Supplemental Disclosure of Cash Flow Information
- ----------------------------------------------------
Interest paid by the Company during the nine months ended September 30, 2000 and
1999, amounted to $793 million and $909 million, respectively. Income taxes
paid during the nine months ended September 30, 2000 and 1999, totaled $183
million and $75 million, respectively. In conjunction with business
combinations during the nine months ended September 30, 2000 and 1999, assumed
assets and liabilities were as follows (in millions):
2000 1999
------ -------
Fair value of assets acquired $ - $ 611
Excess of cost over net tangible 43 2,324
assets acquired
Liabilities assumed (29) (1,938)
Common stock issued - (228)
----- -------
Net cash paid $ 14 $ 769
===== =======
(E) Comprehensive Income
- ------------------------
The following table reflects the calculation of comprehensive income for the
Company for the three and nine months ended September 30, 2000 and 1999 (in
millions):
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
----------------------------- ----------------------------
2000 1999 2000 1999
----------------------------- ----------------------------
Net income applicable to common shareholders $ 951 $1,079 $3,510 $2,656
------ ------ ------ ------
Other comprehensive income (loss):
Foreign currency translation losses (156) (29) (358) (334)
Unrealized holding gains (losses):
Unrealized holding gains (losses) during the period 424 (79) 805 457
Reclassification adjustment for gains included in
net income (167) (66) (382) (81)
------ ------ ------ ------
Other comprehensive income (loss) before tax 101 (174) 65 42
Income tax benefit (expense) (96) 55 (159) (141)
------ ------ ------ ------
Other comprehensive income (loss) 5 (119) (94) (99)
------ ------ ------ ------
Comprehensive income applicable to common shareholders $ 956 $ 960 $3,416 $2,557
====== ====== ====== ======
7
(F) Reclassifications
- ----------------------
Revenues and line costs for prior periods reflect a classification change for
reciprocal compensation and COBRA (central office based remote access) equipment
sales which are now being treated as offsets to cost of sales. Previously, the
Company recorded these items on a gross basis as revenue. Results for all
periods have also been adjusted to reflect the elimination of small business and
consumer PICC (primary interexchange carrier charges) from both revenues and
line costs as a result of the Coalition for Affordable Local and Long Distance
Services ("CALLS") legislation which eliminated single line PICC as of July 1,
2000. Operating income, net income available to common shareholders and the
balance sheet are not affected by these reclassifications.
The effects of these reclassifications on the accompanying consolidated
statements of operations for the three and nine months ended September 30, 2000
and 1999 are as follows:
New Presentation
------------------------------------------
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
2000 1999 2000 1999
------- ------ ------- -------
Revenues $10,047 $8,996 $29,483 $26,586
Line costs $ 3,867 $3,593 $11,376 $11,089
Old Presentation
------------------------------------------
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
2000 1999 2000 1999
------- ------ ------- -------
Revenues $10,303 $9,308 $30,474 $27,495
Line costs $ 4,123 $3,905 $12,367 $11,998
(G) Segment Information
- -----------------------
Based on its organizational structure, the Company operated in eight reportable
segments as of September 30, 2000: Commercial voice and data, Internet,
International operations, Embratel Participacoes S.A. ("Embratel"), Wholesale,
Consumer, 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 type and
class of customer as well as the geographic dispersion of their operations. The
Commercial voice and data segment includes voice, data and other types of
domestic communications services for commercial customers. The Internet segment
provides Internet services including dedicated and dial-up access and web and
application hosting 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. Wholesale includes voice and data domestic
communications services for wholesale customers. Consumer includes domestic
voice communications services for consumer customers. 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"). Previously, the Company had defined six reportable
segments. However, in the second quarter of 2000, the Company began evaluating
opportunities to separate the wholesale and consumer operations into separate
tracking stocks and on November 1, 2000, the Company announced a realignment of
its businesses with the distinct customer bases they serve. If approved, the
Company will create two separately traded tracking stocks: WorldCom, which will
reflect the performance of the Company's core high-growth data, Internet,
hosting and international businesses; and MCI, which will reflect the
performance of its high-cash flow consumer, small business, wholesale long
distance and dial-up Internet access operations. Based on this change in focus
and the Company's plans, the Company intends to classify these operations into
the segments ultimately identified in the realignment.
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 network facilities, which do not make a distinction between the types
of services. As a result, the Company has not historically allocated 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 and nine months ended
September 30, 2000 and 1999, is as follows (in millions):
Revenues From External Customers
--------------------------------------------------------------------
For the Three Months For the Nine Months Ended
Ended September 30, September 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
------- ------ ------- -------
Commercial voice and data $ 4,553 $4,120 $13,459 $12,066
Internet 1,043 809 3,015 2,159
International operations 637 443 1,740 1,167
Wholesale 897 993 2,792 3,069
Consumer 1,984 1,977 5,878 5,575
Operations and technology - - - -
Other - (10) - 513
Corporate - - - -
-------------- --------------- ------------- -------------
Total before Embratel 9,114 8,332 26,884 24,549
Embratel 971 689 2,711 2,091
Elimination of intersegment revenues (38) (25) (112) (54)
-------------- --------------- ------------- -------------
Total $10,047 $8,996 $29,483 $26,586
============== =============== ============= =============
8
Selling, General and Administrative Expenses
----------------------------------------------------------------------
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
----------------------------------- ------------------------------
2000 1999 2000 1999
------ ------ ------ ------
Commercial voice and data $ 543 $ 472 $1,583 $1,518
Internet 231 184 672 536
International operations 167 97 473 314
Wholesale 35 36 108 113
Consumer 575 605 1,808 1,778
Operations and technology 546 591 1,608 1,723
Other - - - 170
Corporate 47 51 145 146
Corporate - Sprint merger costs and other charges 685 - 778 -
---------------- -------------- ------------- ------------
Total before Embratel 2,829 2,036 7,175 6,298
Embratel 249 96 662 449
Elimination of intersegment expenses (9) (7) (27) (7)
---------------- -------------- ------------- ------------
Total $3,069 $2,125 $7,810 $6,740
================ ============== ============= ============
The following is a reconciliation of the segment information to income before
income taxes and minority interests for the three and nine months ended
September 30, 2000 and 1999 (in millions):
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
----------------------------------- ------------------------------
2000 1999 2000 1999
------- ------ ------- -------
Revenues $10,047 $8,996 $29,483 $26,586
Operating expenses 8,173 6,797 22,756 21,095
------- ------ ------- -------
Operating income 1,874 2,199 6,727 5,491
Other income (expense):
Interest expense (245) (228) (699) (748)
Miscellaneous 107 31 327 53
------ ------- ------- -------
Income before income taxes
and minority interests $ 1,736 $2,002 $ 6,355 $ 4,796
======= ======= ======= =======
9
(H) Long-term debt
- -------------------
On May 24, 2000, the Company completed a public debt offering of $5.0 billion
principal amount of debt securities. The net proceeds of $4.95 billion were
used to pay down commercial paper obligations. The public debt offering
consisted of $1.5 billion of Floating Rate Notes Due 2001 (the "Floating Rate
Notes"), which mature on November 26, 2001, $1.0 billion of 7.875% Notes Due
2003 (the "Notes Due 2003"), which mature on May 15, 2003, $1.25 billion of
8.000% Notes Due 2006 (the "Notes Due 2006"), which mature on May 15, 2006 and
$1.25 billion of 8.250% Notes Due 2010 (the "Notes Due 2010"), which mature on
May 15, 2010 (collectively, with the Floating Rate Notes, the Notes Due 2003 and
the Notes Due 2006, the "Notes"). The Floating Rate Notes bear interest payable
quarterly on the 24th day of February, May, August and November, beginning
August 24, 2000. The Notes Due 2003, the Notes Due 2006 and the Notes Due 2010
bear interest payable semiannually in arrears on May 15 and November 15 of each
year, commencing on November 15, 2000.
