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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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
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MCI WORLDCOM, INC.
(Exact name of registrant as specified in its charter)
-------------------------------
Georgia 58-1521612
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
515 East Amite Street, Jackson, Mississippi 39201-2702
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code : (601) 360-8600
WORLDCOM, INC.
-------------------------------------------
(Former Name, if changed since last report)
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 1,833,425,800 on October 31, 1998.
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QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 1998 and December 31, 1997............................. 3
Consolidated Statements of Operations
for the three and nine months ended September 30, 1998
and September 30, 1997............................................... 4
Consolidated Statements of Cash Flows for
the nine months ended September 30, 1998 and
September 30, 1997................................................... 5
Notes to Consolidated Financial Statements........................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................ 23
Item 3. Quantitative and Qualitative Disclosure About Market Risk............ 33
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................... 34
Item 2. Changes in Securities and Use of Proceeds............................ 34
Item 3. Defaults Upon Senior Securities...................................... 34
Item 4. Submission of Matters to a Vote
of Securities Holders................................................ 34
Item 5. Other Information.................................................... 34
Item 6. Exhibits and Reports on Form 8-K..................................... 34
Signature ..................................................................... 36
Exhibit Index ..................................................................... 37
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MCI WORLDCOM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited. In Millions of Dollars, Except Share Data)
September 30, December 31,
1998 1997
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 944 $ 155
Marketable securities -- 54
Accounts receivable, net of allowance for bad debts of $861 in 1998
and $203 in 1997 6,057 1,241
Income taxes receivable 190 5
Deferred tax asset 476 -
Other current assets 993 419
-------------- --------------
Total current assets 8,660 1,874
-------------- --------------
Property and equipment:
Transmission equipment 10,388 3,688
Communications equipment 4,459 2,493
Furniture, fixtures and other 5,167 920
Construction in progress 3,763 468
-------------- --------------
23,777 7,569
Less - accumulated depreciation (1,477) (855)
-------------- --------------
22,300 6,714
-------------- --------------
Goodwill and other intangible assets 46,908 13,882
Deferred tax asset -- 405
Other assets 4,410 721
-------------- --------------
$ 82,278 $ 23,596
============== ==============
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current liabilities:
Short-term debt and current maturities of long-term debt $ 4,242 $ 11
Accounts payable 1,911 470
Accrued line costs 3,809 868
Accrued interest 307 119
Deferred tax liability -- 60
Other current liabilities 3,874 546
-------------- --------------
Total current liabilities 14,143 2,074
-------------- --------------
Long-term liabilities, less current portion:
Long-term debt 16,032 7,413
Deferred tax liability 1,855 --
Other liabilities 1,901 308
-------------- --------------
Total long-term liabilities 19,788 7,721
-------------- --------------
Commitments and contingencies
Minority interests 3,333 --
Company obligated manditorily redeemable preferred
securities of subsidiary trust holding solely junior
subordinated deferrable interest debentures 750 --
Shareholders' investment:
Series A preferred stock, par value $.01 per share;
authorized, issued and outstanding: none in 1998 and
94,992 shares in 1997 (variable liquidation preference) -- --
Series B preferred stock, par value $.01 per share;
authorized, issued and outstanding: 11,777,262 shares in
1998 and 12,421,858 shares in 1997 (liquidation preference
of $1.00 per share plus unpaid dividends) -- --
Preferred stock, par value $.01 per share; authorized:
34,905,008 shares in 1998 and 1997; none issued -- --
Common stock, par value $.01 per share; authorized:
2,500,000,000 shares; issued and outstanding:
1,829,895,614 shares in 1998 and 981,615,661 shares in 1997 18 10
Additional paid-in capital 49,314 15,531
Retained earnings (deficit) (4,915) (1,774)
Unrealized holding gain on marketable equity securities 32 34
Treasury stock, at cost, 4,510,211 shares in 1998 and none in 1997 (185) --
-------------- --------------
Total shareholders' investment 44,264 13,801
-------------- --------------
$ 82,278 $ 23,596
============== ==============
The accompanying notes are an integral part of these statements.
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MCI WORLDCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited. In Millions of Dollars, Except Per Share Data)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
----------------------------- ----------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
Revenues $ 3,758 $ 1,911 $ 8,661 $ 5,364
------------- ------------- ------------- -------------
Operating expenses:
Line costs 1,792 965 4,141 2,783
Selling, general and administrative 902 411 1,904 1,200
Depreciation and amortization 469 247 1,099 719
In-process research and development and other charges 3,227 -- 3,725 --
------------- ------------- ------------- -------------
Total 6,390 1,623 10,869 4,702
------------- ------------- ------------- -------------
Operating income (loss) (2,632) 288 (2,208) 662
Other income (expense):
Interest expense (141) (102) (351) (289)
Miscellaneous 14 12 36 33
------------- ------------- ------------- -------------
Income (loss) before income taxes, minority interests
and extraordinary items (2,759) 198 (2,523) 406
Provision for income taxes 174 122 462 261
------------- ------------- ------------- -------------
Income (loss) before minority interests and extraordinary
items (2,933) 76 (2,985) 145
Minority interests 11 -- 11 --
------------- ------------- ------------- -------------
Net income (loss) before extraordinary items (2,944) 76 (2,996) 145
Extraordinary item (net of income taxes of $78 in 1998
and $0 in 1997) -- -- (129) (3)
Distributions on subsidiary trust mandatorily redeemable
preferred securities 3 -- 3 --
Preferred dividend requirement -- 7 13 20
------------- ------------- ------------- -------------
Net income (loss) applicable to common shareholders $ (2,947) $ 69 $ (3,141) $ 122
============= ============= ============= =============
Earnings (loss) per common share:
Net income (loss) applicable to common shareholders
before extraordinary items:
Basic $ (2.44) $ 0.07 $ (2.77) $ 0.13
============= ============= ============= =============
Diluted $ (2.44) $ 0.07 $ (2.77) $ 0.13
============= ============= ============= =============
Extraordinary item $ -- $ -- $ (0.12) $ (0.00)
============= ============= ============= =============
Net income (loss) applicable to common shareholders :
Basic $ (2.44) $ 0.07 $ (2.89) $ 0.13
============= ============= ============= =============
Diluted $ (2.44) $ 0.07 $ (2.89) $ 0.12
============= ============= ============= =============
The accompanying notes are an integral part of these statements.
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MCI WORLDCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited. In Millions of Dollars)
For the Nine Months
Ended September 30,
-----------------------------------
1998 1997
--------------- ---------------
Cash flows from operating activities:
Net income (loss) $ (3,125) $ 142
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary item 129 3
In-process research and development and other charges 3,725 --
Depreciation and amortization 1,099 719
Provision for losses on accounts receivable 115 77
Provision for deferred income taxes 451 224
Accreted interest on debt 25 114
Change in assets and liabilities, net of effect of
business combinations:
Accounts receivable (753) (266)
Income taxes, net 8 28
Other current assets (147) (115)
Accrued line costs (397) 22
Accounts payable and other current liabilities 383 3
Other (34) (7)
--------------- ---------------
Net cash provided by operating activities 1,479 944
--------------- ---------------
Cash flows from investing activities:
Capital expenditures (3,267) (2,216)
Sale of short-term investments, net 53 839
Acquisitions and related costs (3,049) (494)
Increase in intangible assets (96) (98)
Proceeds from disposition of long-term assets 146 70
Increase in other assets (270) (177)
Decrease in other liabilities (305) (25)
--------------- ---------------
Net cash used in investing activities (6,788) (2,101)
--------------- ---------------
Cash flows from financing activities:
Principal borrowings on debt, net 5,833 716
Common stock issuance 281 147
Dividends paid on preferred stock (13) (20)
Distributions on subsidiary trust mandatorily redeemable preferred securities (3) --
Other -- 6
--------------- ---------------
Net cash provided by financing activities 6,098 849
--------------- ---------------
Net increase (decrease) in cash and cash equivalents 789 (308)
Cash and cash equivalents at beginning of period 155 485
--------------- ---------------
Cash and cash equivalents at end of period $ 944 $ 177
=============== ===============
The accompanying notes are an integral part of these statements.
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MCI WORLDCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(A) GENERAL
References herein to the "Company" or "MCI WorldCom" refer to MCI WORLDCOM,
Inc., a Georgia corporation, and its subsidiaries, which prior to September 15,
1998, was named WorldCom, Inc. ("WorldCom").
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 rules and
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 Company's restated financial statements contained in its Current Report on
Form 8-K dated May 28, 1998 (filed May 28, 1998). The results for the nine month
period ended September 30, 1998 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1998.
(B) BUSINESS COMBINATIONS
On September 14, 1998, the Company acquired MCI Communications Corporation, a
Delaware corporation ("MCI"), pursuant to the merger (the "MCI Merger") of MCI
with and into TC Investments Corp. ("Acquisition Subsidiary"), a wholly owned
subsidiary of the Company. Upon consummation of the MCI Merger, Acquisition
Subsidiary was renamed MCI Communications Corporation. Through the MCI Merger,
the Company acquired one of the world's largest and most advanced digital
networks, connecting local markets in the United States to more than 280
countries and locations worldwide.
As a result of the MCI Merger, each outstanding share of MCI common stock was
converted into the right to receive 1.2439 shares of MCI WorldCom common stock,
par value $.01 per share (the "Common Stock" or "MCI WorldCom Common Stock") or
approximately 755 million MCI WorldCom common shares in the aggregate, and each
share of MCI Class A common stock outstanding (all of which were held by British
Telecommunications plc ("BT")) was converted into the right to receive $51.00 in
cash or approximately $7 billion in the aggregate. The funds paid to BT were
obtained by the Company from (i) available cash as a result of the Company's
$6.1 billion public debt offering in August 1998 (See Note F); (ii) the sale of
MCI's Internet backbone facilities and wholesale and retail Internet business
(the "iMCI Business") to Cable and Wireless plc ("Cable & Wireless") for $1.75
billion in cash on September 14, 1998; (iii) the sale of MCI's 24.9% equity
stake in Concert Communications Services ("Concert") to BT for $1 billion in
cash on September 14, 1998; and (iv) availability under the Company's commercial
paper program and credit facilities (See Note F).
Upon effectiveness of the MCI Merger, the then outstanding and unexercised
options exercisable for shares of MCI common stock were converted into options
exercisable for an aggregate of approximately 83 million shares of MCI WorldCom
Common Stock having the same terms and conditions as the MCI options, except
that the exercise price and the number of shares issuable upon exercise were
divided and multiplied, respectively, by 1.2439. The MCI Merger was accounted
for as a purchase; accordingly, operating results for MCI have been included
from the date of acquisition (See Note E).
On August 4, 1998, MCI acquired a 51.79% voting interest and a 19.26% economic
interest in Embratel Participacoes S.A., ("Embratel"), Brazil's only
facilities-based national communications provider, for approximately $2.3
billion. The purchase price will be paid in local currency installments, of
which $916 million was paid on August 4, 1998 with the remainder to be paid in
two equal installments over the next two years. Embratel provides interstate
long distance and international telecommunications services in Brazil, as well
as over 40 other communications services, including leased high-speed data,
satellite, Internet, frame and packet-switched services. Operating results for
Embratel are consolidated in the accompanying consolidated financial statements
and are included from the date of the MCI Merger.
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On January 31, 1998, the Company acquired CompuServe Corporation, a Delaware
corporation ("CompuServe"), pursuant to the merger (the "CompuServe Merger") of
a wholly owned subsidiary of the Company with and into CompuServe. Upon
consummation of the CompuServe Merger, CompuServe became a wholly owned
subsidiary of MCI WorldCom.
As a result of the CompuServe Merger, each share of CompuServe common stock was
converted into the right to receive 0.40625 shares of MCI WorldCom Common Stock,
or approximately 37.6 million MCI WorldCom common shares in the aggregate. Prior
to the CompuServe Merger, CompuServe operated primarily through two divisions:
Interactive Services and Network Services. Interactive Services offered
worldwide online and Internet access services for consumers, while Network
Services provided worldwide network access, management and applications, and
Internet service to businesses. The CompuServe Merger was accounted for as a
purchase; accordingly, operating results for CompuServe have been included from
the date of acquisition.
On January 31, 1998, the Company also acquired ANS Communications, Inc., a
Delaware corporation ("ANS"), from America Online, Inc. ("AOL") and has entered
into five year contracts with AOL under which MCI WorldCom and its subsidiaries
provide network services to AOL (collectively, the "AOL Transaction"). As part
of the AOL Transaction, AOL acquired CompuServe's Interactive Services division
and received a $175 million cash payment from MCI WorldCom. MCI WorldCom
retained the CompuServe Network Services ("CNS") division. ANS provides Internet
access to AOL and AOL's subscribers in the United States, Canada, the United
Kingdom, Sweden and Japan, and also designs, develops and operates high
performance wide-area networks for business, research, education and
governmental organizations. The AOL Transaction was accounted for as a purchase;
accordingly, operating results for ANS have been included from the date of
acquisition.
On January 29, 1998, MCI WorldCom acquired Brooks Fiber Properties, Inc., a
Delaware corporation ("BFP"), pursuant to the merger (the "BFP Merger") of a
wholly owned subsidiary of MCI WorldCom with and into BFP. Upon consummation of
the BFP Merger, BFP became a wholly owned subsidiary of MCI WorldCom. BFP is a
leading facilities-based provider of competitive local telecommunications
services, commonly referred to as a competitive local exchange carrier, in
selected cities within the United States. BFP acquires and constructs its own
state-of-the-art fiber optic networks and facilities and leases network capacity
from others to provide long distance carriers ("IXCs"), Internet Service
Providers ("ISPs"), wireless carriers and business, government and institutional
end users with an alternative to the incumbent local exchange carriers ("ILECs")
for a broad array of high quality voice, data, video transport and other
telecommunications services.
As a result of the BFP Merger, each share of BFP common stock was converted into
the right to receive 1.85 shares of Common Stock or approximately 72.6 million
MCI WorldCom common shares in the aggregate. The BFP Merger was accounted for as
a pooling-of-interests and, accordingly, the Company's financial statements for
periods prior to the BFP Merger have been restated to include the results of BFP
for all periods presented.
The following unaudited pro forma combined results of operations for the Company
assumes that the MCI Merger was completed on January 1, 1997 (in millions,
except per share data):
For the Nine Months
Ended September 30,
---------------------------
1998 1997
--------- ---------
Revenues $ 22,950 $ 18,971
Income (loss) before extraordinary items (2,870) (19)
Net income (loss) (2,999) (22)
Dilutive income (loss) per common share:
Income (loss) before extraordinary items (1.61) (0.01)
Net income (loss) (1.69) (0.01)
These pro forma amounts represent the historical operating results of MCI
combined with those of the Company with appropriate preliminary adjustments
which give effect to depreciation, amortization, interest and the common shares
issued. These pro forma amounts also do not include amounts with respect to the
CompuServe Merger, AOL Transaction or Embratel prior to their respective
business combination dates because they are individually, and in the aggregate,
not material to MCI WorldCom. These pro forma amounts are not necessarily
indicative of operating results which would have
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occurred if MCI had been operated by current management during the periods
presented because these amounts do not reflect cost savings related to full
network optimization and the redundant effect on operating, selling, general and
administrative expenses.
