1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
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.)
500 Clinton Center Drive, Clinton, Mississippi 39056
(Address of principal executive offices) (Zip Code)
515 East Amite Street, Jackson, Mississippi 39201-2702
(Former address, if changed since last report)
Registrant's telephone number, including area code : (601) 460-5600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
The number of outstanding shares of the registrant's Common Stock, par
value $.01 per share, was 1,860,656,977, net of treasury shares, on April 30,
1999.
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2
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
March 31, 1999 and December 31, 1998................................ 3
Consolidated Statements of Operations
for the three months ended March 31, 1999
and March 31, 1998.................................................. 4
Consolidated Statements of Cash Flows for
the three months ended March 31, 1999 and
March 31, 1998...................................................... 5
Notes to Consolidated Financial Statements.......................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................... 15
Item 3. Quantitative and Qualitative Disclosure About Market Risk........... 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................... 27
Item 2. Changes in Securities and Use of Proceeds........................... 27
Item 3. Defaults Upon Senior Securities..................................... 27
Item 4. Submission of Matters to a Vote
of Securities Holders............................................... 27
Item 5. Other Information................................................... 27
Item 6. Exhibits and Reports on Form 8-K.................................... 27
Signature .......................................................................................... 28
Exhibit Index ...................................................................................... 29
Page 2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MCI WORLDCOM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited. In Millions, Except Share Data)
March 31, December 31,
1999 1998
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 775 $ 1,710
Accounts receivable, net of allowance for bad debts of $930 in 1999
and $897 in 1998 5,737 5,226
Deferred tax asset 2,361 2,523
Other current assets 1,424 1,180
---------- ----------
Total current assets 10,297 10,639
---------- ----------
Property and equipment:
Transmission equipment 11,886 12,052
Communications equipment 5,164 5,256
Furniture, fixtures and other 6,094 5,986
Construction in progress 3,140 3,080
---------- ----------
26,284 26,374
Accumulated depreciation (2,764) (2,067)
---------- ----------
23,520 24,307
---------- ----------
Goodwill and other intangible assets 46,895 47,018
Other assets 5,210 4,437
---------- ----------
$ 85,922 $ 86,401
========== ==========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current liabilities:
Short-term debt and current maturities of long-term debt $ 6,650 $ 4,756
Accounts payable 1,902 1,737
Accrued line costs 4,032 3,903
Accrued interest 378 505
Other current liabilities 5,090 5,128
---------- ----------
Total current liabilities 18,052 16,029
---------- ----------
Long-term liabilities, less current portion:
Long-term debt 13,583 16,083
Deferred tax liability 2,942 2,960
Other liabilities 1,584 1,852
---------- ----------
Total long-term liabilities 18,109 20,895
---------- ----------
Commitments and contingencies
Minority interests 2,514 3,676
Company obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely junior subordinated deferrable
interest debentures of the Company and other mandatorily
redeemable preferred securities 798 798
Shareholders' investment:
Series B preferred stock, par value $.01 per share; authorized, issued and
outstanding: 11,525,459 shares in 1999 and 11,643,002 shares in 1998 (liquidation
preference of $1.00 per share plus unpaid dividends) -- --
Preferred stock, par value $.01 per share; authorized: 34,905,008 shares
in 1999 and 1998; none issued -- --
Common stock, par value $.01 per share; authorized: 2,500,000,000 shares; issued
and outstanding: 1,861,103,747 shares in 1999 and 1,840,280,479 shares in 1998 19 18
Additional paid-in capital 50,409 49,544
Retained earnings (deficit) (3,764) (4,473)
Unrealized holding gain on marketable equity securities 275 122
Cumulative foreign currency translation adjustment (305) (23)
Treasury stock, at cost, 4,510,211 shares in 1999 and 1998 (185) (185)
---------- ----------
Total shareholders' investment 46,449 45,003
---------- ----------
$ 85,922 $ 86,401
========== ==========
The accompanying notes are an integral part of these statements
Page 3
4
MCI WORLDCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited. In Millions, Except Per Share Data)
For the Three Months
Ended March 31,
----------------------
1999 1998
-------- --------
Revenues $ 9,001 $ 2,320
-------- --------
Operating expenses:
Line costs 4,116 1,117
Selling, general and administrative 2,311 478
Depreciation and amortization 1,079 299
In-process research and development and other charges -- 498
-------- --------
Total 7,506 2,392
-------- --------
Operating income (loss) 1,495 (72)
Other income (expense):
Interest expense (260) (102)
Miscellaneous (32) 12
-------- --------
Income (loss) before income taxes, minority interests and extraordinary items 1,203 (162)
Provision for income taxes 543 118
-------- --------
Income (loss) before minority interests and extraordinary items 660 (280)
Minority interests 65 --
-------- --------
Income (loss) before extraordinary items 725 (280)
Extraordinary items (net of income taxes of $78 in 1998) -- (129)
-------- --------
Net income (loss) 725 (409)
Distributions on subsidiary trust and other mandatorily
redeemable preferred securities 16 --
Preferred dividend requirement -- 7
-------- --------
Net income (loss) applicable to common shareholders $ 709 $ (416)
======== ========
Earnings (loss) per common share:
Net income (loss) applicable to common shareholders before
extraordinary items:
Basic $ 0.38 $ (0.28)
======== ========
Diluted $ 0.37 $ (0.28)
======== ========
Extraordinary items $ -- $ (0.13)
======== ========
Net income (loss) applicable to common shareholders:
Basic $ 0.38 $ (0.41)
======== ========
Diluted $ 0.37 $ (0.41)
======== ========
The accompanying notes are an integral part of these statements.