The Notes Due 2006 and the Notes Due 2010 are redeemable, as a whole or in part,
at the option of the Company, at any time or from time to time, at respective
redemption prices equal to the greater of (i) 100% of the principal amount of
the Notes to be redeemed or (ii) the sum of the present values of the Remaining
Scheduled Payments (as defined therein) discounted at the Treasury Rate (as
defined therein) plus (a) 25 basis points for the Notes Due 2006, and (b) 30
basis points for the Notes Due 2010.
The Company is required, subject to certain exceptions and limitations set forth
in the Notes, to pay such additional amounts (the "Additional Amounts") to the
beneficial owner of any Note who is a Non-U.S. Holder (as defined in the Notes)
in order that every net payment of principal and interest on such Note and any
other amounts payable on the Note, after withholding for certain U.S. taxes,
will not be less than the amount provided for in such Note to be then due and
payable. The Notes are also subject to redemption, at the Company's option,
subject to certain conditions specified in the Notes, in the event the Company
has or will become obligated or there is a substantial probability the Company
will or may be required to pay such Additional Amounts.
On August 3, 2000, the Company extended its existing $7 billion 364-Day
Revolving Credit and Term Loan Agreement for a successive 364-day term pursuant
to a First Amendment and Renewal of the Amended and Restated 364-Day Revolving
Credit and Term Loan Agreement ("Facility C Loans"). The Facility C Loans
together with the $3.75 billion Amended and Restated Facility A Revolving Credit
Agreement dated August 6, 1998 ("Facility A Loans"), provide the Company with
aggregate credit facilities of $10.75 billion (the "Credit Facilities"). The
Credit Facilities provide liquidity support for the Company's commercial paper
program and will be used for other general corporate purposes. The Facility A
Loans mature on June 30, 2002. The Facility C Loans mature on August 2, 2001;
provided, however, that the Company may elect at such time to convert up to $4
billion of the principal debt outstanding under the Facility C Loans from
revolving loans to term loans with a maturity date no later than one year after
the conversion. The Credit Facilities bear interest payable in varying periods,
depending on the interest period, not to exceed six months, or with respect to
any Eurodollar Rate Borrowing, 12 months if available to all lenders, at rates
selected by the Company under the terms of the Credit Facilities, including a
Base Rate or Eurodollar Rate, plus the applicable margin. The applicable margin
for the Eurodollar Rate Borrowing generally varies from 0.35% to 0.75% as to
Facility A Loans and from 0.225% to 0.45% as to Facility C Loans, in each case
based upon the better of certain debt ratings. The Credit Facilities are
unsecured but include a negative pledge of the assets of the Company and certain
of its subsidiaries (subject to certain exceptions). The Credit Facilities
require compliance with a financial covenant based on the ratio of total debt to
total capitalization, calculated on a consolidated basis. The Credit Facilities
require compliance with certain operating covenants which limit, among other
things, the incurrence of additional indebtedness by the Company and certain of
its subsidiaries, sales of assets and mergers and dissolutions, and which
covenants do not restrict distributions to shareholders, provided the Company is
not in default under the Credit Facilities. At September 30, 2000, the Company
was in compliance with these covenants. The Facility A Loans and the Facility C
Loans are subject to annual commitment fees not to exceed 0.25% and 0.15%,
respectively, of any unborrowed portion of the facilities.
10
The following table sets forth the outstanding debt of the Company as of
September 30, 2000 (in millions):
Commercial paper and credit facilities $ 3,703
Floating rate notes due 2001 through 2002 1,560
7.88% - 8.25% Notes Due 2003-2010 3,500
6.13% - 6.95% Notes Due 2001-2028 6,100
7.13% - 7.75% Notes Due 2004-2027 2,000
8.88% - 9.38% Senior Notes Due 2004-2006 672
7.13% - 8.25% Senior Debentures due 2023-2027 1,437
6.13% - 7.50% Senior Notes Due 2004-2012 1,936
Capital lease obligations (maturing through 2002) 437
Other debt (maturing through 2008) 1,644
-------
22,989
Short-term debt and current maturities of long-term debt 4,289
-------
$18,700
=======
(I) 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,
the Company 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. The Company 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's subsidiaries must be certified separately in
each state to offer local exchange and intrastate long distance services. No
state, however, subjects any Company subsidiary to price cap or rate of return
regulation, nor are they currently required to obtain Federal Communications
Commission ("FCC") authorization for installation or operation of their network
facilities used for domestic services, other than licenses for specific
multichannel multipoint distribution service ("MMDS"), wireless communications
service, terrestrial microwave and satellite earth station facilities that
utilize radio frequency spectrum. FCC approval is required, however, for the
installation and operation of international facilities and services. The Company
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, local
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 the Company.
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 Court is holding the
case in abeyance pending reconsideration at the FCC. On July 18, 2000, the
United States Court of Appeals for the Eighth Circuit again invalidated the
FCC's pricing rules. Among other things, the Court held that the FCC's
requirement that rates for unbundled network elements be based on the most
efficient technology and network configuration available, using existing wire
center locations, violated the plain meaning of the Telecom Act. The Court,
however, upheld the use of a forward-looking cost methodology. The Court
remanded the pricing rules to the FCC for further proceedings. Various parties,
including the Company, are seeking review by the U.S. Supreme Court.