(C) EARNINGS PER SHARE
Earnings per share are calculated in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 128 "Earnings Per Share." The following is a
reconciliation of the numerators and the denominators of the basic and diluted
per share computations (in millions, except per share data):
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------- --------------------------
1998 1997 1998 1997
--------- ------------ ---------- ------------
Basic
Net income (loss) before extraordinary items $ (2,944) $ 76 $ (2,996) $ 145
Preferred stock dividends and distributions 3 7 16 20
--------- ------------ ---------- ------------
Net income (loss) applicable to common shareholders
before extraordinary items $ (2,947) $ 69 $ (3,012) $ 125
========= ============ ========== ============
Weighted average shares outstanding 1,209 974 1,088 961
========= ============ ========== ============
Basic earnings (loss) per share $ (2.44) $ 0.07 $ (2.77) $ 0.13
========= ============ ========== ============
Diluted
Net income (loss) applicable to common shareholders
before extraordinary items $ (2,947) $ 69 $ (3,012) $ 125
Add back:
Preferred stock dividends and distributions -- 7 -- 1
--------- ------------ ---------- ------------
Net income (loss) applicable to common shareholders
before extraordinary items $ (2,947) $ 76 $ (3,012) $ 126
========= ============ ========== ============
Weighted average shares outstanding 1,209 974 1,088 961
Common stock equivalents -- 33 -- 31
Common stock issuable upon conversion of preferred stock -- 34 -- 1
--------- ------------ ---------- ------------
Diluted shares outstanding 1,209 1,041 1,088 993
========= ============ ========== ============
Diluted earnings (loss) per share $ (2.44) $ 0.07 $ (2.77) $ 0.13
========= ============ ========== ============
(D) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid by the Company during the nine months ended September 30, 1998 and
1997 amounted to $422.5 million and $136.5 million, respectively. Income taxes
paid during the nine months ended September 30, 1998 and 1997 were $24.3 million
and $12.0 million, respectively. In conjunction with business combinations
during the nine months ended September 30, 1998 and 1997, assumed assets and
liabilities were as follows (in millions):
For the Nine Months
Ended September 30,
---------------------------
1998 1997
--------- ---------
Fair value of assets acquired $ 21,590 $ 64
Excess of cost over net tangible assets acquired 36,866 367
Liabilities paid (assumed) (22,147) 216
Common stock issued (33,260) (153)
--------- ---------
$ 3,049 $ 494
========= =========
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(E) IN-PROCESS RESEARCH AND DEVELOPMENT AND OTHER CHARGES
In the first quarter of 1998, the Company recorded a pre-tax charge of $69
million for employee severance, alignment charges and direct merger costs
associated with the BFP Merger. Additionally, in the third quarter of 1998, the
Company recorded a pre-tax charge of $127 million primarily in connection with
the MCI Merger. The third quarter charge included severance costs associated
with the termination of certain employees which is expected to be completed by
the first quarter of 1999. Also included are alignment charges, and other exit
activities which include the costs of consolidating and closing facilities, loss
on sale or write down of assets and conformance of accounting principles. The
Company anticipates completing its plans for alignment and exit activities by
the end of the first quarter of 1999. The following table reflects the
components of the significant items included as other charges in the
accompanying consolidated statements of operations for the nine months ended
September 30, 1998 (in millions):
BFP direct merger costs $ 17
Severance 21
Alignment and other exit activities 158
------
$ 196
======
In connection with the above charges, $43 million, $18 million and $16 million
are included in other current liabilities, accrued line costs and other
liabilities, respectively, in the accompanying consolidated financial statements
as of September 30, 1998. The amount included in other current liabilities also
includes $8 million for severance as of September 30, 1998.
In connection with recent business combinations, the Company made allocations of
the purchase price to acquired in-process research and development ("R&D")
totaling $429 million in the first quarter of 1998 related to the CompuServe
Merger and AOL Transaction and $3.1 billion in the third quarter of 1998 related
to the MCI Merger.
The Company used professional appraisal consultants to assess and allocate
values to the in-process research and development. These allocations represent
the estimated fair value based on risk-adjusted future cash flows related to the
incomplete projects. At the date of the respective business combinations, the
development of these projects had not yet reached technological feasibility and
the R&D in progress had no alternative future uses. Accordingly, these costs
were expensed as of the respective acquisition dates.
Discounting the net cash flows back to their present value is based on the
weighted average cost of capital ("WACC"). The respective business enterprises
are comprised of various types of assets, each possessing different degrees of
investment risk contributing to the Company's overall WACC. Intangible assets
are assessed higher risk factors due to their lack of liquidity and poor
versatility for redeployment elsewhere in the business. In the MCI analysis,
CompuServe analysis and ANS analysis the implied WACC was 14%, 14.5% and 16.5%,
respectively, based on the purchase price paid, assumed liabilities, projected
cash flows, and each company's asset mix. Returns on monetary and fixed assets
were estimated based on prevailing interest rates. The process for quantifying
intangible asset investment risk involved consideration of the uncertainty
associated with realizing discernible cash flows over the life of the asset. A
discount range of 15.5% to 19% was used for valuing the in-process research and
development. These discount rates are higher than the WACC due to the inherent
uncertainties surrounding the successful development of the purchased in-process
research and development, the useful life of such technology, the profitability
levels of such technology, and the uncertainty of technological advances that
are unknown at this time.
The value of the in-process research and development projects was adjusted to
reflect the relative value and contribution of the acquired R&D. In doing so,
consideration was given to the R&D's stage of completion, the complexity of the
work completed to date, the difficulty of completing the remaining development,
costs already incurred and the projected cost to complete the projects.
The Company believes that the assumptions used in the forecasts were reasonable
at the time of the respective business combination. No assurance can be given,
however, that the underlying assumptions used to estimate expected project
sales, development costs or profitability, or the events associated with such
projects, will transpire as estimated. For these reasons, actual results may
vary from the projected results.
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Management expects to continue supporting these R&D efforts and believes the
Company has a reasonable chance of successfully completing the R&D programs.
However, there is risk associated with the completion of the R&D projects and
the Company cannot be assured that any will meet with either technological or
commercial success.
If none of these R&D projects is successfully developed, the sales and
profitability of the Company may be adversely affected in future periods. The
failure of any particular individual project in-process would not materially
impact the Company's financial condition, results of operations or the
attractiveness of the overall investment in MCI, CompuServe or ANS. Operating
results are subject to uncertain market events and risks, which are beyond the
Company's control, such as trends in technology, government regulations, market
size and growth, and product introduction or other actions by competitors.
The integration and consolidation of MCI, CompuServe and ANS requires
substantial management and financial resources. While the Company believes the
early results of these efforts are encouraging, the MCI Merger, CompuServe
Merger and AOL Transaction necessarily involve a number of significant risks,
including potential difficulties in assimilating the technologies and services
of these companies and in achieving the expected synergies and cost reduction.
A description of the acquired in-process technology and the estimates made by
the Company for each business combination is set forth below.
MCI
The in-process technology acquired in the MCI Merger consisted of seventy
significant R&D projects grouped into six categories. The aggregate value
assigned to MCI in-process research and development was $3.1 billion. These
projects were all targeted at: (1) developing and deploying an all optical
network, new architecture of the telephone system using Internet Protocol ("IP")
and developing the systems and tools necessary to manage the voice and data
traffic; (2) creating new products and services; and (3) developing certain
information systems that may enhance the management of MCI WorldCom's products
and service offerings.
A brief description of the six categories of in-process research and development
projects purchased in connection with the MCI Merger is set forth below:
o R&D Related to an All Optical Network. These projects involve R&D related
to the development of an all optical network. This structure is in contrast
to current systems which employ a combination of optics and electronics.
New technologies that are in development include: (a) an optical cross
connect system for all optical packet transport and sub-second service
restoration, (b) a wavelength channel plan for enabling multiple
simultaneous transmission channels, (c) projects related to distortion
elimination, and (d) next generation optical networking technologies
related to the fiber infrastructure. Achievements to date include
demonstration of limited-scope prototypes in the laboratory. Remaining
efforts include: demonstration of the system on a large scale with
commercial traffic, physics research in certain areas, development of
algorithms to enable network management, and addressing technology issues
related to switching. The amount of R&D costs to date for these projects
total $7 million. Estimated costs to complete are $10 million, as follows:
15% during the last quarter of 1998, 48% during the four quarters in 1999,
31% during the four quarters in 2000, and 6% during the four quarters in
2001. The completion of these projects will be difficult, and the risk of
these technologies not being completed is rated as medium to high. Failure
to complete the R&D would cause the Company's future revenues and profits
attributable to the R&D not to materialize as these projects would
contribute to differentiating the Company from the competition in the
future.
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o R&D Related to Data Transmission Service / Other Transmission Efforts. The
Company is currently working on a variety of significant efforts related to
data management. These new technologies include: (a) new data services to
satisfy new capacity requirements and Internet needs, (b) a next generation
intelligent network to enable deployment of specific new telecommunications
services across multiple networks, (c) a 16 wavelength bi-directional line
amplifier to amplify optical signals, (d) multiservice and integrated
access platforms and development of new methods for serving ISPs on the
local services network, and (e) Andromeda, which is related to specific
improvements to Internet operations. Achievements to date include methods
for new high speed switching, multicasting, and offering a variety of
service levels, as well as architectural design for next generation
intelligent networks. Tasks to complete the new technologies include:
engineering related to telephone system to utilize IP; solving scalability
issues across the infrastructure; and conducting extensive testing of the
technologies under development. To date $48 million has been expended to
develop these R&D projects. Estimated costs to complete the projects are
$132 million, as follows: 9% during the last quarter of 1998, 33% during
the four quarters in 1999, 46% during the four quarters in 2000, and 12%
during the four quarters in 2001. The completion of these projects will be
difficult and the risk of not completing these projects can be
characterized as medium to high. Failure to complete the R&D would cause
the Company's future revenues and profits attributable to the R&D not to
materialize.
o Next Generation Tools. The Company's personnel are developing a variety of
new tools that are being designed to achieve specific reliability and
quality objectives related to the network. Important new development
technologies in this category include: (a) reliability and quality
engineering tools related to the reliability test and quality control, (b)
network design development tools to enable end-to-end network design and
modeling capabilities, (c) the Integrated Management Platform Advanced
Communications Technology ("IMPACT") project to provide new network
management for the networks, (d) the integrated test system to provide a
new testing architecture for the Company's local, long distance, and
international networks, and (e) an enhanced traffic system and security.
Progress to date includes: definition of architectural components, partial
development of software algorithms, and limited prototypes for tasks.
Remaining efforts include completion of algorithms, prototype development,
validation, testing, and development of support systems. To date $84
million has been spent on the R&D projects. Estimated costs to complete are
$48 million, as follows: 22% during the last quarter of 1998, 46% during
the four quarters in 1999, 23% during the four quarters in 2000, and 9%
during the four quarters in 2001. There are significant risks of not being
able to complete the prototypes and there is also uncertainty in the
timeliness of completion. The aggregate risk level for this category of R&D
projects is considered medium to high. Project failure would result in the
elimination of the Company's future revenues and profits attributable to
the R&D.
o Specific New Customer Care Capabilities. These projects involve a series of
efforts designed to provide customers with a suite of new services. This
includes development of major technologies such as: (a) the virtual data
delivery system to engineer new order processing and provisioning
capabilities for data services, (b) network automation projects related to
capacity and change management, (c) hyperlink to deploy private lines and
frame relay circuits utilizing a new methodology, (d) common data platform
to create a depository of network management information, and (e) the
Talisman project to develop data products for the network MCI One Voice.
Achievements to date include design, partial coding, and prototyping. Tasks
to complete include: addition of significant features and functionality;
additional design, testing and coding; and addressing scalability issues.
To date $67 million has been spent on developing this R&D. Estimated costs
to complete are $76 million, as follows: 20% during the last quarter of
1998, 50% during the four quarters in 1999, 19% during the four quarters in
2000, and 11% during the four quarters in 2001. There are significant risks
in completing the algorithms successfully and on time. The aggregate risk
level for this category of R&D projects is considered medium to high.
Project failure would eliminate the Company's future revenues and profits
attributable to the R&D.
o R&D Related to Local Services. This category involves a series of specific
projects to create an offering of local services on a national basis.
Efforts include: (a) electronic bonding for local service maintenance
organizations, (b) elements of an order automation and tracking system, (c)
access technology development, and (d) the substantial R&D related to the
network optimization enhancement system. Achievements to date include:
completion of system definitions, partial coding development, and base
functionality developed on certain projects. Tasks to complete include
adding features and functionality, module development and testing. To date
$53 million has been spent on developing the R&D projects. Estimated costs
to complete are $38 million, as follows: 25% during the last quarter of
1998, 43% during the four quarters in 1999, 21% during the four quarters in
2000, and 11% during the four quarters in 2001.
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There are significant risks related to developing the interfaces and the
required technologies and the complex interconnections. The aggregate risk
level for this category of R&D projects is considered medium to high.
Failure of the R&D project would eliminate the Company's future revenues
and profits attributable to the R&D.
o New Products and Services. A series of new products and services are being
developed by the Company. These include: (a) video services to design and
implement a new terrestrial video distribution network for real-time
quality video, (b) distance learning services via an integrated multimedia
network platform, (c) fractal compression technology for image compression
and encoding to reduce data transmit time and bit losses, and (d)
integrated messaging for one number service for telephone, fax, voicemail,
Internet, and paging. Progress to date includes: definition, development,
and component testing; feasibility and analysis; and development of
prototypes. Remaining development includes: design and deployment;
resolving issues related to product functionality; and addressing
scalability issues across the Company's infrastructure. To date $37 million
has been spent on developing the R&D in this category. Estimated costs to
complete are $38 million, as follows: 24% during the last quarter of 1998,
43% during the four quarters in 1999, 22% during the four quarters in 2000,
and 11% during the four quarters in 2001. There are significant risks in
completing the R&D projects, particularly developing the leading edge
components, compression technologies, and developing operational support
systems. The aggregate risk level for this category of R&D projects is
considered medium to high. Project failure would eliminate the Company's
future revenues and profits attributable to the R&D.
A summary of allocated values by technology/project is as follows (in millions):
Developed In-Process
Technology R&D
----------- -----------
All Optical Network $ 200 $ 400
Data Transmission Service/Other 200 300
Next Generation Tools 100 400
New Customer Care Capabilities 800 1,100
Local 200 700
New Products and Services 200 200
----------- -----------
$ 1,700 $ 3,100
=========== ===========
The value assigned to purchased in-process technology was determined by
estimating the contribution of the purchased in-process technology to developing
commercially viable products, estimating the resulting net cash flows from the
expected product sales of such products, and discounting the net cash flows to
their present value using a risk-adjusted discount rate. Royalty rates used in
the valuation of in-process R&D ranged from 1% to 3%. Funding for such projects
is expected to be obtained from internally generated sources.
Developed technology will be depreciated over 10 years on a straight-line basis.
The remaining purchase price included allocations to goodwill and tradename
which will be amortized over 40 years on a straight-line basis.