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5
MCI WORLDCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited. In Millions)
For the Three Months
Ended March 31,
----------------------
1999 1998
-------- --------
Cash flows from operating activities:
Net income (loss) $ 725 $ (409)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Minority interests (65) --
Extraordinary items -- 129
In-process research and development and other charges -- 498
Depreciation and amortization 1,079 299
Provision for losses on accounts receivable 222 24
Provision for deferred income taxes 50 118
Change in assets and liabilities, net of effect of
business combinations:
Accounts receivable (674) (316)
Other current assets (226) (18)
Accrued line costs 96 22
Accounts payable and other current liabilities 600 (87)
Other 118 13
-------- --------
Net cash provided by operating activities 1,925 273
-------- --------
Cash flows from investing activities:
Capital expenditures (1,639) (962)
Sale of short-term investments, net -- 53
Acquisitions and related costs (285) (40)
Increase in intangible assets (174) (44)
Proceeds from disposition of long-term assets 76 56
Increase in other assets (632) (196)
Decrease in other liabilities (161) (32)
-------- --------
Net cash used in investing activities (2,815) (1,165)
-------- --------
Cash flows from financing activities:
Net borrowings 1,120 917
Principal payments on debt (1,384) (200)
Common stock issuance 437 120
Distributions on subsidiary trust and other mandatorily
redeemable preferred securities (16) --
Dividends paid on preferred stock -- (7)
-------- --------
Net cash provided by financing activities 157 830
Effect of exchange rate changes on cash (202) --
-------- --------
Net decrease in cash and cash equivalents (935) (62)
Cash and cash equivalents at beginning of period 1,710 155
-------- --------
Cash and cash equivalents at end of period $ 775 $ 93
======== ========
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 ("SEC") regulations.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. In the
opinion of management, the financial statements reflect all adjustments (of a
normal and recurring nature) which are necessary to present fairly the financial
position, results of operations and cash flows for the interim periods. These
financial statements should be read in conjunction with the Annual Report of the
Company on Form 10-K for the year ended December 31, 1998 (the "Form 10-K"). The
results for the three month period ended March 31, 1999 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1999.
(B) BUSINESS COMBINATIONS
On September 14, 1998, the Company acquired MCI Communications Corporation
("MCI") for approximately $40 billion, pursuant to the merger (the "MCI Merger")
of MCI with and into a wholly owned subsidiary of the Company. 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 "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; (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.
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.
The purchase price in the MCI Merger was allocated based on estimated fair
values at the date of acquisition. This resulted in an excess of purchase price
over net assets acquired of which $3.1 billion was allocated to in-process
research and development ("IPR&D") and $1.7 billion to developed technology,
which will be depreciated over 10 years on a straight-line basis. The remaining
excess has been allocated to goodwill and tradename, which are being amortized
over 40 years on a straight-line basis.
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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 R$2.65
billion (US$2.3 billion). The purchase price will be paid in local currency
installments, of which R$1.06 billion (US$916 million) was paid on August 4,
1998 with the remaining R$1.59 billion (US$927 million at March 31, 1999) 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 relay 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.
On January 31, 1998, MCI WorldCom acquired CompuServe Corporation
("CompuServe"), for approximately $1.3 billion, 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. ("ANS"),
from America Online, Inc. ("AOL"), for approximately $500 million, 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 division. ANS
provides Internet access to AOL and AOL's subscribers in the United States,
Canada, the United Kingdom, Sweden and Japan. The AOL Transaction was accounted
for as a purchase; accordingly, operating results for ANS have been included
from the date of acquisition.