11
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 markets, 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. On June 6, 2000, the U.S.
Supreme Court granted the petition for certiorari filed by GTE Corporation
("GTE") seeking review of the Fifth Circuit's decision that the FCC's forward-
looking methodology for funding universal services does not result in an
unconstitutional taking of the ILECs' property. The U.S. Supreme Court denied
petitions for certiorari filed by various parties, including the Company,
challenging certain other aspects of this decision. However, on November 2,
2000, the Court granted GTE's motion to voluntarily withdraw its petition for
review. On November 1, 1999, the FCC implemented the Fifth Circuit's decision.
AT&T has appealed this FCC order to the United States Court of Appeals for the
Fifth Circuit, and the Company 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 ordinarily 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. Oral argument is scheduled for February 21, 2001.
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. The Court is holding the case in abeyance
pending reconsideration at the FCC.
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, over 30 state Public Utility Commissions ("PUCs") issued orders
finding that carriers, including the Company, 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 ILECs have filed new
cases at the PUCs or in court. Moreover, the Company 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, which are currently pending. On May 15, 2000,
legislation was introduced in the U.S. House of Representatives that would
exclude dial-up Internet traffic from the reciprocal compensation provisions of
12
the Telecom Act. The Company cannot predict the outcome of the cases filed by
the ILECs, the FCC's proceedings on remand, or the congressional legislation,
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 FCC's orders prevent the Company from relying on its domestic
federal tariff to limit liability or to establish its interstate rates for
customers. The Company will comply with the orders and is in the process of
developing modifications to the manner in which it establishes 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 services 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 two; Bell Atlantic Corporation's application for New York was granted on
December 21, 1999, and SBC Communications, Inc.'s application for Texas was
granted on June 30, 2000. At this time, Section 271 applications for the states
of Massachusetts, Kansas, and Oklahoma are pending before the FCC. Other
applications may be filed this year. The Company cannot predict the outcome of
these proceedings or whether or not the results will have a material adverse
impact on its consolidated financial position or future results of operations.
On May 31, 2000, the FCC adopted further access charge and universal service
reform. In response to a proposal made by CALLS, a group of regional Bell
operating companies, GTE and two long distance companies, the FCC reduced access
charges paid by long distance companies to local exchange carriers by
approximately $3.2 billion annually. The proposal, which will allow charges
imposed on end user customers by local exchange carriers to increase over time,
also created a new $650 million universal service fund. Several parties have
appealed various aspects of the CALLS order.
It is possible that rights held by the Company to MMDS and/or ITFS spectrum may
be disrupted by FCC decisions to re-allocate some or all of that spectrum to
other services. If such re-allocation were to occur, the Company cannot predict
whether current deployment plans for its MMDS services will be sustainable.
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.
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
13
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 the Company to terminate international
traffic, there is a risk that the payments the Company 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 the Company. 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
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.
14
All providers of telecommunications services are subject to quality and
modernization obligations provided in the Plan Geral de Qualidade ("General Plan
on Quality").
Litigation. In November 2000, class action complaints were filed in the United
States District Court for the Southern District of Mississippi against the
Company and certain of its named executive officers. The complaints generally
allege that the defendants made false and misleading statements about certain
aspects of the Company's performance by failing to disclose, among other things,
that the merger with MCI Communications Corporation ("MCI Corp.") did not yield
the anticipated cost savings and revenue increases, that the Company's growth
rate was declining, and that the Company's financial statements were inflated
due to the failure to write down, on a timely basis, $405 million in
receivables. Based on these allegations, the complaints assert claims for
violation of Section 10(b) of the Securities Exchange Act of 1934 (the "1934
Securities Act") and Rule 10b-5 promulgated thereunder and Section 20(a) of the
1934 Securities Act. The complaints seek to certify a class of persons who
purchased or otherwise acquired shares of the Company between April 13, 2000 and
November 1, 2000. The Company believes that the factual allegations and legal
claims asserted in the complaints are without merit and it intends to defend
them vigorously.
On November 4, 1996, and thereafter, and on August 25, 1997, and thereafter, MCI
Corp. 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 Corp., individually
and purportedly as class actions on behalf of all other stockholders of MCI
Corp. The complaints allege that MCI Corp.'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 Corp. 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 the Company and a Company
subsidiary as additional defendants. These plaintiffs generally allege that the
defendants breached their fiduciary duties to stockholders in connection with
the merger with MCI Corp. and the agreement to pay a termination fee to the
Company. They further allege discrimination in favor of BT in connection with
the MCI Corp. merger. The plaintiffs seek, inter alia, damages and injunctive
relief prohibiting the consummation of the MCI Corp. 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 Corp. 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 Corp.'s shares between July 11, 1997 and August
21, 1997, inclusive, that MCI Corp. and certain of its officers and directors
failed to disclose material information about MCI Corp., including that MCI
Corp. 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 the Company has improperly charged "pre-subscribed"
- -----
customers "non-subscriber" or so-called "casual" rates for certain direct-dialed
calls. Plaintiffs further challenge the Company's credit policies for this
"non-subscriber" traffic. Plaintiffs assert that the Company's conduct violates
the Communications Act and various state laws; the complaint seeks rebates to
all affected customers as well as punitive damages and other relief. In
response to a motion filed by the Company, the Judicial Panel on Multi-District
Litigation consolidated these matters in the United States District Court for
the Southern District of Illinois. The parties have entered into a memorandum
of understanding to settle these cases, pursuant to which the Company would pay
$88 million for the benefit of the Settlement Class. Judicial approval of the
tentative settlement is required. The Company's appeal of the FCC's Halprin
-------
decision to the United States Court of Appeals for the District of Columbia
Circuit is stayed pending judicial review of the proposed settlement.