Total MCI stand-alone revenues are projected to exceed $34 billion within five
years. This level of revenue implies a compound annual growth rate ("CAGR") of
approximately 12.3%. Estimated total revenues from the acquired in-process
technology peak in the year 2001 and steadily decline in 2002 through 2009 as
other new product and service technologies are expected to be introduced by the
combined company. These projections are based on management's estimates of
market size and growth, expected trends in technology, and the expected timing
of new product introductions. These projections, which constitute
forward-looking statements, were not made with a view to public disclosure and
were based on a variety of estimates and judgments. Actual results may vary
materially due to a number of significant risks, including, without limitation,
uncertainties regarding future business, economic, competitive, regulatory and
financial market conditions and future business decisions, all of which are
difficult to predict and many of which are beyond the Company's control. No
assurance can be given that such projections will be realized. The Company does
not intend to update or supplement these projections in the future.
COMPUSERVE AND ANS
The in-process technology acquired in the CompuServe Merger and the AOL
Transaction consisted of three main R&D efforts underway at CNS and two main R&D
efforts underway at ANS. The aggregate value assigned to CompuServe and ANS
in-process technology was $429 million. These projects included next generation
network technologies and new value-added networking applications, such as
application hosting, multimedia technologies and virtual private data networks.
A brief description of the in-process research and development projects
purchased in connection with the CompuServe Merger and AOL Transaction is set
forth below:
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o Virtual Private Data Network ("VPDN"). In order to provide competitive VPDN
products and services, CNS had undertaken, at the acquisition date, a
number of important projects. CNS was developing a new radius-roaming
functionality. This capability was intended to allow remote VPDN users to
"roam" the country, much like cellular phone users, and access their
corporate network without regard for how to initiate a remote connection.
CNS was also developing another VPDN adjunct product called the Phone
Access Locator. This product, if successful, was to be used by CNS' remote
customers to look up local network access point phone numbers. Other VPDN
development efforts underway related to voluntary tunneling and development
of new packet network technologies. Achievements leading up to the
acquisition included completion of certain software specifications and
design limited concept testing, and performance verification. Remaining
efforts included large-scale design, performance testing, debugging, and
quality assurance. Costs to complete this R&D project were projected to be
approximately $3 million in 1998 and $4 million in 1999. The risk of not
completing these efforts was rated as medium. Project failure would result
in the elimination of the Company's future revenues and profits
attributable to the R&D.
o Network Technologies. At the date of the CompuServe Merger, CNS had
undertaken significant projects to develop new IP-based network
technologies. These projects involved many separate efforts, including:
researching the use of switching and multicast technologies; investigating
and testing proprietary switching and routing technology; researching and
developing Fast Ethernet and/or Gigabit Ethernet protocols; and developing
and testing switches with routing functionality. CNS was also working on a
significant effort to enhance workstation-based open systems technologies
that contained new functions intended to allow the company to address new
market needs. CNS' development work included the testing of new products
and the development of new in-house network management solutions.
Achievements leading up to the acquisition included completion of certain
software and hardware specifications and design. Remaining efforts included
large-scale design, performance testing and debugging. Costs to complete
this R&D project were projected to be approximately $6 million in 1998 and
$8 million in 1999. The risk of not completing these efforts was rated as
medium. Project failure would result in the elimination of the Company's
future revenues and profits attributable to the R&D.
o Application Hosting. At the date of the CompuServe Merger, CNS had
undertaken an effort to develop proprietary software, and identify and test
third party Web hosting technology in order to provide complex Web and
groupware hosting services. As part of this effort, CNS was attempting to
develop a new capability in which it would host complex Web sites, without
duplicating any development efforts. In addition, CNS was in the process of
developing leading-edge electronic commerce solutions for its complex Web
hosting product. CNS was also developing proprietary software and testing
reporting tools. CNS was also in the process of making substantial
enhancements that would result in a new e-mail gateway. Achievements
leading up to the acquisition included completion of certain software
specifications and design, limited concept testing, and performance
verification. Remaining efforts included large-scale design and
engineering, performance testing, and debugging. Costs to complete this R&D
project were projected to be approximately $1 million in 1998 and $2
million in 1999. The risk of not completing these efforts was rated as
medium. Project failure would result in the elimination of the Company's
future revenues and profits attributable to the R&D.
o Supercore. At the date of the AOL Transaction, Supercore was a significant
project involving R&D related to data transmission and VPDN technologies.
The Supercore project was intended to provide for the differentiation of
connectivity service based on the needs of the transmission. At the time of
the acquisition, ANS had made significant progress on this important R&D
effort. Achievements leading up to the acquisition included a completed
design and limited performance evaluation. Remaining efforts involved
large-scale testing and proof of concept. ANS estimated it would spend
approximately $12 million in 1998 and $17 million in 1999 to complete R&D
projects related to Supercore. The risk of not completing these projects
was considered medium to high. Failure to complete the R&D would cause the
Company's future revenues and profits attributable to the R&D not to
materialize.
o Value Added Applications (Security Systems, Application Hosting, and
Multimedia Systems). At the date of the AOL Transaction, ANS had a number
of R&D projects underway related to security systems, application hosting,
and multimedia systems. In connection with a security system product called
Interlock, ANS was developing next-generation capabilities to render
multiple Local Area Network ("LAN") connections, Simple Network Management
Protocol ("SNMP") support, and the selective use of Java and ActiveX
protocols. Other R&D efforts were related to distributed firewalls,
firewall farm technology, new encryption technologies, and multiple LAN
interface capability. A
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Windows project involved substantially improving aspects of the server
software intended to make it support a Domain Named System ("DNS") cache,
firewall functionality, and remote administration. ANS also had several
application R&D projects underway that were aimed at the development of a
set of software tools, which would culminate in a new complex Web hosting
product. ANS' complex Web hosting product was being developed to have near
real-time database replication across geographic location, which would
allow ANS, if successful, to maintain a company's Web site on several
servers. As of the acquisition date, ANS did not offer multimedia services
over its network. As a result, ANS was conducting R&D related to four
multimedia services: fax over IP, video over IP, voice over IP, and call
centers. R&D activity included system and software design, development of
prototype systems, and systems testing. The most important R&D efforts
related to multimedia systems were development of priority routing. In
addition to ANS' security systems, application hosting, and multimedia R&D
projects, ANS had undertaken a number of additional R&D efforts to develop
technologies that would allow customers to access the system from any
platform and to create a new data warehouse. In concert with these efforts,
ANS was also addressing the customer's use of reporting, query, and On-Line
Analytical Processing ("OLAP") tools. Achievements on the value added
applications R&D leading up to the acquisition included the design and
development of certain software algorithms, unit testing, and limited
system testing. Remaining efforts included additional design work,
large-scale testing, significant performance enhancements, and debugging.
ANS expected to spend approximately $4 million in 1998 and $5 million in
1999 to complete the value added applications R&D. The risk of not
completing these projects was considered to be medium to high. Failure to
complete the R&D would cause the Company's future revenues and profits
attributable to the R&D not to materialize.
The value assigned to purchased in-process technology was determined by
estimating the contribution of the purchased in-process technology to developing
commercially viable products, estimating the resulting net future cash flows
from the expected sales of such products, and discounting the net future cash
flows to their present value using a risk-adjusted discount rate. The Company
expected to begin generating the economic benefits from the ANS and CNS projects
in progress as they were completed in late 1998 and 1999. At the time of
valuation, the cost to complete all such projects was approximately $62 million.
Funding for completion of the in-process projects was expected to be obtained
from internally generated sources. Based on the cost incurred at the acquisition
dates and the milestones achieved by ANS and CNS, in aggregate, ANS' projects
were estimated to be approximately 80% complete, while CNS' projects were
estimated to be approximately 60% complete.
The allocation of purchase price for the CompuServe Merger and the AOL
Transaction included allocations to developed technologies, assembled work
force, customer relationships and tradenames which will be amortized on a
straight-line basis over 10 years.
Total ANS and CNS stand-alone revenues are projected to exceed $3.5 billion
within five years. This level of revenues implied a CAGR of approximately 32%.
Estimated total revenues from the acquired in-process technology related to CNS
peak in the year 2002 and steadily decline through 2006 as other new product and
service technologies are expected to be introduced by the Company. Estimated
total revenues from the acquired in-process technology related to ANS peak in
the year 2004 and steadily decline through 2006. These projections are based on
management's estimates of market size and growth, expected trends in technology,
and the expected timing of new product introductions. These projections, which
constitute forward-looking statements, were not made with a view to public
disclosure and were based on a variety of estimates and judgments. Actual
results may vary materially due to a number of significant risks, including,
without limitation, uncertainties regarding future business, economic,
competitive, regulatory and financial market conditions and future business
decisions, all of which are difficult to predict and many of which are beyond
the Company's control. No assurance can be given that such projections will be
realized. The Company does not intend to update or supplement these projections
in the future.
(F) LONG-TERM DEBT
In connection with the BFP Merger, the Company announced in February 1998 that
it had commenced offers offer (the "Tender Offers") to purchase for cash various
series of BFP outstanding notes (the "BFP Notes"). Concurrently with the Tender
Offers, MCI WorldCom obtained the requisite consents to eliminate certain
restrictive covenants and amend certain other provisions of the respective
indentures of the BFP Notes. In March 1998, the Company accepted all BFP Notes
validly tendered. As of the expiration of the Tender Offers, MCI WorldCom had
received valid tenders and consents from holders of approximately $1.1 billion
of BFP Notes (over 99% of total outstanding). The funds required to pay all
amounts required under the Tender Offers were obtained by MCI WorldCom from
available working capital and lines of credit. In connection with the Tender
Offers and related refinancings, MCI WorldCom recorded an extraordinary item of
$128.7 million, net of income tax benefit of $77.6 million in the first quarter
of 1998.
On August 6, 1998, MCI WorldCom replaced its existing $3.75 billion and
$1.25 billion revolving credit facilities (the "Old Credit Facilities") with
$12.0 billion in credit facilities consisting of a $3.75 billion Amended and
Restated Facility A Revolving Credit Agreement ("Facility A Loans"), a $1.25
billion Amended and Restated Facility B Term Loan Agreement
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("Facility B Loans") and a new $7 billion 364-Day Revolving Credit and Term Loan
Agreement (the "Facility C Loans"). The Facility C Loans, together with the
Facility A Loans and Facility B Loans, hereinafter referred to as the "New
Credit Facilities." The New 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 and the Facility B Loans mature on June 30, 2002.
The Facility C Loans have a 364-day term, which may be extended for up to two
successive 364-day terms thereafter to the extent of the committed amounts from
those lenders consenting thereto, with a requirement that lenders holding at
least 51% of the committed amounts consent. Additionally, effective as of the
end of such 364-day term, the Company may elect 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 New 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 New Credit Facilities, including a Base Rate or
Eurodollar Rate, plus the applicable margin. The applicable margin for the
Eurodollar Rate borrowing varies from 0.35% to 0.75% as to Facility A Loans and
Facility B Loans and from 0.225% to 0.450% as to Facility C Loans, in each case
based upon the better of certain debt ratings. The New Credit Facilities are
unsecured but include a negative pledge of the assets of the Company and its
subsidiaries (subject to certain exceptions). The New Credit Facilities require
compliance with a financial covenant based on the ratio of total debt to total
capitalization, calculated on a consolidated basis. The New Credit Facilities
require compliance with certain operating covenants which limit, among other
things, the incurrence of additional indebtedness by the Company and its
subsidiaries, sales of assets and mergers and dissolutions, which covenants are
generally less restrictive than those contained in the Old Credit Facilities and
which do not restrict distributions to shareholders, provided the Company is not
in default under the New Credit Facilities. The Facility A Loans and the
Facility C Loans are subject to annual commitment fees not to exceed 0.25% and
0.12%, respectively, of any unborrowed portion of the facilities.
Subsequent to September 30, 1998, the Company elected to repay the Facility B
Loans and cancel the facility commitment of $1.25 billion. The funds used to
repay Facility B Loans were obtained by the Company from availability under the
Company's New Credit Facilities and commercial paper program.
The Company approved the issuance of commercial paper notes in the aggregate
principal amount not to exceed $10.0 billion, which notes have a maturity not to
exceed 364 days from the date of issuance. The Company maintains unused credit
facilities equal to 100% of the commercial paper notes outstanding. As of
September 30, 1998, $2.74 billion was outstanding under the commercial paper
program.
On August 11, 1998, the Company completed a public debt offering of $6.1 billion
principal amount of debt securities. The net proceeds of $6.04 billion were used
to pay down commercial bank debt, finance the approximately $7 billion payment
to BT and for general corporate purposes.
The public debt offering consisted of $1.5 billion principal amount of 6.125%
Notes Due 2001 (the "Notes Due 2001"), which mature August 15, 2001, $600
million principal amount of 6.25% Notes Due 2003 (the "Notes Due 2003"), which
mature on August 15, 2003, $2.25 billion principal amount of 6.40% Notes Due
2005 (the "Notes Due 2005"), which mature August 15, 2005 and $1.75 billion
principal amount of 6.95% Notes Due 2028 (the "Notes Due 2028" and collectively
with the Notes Due 2001, the Notes Due 2003 and the Notes Due 2005, the
"Notes"). The Notes bear interest payable semiannually in arrears on February 15
and August 15 of each year, commencing February 15, 1999.
The Notes 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) plus (a) 10 basis points for the Notes Due 2001, (b) 15 basis points
for the Notes Due 2003 and the Notes Due 2005, or (c) 20 basis points for the
Notes Due 2028, plus in the case of each of clause (i) and (ii), accrued
interest to the date of redemption.
At the time of the MCI Merger, MCI had outstanding $1.44 billion of MCI Senior
Debentures with rates ranging from 7.125% to 8.25% and maturing from January
2023 through June 2027 (the "MCI Senior Debentures"), and $2.66 billion of MCI
Senior Notes with rates ranging from 6.125% to 7.5% and maturing from March 1999
through April 2012 (the "MCI Senior Notes"). Additionally, MCI had outstanding a
$1.34 billion note payable in annual local currency installments over the next
two years as a result of MCI's purchase of Embratel on August 4, 1998, and other
debt including, without limitation, capital leases.
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The following table sets forth the long-term debt of the Company before and
after consideration of Embratel as of September 30, 1998 (in millions):
Excluding
Embratel Embratel Consolidated
------------ --------- ------------
Commercial paper and credit facilities borrowings $ 3,968 $ -- $ 3,968
6.125% Notes Due 2001 1,500 -- 1,500
6.25% Notes Due 2003 600 -- 600
6.40% Notes Due 2005 2,250 -- 2,250
6.95% Notes Due 2028 1,750 -- 1,750
7.55% Senior Notes Due 2004 600 -- 600
7.75% Senior Notes Due 2007 1,100 -- 1,100
7.75% Senior Notes Due 2027 300 -- 300
9.375% Senior Notes Due 2004 680 -- 680
8.875% Senior Notes Due 2006 667 -- 667
MCI Senior Debentures 1,444 -- 1,444
MCI Senior Notes 2,657 -- 2,657
Note payable due in annual installments through 2000 -- 1,342 1,342
Other debt and capital leases (maturing through 2006) 868 548 1,416
------------ --------- ---------
18,384 1,890 20,274
Less: Short-term debt and current maturities (4,125) (117) (4,242)
------------ --------- ---------
$ 14,259 $ 1,773 $ 16,032
============ ========= =========
(G) COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES OF THE
COMPANY
In connection with the MCI Merger, the Company acquired $750 million aggregate
principal amount of 8% Cumulative Quarterly Income Preferred Securities, Series
A, representing 30 million shares outstanding ("preferred securities") due June
30, 2026 which were previously issued by MCI Capital I, a wholly owned Delaware
statutory business trust (the "Trust"). The Trust exists for the sole purpose of
issuing the preferred securities and investing the proceeds in the Company's 8%
Junior Subordinated Deferrable Interest Debentures, Series A ("Subordinated Debt
Securities") due June 30, 2026, the only assets of the Trust.
Holders of the preferred securities are entitled to receive preferential
cumulative cash distributions from the Trust on a quarterly basis, provided the
Company has not elected to defer the payment of interest due on the Subordinated
Debt Securities to the Trust. The Company may elect this deferral from time to
time, provided that the period of each such deferral does not exceed five years.
The preferred securities are subject to mandatory redemption, in whole or in
part, upon repayment of the Subordinated Debt Securities at maturity or earlier
in an amount equal to the amount of Subordinated Debt Securities maturing or
being repaid. In addition, in the event the Company terminates the Trust, the
Subordinated Debt Securities will be distributed to the then holders of the
preferred securities of the Trust. The Trust assets had an estimated fair market
value of $773.2 million at September 30, 1998.
The Company and MCI have executed various guarantee agreements and supplemental
indentures which agreements, when taken together with the issuance of the
Subordinated Debt Securities, constitute a full, irrevocable, and unconditional
guarantee by the Company and MCI of all of the Trust's obligations under the
preferred securities (the "Guarantee"). A Guarantee Agreement and Supplement No.
1 thereto covers payment of the preferred securities' quarterly distributions
and payments on maturity or redemption of the preferred securities, but only in
each case to the extent of funds held by the Trust. If the Company does not make
interest payments on the Subordinated Debt Securities held by the Trust, the
Trust will have insufficient funds to pay such distributions. The obligations of
the Company and MCI under the Guarantee and the Subordinated Debt Securities are
subordinate and junior in right of payment to all senior debt of the Company and
MCI, respectively.
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(H) PREFERRED STOCK
In May 1998, the Company exercised its option to redeem all of the outstanding
Series A 8% Cumulative Convertible Preferred Stock (the "Series A Preferred
Stock") and related Depositary Shares. Prior to the redemption date,
substantially all of the holders of Series A Preferred Stock elected to convert
the preferred stock into Common Stock, resulting in the issuance of
approximately 32.7 million shares of Common Stock.
(I) COMPREHENSIVE INCOME
Effective January 1, 1998, MCI WorldCom adopted SFAS No. 130 "Reporting
Comprehensive Income." This statement requires the reporting of comprehensive
income in addition to net income from operations. Comprehensive income is a more
inclusive financial reporting methodology that includes disclosure of certain
financial information that historically has not been recognized in the
calculation of net income.
The following table reflects the calculation of comprehensive income (loss) for
MCI WorldCom for the three and nine months ended September 30, 1998 and 1997 (in
millions):
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
----------------------- -------------------
1998 1997 1998 1997
--------- --------- --------- -------
Net income (loss) applicable to common shareholders $ (2,947) $ 69 $ (3,141) $ 122
--------- --------- --------- -------
Other comprehensive income (loss):
Foreign currency translation gains (losses) 24 1 15 (20)
Unrealized holding gains (losses):
Unrealized holding gains (losses) during the period (22) (1) (39) 8
Reclassification adjustment for losses
included in net (income) loss 49 -- 36 --
--------- --------- --------- -------
Other comprehensive income (loss) before income taxes 51 -- 12 (12)
Income tax expense (benefit) (10) -- 1 (3)
--------- --------- --------- -------
Other comprehensive income (loss) 41 -- 13 (15)
--------- --------- --------- -------
Comprehensive income (loss) applicable to common
shareholders $ (2,906) $ 69 $ (3,128) $ 107
========= ========== ========= =======
(J) PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS
MCI
MCI has a noncontributory defined benefit pension plan (the "MCI Plan") and a
supplemental pension plan (the "Supplemental Plan"), and the Western Union
International, Inc. ("WUI"), a subsidiary of MCI, has a defined benefit pension
plan (the "WUI Plan"). Collectively, these plans cover substantially all MCI
employees who work 1,000 hours or more in a year.
The MCI Plan and the Supplemental Plan provide pension benefits that are based
on the employee's compensation for each year of service prior to retirement. The
WUI Plan provides pension benefits based on the employee's compensation for each
year of service after 1990 and prior to retirement.
MCI's policy is to fund the MCI Plan and the WUI Plan in accordance with the
funding requirements of the Employee Retirement Income Security Act of 1974 and
within the limits of allowable tax deductions. The assets of the plans are
primarily invested in corporate equities, government securities, and corporate
debt securities.
The information for the pension plans' assets and obligations consists of
(dollars in millions):
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CHANGE IN BENEFIT OBLIGATION
Benefit obligation at January 1, 1998 $ 563
Service cost 54
Interest cost 31
Actuarial loss 35
Benefits paid (25)
Assumption change 81
--------
Benefit obligation at September 30, 1998 $ 739
CHANGE IN PLAN ASSETS
Fair value at January 1, 1998 $ 494
Actual return on plan assets (3)
Employer contributions 63
Benefits paid (25)
--------
Fair value of assets at September 30, 1998 529
--------
Accrued benefit cost $ (210)
========
WEIGHTED AVERAGE ACTUARIAL ASSUMPTIONS:
Discount rate 6.00%
Expected return on plan assets 9.00%
Rate of compensation increase 5.75%
Annual service cost is determined using the Projected Unit Credit actuarial
method, and prior service cost is amortized on a straight-line basis over the
average remaining service period of employees. The MCI Plan accumulated benefit
obligation exceeds the fair value of assets by $108 million. There is no
additional minimum pension liability required to be recognized.
Retirement benefits, under the MCI Plan, are calculated by first establishing an
initial balance for each participant based on the present value of benefits
earned through 1995. For service after 1995, participants accrue benefits based
on a specific percentage of annual salary and earn interest credits based on the
prior year's balance at a specific interest rate. Employees who are age 50 or
older and have at least five years of service as of December 31, 1995, will have
their benefits continue to accrue under a previous formula through the year
1998. Effective January 1, 1999, no future compensation credits will be earned
by participants. Participant account balances will continue to accrue interest
credits at a specified rate.
EMBRATEL
Embratel sponsors a contributory defined benefit pension plan and a
post-retirement benefit plan, both managed by the Fundacao Embratel de
Seguridade Social ("Telos"). Approximately 97% of Embratel's employees are
covered by these plans.
The pension benefit is generally defined as the difference between (i) 90% of
the retiree's average salary during the last 36 months indexed to the date of
retirement and (ii) the value of the retirement pension paid by the Brazilian
social security system. For retired employees, the initial pension payment is
subsequently adjusted upwards to recognize cost of living increases and
productivity awards granted to active employees. In addition to the pension
supplements, post-retirement health care and life insurance benefits are
provided to eligible pensioners and their dependents.
Contributions to the Embratel plans are based on actuarial studies prepared by
independent actuaries under Brazilian regulations. The actuarial studies are
revised periodically to identify whether adjustments to the contributions are
necessary.
The information for the defined benefit pension and post-retirement plans'
assets and obligations, converted to U.S. dollars and prepared in accordance
with U.S. generally accepted accounting principles consists of (dollars in
millions):
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Pension Benefits Other Benefits
---------------- --------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at January 1, 1998 $ 1,231 $ 265
Service cost 34 7
Interest cost 53 12
Actuarial loss (48) (7)
Benefits paid (22) (2)
Assumption change (182) --
--------- -----------
Benefit obligation at September 30, 1998 $ 1,066 $ 275
CHANGE IN PLAN ASSETS
Fair value at January 1, 1998 $ 550 $ 29
Actual return on plan assets (20) --
Employer contributions 31 4
Employee contributions 19 --
Benefits paid (22) (2)
--------- -----------
Fair value of assets at September 30, 1998 $ 558 $ 31
FUNDED STATUS $ (508) $ (244)
Unrecognized net actuarial (gain) loss (212) 88
Unrecognized transition liability 276 --
--------- -----------
Accrued benefit cost $ (444) $ (156)
========= ===========
WEIGHTED AVERAGE ACTUARIAL ASSUMPTIONS:
Discount rate 6.00% 6.00%
Expected return on plan assets 9.00% 9.00%
Rate of compensation increase 3.25%
The defined benefit pension plan has an accumulated benefit obligation in excess
of fair value of assets of $345 million. There is no additional minimum pension
liability to be recognized.
Health care cost trend rates of increase were projected at annual rates
excluding inflation ranging from 6.48% in 1998 to 2.00% in 2047. The effect of a
one percentage point increase in the assumed health care cost trend rates would
increase the accumulated post-retirement benefit obligation at September 30,
1998 by $63 million and the aggregate service and interest cost components by $7
million on an annual basis. The effect of a one percentage point decrease in the
assumed health care cost trend rate would reduce the post-retirement benefit
obligation by $51 million and reduce the total service and interest cost
component by $6 million.
Embratel has created a new defined contribution plan (the "new plan"), through
Telos, which is in the regulatory review process with the Brazilian government.
Government approval of the new plan is anticipated by the end of 1998. Once
government approval of the new plan is received, all newly hired employees of
Embratel will automatically enter the new plan and entry into the existing
Embratel pension and post-retirement plans will be frozen. Current Embratel
employees have been given the option to migrate from the existing defined
benefit pension and post-retirement benefit plans to the new plan. The option
expires on December 31, 1998 and was effective on January 1, 1999. The new plan
will provide an employer match on employee contributions based on certain
limits, transfer of the defined benefit account balance, employee directed
investment, and a lump sum payment from the post-retirement plan, which can be
used to assist with medical coverage in the future. Any employees not electing
to migrate to the new plan will remain in the existing plans and will not have a
future opportunity to move to the new plan.
(K) CONTINGENCIES
The Company is involved in legal and regulatory proceedings generally incidental
to its business and has included accrued
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loss contingencies in other liabilities for certain of these matters. The
Company does not expect that the results in these lawsuits and proceedings will
have a material adverse effect on the Company's consolidated results of
operations or financial position.
FEDERAL REGULATION. In implementing the Telecommunications Act of 1996 (the
"Telecom Act"), the Federal Communications Commission ("FCC") established
nationwide rules designed to encourage new entrants to participate in the local
services markets through interconnection with the ILECs, resale of ILECs' retail
services and use of individual and combinations of unbundled network elements.
These rules set the groundwork for the statutory criteria governing entry of the
Bell Operating Companies (the "BOCs") into the long distance market. Appeals of
the FCC order adopting these rules were consolidated before the United States
Court of Appeals for the Eighth Circuit (the "Eighth Circuit"). The Eighth
Circuit found constitutional challenges to certain practices implementing cost
provisions of the Telecom Act that were ordered by certain Public Utility
Commissions ("PUCs") to be premature, but vacated significant portions of the
FCC's nationwide pricing rules, and vacated an FCC rule requiring that unbundled
network elements be provided on a combined basis. In response to requests by the
Solicitor General, on behalf of the FCC, and certain other parties, including
MCI WorldCom, the United States Supreme Court has agreed to review the decision
of the Eighth Circuit. The case is under consideration by the Court and a
decision is expected before June 1999. Certain BOCs have also raised
constitutional challenges to provisions of the Telecom Act restricting BOC
provision of long distance services, manufacturing of telecommunications
equipment, electronic publishing and alarm monitoring services. On December 31,
1997, the United States District Court for the Northern District of Texas (the
"Texas Federal District Court") ruled that these restrictions violate the Bill
of Attainder Clause of the U.S. Constitution. The decision only applied to SBC
Corporation, US West Communications Group, and Bell Atlantic Corporation. At the
request of various parties, on February 11, 1998 the Texas Federal District
Court issued a stay of its decision pending appeal. AT&T Corp., MCI, the
Department of Justice, the FCC and other parties appealed the decision to the
United States Court of Appeals for the Fifth Circuit (the "Fifth Circuit"). On
September 4, 1998, the Fifth Circuit reversed the decision of the Texas Federal
District Court and upheld the constitutionality of the challenged provisions. On
October 19, 1998, SBC Corporation, US West Communications Group and Bell
Atlantic Corporation filed petitions requesting the U.S. Supreme Court review
the Fifth Circuit decision. The Supreme Court has not yet acted on the request.
BellSouth Corporation ("BellSouth") also raised the Bill of Attainder issue in
its appeal before the United States Court of Appeals for the D.C. Circuit of the
FCC's denial of BellSouth's application to provide access long distance service
in South Carolina. A decision in that case is pending. MCI WorldCom cannot
predict either the ultimate outcome of these or future challenges to the Telecom
Act, any related appeals of regulatory or court decisions, or the eventual
effect on its businesses or the industry in general.
The FCC has denied applications filed by a Regional Bell Operating Company
("RBOC") seeking authority to provide inter local access transport area
("interLATA") long distance service. In its denial of an Ameritech Corporation
("Ameritech") application and a BellSouth application, the FCC provided detailed
guidance to applicants regarding the obligations of the applicants, the format
of future applications, the content of future applications, and the review
standards that it will apply in evaluating any future applications. The National
Association of Regulatory Utility Commissioners and several state regulatory
commissions have appealed jurisdictional aspects of that Ameritech application
denial to the Eighth Circuit. On January 22, 1998, the Eighth Circuit granted
the various appeals and held that the FCC does not have jurisdiction to consider
pricing issues when deciding RBOC interLATA long distance applications. The
Solicitor General, on behalf of the FCC and certain other parties, including MCI
WorldCom, has asked the U.S. Supreme Court to review the Eighth Circuit's
decision. The Supreme Court has yet to act on the petitions. MCI WorldCom cannot
predict either the outcome of these appeals, or the BOCs' willingness to abide
by these FCC guidelines, or the timing or outcome of future applications
submitted to the FCC. Additionally, the FCC issued a Notice of Proposed
Rulemaking seeking to allow the RBOCs to establish separate subsidiaries to
provide enhanced data services. Other RBOCs have filed or announced their
intention to file applications at the FCC for authority to provide interLATA
services. Additionally, the FCC and several PUCs are considering a proposal that
would allow BOCs electing to create separate wholesale network and retail
organizations to enter the long distance market on an accelerated basis. MCI
WorldCom cannot predict the outcome of these proceedings or whether the outcome
will have a material impact upon its consolidated financial position or results
of operations.
On May 7, 1997, the FCC announced that it would issue a series of orders that
will reform Universal Service Subsidy allocations and adopted various reforms to
the existing rate structure for interstate access services provided by the ILECs
that are designed to reduce access charges, over time, to more economically
efficient levels and rate structures. It also affirmed that information service
providers (including, among others, ISPs) should not be subject to existing
access charges
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("ISP Exemption"). Petitions for reconsideration of, among other things, the
access service and ISP Exemption related actions were filed before the FCC and
appeals taken to various United States Courts of Appeals. On reconsideration,
the FCC in significant part affirmed the access charge and ISP Exemption actions
and the court appeals have been consolidated before the Eighth Circuit. On
August 18, 1998, the Eighth Circuit denied all appeals. Also, several state
agencies have started proceedings to address the reallocation of implicit
subsidies contained in the access rates and retail service rates to state
universal service funds. Access charges are a principal component of MCI
WorldCom's telecommunication expense. Additionally, modification of the ISP
Exemption could have an adverse effect on the Company's Internet-related
services business. MCI WorldCom cannot predict either the outcome of these
appeals or whether or not the result(s) will have a material impact upon its
consolidated financial position or results of operations.