15
(J) Related Party Transactions
- -------------------------------
In September 2000, the Company loaned $50 million to Bernard J. Ebbers,
President and Chief Executive Officer of the Company. The loan from the Company
is payable on demand and bears interest at a floating rate equal to that under
the Facility C Loans. In November 2000, the Company agreed to guarantee up to
$100 million principal amount of indebtedness, together with any related
interest, attorneys' fees or costs, owed from time to time by Mr. Ebbers to an
institutional lender. As of November 14, 2000, no advance under the guaranty had
been made. Additionally, in November 2000, the Company agreed to loan Mr. Ebbers
up to an additional $25 million, of which $11.5 million had been borrowed as of
November 14, 2000, on the same terms and conditions as the September loan. In
connection with the November transactions, and subject to certain limitations,
including any restrictions under existing agreements, Mr. Ebbers pledged to the
Company shares of the Common Stock held by him to secure his obligations under
the loans and guaranty. The pledge is subordinated to obligations to his
existing lenders. Mr. Ebbers has used, or plans to use, the proceeds of the
loans from the Company and the loan guaranteed by the Company to repay certain
indebtedness under margin loans from institutional lenders secured by shares of
the Common Stock held by him.
(K) Subsequent Event
- ---------------------
On November 1, 2000, the Company announced a realignment of its businesses with
the distinct customer bases they serve. If approved by the shareholders, the
Company will amend its articles of incorporation to effect a recapitalization
that will replace existing Common Stock with two new series of common stock:
WorldCom stock and MCI stock. The WorldCom stock is intended to reflect, or
track, the performance of the Company's core high-growth data, Internet, hosting
and international businesses, and MCI stock is intended to reflect, or track,
the performance of the Company's high-cash flow consumer, small business,
wholesale long distance and dial-up Internet access operations. Upon
shareholder approval, the Company's shareholders will receive one share of MCI
stock for every 25 shares of Common Stock held immediately prior to the tracking
stock distribution date.
MCI stock will initially pay a quarterly dividend of approximately $75 million
($300 million per year). MCI will initially be allocated notional debt of $6
billion and the remaining Company debt (approximately $17 billion) will be
allocated on a notional basis to the WorldCom tracking stock. The Company will
report separate financial results for WorldCom and MCI in addition to the
consolidated Company results. The Company does not expect that this transaction
will have any impact on its credit ratings.
Voting rights of WorldCom and MCI shareholders will be prorated based on the
relative market values of WorldCom and MCI, with no predetermined maximum limit
on the percent of vote either group may represent. The Company will conduct
shareholder meetings that encompass all holders of voting stock. WorldCom and
MCI share-holders will vote together as a single class on all matters brought to
a vote of shareholders, including the election of the directors.
The Company's board of directors may convert each outstanding share of MCI
tracking stock into shares of WorldCom tracking stock at a premium of 110% of
the relative trading value of the MCI tracking stock for the 20 days prior to
the announcement of the conversion. No premium will be paid on a conversion
that occurs three years after the issuance of the MCI tracking stock.
If all or substantially all of the WorldCom or MCI assets were sold, the
relevant shareholders would receive either: (i) a distribution equal to the
fair value of the net proceeds of the sale, either by special dividend or by
redemption of shares; or (ii) a number of shares of the remaining entity's
common stock having been calculated in accordance with a predetermined
conversion premium.
The Company expects to file a registration/proxy statement in connection with
the tracking stocks with the SEC before the end of 2000, to hold its shareholder
meeting to vote on the tracking stock plan in the first half of 2001, and to
effect the distribution of the tracking stocks shortly after shareholder
approval. No regulatory approvals are expected to be required.
16
Investors and security holders are urged to read the Company's Registration
Statement on Form S-4 relating to the tracking stocks, including the prospectus
and proxy statement, when they become available. When these and other documents
relating to the tracking stock transaction are filed with the SEC, they may be
obtained without charge from the SEC's website at http://www.sec.gov. Holders
------------------
of the Company's stock may also obtain each of these documents (when they become
available) for free by directing their request to WorldCom, Inc., c/o Investor
Relations Department, 500 Clinton Center Drive, Clinton, Mississippi 39056.
This Form 10-Q, and such proxy statement/prospectus does not constitute an offer
to sell or the solicitation of an offer to buy, nor will there be any sale of
tracking stock in any state in which the offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
that state. No offering of tracking stock will be made except by means of a
prospectus meeting the requirements of Section 10 of the Securities Act.
The Company and other persons referred to below may be deemed to be participants
in the solicitation of proxies of the Company's shareholders to adopt the
proposals which will be set forth in the proxy statement contained in the
Company's Registration Statement on Form S-4 relating to the tracking stocks.
The participants in this solicitation may include the directors and executive
officers of the Company, who may have an interest in the transaction including
as a result of holding shares of common stock and/or options to acquire the
same. A detailed list of the names and interests of the Company's directors and
executive officers is contained in the Company's proxy statement for its 2000
annual meeting, which may be obtained without charge at the SEC's website at
http://www.sec.gov.
- ------------------
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 1934 Securities Act, 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.
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) possible effects of the Company's recent
announcement regarding the creation of tracking stocks to track the performance
of its core high-growth data, Internet, hosting and international businesses and
its high-cash flow consumer, small business, wholesale long distance and dial-up
Internet access operations; (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 and nine months ended
September 30, 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.
17
Results of Operations
The following table sets forth for the periods indicated the Company's
statements of operations as a percentage of its revenues for the three and nine
months ended September 30, 2000 and 1999:
For the Three Months For the Nine Months Ended
Ended September 30, September 30,
------------------------- --------------------------
2000 1999 2000 1999
----- ----- ----- -----
Revenues........................................................ 100.0% 100.0% 100.0% 100.0%
Line costs...................................................... 38.5 39.9 38.6 41.7
Selling, general and administrative............................. 30.5 23.6 26.5 25.4
Depreciation and amortization................................... 12.3 12.0 12.1 12.3
----- ----- ----- -----
Operating income................................................ 18.7 24.5 22.8 20.6
Other income (expense):
Interest expense............................................. (2.4) (2.5) (2.4) (2.8)
Miscellaneous................................................ 1.0 0.2 1.1 0.2
----- ----- ----- -----
Income before income taxes and minority interests............... 17.3 22.2 21.5 18.0
Provision for income taxes...................................... 6.9 8.8 8.7 7.5
----- ----- ----- -----
Income before minority interests................................ 10.4 13.4 12.8 10.5
Minority interests.............................................. (0.7) (1.2) (0.7) (0.3)
----- ----- ----- -----
Net income...................................................... 9.7 12.2 12.1 10.2
Distributions on subsidiary trust and other mandatorily
redeemable preferred securities.............................. 0.2 0.2 0.2 0.2
Preferred dividend requirement.................................. - - - -
----- ----- ----- -----
Net income applicable to common shareholders.................... 9.5% 12.0% 11.9% 10.0%
===== ===== ===== =====
Three and nine months ended September 30, 2000 vs.