The FCC issued on December 24, 1996 a Notice of Inquiry to seek comment on
whether it should consider various actions relating to interstate information
services and the Internet. The FCC recognized that these services and recent
technological advances may be constrained by current regulatory practices that
have their foundations in traditional circuit switched telecommunications
services and technologies. Based upon this and other proceedings, the FCC may
permit telecommunications companies, BOCs, or others to increase the scope or
reduce the cost of their Internet access services. MCI WorldCom cannot predict
the effect that the Notice of Inquiry, the Telecom Act or any future
legislation, regulation or regulatory changes may have on its consolidated
financial position or results of operations.
INTERNATIONAL. In December 1996, the FCC adopted a new policy that makes it
easier for United States international carriers to obtain authority to route
international public switched voice traffic to and from the United States
outside of the traditional settlement rate and proportionate return regimes
("alternative traffic routing"). In August 1998, the FCC proposed to modify its
rules to make it even easier for U.S. international carriers to engage in
alternative traffic routing. In February 1997, the United States entered into a
World Trade Organization Agreement (the "WTO Agreement") that should 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 order to comply
with United States commitments to the WTO Agreement, the FCC implemented new
rules in February 1998 that liberalize existing policies regarding (i) 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 (ii) 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 within the
benchmark. The FCC also adopted new rules that will liberalize the provision of
switched services over private lines to World Trade Organization member
countries, by allowing 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.
Although the FCC's new policies and implementation of the WTO Agreement may
result in lower out-payments by MCI WorldCom to terminate international traffic,
there is a risk that the in-payment that MCI WorldCom will receive from inbound
international traffic may decrease to an even greater degree. The implementation
of the WTO Agreement may also make it easier for foreign carriers with market
power in their home markets to offer United States and foreign customers
end-to-end services to the disadvantage of MCI WorldCom, which 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.
Further, many foreign carriers have challenged, in court and at the FCC, the
FCC's order adopting mandatory settlement rate benchmarks. If the FCC's
settlement rate benchmark order was overturned, it could accelerate the
full-fledged entry of foreign carriers into the United States, and make it more
advantageous for foreign carriers to route international traffic into the United
States at low, cost-based termination rates, while United States carriers would
continue to have little choice but to route international traffic into most
foreign countries at much higher, above cost, settlement rates.
LITIGATION. On November 4, 1996, and thereafter, and on August 25, 1997, and
thereafter, MCI and all of its directors, including the two directors who were
also executive officers of MCI and the three directors elected by BT, were named
as
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defendants in a total of 15 complaints filed in the Court of Chancery in the
State of Delaware. BT was named as a defendant in 13 of the complaints. The
complaints were brought by alleged stockholders of MCI, individually and
purportedly as class actions on behalf of all other stockholders of MCI. In
general, the complaints allege that MCI's directors breached their fiduciary
duty in connection with the MCI BT Merger Agreement, dated November 3, 1996 (the
"MCI BT Merger Agreement") that BT aided and abetted those breaches of duty,
that BT owes fiduciary duties to the other stockholders of MCI and that it
breached those duties in connection with the MCI BT Merger Agreement. The
complaints seek damages and injunctive and other relief.
On or about October 8, 1997, all of MCI's directors, including the two MCI
directors who were also executive officers of MCI and the three MCI directors
elected by BT, were named as defendants in a purported derivative complaint
filed in the Court of Chancery in the State of Delaware. BT and Tadworth
Corporation were also named as defendants, and MCI was named as a nominal
defendant. The plaintiff, derivatively and on behalf of MCI, alleges breach of
fiduciary duty by the MCI directors and aiding and abetting those breaches of
duty by BT in connection with the MCI BT Merger Agreement and WorldCom's
exchange offer. The complaint seeks injunctive relief, damages and other relief.
One of the purported stockholder class actions pending in Delaware Chancery
Court has been amended and plaintiffs in four of the other purported stockholder
class actions have moved to amend their complaints to name WorldCom and
Acquisition Subsidiary, as additional defendants. They generally allege that the
defendants breached their fiduciary duties to stockholders in connection with
the MCI Merger and the agreement to pay a termination fee to WorldCom, and
allege discrimination in favor of BT in connection with the MCI Merger. They
seek, inter alia, damages and injunctive relief prohibiting the consummation of
the MCI Merger and the payment of the inducement fee to BT.
Three complaints were filed in the Federal District Court in Washington, D.C.,
as class actions on behalf of purchasers of MCI shares. The three cases were
consolidated on April 1, 1998. On or about May 8, 1998, the plaintiffs in all
three cases filed a consolidated amended complaint alleging, on behalf of
purchasers of MCI's shares between July 11, 1997 and August 21, 1997, inclusive,
that MCI and certain of its officers and directors failed to disclose material
information about MCI, including that MCI was renegotiating the terms of the MCI
BT Merger Agreement. The consolidated amended complaint seeks damages and other
relief. The Company and the other defendants have moved to dismiss the
consolidated amended complaint.
On May 7, 1998, GTE Corporation and three of its subsidiaries filed suit in the
U.S. District Court for the District of Columbia against MCI and WorldCom. The
complaint alleges that the MCI Merger would have the effect of substantially
lessening competition or tending to create a monopoly, and thereby violate
section 7 of the Clayton Act, with respect to the markets for Internet backbone
services, facilities to extend the reach of the Internet backbone, wholesale
and retail long distance services and international calling services. The
complaint requests declaratory and injunctive relief. At a scheduling
conference on July 10, 1998, the District Court set a trial date of May 10,
1999. On or about October 14, 1998, GTE filed an amended complaint seeking
declaratory and injunctive relief and damages, and on October 21, 1998, MCI and
WorldCom moved to dismiss the amended complaint in its entirety.
The Company believes that all of the complaints are without merit, and based on
information currently available, the Company presently does not expect that the
above actions will have a material adverse effect on the Company's consolidated
results of operations or financial position.
(L) RECLASSIFICATIONS
Revenues and line costs for prior periods reflect a classification change for
inbound international settlements which are now being treated as an offset to
line costs instead of revenues. Previously, both MCI and WorldCom classified
foreign post telephone and telegraph administration ("PTT") settlements on a
gross basis with the outbound settlement reflected as line cost expense and the
inbound settlement reflected as revenue. This change better reflects the way in
which the business is operated because the Company actually settles in cash
through a formal net settlement process that is inherent in the operating
agreements with foreign carriers.
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(M) RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. This statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires a company to formally document,
designate and assess the effectiveness of transactions that receive hedge
accounting. This statement is effective for fiscal years beginning after
September 15, 1999, but may be implemented as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning September 16, 1998
and thereafter). This statement cannot be applied retroactively. 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 has not yet quantified the effects of adopting SFAS No. 133 on the
financial statements and has not determined the timing of or method of our
adoption of this statement. However, this statement could increase volatility in
earnings and other comprehensive income.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Management's Discussion and Analysis of Financial Condition and Results of
Operations may be deemed to include forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, that involve risk and
uncertainty, including financial, regulatory environment and trend projections
and the outcome of year 2000 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) the Company's degree of financial leverage; (2)
risks associated with debt service requirements and interest rate fluctuations;
(3) risks associated with year 2000 uncertainties; (4) acquisitions and the
integration thereof; (5) risks of international business; (6) dependence on
availability of transmission facilities; (7) regulation risks including the
impact of the Telecom Act; (8) contingent liabilities; (9) the impact of
competitive services and pricing; and (10) other risks referenced from time to
time in the Company's filings with the SEC, including the Company's Prospectus
Supplement dated August 7, 1998.
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 month periods ended
September 30, 1998 and 1997 after giving effect to the BFP Merger, which was
accounted for as a pooling-of-interests. The information should be read in
conjunction with the restated consolidated financial statements and notes
thereto contained herein and in the Company's Current Report on Form 8-K dated
May 28, 1998 (filed May 28, 1998) and with Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
Unless otherwise defined, capitalized terms used herein have the meanings
assigned to them in the Notes to Consolidated Financial Statements contained
herein.
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GENERAL
The Company is one of the largest telecommunications companies in the United
States, serving local, long distance and Internet customers domestically and
internationally. The Company's operations have grown significantly in each year
of its operations as a result of internal growth, the selective acquisition of
other telecommunications companies and international expansion.
On September 14, 1998, the Company, through a wholly owned subsidiary, merged
with MCI. Through the MCI Merger, the Company acquired one of the world's
largest and most advanced digital networks, connecting local markets in the
United States to more than 280 countries and locations worldwide.
As a result of the MCI Merger, each share of MCI common stock was converted into
the right to receive 1.2439 shares of MCI WorldCom Common Stock or approximately
755 million MCI WorldCom common shares in the aggregate, and each share of MCI
Class A common stock outstanding (all of which were held by BT) was converted
into the right to receive $51.00 in cash or approximately $7 billion in the
aggregate. The funds paid to BT were obtained by the Company from (i) available
cash as a result of the Company's $6.1 billion public debt offering in August
1998; (ii) the sale of MCI's iMCI Business to Cable & Wireless for $1.75 billion
in cash on September 14, 1998; (iii) the sale of MCI's 24.9% equity stake in
Concert to BT for $1 billion in cash on September 14, 1998; and (iv)
availability under the Company's New Credit Facilities and commercial paper
program. The MCI Merger was accounted for as a purchase; accordingly, operating
results for MCI have been included from the date of acquisition.
On August 4, 1998, MCI acquired a 51.79% voting interest and a 19.26% economic
interest in Embratel, Brazil's only facilities-based national communications
provider, for approximately $2.3 billion. The purchase price will be paid in
local currency installments of which $916 million was paid on August 4, 1998
with the remainder to be paid in two equal installments over the next two years.
Embratel provides interstate long distance and international telecommunications
services, as well as over 40 other communications services, including leased
high-speed data, satellite, Internet, frame and packet-switched services.
Operating results for Embratel are included from the date of the MCI Merger.
On January 31, 1998, MCI WorldCom, through a wholly owned subsidiary, merged
with CompuServe. As a result of the CompuServe Merger, each share of CompuServe
common stock was converted into the right to receive 0.40625 shares of MCI
WorldCom Common Stock, or approximately 37.6 million MCI WorldCom common shares
in the aggregate. Prior to the CompuServe Merger, CompuServe operated primarily
through two divisions: Interactive Services and Network Services. Interactive
Services offered worldwide online and Internet access services for consumers,
while Network Services provided worldwide network access, management and
applications, and Internet service to businesses. The CompuServe Merger was
accounted for as a purchase; accordingly, operating results for CompuServe have
been included from the date of acquisition.
On January 31, 1998, MCI WorldCom also acquired ANS from AOL, and has entered
into five year contracts with AOL under which MCI WorldCom and its subsidiaries
will provide network services to AOL. As part of the AOL Transaction, AOL
acquired CompuServe's Interactive Services Division and received a $175 million
cash payment from MCI WorldCom. MCI WorldCom retained the CNS division. ANS
provides Internet access to AOL and AOL's subscribers in the United States,
Canada, the United Kingdom, Sweden and Japan, and also designs, develops and
operates high performance wide-area networks for business, research, education
and governmental organizations. The AOL Transaction was accounted for as a
purchase, accordingly, operating results for ANS have been included from the
date of acquisition.
On January 29, 1998, MCI WorldCom, through a wholly owned subsidiary, merged
with BFP. BFP is a leading facilities-based provider of competitive local
telecommunications services, commonly referred to as a competitive local
exchange carrier, in selected cities within the United States. BFP acquires and
constructs its own state-of-the-art fiber optic networks and facilities and
leases network capacity from others to provide IXCs, ISPs, wireless carriers and
business, government and institutional end users with an alternative to the
ILECs for a broad array of high quality voice, data, video transport and other
telecommunications services.
As a result of the BFP Merger, each share of BFP common stock was converted into
the right to receive 1.85 shares of Common Stock or approximately 72.6 million
MCI WorldCom common shares in the aggregate. The BFP Merger was accounted for as
a pooling-of-interests and, accordingly, the Company's financial statements for
periods prior to the BFP
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Merger have been restated to include the results of BFP for all periods
presented.
The Company's strategy is to become a fully integrated communications company
that would be well positioned to take advantage of growth opportunities in
global telecommunications. Consistent with this strategy, the Company believes
that transactions such as the MCI Merger, the CompuServe Merger and the AOL
Transaction enhance the combined entity's opportunities for future growth,
create a stronger competitor in the changing telecommunications industry, allow
provision of end-to-end bundled service over global networks, and provide the
opportunity for significant cost savings and operating efficiencies for the
combined organization.
The Company's profitability is dependent upon, among other things, its ability
to achieve line costs that are less than its revenues. The principal components
of line costs are access charges and transport charges and the most significant
portion of the Company's line costs is access charges, which are highly
regulated. The FCC revised its rules regarding access charges in a manner that
will, over time, revamp the access rate element structure and, over the near
term, reduce the overall access revenues collected by the ILECs. The FCC's rate
element restructuring is intended to align costs with the manner in which they
are incurred by the ILECs. As a result, the usage based system has been replaced
with a system composed of a combination of flat rate charges and usage based
charges. The FCC has also implemented subsidy systems for local telephone
services and services to schools, libraries, and hospitals. The subsidy systems
will result in additional charges being placed on all telecommunications
providers, which charges may be directly recovered from the end users. In
addition, various state regulatory agencies are considering adoption of subsidy
systems that could cause rate adjustments to the access services obtained by the
Company and to retail rates. The Company cannot predict what effect continued
regulation and increased competition between LECs and other IXCs will have on
future access charges or the Company's business. However, the Company believes
that it will be able to continue to reduce transport costs through effective
utilization of its network, favorable contracts with carriers and network
efficiencies made possible as a result of expansion of the Company's customer
base by acquisitions and internal growth.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the Company's statement
of operations as a percentage of its operating revenues.
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
1998 1997 1998 1997
----- ---- ----- ----
Revenues...................................................... 100% 100% 100% 100%
Line costs.................................................... 47.7 50.5 47.8 51.9
Selling, general and administrative........................... 24.0 21.5 22.0 22.4
Depreciation and amortization................................. 12.5 12.9 12.7 13.4
In-process research and development and other charges......... 85.9 -- 43.0 --
----- ---- ----- ----
Operating income (loss)....................................... (70.0) 15.1 (25.5) 12.3
Other income (expense):
Interest expense.......................................... (3.8) (5.3) (4.1) (5.4)
Miscellaneous............................................. 0.4 0.6 0.4 0.6
----- ---- ----- ----
Income (loss) before income taxes, minority interests and
extraordinary items......................................... (73.4) 10.4 (29.2) 7.6
Provision for income taxes.................................... 4.6 6.4 5.3 4.9
----- ---- ----- ----
Net income (loss) before, minority interests extraordinary
items....................................................... (78.0) 4.0 (34.5) 2.7
Minority interests............................................ 0.3 -- 0.1 --
Extraordinary item............................................ -- -- (1.5) (0.1)
Distribution on subsidiary trust mandatorily
redeemable preferred securities 0.1 -- - --
Preferred dividend requirement................................ -- 0.4 0.2 0.4
----- ---- ----- ----
Net income (loss) applicable to common shareholders........... (78.4)% 3.6% (36.3)% 2.3%
===== ==== ===== ====
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THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 VS.
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997
Revenues for the three months ended September 30, 1998 increased 97% to $3.8
billion as compared to $1.9 billion for the three months ended September 30,
1997. For the nine months ended September 30, 1998, revenues increased 61% to
$8.7 billion versus $5.4 billion for the same period of the prior year. The
increase in total revenues is attributable to the MCI Merger, the CompuServe
Merger and the AOL Transaction as well as internal growth. Results for the three
and nine month periods ended September 30, 1998 include 16 days of MCI and
Embratel operations. Prior year results have been restated to reflect the BFP
Merger, which was accounted for as a pooling-of-interests.
Actual reported revenues by category and associated revenue increases for the
three and nine months ended September 30, 1998 and 1997 reflect the following
increases by category (dollars in millions):
Three Months Ended September 30, Nine months Ended September 30,
-------------------------------------- -------------------------------------
Actual Actual Percent Actual Actual Percent
1998 1997 Change 1998 1997 Change
------- ------- ------ ------- -------- ------
REVENUES
Voice $ 1,877 $ 1,028 83 $ 4,247 $ 2,972 43
Data 735 419 75 1,768 1,160 52
International 301 195 54 802 515 56
Embratel 174 -- 100 174 -- 100
Internet 589 147 301 1,507 384 292
------- ------- ------- --------
COMMUNICATION SERVICES 3,676 1,789 106 8,498 5,031 69
Other 82 122 (33) 163 333 (51)
------- ------- ------- --------
TOTAL REVENUES $ 3,758 $ 1,911 97 $ 8,661 $ 5,364 61
======= ======= ======= ========
The following table provides supplemental detail for MCI WorldCom revenues.
Since actual results only reflect 16 days of operations for MCI and Embratel,
the pro forma results are more indicative of internal growth for the combined
company. The pro forma revenue increases for the three and nine months ended
September 30, 1998 and 1997 reflect the following increases by category (dollars
in millions):
Three Months Ended September 30, Nine months Ended September 30,
--------------------------------------- ----------------------------------------
Pro Forma Pro Forma Percent Pro Forma Pro Forma Percent
1998 1997 Change 1998 1997 Change
------- ------- ------- -------- -------- -------
REVENUES
Voice $ 4,907 $ 4,462 10 $ 14,483 $ 13,291 9
Data 1,520 1,147 33 4,211 3,295 28
International 302 195 55 802 515 56
Embratel 930 507 83 2,422 1,510 60
Internet 589 343 72 1,588 917 73
------- ------- -------- --------
COMMUNICATION SERVICES 8,248 6,654 24 23,506 19,528 20
Other 358 477 (25) 1,323 1,486 (11)
------- ------- -------- --------
TOTAL REVENUES $ 8,606 $ 7,131 21 $ 24,829 $ 21,014 18
======= ======= ======== ========
Pro forma results for the prior periods reflect a classification change for
inbound international settlements which are now being treated as an offset to
line costs instead of revenues. Previously, both MCI and WorldCom classified
foreign PTT settlements on a gross basis with the outbound settlement reflected
as line cost expense and the inbound settlement reflected as revenue. This
change better reflects the way in which the business is operated because the
Company actually settles in cash through a formal net settlement process that is
inherent in the operating agreements with foreign carriers.
The following discusses the pro forma revenue increases for the three and nine
month periods ended September 30, 1998 as compared to pro forma revenues for
the comparable prior year periods. The pro forma revenues assume that the MCI
Merger, CompuServe Merger and the AOL Transaction occurred at the beginning of
1997. Changes in actual revenues are shown in the Consolidated Statements of
Operations and the foregoing tables and, as noted above, primarily reflect the
MCI Merger, CompuServe Merger, AOL Transaction and the internal growth of the
Company.
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Voice (formerly domestic switched) revenues for the third quarter experienced a
10% pro forma year-over-year increase driven by a gain of 15% in traffic. For
the nine month period ended September 30, 1998, voice revenues increased 9% over
the prior year pro forma amount on a 17% increase in traffic. Strong long
distance volume gains in domestic commercial sales channels, combined with an
increasing mix of local services, were the primary contributors to this
increase. Local voice revenues grew 87% in the third quarter of 1998 versus the
same period of the prior year. For the nine months ended September 30, 1998
local voice revenues experienced a 97% pro forma year over year increase. Voice
revenues include both long distance and local domestic switched revenues. While
the Company continues to show significant percentage gains in switched local, it
is still a relatively small component of total Company revenues.
Pro forma data (formerly domestic private line) revenues for the three and nine
month periods ended September 30, 1998 increased 33% and 28%, respectively. The
revenue growth for data services continues to be driven by significant
commercial end-user demand for high-speed data and by Internet-related growth on
both a local and long-haul basis. This growth is not only being fueled by
connectivity demands, but applications are becoming more strategic, far reaching
and complex; additionally, bandwidth consumption is driving an acceleration in
growth for higher capacity circuits. Data includes both long distance and local
dedicated bandwidth sales. Rapidly growing demand for high-speed data access as
well as data transport has contributed to a 43% pro forma year over year local
data revenue growth for the third quarter of 1998 and a 46% pro forma year over
year increase for the nine month period. As of September 30, 1998, the Company
had approximately 16 million domestic local voice grade equivalents and
approximately 38,000 buildings connected over its high-capacity circuits. Local
route miles of connected fiber are in excess of 8,000 and domestic long distance
route miles are in excess of 45,000.
Pro forma International revenues - those revenues originating outside of the
United States - for the third quarter of 1998 were $302 million, an increase of
55% as compared with $195 million for the same pro forma period of the prior
year. For the nine month period ended September 30, 1998, pro forma
international revenues increased 56% to $802 million versus $515 million for the
same pro forma period of the prior year. In July 1998, the pan-European network
was commissioned for service and now provides MCI WorldCom the capability to
connect from end-to-end over 5,000 buildings in Europe with over 33,000
buildings in the U.S. - all over its own high-capacity circuits. In Europe, the
Company has over 900 route miles of local fiber and over 1,700 long distance
route miles. Additionally, plans were announced to build national networks in
the United Kingdom, France and Germany.
Pro Forma Embratel revenues increased to $930 million for the three months ended
September 30, 1998 versus $507 million for the same period of the prior year.
For the nine months ended September 30, 1998 revenues increased to $2.4 billion
from $1.5 billion in the same period of the prior year. These increases
principally reflect the implementation of a new interconnection regime among
Embratel and Brazil's three regional fixed-line operators, effective April 1,
1998. Under this new regime, Embratel has begun receiving remittances from the
fixed-line operators for switched services provided to end-customers. Embratel
has also begun paying interconnection charges associated with this service to
the regional fixed-line operators. In addition to such charges, Embratel is
required to pay a supplemental per-minute charge for interconnection through
June 30, 2001. The publicly stated intent of the new regime was to minimally
impact the profitability of Embratel and the three fixed-line operators.
Embratel results are consolidated with those of the Company due to the Company's
51.79% voting interest and 19.26% economic interest in Embratel.
Pro forma Internet revenues for the three and nine month periods ended September
30, 1998 increased 72% and 73%, respectively, over the prior year pro forma
amounts. Growth is being driven by both dial up and dedicated connectivity to
the Internet as more and more business customers migrate their data networks and
applications to Internet-based technologies. Additionally, Internet revenues
growth is partially attributable to the acquired customer contract for which
profit margins have been reflected at market rates as of the date of
acquisition. The remaining term of the acquired contract and associated
amortization to reflect market rates is 52 months. MCI's Internet revenues
have been excluded from the above table, due to the divestiture of the iMCI
Business on September 14, 1998.
Pro forma other revenues for the third quarter of 1998 were $358 million, down
25% as compared with the pro forma third quarter of 1997. For the nine month
period ended September 30, 1998, pro forma other revenues decreased 11% to $1.3
billion versus $1.5 billion for the same pro forma period of the prior year. The
year over year decline reflects the negative impact of eliminating certain lines
of operation and the Canadian currency translation effects.
The following discusses the results of operations for the three and nine months
ended September 30, 1998, as compared to the comparable prior year periods.
Line costs as a percentage of revenues for the third quarter of 1998 were 47.7%
as compared to 50.5% reported for the same period of the prior year. On a
year-to-date basis, line costs as a percentage of revenues decreased to 47.8% as
compared to 51.9% reported for the same period of the prior year. Line costs for
the three and nine month periods ended September 30, 1998 include a $37 million
one-time merger-related charge for unfavorable contracts. Overall decreases are
attributable to changes in the product mix and synergies and economies of scale
resulting from network efficiencies achieved from the assimilation of CNS and
ANS into the Company's operations and were offset in part by universal service
fund costs recorded for the first nine months of 1998. Additionally, access
charge reductions beginning in July 1997 reduced total line cost expense by
approximately $84 million for the first nine months in 1998. While access
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charge reductions were primarily passed through to the customer, line costs as
a percentage of revenues was positively affected by more than half a percentage
point for both the three and nine months ended September 30, 1998. The Company
anticipates that line costs as a percentage of revenues will continue to
decline as a result of synergies and economies of scale resulting from network
efficiencies achieved from the assimilation of MCI, CNS, ANS and BFP into the
Company's operations. Additionally, local revenues are increasing rapidly and
line costs related to local are primarily fixed in nature - leading to lower
line costs as a percentage of revenues.
Selling, general and administrative expenses for the third quarter of 1998 were
$902 million or 24.0% of revenues as compared to $411 million or 21.5% of
revenues for the third quarter of 1997. For the nine months ended September 30,
1998, this expense was $1.9 billion or 22.0% of revenues compared to the $1.2
billion or 22.4% of revenues for 1997. The increase in selling, general and
administrative expenses as a percentage of revenues for the three month period
ended September 30, 1998 includes MCI for 16 days and reflects the Company's
expanding operations, primarily through the MCI Merger. The increase is also
attributable to a one-time merger-related charge of $21 million for the
adjustment of certain asset carrying values. The Company's goal is to achieve
additional selling, general and administrative synergies in connection with the
MCI Merger as the result of the assimilation of MCI into the Company's strategy
of cost control.
Depreciation and amortization expense for the third quarter of 1998 increased to
$469 million or 12.5% of revenues from $247 million or 12.9% of revenues for the
third quarter of 1997. On a year-to-date basis, this expense increased to $1.1
billion or 12.7% of revenues from $719 million or 13.4% of revenues for the
comparable 1997 period. These increases reflect increased amortization
associated with the MCI Merger, CompuServe Merger and AOL Transaction and
additional depreciation related to capital expenditures. As a percentage of
revenues, these costs decreased due to the higher revenue base.
In the first quarter of 1998 the Company recorded a pre-tax charge of $69
million for employee severance, alignment charges and direct merger costs
associated with the BFP Merger. Additionally, in the third quarter of 1998, the
Company recorded a pre-tax charge of $127 million primarily in connection with
the MCI Merger. The third quarter charge included severance costs associated
with the termination of certain employees which is expected to be completed by
the first quarter of 1999. Also included are alignment charges, and other exit
activities which include the costs of consolidating and closing facilities,
loss on sale or write down of assets and conformance of accounting principles.
(See Note E)
In connection with recent business combinations, the Company made allocations of
the purchase price to acquired in-process technology totaling $429 million in
the first quarter of 1998 related to the CompuServe Merger and AOL Transaction
and $3.1 billion in the third quarter of 1998 related to the MCI Merger (See
Note E).
Interest expense in the third quarter of 1998 was $141 million or 3.8% of
revenues, as compared to $102 million or 5.3% of revenues reported in the third
quarter of 1997. For the nine months ended September 30, 1998, interest expense
was $351 million or 4.1% of revenues, as compared to $289 million or 5.4% of
revenues for the first nine months of 1997. The increase in interest expense is
attributable to higher debt levels as the result of higher capital expenditures,
the 1997 and 1998 fixed rate debt financings and the MCI Merger, offset by lower
interest rates as a result of the Tender Offers, the 1998 fixed rate debt
financings and slightly lower rates in effect on the Company's variable rate
long-term debt. For the three months ended September 30, 1998 and 1997, weighted
average annual interest rates on the Company's long-term debt were 7.03% and
7.99%, respectively, while weighted average annual levels of borrowings were
$11.9 billion and $6.0 billion, respectively. For the nine months ended
September 30, 1998 and 1997, weighted average annual interest rates on the
Company's total long-term debt were 7.12% and 7.75%, respectively, while
weighted average annual levels of borrowing were $9.74 billion, and $5.61
billion, respectively.
The Company recorded a tax provision of $174 million and $462 million,
respectively, for the three and nine month periods ended September 30, 1998 on a
pretax loss of $2.76 billion and $2.52 billion, respectively. Although the
Company generated a consolidated pre-tax loss for the three and nine months
ended September 30, 1998, permanent non-deductible items aggregating
approximately $3.2 billion and $3.8 billion, respectively, resulted in the
recognition of taxable income. Included in the permanent non-deductible items
was the $3.53 billion charge for in-process research and development related to
the MCI Merger, CompuServe Merger and AOL Transaction.
In the first quarter of 1998, the Company recorded an extraordinary item
totaling $128.7 million, net of income tax benefit of $77.6 million. The charge
was recorded in connection with the Tender Offers and related refinancings of
outstanding debt of BFP discussed below. In the second quarter of 1997 the
Company recognized an extraordinary loss of $2.9 million related to the early
extinguishment of secured indebtedness.
For the quarter ended September 30, 1998, the Company reported a net loss of
$2.9 billion as compared to net income of $69 million reported in the third
quarter of 1997. Diluted loss per common share was $2.44 compared to diluted
earnings per common share of $0.07 per share for the comparable 1997 period.
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For the nine months ended September 30, 1998, the Company reported a net loss of
$3.1 billion or $2.89 per share compared to net income of $122 million or $0.12
per share for the prior year period.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company's total debt was $20.27 billion, an
increase of $12.85 billion from December 31, 1997 primarily due to the
acquisition of MCI debt, including Embratel debt and the related cost to
finance the Embratel investment, financing of the approximately $7 billion
payment to BT and increased capital expenditures.
In connection with the BFP Merger, the Company announced in February 1998 that
it had commenced the Tender Offers to purchase for cash various series of
outstanding BFP Notes. Concurrently with the Tender Offers, MCI WorldCom
obtained the requisite consents to eliminate certain restrictive covenants and
amend certain other provisions of the respective indentures of the BFP Notes.
In March 1998, the Company accepted all BFP Notes validly tendered. As of the
expiration of the Tender Offers, MCI WorldCom had received valid tenders and
consents from holders of approximately $1.1 billion of BFP Notes (over 99% of
total outstanding). The funds required to pay all amounts required under the
Tender Offers were obtained by MCI WorldCom from available working capital and
lines of credit. In connection with the Tender Offers and related refinancings,
MCI WorldCom recorded an extraordinary item of $128.7 million, net of income
tax benefit of $77.6 million in the first quarter of 1998.