Three and nine months ended September 30, 1999
Revenues for the three months ended September 30, 2000, increased 11.7% to $10.0
billion as compared to $9.0 billion for the three months ended September 30,
1999. For the nine months ended September 30, 2000, revenues increased 10.9% to
$29.5 billion versus $26.6 billion for the same period in the prior year. The
increase in total revenues is attributable to internal growth of the Company.
Revenues and line costs for prior periods reflect a classification change for
reciprocal compensation and COBRA equipment sales which are now being treated as
offsets to cost of sales. Previously, the Company recorded these items on a
gross basis as revenue. Results for all periods have also been adjusted to
reflect the elimination of small business and consumer PICC from both revenues
and line costs as a result of the CALLS legislation which eliminated single line
PICC as of July 1, 2000.
On November 1, 2000, the Company announced a realignment of its businesses with
the distinct customer bases they serve. If approved, the Company will create
two separately traded tracking stocks: WorldCom, which will reflect the
performance of the Company's core high-growth data, Internet, hosting and
international businesses; and MCI, which will reflect the performance of its
high-cash flow consumer, small business, wholesale long distance and dial-up
Internet access operations. Therefore, the revenues reported below for the
three and nine months ended September 30, 2000 and 1999 reflect this
classification change (dollars in millions):
18
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- ------------------------------
Percent Percent
2000 1999 Change 2000 1999 Change
------- ------ ------- ------- ------- -------
Revenues
Voice $ 1,731 $1,823 (5.0)% $ 5,328 $ 5,590 (4.7)%
Data 1,913 1,514 26.4 5,474 4,262 28.4
International 1,570 1,107 41.8 4,339 3,204 35.4
Internet dedicated and other 639 418 52.9 1,777 1,069 66.2
------- ------ ------- -------
Commercial services 5,853 4,862 20.4 16,918 14,125 19.8
------- ------ ------- -------
Wholesale and consumer 2,837 2,942 (3.6) 8,548 8,559 (0.1)
Alternative channels and small business 954 807 18.2 2,792 2,310 20.9
Internet-dial 403 385 4.7 1,225 1,069 14.6
------- ------ ------- -------
Communications services 10,047 8,996 11.7 29,483 26,063 13.1
Other - - - - 523 -
------- ------ ------- -------
Total $10,047 $8,996 11.7% $29,483 $26,586 10.9%
======= ====== ======= =======
Commercial services revenues, which includes the revenues generated from
commercial voice, data, international and dedicated and other Internet services,
for the three months ended September 30, 2000 increased 20.4% to $5.9 billion as
compared to $4.9 billion for the three months ended September 30, 1999. For the
nine months ended September 30, 2000, commercial services revenues increased
19.8% to $16.9 billion versus $14.1 billion for the same period in the prior
year.
Commercial voice revenues for the three and nine months ended September 30, 2000
decreased 5.0% and 4.7%, respectively, over the prior year periods, on traffic
growth of 6.1% and 5.2%, respectively, as a result of pricing pressure in the
commercial markets. The revenue decrease was partially offset by local voice
revenue increases of 17.6% and 19.8%, respectively, for the three and nine
months ended September 30, 2000. The Company continues to show significant
percentage gains in local voice services as customers purchase "all-distance"
voice services from the Company. However, it is still a relatively small
component of total Company commercial voice revenues. Commercial voice revenues
include both domestic commercial long distance and local switched revenues.
Data revenues for the three and nine months ended September 30, 2000, increased
26.4% and 28.4%, respectively, over the same periods of the prior year. Data
includes both commercial 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 the existing customer
base of frame relay services and increased demand in asynchronous transfer mode
("ATM") services. The Company continues to experience strong demand for
capacity increases across the product set as businesses move more of their
mission critical applications to their own networks. As of September 30, 2000,
the Company's domestic local voice grade equivalents ("VGEs"), which measure the
capacity of local private line data circuits, had increased 100% to 55.5 million
VGEs versus the prior year amount.
International revenues - those revenues originating outside of the United States
- - for the three months ended September 30, 2000 were $1.6 billion, an increase
of 41.8% as compared with $1.1 billion for the same period of the prior year.
For the nine-month period ended September 30, 2000, international revenues
increased 35.4% to $4.3 billion versus $3.2 billion for the same period of the
prior year. Excluding Embratel, international revenues for the three and nine
months ended September 30, 2000 increased 43.8% and 49.2% respectively, over the
prior period amounts. The increase is attributable to additional sales force
and network infrastructure established to pursue international opportunities.
During the third quarter of 2000 the Company continued to extend the reach of
its end-to-end networks, adding nearly 2,000 buildings for a total of over
15,000 buildings connected on the international networks.
Dedicated Internet revenues for the three and nine months ended September 30,
2000 increased 52.9% and 66.2%, respectively, over the prior year amounts.
Growth was driven by demand for dedicated circuits as more and more business
customers migrated their data networks and applications to Internet-based
technologies with greater amounts of bandwidth.
19
Wholesale and consumer revenues for the three and nine month periods ended
September 30, 2000 decreased 3.6% and 0.1%, respectively, over the same periods
in the prior year. The wholesale market continues to be extremely price
competitive as declines in minute rates outpaced increases in traffic resulting
in revenue decreases of 11.5% and 10.4%, respectively, for the three and nine
months ended September 30, 2000, versus the same periods in the prior year. The
wholesale market decreases were partially offset by increases of 0.3% and 5.3%,
respectively, in consumer revenues as the Company's partner marketing programs
helped to drive Dial-1 product gains. Consumer revenue growth was impacted by
declines in 1-800-COLLECT, which has been pressured by increasing wireless
substitution, and 10-10-321, which the Company no longer actively markets.
The Company expects to see continued pricing pressure in both the wholesale and
consumer businesses, which will affect both revenue growth and gross margins.
Alternative channels and small business revenues for the three and nine months
ended September 30, 2000 increased 18.2% and 20.9%, respectively, over the prior
year periods. Alternative channels and small business includes sales agents and
affiliates, wholesale alternative channels, small business, prepaid calling card
and paging revenues. These increases are primarily attributable to internal
growth for wholesale alternative channel voice revenues. The Company expects
that pricing pressures in the wholesale and small business markets will continue
to negatively affect revenue growth in this area and the Company cannot predict
whether or not this level of growth can be sustained in the foreseeable future.
Internet-dial revenue growth for the three and nine months ended September 30,
2000 was 4.7% and 14.6%, respectively, over the same periods in the prior year.