On August 6, 1998, MCI WorldCom replaced its Old Credit Facilities with $12.0
billion in New Credit Facilities consisting of $3.75 billion of Facility A
Loans, $1.25 billion of Facility B Loans and $7 billion of Facility C Loans.
The New 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 and the Facility B Loans mature on June 30, 2002. The
Facility C Loans have a 364-day term, which may be extended for up to two
successive 364-day terms thereafter to the extent of the committed amounts from
those lenders consenting thereto, with a requirement that lenders holding at
least 51% of the committed amounts consent. Additionally, effective as of the
end of such 364-day term, the Company may elect 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 New 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 New Credit Facilities, including
a Base Rate or Eurodollar Rate, plus the applicable margin. The applicable
margin for the Eurodollar Rate borrowing varies from 0.35% to 0.75% as to
Facility A Loans and Facility B Loans and from 0.225% to 0.450% as to Facility
C Loans, in each case based upon the better of certain debt ratings. The New
Credit Facilities are unsecured but include a negative pledge of the assets of
the Company and its subsidiaries (subject to certain exceptions). The New
Credit Facilities require compliance with a financial covenant based on the
ratio of total debt to total capitalization, calculated on a consolidated
basis. The New Credit Facilities require compliance with certain operating
covenants which limit, among other things, the incurrence of additional
indebtedness by the Company and its subsidiaries, sales of assets and mergers
and dissolutions, which covenants are generally less restrictive than those
contained in the Old Credit Facilities and which do not restrict distributions
to shareholders, provided the Company is not in default under the New Credit
Facilities. The Facility A Loans and the Facility C Loans are subject to annual
commitment fees not to exceed 0.25% and 0.12%, respectively, of any unborrowed
portion of the facilities.
Subsequent to September 30, 1998, the Company elected to repay the Facility B
Loans and cancel the facility commitment of $1.25 billion. The funds used to
repay Facility B Loans were obtained by the Company from availability under the
Company's New Credit Facilities and commercial paper program.
The Company approved the issuance of commercial paper notes in the aggregate
principal amount not to exceed $10.0 billion, which notes have a maturity not
to exceed 364 days from the date of issuance. The Company maintains unused
credit facilities equal to 100% of the commercial paper notes outstanding. At
September 30, 1998, $2.74 billion was outstanding under the commercial paper
program.
As of September 30, 1998, the Company had available liquidity of $8.96 billion
under its New Credit Facilities and
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commercial paper program and from available cash. After the Facility B Loans
were repaid, available liquidity was reduced by $1.25 billion.
On August 11, 1998, the Company completed a public debt offering of $6.1 billion
principal amount of debt securities with interest rates ranging from 6.125% to
6.95% and maturing from August 2001 to August 2028. The net proceeds of $6.04
billion were used to pay down commercial bank debt, finance the approximately $7
billion payment to BT and for general corporate purposes. The notes bear
interest payable semiannually in arrears on February 15 and August 15 of each
year, commencing February 15, 1999.
The Notes 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) plus (a) 10 basis points for the Notes Due 2001, (b) 15 basis points
for the Notes Due 2003 and the Notes Due 2005, or (c) 20
basis points for the Notes Due 2028, plus in the case of each of clause (i) and
(ii) accrued interest to the date of redemption.
At the time of the MCI Merger, MCI had outstanding $1.44 billion of MCI Senior
Debentures with rates ranging from 7.125% to 8.25% and maturing from January
2023 through June 2027, and $2.66 billion of MCI Senior Notes with rates ranging
from 6.125% to 7.5% and maturing from March 1999 through April 2012.
Additionally, MCI had outstanding a $1.34 billion note payable in annual local
currency installments over the next two years as a result of MCI's purchase of
Embratel on August 4, 1998, and other debt including, without limitation,
capital leases.
In connection with the MCI Merger, the Company also acquired $750 million
aggregate principal amount of 8% Cumulative Quarterly Income Preferred
Securities, Series A, representing 30 million shares outstanding (preferred
securities) due June 30, 2026 which were previously issued by the Trust. The
Trust exists for the sole purpose of issuing the preferred securities and
investing the proceeds in the Company's Subordinated Debt Securities due June
30, 2026, the only assets of the Trust.
For the nine months ended September 30, 1998, the Company's cash flow from
operations was $1.48 billion, increasing 57% from $944 million in the comparable
period for 1997. The increase in cash flow from operations was primarily
attributable to internal growth and synergies and economies of scale resulting
from network efficiencies and selling, general and administrative cost savings
achieved from the assimilation of recent acquisitions into the Company's
operations.
In 1998, the Company's existing receivables purchase agreement generated
additional proceeds of $72 million, bringing the total amount outstanding to
$489 million. The Company used these proceeds to reduce outstanding debt under
the Company's existing credit facilities. As of September 30, 1998, the
purchaser owned an undivided interest in a $1.2 billion pool of receivables.
Cash used in investing activities for the nine months ended September 30, 1998
totaled $6.79 billion and included capital expenditures of $3.27 billion and
acquisition and related costs of $3.05 billion. Primary capital expenditures
include purchases of switching, transmission, communication and other equipment.
The Company anticipates that approximately $1.9 billion will be spent during the
remainder of 1998 for transmission and communications equipment, construction
and other capital expenditures. Acquisition and related costs includes the costs
associated with the MCI Merger, CompuServe Merger and AOL Transaction.
Included in cash flows from financing activities are payments of $12.7 million
for the Series A Preferred Stock dividend and $0.7 million for the Series B
preferred dividend requirements. The Company has never paid cash dividends on
its Common Stock. Dividends on the Series B Convertible Preferred Stock of MCI
WorldCom ("MCI WorldCom Series B Preferred Stock") accrue at the rate per share
of $0.0775 per annum and are payable in cash. Dividends will be paid only when,
as and if declared by the Board of Directors of the Company. The Company
anticipates that dividends on the MCI WorldCom Series B Preferred Stock will not
be declared but will continue to accrue. Upon conversion, accrued but unpaid
dividends are payable in cash or shares of MCI WorldCom Common Stock at the
Company's election.
In May 1998, the Company exercised its option to redeem all of the outstanding
Series A Preferred Stock and related Depositary Shares. Prior to the redemption
date, substantially all of the holders of Series A Preferred Stock elected to
convert the preferred stock into Common Stock, resulting in the issuance of
approximately 32.7 million shares of Common Stock.
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In connection with the MCI Merger, MCI WorldCom paid BT $51.00 in cash without
interest for each of the shares of MCI Class A Common Stock it owned, or
approximately $7 billion in the aggregate. Additionally, MCI WorldCom paid BT a
fee of $465 million to induce BT to terminate the previously signed BT/MCI
Merger Agreement and to enter into the BT Agreement. MCI WorldCom funded the
commitment through a combination of available cash from the August 1998 public
debt offering and proceeds from the sale of the iMCI Business and MCI's
investment in Concert and availability unde the Company's New Credit Facilities
and commercial paper program.
Increases in interest rates on MCI WorldCom's variable rate debt would have an
adverse effect upon MCI WorldCom's reported net income and cash flow. MCI
WorldCom believes that the combined operations of MCI WorldCom, CNS, ANS, and
MCI will generate sufficient cash flow to service MCI WorldCom's debt and
capital requirements; however, economic downturns, increased interest rates and
other adverse developments, including factors beyond MCI WorldCom's control,
could impair its ability to service its indebtedness. In addition, the cash flow
required to service MCI WorldCom's debt may reduce its ability to fund internal
growth, additional acquisitions and capital improvements.
The development of the businesses of MCI WorldCom and the installation and
expansion of its domestic and international networks will continue to require
significant capital expenditures. Failure to have access to sufficient funds for
capital expenditures on acceptable terms or the failure to achieve capital
expenditure synergies may require MCI WorldCom to delay or abandon some of its
plans, which could have a material adverse effect on the success of MCI
WorldCom. The Company has historically utilized a combination of cash flow from
operations and debt to finance capital expenditures and a mixture of cash flow,
debt and stock to finance acquisitions. The Company expects to experience
increased capital intensity due to network expansion and merger related expenses
as noted above and believes that funding needs in excess of internally generated
cash flow and the Company's New Credit Facilities and commercial paper program
will be met by accessing the debt markets.
The Company believes that MCI WorldCom, following the MCI Merger, CompuServe
Merger and the AOL Transaction will generate sufficient cash flow to adequately
fund the capital requirements of these businesses. As a result of the MCI
Merger, the CompuServe Merger and the AOL Transaction, the Company believes that
the operating and capital synergies from the integration of these acquisitions
into MCI WorldCom's operations will further enhance the cash flow contribution
for the Company.
Absent significant capital requirements for other acquisitions, the Company
believes that cash flow from operations and available liquidity, including the
Company's New Credit Facilities and commercial paper program and available cash
will be more than adequate to meet the Company's capital needs for the remainder
of 1998.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. This statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires a company to formally document,
designate and assess the effectiveness of transactions that receive hedge
accounting. This statement is effective for fiscal years beginning after
September 15, 1999, but may be implemented as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning September 16, 1998
and thereafter). This statement cannot be applied retroactively. 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 has not yet quantified the effects of adopting SFAS No. 133 on the
financial statements and has not determined the timing of or method of our
adoption of this statement. However, this statement could increase volatility in
earnings and other comprehensive income.
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Year 2000 Readiness Disclosure
Due to their extensive use of computer technology, both MCI and WorldCom began
developing strategic plans in 1996 to address their respective year 2000 issues.
Since the MCI Merger, the Company has been melding these strategies. The
Company's year 2000 compliance plan is an ongoing program in which remediation
strategies are being implemented by the Company's business organizations to
address noncompliant computer and network systems and technology. The Company
has a central organization that has overall responsibility for coordinating the
implementation of this strategy.
The remediation strategies followed by the Company's business organizations
generally involve a sequence of steps that include (i) identifying computer
hardware, software and network components and equipment potentially impacted by
year 2000 problems; (ii) analyzing the date sensitivity of those elements; (iii)
developing plans for remediation where necessary; (iv) converting non-compliant
code or equipment (or, in some cases, replacing or decommissioning systems); (v)
testing, and (vi) deploying and monitoring remediation solutions. These steps
will vary to meet the particular needs of a business organization and, in some
cases, will overlap. Testing, for example, may be performed at several stages of
the remediation process.
The Company has substantially completed its efforts to identify and assess year
2000 computer issues, and its business organizations are in the process of
developing remediation plans, converting noncompliant code or equipment, and
replacing or decommissioning systems, and testing. The Company has targeted year
2000 compliance for the majority of its mission-critical systems, including
network and customer interfacing systems, on or before March 31, 1999. The
remaining mission-critical systems, and non-mission critical systems, are
targeted for compliance by June 30, 1999, with full deployment of the
remediation solutions throughout the Company's network targeted for no later
than September 30, 1999.
As part of its year 2000 plan, the Company is seeking confirmation from its
domestic and foreign interconnecting carriers (collectively, the
"Interconnecting Carriers") and major communications equipment vendors (the
"Primary Vendors") that they are developing and implementing plans to become
year 2000 compliant. The Company has contacted these carriers and vendors, and
will continue to do so, but has not yet received enough information from certain
domestic and foreign carriers to assess their year 2000 readiness. The Company
has received information from its Primary Vendors regarding their year 2000
readiness. This information indicates the Primary Vendors have documented plans
to become year 2000 compliant. Like all major telecommunication carriers, the
Company's ability to provide service is dependent on its Interconnecting
Carriers and Primary Vendors.
The Company intends to prepare contingency plans to address potential year 2000
related business interruptions that may occur on January 1, 2000 or thereafter.
The Company anticipates that these contingency plans will primarily address
potential year 2000 problems due to failures to remediate major systems
successfully, and potential failure of the Company's Interconnecting Carriers'
and Primary Vendors' year 2000 compliance efforts. The Company plans to complete
preparation and implementation of its contingency plans by December 31, 1999.
Failure to meet this target could materially impact the Company's operations.
To achieve its year 2000 compliance plan, the Company is utilizing both internal
and external resources to identify, correct or reprogram, and test its systems
for year 2000 compliance. The Company expects to incur internal labor as well as
consulting and other expenses related to infrastructure and facilities
enhancements necessary to prepare its systems for the year 2000. The Company's
use of internal resources to achieve its year 2000 compliance plan has not had a
material adverse effect on its ability to develop new products and services or
to maintain and upgrade, if necessary, its existing products and services.
The year 2000 costs incurred by the MCI and WorldCom for the nine months ended
September 30, 1998, which have been included in selling, general and
administrative expenses for that period, were approximately $116 million. This
level of expenditures is consistent with the planned expenditures for the
period. The Company expects to incur approximately $384 million in expenses over
the next five quarters to support its year 2000 compliance initiatives. The
costs of the Company's year 2000 remediation efforts are based upon management's
best estimates, which require assumptions about future events, availability of
resources and personnel, third-party remediation actions, and other factors.
There are no assurances that these estimates will be
Page 32
33
accurate, and actual amounts may differ materially based on a number of factors,
including the availability and cost of resources to undertake remediation
activities and the scope and nature of the work required to complete
remediation.
Due to the inherent uncertainties concerning year 2000 remediation efforts, and
the potential impact of actions by third parties, the Company cannot predict its
most reasonably likely worst case scenario. The failure to correct a material
year 2000 problem could result in an interruption in, or a failure of, normal
business activities and operations. Such failures could materially and adversely
affect the Company's results of operations, liquidity and financial condition.
The Company is unable to determine at this time whether the consequences of year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition due to the general uncertainty
inherent in the year 2000 problem, resulting in part from the uncertainty of the
year 2000 readiness of its Interconnecting Carriers and Primary Vendors, and
other suppliers, as well as uncertainties related to the Company's ongoing
remediation program. The Company's year 2000 compliance plan is expected to
reduce significantly the Company's level of uncertainty about the year 2000
problem and, in particular, about the year 2000 compliance and readiness of its
Interconnecting Carriers and Primary Vendors. The Company believes that, with
the implementation of new business systems, its Interconnecting Carriers and
Primary Vendors year 2000 readiness, and completion of the year 2000 compliance
plan as scheduled, it will maintain normal operations.
Statements concerning year 2000 issues which contain more than historical
information may be considered forward-looking statements (as that term is
defined in the Private Securities Litigation Reform Act of 1995), which are
subject to risks and uncertainties. Actual results may differ materially from
those expressed in the forward-looking statements, and readers are cautioned
that the Company's year 2000 discussion should be read in conjunction with the
company's statement on forward-looking statements which appears at the beginning
of this Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
EURO CONVERSION
On January 1, 1999, certain member countries of the European Union are scheduled
to establish fixed conversion rates between their existing currencies and the
European Union's common currency ("Euro"). The transition period for the
introduction of the Euro will be between January 1, 1999 to December 31, 2000.
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 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, 1998, the Company does not believe a hypothetical 10
percent adverse change in quoted market prices would be material to net income.
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 change in the Company's variable rate debt obligations
would be material to the Company's results of operations.
Although the Company conducts business in foreign countries, foreign currency
transaction gains and losses were not material to the Company's results of
operations for the nine months ended September 30, 1998. Accordingly, the
Company was not subject to material foreign currency exchange rate risk from the
effects that exchange rate movements of foreign currencies would have on the
Company's future costs or on future cash flows it would receive from its foreign
subsidiaries. To date, the Company has not entered into any significant foreign
currency forward exchange contracts or other derivative financial instruments to
hedge the effects of adverse fluctuations in foreign currency exchange rates.