The Company's dial access network has grown 76% to over 2.5 million modems as of
September 30, 2000, compared with the same period in the prior year.
Additionally, Internet connect hours increased 49% to 1.6 billion hours for the
three months ended September 30, 2000 versus the third quarter of 1999. These
network usage increases were offset by pricing pressure on dial-up Internet
traffic as a result of contract repricings in 2000.
Other revenues which, prior to April 1999, primarily consisted of the operations
of SHL, were zero for the three and nine month periods ended September 30, 2000
and zero and $523 million, respectively, for the prior year periods. 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 third quarter of
2000 were 38.5% as compared to 39.9% reported for the same period of the prior
year. On a year-to-date basis, line costs as a percentage of revenues decreased
to 38.6% as compared to 41.7% reported for the same period of the prior year.
The overall improvements are a result of annual access reform reductions, more
data and dedicated Internet traffic over Company-owned facilities, and improved
interconnection terms in Europe. These improvements were somewhat offset by 2000
contract repricings in the dial Internet business, continued competitive pricing
on dial Internet business and increased dial Internet traffic over facilities
not owned by the Company.
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. The Company 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. The Company 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 networks, 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 third quarter of 2000 were $3.1 billion or 30.5% of revenues as
compared to $2.1 billion or 23.6% of revenues for the third quarter of 1999.
Selling, general and administrative expenses for the three months ended
September 30, 2000, includes a $685 million pre-tax charge associated with
specific domestic and international wholesale accounts that are no longer deemed
collectible due to bankruptcies, litigation and settlements of contractual
disputes that occurred in the third quarter of 2000. On a year-to-date basis,
selling, general and administrative expenses as a percentage of revenues
20
were 26.5% as compared to 25.4% for the same period of the prior year. Selling,
general and administrative expenses for the nine months ended September 30, 2000
also includes a $93 million pre-tax one-time charge recorded in the second
quarter of 2000 associated with the termination of the Sprint Merger Agreement,
including regulatory, legal, accounting and investment banking fees and other
costs. Excluding these charges, selling, general and administrative expenses as
a percentage of revenues were 23.7% and 23.9%, respectively, for the three and
nine months ended September 30, 2000. The increase in selling, general and
administrative expenses as a percentage of revenues for the quarter ended
September 30, 2000 results primarily from increased costs associated with
"generation d" initiatives that include product marketing, customer care,
information system and product development; employee retention costs; and costs
associated with MMDS product development. The Company expects selling, general
and administrative expenses to increase over the next twelve months as a result
of the previously noted costs being incurred at an accelerated pace.
Depreciation and amortization. Depreciation and amortization expense for the
third quarter of 2000 increased to $1.2 billion or 12.3% of revenues from $1.1
billion or 12.0% of revenues for the comparable quarter of 1999. On a year-to-
date basis, this expense increased to $3.6 billion or 12.1% of revenues from
$3.3 billion or 12.3% of revenues for the comparable 1999 period. These
increases reflect increased amortization and depreciation from 1999 acquisitions
as well as additional depreciation related to capital expenditures.
Interest expense. Interest expense in the third quarter of 2000 was $245
million or 2.4% of revenues, as compared to $228 million or 2.5% of revenues
reported in the third quarter of 1999. For the nine months ended September 30,
2000, interest expense was $699 million or 2.4% of revenues as compared to $748
million or 2.8% of revenues for the first nine months of 1999. For the three
months ended September 30, 2000 and 1999, weighted average annual interest rates
on the Company's long-term debt were 7.35% and 7.36%, respectively, while
weighted average levels of borrowings were $22.4 billion and $18.2 billion,
respectively. For the nine months ended September 30, 2000 and 1999, weighted
average annual interest rates on the Company's long-term debt were 7.22% and
7.34% respectively, while weighted average levels of borrowings were $20.8
billion and $19.5 billion, respectively. Interest expense for the three and
nine months ended September 30, 2000 was favorably impacted by increased
construction activity and the associated interest capitalization, offset in part
by higher weighted average levels of borrowings and higher interest rates on the
Company's variable rate debt and 2000 public debt offerings. Interest expense
for the nine months ended September 30, 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 third quarter of
2000 was $107 million or 1.0% of revenues as compared to $31 million or 0.2% of
revenues for the third quarter of 1999. For the nine months ended September 30,
2000, miscellaneous income was $327 million or 1.1% of revenues as compared to
$53 million or 0.2% of revenues for the first nine months of 1999.
Miscellaneous income includes investment 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 non-operating items.
Net income applicable to common shareholders. For the quarter ended September
30, 2000, the Company reported net income applicable to common shareholders of
$951 million as compared to $1.1 billion reported in the third quarter of 1999.
Diluted income per common share was $0.33 compared to income per share of $0.37
for the comparable 1999 period. For the nine months ended September 30, 2000,
the Company reported net income applicable to common shareholders of $3.5
billion as compared to $2.7 billion for the nine months ended September 30,
1999. Diluted income per common share was $1.20 compared to income per common
share of $0.91 for the comparable 1999 period.
Liquidity and Capital Resources
As of September 30, 2000, the Company's total debt was $23.0 billion, an
increase of $4.8 billion from December 31, 1999. Additionally, at September 30,
2000, the Company had available liquidity of $7.9 billion under its Credit
Facilities and commercial paper program (which are described below) and from
available cash.
21
On May 24, 2000, the Company completed a public debt offering of $5.0 billion
principal amount of debt securities. The net proceeds of $4.95 billion were
used to pay down commercial paper obligations. The public debt offering
consisted of $1.5 billion of Floating Rate Notes Due 2001 (the "Floating Rate
Notes"), which mature on November 26, 2001, $1.0 billion of 7.875% Notes Due
2003 (the "Notes Due 2003"), which mature on May 15, 2003, $1.25 billion of
8.000% Notes Due 2006 (the "Notes Due 2006"), which mature on May 15, 2006 and
$1.25 billion of 8.250% Notes Due 2010 (the "Notes Due 2010"), which mature on
May 15, 2010 (collectively, with the Floating Rate Notes, the Notes Due 2003 and
the Notes Due 2006, the "Notes"). The Floating Rate Notes bear interest payable
quarterly on the 24th day of February, May, August and November, beginning
August 24, 2000. The Notes Due 2003, the Notes Due 2006 and the Notes Due 2010
bear interest payable semiannually in arrears on May 15 and November 15 of each
year, commencing on November 15, 2000.
The Notes Due 2006 and the Notes Due 2010 are redeemable, as a whole or in part,
at the option of the Company, at any time or from time to time, at respective
redemption prices equal to the greater of (i) 100% of the principal amount of
the Notes to be redeemed or (ii) the sum of the present values of the Remaining
Scheduled Payments (as defined therein) discounted at the Treasury Rate (as
defined therein) plus (a) 25 basis points for the Notes Due 2006, and (b) 30
basis points for the Notes Due 2010.
The Company is required, subject to certain exceptions and limitations set forth
in the Notes, to pay such additional amounts (the "Additional Amounts") to the
beneficial owner of any Note who is a Non-U.S. Holder (as defined in the Notes)
in order that every net payment of principal and interest on such Note and any
other amounts payable on the Note, after withholding for certain U.S. taxes,
will not be less than the amount provided for in such Note to be then due and
payable. The Notes are also subject to redemption, at the Company's option,
subject to certain conditions specified in the Notes, in the event the Company
has or will become obligated or there is a substantial probability the Company
will or may be required to pay such Additional Amounts.
On August 3, 2000, the Company extended its existing $7 billion 364-Day
Revolving Credit and Term Loan Agreement for a successive 364-day term pursuant
to a First Amendment and Renewal of the Amended and Restated 364-Day Revolving
Credit and Term Loan Agreement ("Facility C Loans"). The Facility C Loans
together with the $3.75 billion Amended and Restated Facility A Revolving Credit
Agreement dated August 6, 1998 ("Facility A Loans"), provide the Company with
aggregate credit facilities of $10.75 billion (the "Credit Facilities"). The
Credit Facilities provide liquidity support for the Company's commercial paper
program and will be used for other general corporate purposes. The Facility A
Loans mature on June 30, 2002. The Facility C Loans mature on August 2, 2001;
provided, however, that the Company may elect at such time to convert up to $4
billion of the principal debt outstanding under the Facility C Loans from
revolving loans to term loans with a maturity date no later than one year after
the conversion. The Credit Facilities bear interest payable in varying periods,
depending on the interest period, not to exceed six months, or with respect to
any Eurodollar Rate Borrowing, 12 months if available to all lenders, at rates
selected by the Company under the terms of the Credit Facilities, including a
Base Rate or Eurodollar Rate, plus the applicable margin. The applicable margin
for the Eurodollar Rate Borrowing generally varies from 0.35% to 0.75% as to
Facility A Loans and from 0.225% to 0.45% as to Facility C Loans, in each case
based upon the better of certain debt ratings. The Credit Facilities are
unsecured but include a negative pledge of the assets of the Company and certain
of its subsidiaries (subject to certain exceptions). The Credit Facilities
require compliance with a financial covenant based on the ratio of total debt to
total capitalization, calculated on a consolidated basis. The Credit Facilities
require compliance with certain operating covenants which limit, among other
things, the incurrence of additional indebtedness by the Company and certain of
its subsidiaries, sales of assets and mergers and dissolutions, and which
covenants do not restrict distributions to shareholders, provided the Company is
not in default under the Credit Facilities. At September 30, 2000, the Company
was in compliance with these covenants. The Facility A Loans and the Facility C
Loans are subject to annual commitment fees not to exceed 0.25% and 0.15%,
respectively, of any unborrowed portion of the facilities.
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 the
Company from available liquidity under the Credit Facilities and commercial
paper program.
22
In the third quarter of 2000, the Company paid the final installment of R$795
million (U.S. $444 million) on the note due in connection with the Company's
purchase of Embratel. Additionally, in the first quarter of 2000, $200 million
of senior notes with an interest rate of 7.13% matured. The funds utilized to
repay this indebtedness were obtained from available liquidity under the Credit
Facilities and commercial paper program.
In the third quarter of 1999, the Company increased its $500 million receivables
purchase program to $2.0 billion. As of September 30, 2000, the purchaser owned
an undivided interest in a $3.7 billion pool of receivables, which includes the
$1.95 billion sold.
For the nine months ended September 30, 2000, the Company's cash flow from
operations was $5.9 billion versus $7.9 billion for the comparable 1999 period.
The Company's improved operating results were more than offset by a $633 million
increase in accounts receivable at Embratel for the first nine months of 2000
primarily due to Embratel's direct billing of customers and the implementation
of this new billing system during 2000. Additionally, there were decreases in
other current liabilities and deferred taxes of $1.7 billion versus the prior
year period.
Cash used in investing activities for the nine months ended September 30, 2000,
totaled $10.6 billion. Primary capital expenditures include purchases of
switching, transmission, communications and other equipment. The Company
anticipates that approximately $2.5 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 variable rate debt would have an adverse effect
upon the Company's reported net income and cash flow. The Company believes that
it will generate sufficient cash flow to service the Company's debt and capital
requirements; however, economic downturns, increased interest rates and other
adverse developments, including factors beyond the Company's control, could
impair its ability to service its indebtedness. In addition, the cash flow
required to service the Company's debt may reduce its ability to fund internal
growth, additional acquisitions and capital improvements.
The Company believes that, if consummated, the Intermedia Merger will fuel the
Company's web hosting expansion, through the acquisition of the controlling
interest in Digex, by providing a comprehensive portfolio of mission critical
hosting products and services for commercial businesses. This will allow the
Company to accelerate its ability to provide world-class managed web and
application hosting services by 12 to 18 months. Additionally, the Company
expects that, after consummation of the Intermedia Merger, Digex will continue
to build its operations and expand its customer base, causing it to continue to
incur operating losses for the foreseeable future, which could adversely
effect the results of operations for the combined Company as a whole.
The development of the businesses of the Company 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 the Company to delay or abandon some of its
plans, which could have a material adverse effect on the success of the Company.
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 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 a remaining aggregate value of approximately $9.9 billion.
The shelf registration statement offers the Company flexibility, as the market
permits, to access the public debt markets. No assurance can be given that any
public financing will be available on terms acceptable to the Company.
Absent significant capital requirements for acquisitions, the Company believes
that cash flow from operations and available liquidity, including the 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, under
existing credit conditions, the Company believes that funding needs in excess of
internally generated cash flow and availability under the Credit Facilities and
commercial paper program could be met by accessing debt markets.
23
Recently Issued Accounting Standards
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" ("SAB 101"). In June 2000, the SEC issued
an amendment to SAB 101 which allows registrants to wait until the fourth
quarter of their fiscal year beginning after December 15, 1999 to implement SAB
101. SAB 101 provides guidance on the recognition, presentation and disclosure
of revenue in financial statements filed with the SEC. The deferral of
telecommunications service activation fees and certain related costs are
specifically addressed in SAB 101. The Company is currently assessing the
impact of SAB 101 on its consolidated results of operations or financial
position and there can be no assurance as to the effect on the Company's
consolidated financial statements.