The Company is evaluating the future use of such financial instruments as well
as the effect of the Euro conversion, described above, on the Company's
operations.
Page 33
34
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, 1997, except as may be reflected in the discussion under
Note K of the Notes to Consolidated Financial Statements in Part I,
Item 1, above.
Item 2. Changes in Securities and Use of Proceeds
In connection with the MCI Merger, the Company and MCI have executed
certain agreements constituting a full, irrevocable and unconditional
guarantee by the Company and MCI of all of the obligations of MCI
Capital I, a wholly-owned Delaware statutory business trust, with
respect to its 8% Cumulative Quarterly Income Preferred Securities,
Series A. See Note G of the Notes to Consolidated Financial
Statements contained in Part I, Item 1, above.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Securities Holders
None
Item 5. Other Information
In September 1998, the Company amended and restated its Bylaws to,
among other things, adopt advance notice provisions relating to
proposals of business and nominations of directors at meetings of
shareholders. The amended and restated Bylaws were described in and
filed as an exhibit to the Company's Current Report on Form 8-K dated
September 14, 1998 (filed September 29, 1998).
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 September 14, 1998 (filed
September 29, 1998) reporting under Item 2, Acquisition or
Disposition of Assets, among other things, information
related to the MCI Merger, and the Company's amended and
restated Bylaws to, among other things, adopt advance notice
provisions relating to proposals of business and nominations
of directors at meetings of shareholders and under Item
7(a), Financial Statements of Businesses Acquired, the
following financial statements:
MCI Communications Corporation and Subsidiaries -
for the three and six month periods ended June 30,
1997 and 1998 (unaudited)
Consolidated Income Statements
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholders' Equity
Notes to Interim Condensed Consolidated Financial
Statements
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Page 34
35
(ii) Current Report on Form 8-K dated July 23, 1998 (filed
July 24, 1998), reporting under Item 5, Other Events,
certain portions of WorldCom's second quarter 1998
press release
(iii) Current Report on Form 8-K dated August 4, 1998
(filed August 4, 1998), reporting under Item 5, Other
Events, among other things, information regarding MCI's
announcement that it had entered into a letter
agreement with Cable & Wireless to sell the iMCI
Business, WorldCom's announcement of negotiations for
the New Credit Facilities and certain portions of MCI's
second quarter 1998 press release.
(iv) Current Report on Form 8-K dated August 6,
1998 (filed August 6, 1998) reporting under Item 5,
Other Events, among other things, certain
information regarding the MCI Merger and under Item
7(b), Pro Forma Information, the following financial
information:
WorldCom, Inc. - For the three months ended March
31, 1998 and for the fiscal year ended
December 31, 1997:
Pro Forma Condensed Combined Financial
Statements
Pro Forma Condensed Combined Balance
Sheet as of March 31, 1998
Pro Forma Condensed Combined Statement of
Operations for the three months ended
March 31, 1998
Pro Forma Condensed Combined Statement of
Operations for the year ended
December 31, 1997
Notes to Pro Forma Condensed Combined
Financial Statements
(v) Current Report on Form 8-K dated August 6, 1998 (filed
August 7, 1998), reporting under Item 5, Other Events,
information regarding the Company's $6.1 billion public
debt offer in August 1998 and the New Credit
Facilities.
Page 35
36
SIGNATURES
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.
MCI WORLDCOM, INC.
By: /s/ SCOTT D. SULLIVAN
--------------------------------
Scott D. Sullivan
Dated: November 16, 1998 Chief Financial Officer
Page 36
37
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
1.1 Underwriting Agreement dated August 6, 1998, between WorldCom, Inc. ("WorldCom") and Salomon Brothers 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 August 6, 1998 (filed August 7, 1998) (File No. 0-11258))
1.2 Terms Agreement, dated August 6, 1998, between WorldCom, and Salomon Brothers 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 August 6, 1998 (filed August 7, 1998) (File No. 0-11258))
2.1 Agreement and Plan of Merger dated as of November 9, 1997 among WorldCom, TC Investments Corp. and MCI
Communications Corporation (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K
dated November 9, 1997 (filed November 12, 1997) (File No. 0-11258))*
2.2 Agreement dated as of November 9, 1997 among British Telecommunications plc, WorldCom and MCI
Communications Corporation (incorporated by reference to Exhibit 99.1 to the Company's Current
Report on Form 8-K dated November 9, 1997 (filed November 12, 1997) (File No. 0-11258))*
2.3 Agreement and Plan of Merger, dated as of September 7, 1997, by and among H&R Block, Inc., H&R Block Group, Inc.,
CompuServe Corporation, WorldCom, and Walnut Acquisition Company, L.L.C. (incorporated herein by reference to
Exhibit 2.1 to the Company's Current Report on Form 8-K dated September 7, 1997 (File No. 0-11258))*
2.4 Purchase and Sale Agreement by and among America Online, Inc., ANS Communications, Inc. and
WorldCom, dated as of September 7, 1997 (incorporated herein by reference to Exhibit 2.4 to the
Company's Current Report on Form 8-K dated September 7, 1997 (File No. 0-11258))*
2.5 Amended and Restated Agreement and Plan of Merger dated as of October 1, 1997 by and among
WorldCom, BV Acquisition, Inc. and Brooks Fiber Properties, Inc. (incorporated by reference to
Exhibit 2.1 to WorldCom's Registration Statement on Form S-4 (File No. 333-43253))*
4.1 Second Amended and Restated Articles of Incorporation of MCI WORLDCOM, Inc. (including preferred stock
designations), as amended as of September 15, 1998 (incorporated herein by reference to Exhibit 4.1 of MCI
WorldCom's Post-Effective Amendment No. 1 on Form S-8 to Registration Statement on Form S-4, No. 333-36901 (filed
September 14, 1998))
4.2 Restated Bylaws of MCI WORLDCOM, Inc. (incorporated 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 Form of 6.125% Notes Due 2001 (incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on
Form 8-K dated August 6, 1998 (filed August 7, 1998) (File No. 0-11258))
38
Exhibit No. Description
----------- -----------
4.4 Form of 6.250% Notes Due 2003 (incorporated herein by reference to Exhibit 4.2 to the Company's Current Report on
Form 8-K dated August 6, 1998 (filed August 7, 1998) (File No. 0-11258))
4.5 Form of 6.400% Notes Due 2005 (incorporated herein by reference to Exhibit 4.3 to the Company's Current Report on
Form 8-K dated August 6, 1998 (filed August 7, 1998) (File No. 0-11258))
4.6 Form of 6.950% Notes Due 2028 (incorporated herein by reference to Exhibit 4.4 to the Company's Current Report on
Form 8-K dated August 6, 1998 (filed August 7, 1998) (File No. 0-11258))
4.7 Senior Indenture dated March 1, 1997 by and between WorldCom and The Chase Manhattan Bank, as successor trustee to
Mellon Bank N.A. (incorporated herein by reference to Exhibit 4.6 to WorldCom's Quarterly Report on Form 10-Q for
the period ended March 31, 1997 (File No. 0-11258))
4.8 Supplemental Indenture No. 3 to the Junior Subordinated Indenture dated as of November 12, 1998, among MCI
WORDLCOM, Inc., MCI Communications Corporation and Wilmington Trust Company
4.9 Supplement No. 1 to the Guarantee Agreement dated as of November 12, 1998 among MCI WORLDCOM, Inc., MCI
Communications Corporation (as guarantor) and Wilmington Trust Company (as trustee)
4.10 Trust Agreement Guarantee dated as of November 12, 1998, among Wilmington Trust Company, the administrative
trustee thereto, MCI Communications Corporation and MCI WORLDCOM, Inc.
4.11 Expense Agreement Guarantee dated as of November 12, 1998, between MCI WORLDCOM, Inc. and MCI Capital I, a
Delaware business trust
4.12 Junior Subordinated Indenture between MCI Communications Corporation and Wilmington Trust Company, as Debenture
Trustee (incorporated by reference to Exhibit 4.01 of MCI's Registration Statement on Form S-3, Registration No.
333-02693)
4.13 Form of Amended and Restated Trust Agreement among MCI Communications Corporation, as Depositor, Wilmington Trust
Company, as Property Trustee and Delaware Trustee, and the Administrative Trustees named therein (incorporated by
reference to Exhibit 4.10 of MCI's Registration Statement on Form S-3, Registration No. 333-02593)
4.14 Form of Guarantee Agreement between MCI Communications Corporation, as Guarantor, and Wilmington Trust Company, as
Trustee (incorporated by reference to Exhibit 4.12 of MCI's Registration Statement on Form S-3, Registration No.
333-02593)
4.15 Form of Supplemental Indenture between MCI Communications Corporation and Wilmington Trust Company, as Debenture
Trustee (incorporated by reference to Exhibit 4.13 of MCI's Registration Statement on Form S-3, Registration No.
333-02593)
10.1** Amended and Restated Facility A Revolving Credit Agreement among WorldCom (borrower), NationsBank, N.A. (Arranging
Agent and Administrative Agent), NationsBanc Montgomery Securities LLC (Lead Arranger), 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 (Co-Syndication Agents) and the lenders named therein dated as of August 6, 1998 (incorporated
herein by reference to Exhibit 10.1 to WorldCom's Current Report on Form 8-K dated August 6, 1998 (filed August 7,
1998) (File No. 0-11258))
39
Exhibit No. Description
----------- -----------
10.2 Amended and Restated Facility B Term Loan Agreement among WorldCom (borrower), NationsBank, N.A. (Arranging Agent
and Administrative Agent), NationsBanc Montgomery Securities LLC (Lead Arranger), 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 (Co-Syndication Agents) and the lenders named therein dated as of August 6, 1998 (incorporated
herein by reference to Exhibit 10.2 to WorldCom's Current Report on Form 8-K dated August 6, 1998 (filed August 7,
1998) (File No. 0-11258))
10.3 364-Day Revolving Credit and Term Loan Agreement among WorldCom (borrower), NationsBank, N.A. (Arranging Agent and
Administrative Agent), NationsBanc Montgomery Securities LLC (Lead Arranger), 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 (Co-Syndication Agents) and the lenders named therein dated as of August 6, 1998 (incorporated herein by
reference to Exhibit 10.3 to WorldCom's Current Report on Form 8-K dated August 6, 1998 (filed August 7, 1998)
(File No. 0-11258))
10.4 MCI 1979 Stock Option Plan as amended and restated (incorporated by reference to Exhibit 10(a) to MCI's Annual
Report on Form 10-K for the fiscal year ended December 31, 1988 (File No. 0-6457)) (compensatory plan)***
10.5 Supplemental Retirement Plan for Employees of MCI Communications Corporation and Subsidiaries, as amended
(incorporated by reference to Exhibit 10(b) to MCI's Annual Report on Form 10-K for the fiscal year ended December
31, 1993 (File No. 0-6457)) (compensatory plan)***
10.6 Description of Executive Life Insurance Plan for MCI Communications Corporation and Subsidiaries (incorporated by
reference to "Remuneration of Officers" in MCI's Proxy Statement for its 1992 Annual Meeting of Stockholders (File
No. 0-6457)) (compensatory plan)***
10.7 MCI Communications Corporation Executive Incentive Compensation Plan (incorporated by reference to Exhibit 10(e)
to MCI's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (File No. 0-6457)) (compensatory
plan)***
10.8 Amendment No. 1 to MCI Communications Corporation Executive Incentive Compensation Plan (incorporated by reference
to Exhibit 10(e) to MCI's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No.
0-6457)) (compensatory plan)***
10.9 1988 Directors' Stock Option Plan of MCI (incorporated by reference to Exhibit D to MCI's Proxy Statement for its
1989 Annual Meeting of Stockholders (File No. 0-6457)) (compensatory plan)***
10.10 Amendment No. 1 to the 1988 Directors' Stock Option Plan of MCI (incorporated by reference to Appendix D to MCI's
Proxy Statement for its 1996 Annual Meeting of Stockholders (File No. 0-6457)) (compensatory plan)***
10.11 Amendment No. 2 to 1988 Directors' Stock Option Plan of MCI (incorporated by reference to Exhibit 10(i) to MCI's
Annual Report on Form 10-K for the fiscal year ended December 31, 1996) (File No.
0-6457)) (compensatory plan)***
10.12 Amendment No. 3 to 1988 Directors' Stock Option Plan of MCI (incorporated by reference to Exhibit 10(j) to MCI's
Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No.
0-6457)) (compensatory plan)***
40
Exhibit No. Description
----------- -----------
10.13 Stock Option Plan of MCI (incorporated by reference to Exhibit C to MCI's Proxy Statement for its 1989 Annual
Meeting of Stockholders (File No. 0-6457)) (compensatory plan)***
10.14 Amendment No. 1 to the Stock Option Plan of MCI (incorporated by reference to Exhibit 10(1) to MCI's Annual Report
on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-6457)) (compensatory plan)***
10.15 Amendment No. 2 to the Stock Option Plan of MCI (incorporated by reference to Appendix B to MCI's Proxy Statement
for its 1996 Annual Meeting of Stockholders (File No. 0-6457)) (compensatory plan)***
10.16 Amendment No. 3 to the Stock Option Plan of MCI (incorporated by reference to Exhibit 10(n) to MCI's Annual Report
on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-6457)) (compensatory plan)***
10.17 Amendment No. 4 to the Stock Option Plan of MCI (incorporated by reference to Exhibit 10(o) to MCI's Annual Report
on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-6457)) (compensatory plan)***
10.18 Amendment No. 5 to the Stock Option Plan of MCI (incorporated by reference to Exhibit 10(p) to MCI's Annual Report
on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-6457)) (compensatory plan)***
10.19 Board of Directors Deferred Compensation Plan of MCI (incorporated by reference to Exhibit 10(i) to MCI's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994 (File No. 0-6457)) (compensatory plan)
10.20 The Senior Executive Incentive Compensation Plan of MCI (incorporated by reference to Appendix A to MCI's Proxy
Statement for its 1996 Annual Meeting of Stockholders (File No. 0-6457)) (compensatory plan)
10.21 Amendment No. 1 to the Senior Executive Incentive Compensation Plan of MCI (incorporated by reference to Exhibit
10(s) to MCI's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-6457))
(compensatory plan)
10.22 Executive Severance Policy (incorporated by reference to Exhibit 10(a) to MCI's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996 (File No. 0-6457)) (compensatory plan)
10.23 Form of employment agreement, effective as of November 2, 1996, between MCI and certain executive officers of MCI
(incorporated by reference to Exhibit 10(u) to MCI's Annual Report on Form 10-K for the fiscal year ended December
31, 1996 (File No. 0-6457)) (compensatory plan)
27.1 Financial Data Schedule
*The registrant hereby agrees to furnish supplementally a copy of any omitted
schedules to this Agreement to the Securities and Exchange Commission.
**No other long-term debt instruments are filed since the total amount of
securities authorized under any such instrument does not exceed ten percent of
the total assets of the Company and its subsidiaries on a consolidated basis.
The Company agrees to furnish a copy of such instruments to the Securities and
Exchange Commission upon request.
***Pursuant to this plan, the common stock of the Company was substituted for
common stock of MCI.