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 and 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.
The Company is exposed to foreign exchange rate risk primarily due to the
Company's international operations holding approximately $1.3 billion in U.S.
dollar denominated debt, and approximately $278 million of indebtedness indexed
in other currencies including the French Franc, Deutsche Mark, Japanese Yen and
Brazilian real as of September 30, 2000. The potential immediate loss to the
Company that would result from a hypothetical 10% change in foreign currency
exchange rates based on these positions would be approximately $39 million
(after elimination of minority interests).
24
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.
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 September 30, 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 reflected in the discussion under Note I 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
The information contained in Notes I, J and K of the Notes to
Consolidated Financial Statements in Part I, Item 1 above, is hereby
incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
See Exhibit Index.
B. Reports on Form 8-K
(i) Current Report on Form 8-K dated July 13, 2000 (filed July
13, 2000), reporting under item 5, Other Events, information
related to the termination of the Sprint Merger Agreement.
25
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: November 14, 2000.
26
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
1.1 Underwriting Agreement dated May 19, 2000, between WorldCom, Inc.
("the Company") and Salomon Smith Barney Inc. and the other firms
named therein, acting severally on behalf of themselves as Managers
and Underwriters and on behalf of the other several Underwriters,
if any, named in the Terms Agreement (incorporated herein by
reference to Exhibit 1.1 to the Company's Current Report on Form 8-
K dated May 19, 2000 (filed May 22, 2000) (File No. 0-11258))
1.2 Terms Agreement, dated May 19, 2000, between the Company, and
Salomon Smith Barney Inc. and the other firms named therein, acting
severally on behalf of themselves as Managers and Underwriters and
on behalf of the other several Underwriters named therein
(incorporated herein by reference to Exhibit 1.2 to the Company's
Current Report on Form 8-K dated May 19, 2000 (filed May 22, 2000)
(File No. 0-11258))
2.1 Agreement and Plan of Merger between the Company, Wildcat
Acquisition Corp. and Intermedia Communications Inc. ("Intermedia")
dated as of September 1, 2000 (filed as Annex A to the Company's
Registration Statement on Form S-4, Registration No. 333-48012 and
incorporated herein by reference)*
4.1 Second Amended and Restated Articles of Incorporation of the
Company (including preferred stock designations), as amended as of
May 1, 2000 (incorporated herein by reference to Exhibit 4.1 to the
Company's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2000 (File No. 0-11258))
4.2 Restated Bylaws of the Company (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 the Company, 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))
4.5 Form of Floating Rate Note Due 2001 (incorporated herein by
reference to Exhibit 4.1 to the Company's Current Report on Form 8-
K dated May 19, 2000 (filed May 22, 2000) (File No. 0-11258))
4.6 Form of 7.875% Note Due 2003 (incorporated herein by reference to
Exhibit 4.2 to the Company's Current Report on Form 8-K dated May
19, 2000 (filed May 22, 2000) (File No. 0-11258))
4.7 Form of 8.000% Notes Due 2006 (incorporated herein by reference to
Exhibit 4.3 to the Company's Current Report on Form 8-K dated May
19, 2000 (filed May 22, 2000) (File No. 0-11258))
4.8 Form of 8.25% Notes Due 2010 (incorporated herein by reference to
Exhibit 4.4 to the Company's Current Report on Form 8-K dated May
19, 2000 (filed May 22, 2000) (File No. 0-11258))
4.9 Indenture dated as of May 15, 2000 by and between the Company and
Chase Manhattan Trust Company, National Association (incorporated
herein by reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-3 (File No. 333-34578))
27
10.1 Amended and Restated Facility A Revolving Credit Agreement among
the Company, NationsBank, N.A., NationsBanc Montgomery Securities
LLC, Bank of America NT & SA, Barclays Bank PLC, The Chase
Manhattan Bank, Citibank, N.A., Morgan Guaranty Trust Company of
New York, and Royal Bank of Canada and the lenders named therein
dated as of August 6, 1998 (incorporated herein by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K dated
August 6, 1998 (filed August 7, 1998) (File No. 0-011258))*
10.2 Amended and Restated 364-Day Revolving Credit and Term Loan
Agreement among the Company and Bank of America, N.A.,
Administrative Agent; Bank of America Securities, LLC, Sole Lead
Arranger and Book Manager; Barclays Bank PLC, The Chase Manhattan
Bank, Citibank, N.A., Morgan Guaranty Trust Company of New York,
and Royal Bank of Canada, Co-Syndication Agents; and the lenders
named therein dated as of August 5, 1999 (incorporated herein by
reference to Exhibit 10.1 of the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1999) (File No. 0-
11258))*
10.3 First Amendment and Renewal of the Amended and Restated 364-Day
Revolving Credit and Term Loan Agreement entered into as of August
3, 2000, among the Company, certain Purchasing Lenders named
therein, certain Increasing Lenders as named therein, Bank of
America, N.A., as a Lender and as Administrative Agent for itself
and the Accepting Lenders (as therein defined) with Banc of America
Securities, LLC, as the Sole Lead Arranger and Book Manager
(incorporated herein by reference to exhibit 10.3 of the Company's
Quarterly Report on Form 10-Q for the quarterly period ended June
30, 2000) (File No. 0-11258))*
10.4 Promissory Note dated September 8, 2000 between Bernard J. Ebbers
(the "Borrower") and the Company
10.5 Promissory Note dated November 1, 2000 between the Borrower and
the Company
10.6 Letter Agreement dated November 1, 2000 between the Borrower
and the Company
10.7 Limited Guaranty from the Company to Bank of America, N.A.
12.1 Statement re Computation of Ratio of Earnings to Fixed Charges
27.1 Financial Data Schedule - for the nine months ended September 30,
2000, for the six months ended June 30, 2000, and for the three
months ended March 31, 2000
27.2 Restated Financial Data Schedule - for the twelve months ended
December 31, 1999, for the nine months ended September 30, 1999,
and for the six months ended June 30, 1999
27.3 Restated Financial Data Schedule - for the three months ended March
31, 1999, for the twelve months ended December 31, 1998, and for
the twelve months ended December 31, 1997
* The registrant hereby agrees to furnish supplementally a copy of any
omitted schedules to this Agreement to the SEC upon request.
28