The purchase price in the CompuServe Merger and AOL Transaction was allocated
based on estimated fair values at the date of acquisition. This resulted in an
excess of purchase price over net assets acquired of which $429 million was
allocated to IPR&D. The remaining excess has been recorded as goodwill, which is
being amortized over 10 years on a straight-line basis.
On January 29, 1998, MCI WorldCom acquired Brooks Fiber Properties, Inc.
("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.
Page 7
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As a result of the BFP Merger, each share of BFP common stock was converted into
the right to receive 1.85 shares of MCI WorldCom 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.
Upon effectiveness of the BFP Merger, the then outstanding and unexercised
options and warrants exercisable for shares of BFP common stock were converted
into options and warrants, respectively, exercisable for shares of MCI WorldCom
Common Stock having the same terms and conditions as the BFP options and
warrants, except that the exercise price and the number of shares issuable upon
exercise were divided and multiplied, respectively, by 1.85.
The following unaudited pro forma combined results of operations for the Company
for the three months ended March 31, 1998 assumes that the MCI Merger was
completed on January 1, 1998 (in millions, except per share data):
Revenues $ 7,171
Loss before extraordinary items
Net loss (309)
Loss per common share: (438)
Loss before extraordinary items $ (0.18)
Net loss $ (0.25)
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 an IPR&D charge of $3.1 billion in 1998, depreciation,
amortization, interest and the common shares issued. These pro forma amounts do
not include amounts with respect to Embratel because its is not material to MCI
WorldCom. These pro forma amounts are not necessarily indicative of operating
results which would have 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
The following is a reconciliation of the numerators and the denominators of the
basic and diluted per share computations for the three months ended March 31,
1999 and 1998 (in millions, except per share data):
1999 1998
---------- ----------
Basic
Income (loss) before extraordinary items $ 725 $ (280)
Distributions on subsidiary trust and other mandatorily
redeemable preferred securities 16 --
Preferred stock dividends -- 7
---------- ----------
Net income (loss) applicable to common shareholders
before extraordinary items $ 709 $ (287)
========== ==========
Weighted average shares outstanding 1,848 1,012
========== ==========
Basic earnings (loss) per share
before extraordinary items $ 0.38 $ (0.28)
========== ==========
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1999 1998
---------- ----------
Diluted
Net income (loss) applicable to common shareholders
before extraordinary items $ 709 $ (287)
---------- ----------
Weighted average shares outstanding 1,848 1,012
Common stock equivalents 73 --
Common stock issuable upon conversion of preferred stock 1 --
---------- ----------
Diluted shares outstanding 1,922 1,012
---------- ----------
Diluted earnings (loss) per share before extraordinary items $ 0.37 $ (0.28)
========== ==========
(D) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid by the Company during the three months ended March 31, 1999 and
1998 amounted to $419 million and $153 million, respectively. Income taxes paid
during the three months ended March 31, 1999 and 1998 were $29 million and $1
million, respectively. In conjunction with business combinations during the
three months ended March 31, 1999 and 1998, assumed assets and liabilities were
as follows (in millions):
1999 1998
---------- ----------
Fair value of assets acquired $ 12 $ 402
Excess of cost over net tangible assets acquired 416 1,344
Liabilities assumed (143) (444)
Common stock issued -- (1,262)
---------- ----------
Net cash paid $ 285 $ 40
========== ==========
Acquisition and related costs for the three months ended March 31, 1999 reflect
additional costs related to the acquisitions in 1998 and a smaller acquisition
completed during 1999.
(E) COMPREHENSIVE INCOME
The following table reflects the calculation of comprehensive income for MCI
WorldCom for the three months ended March 31, 1999 and 1998 (in millions):
1999 1998
-------- --------
Net income (loss) applicable to common shareholders $ 709 $ (416)
-------- --------
Other comprehensive income (loss):
Foreign currency translation adjustments (282) (9)
Unrealized holding gains on marketable equity securities during the period 245 26
-------- --------
Other comprehensive income (loss) before income taxes (37) 17
Income tax expense (benefit) (92) 10
-------- --------
Other comprehensive income (loss) $ (129) $ 7
-------- --------
Comprehensive income (loss) applicable to common shareholders $ 580 $ (409)
======== ========
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(F) SEGMENT INFORMATION
Based on its organizational structure, the Company operates in five reportable
segments: MCI WorldCom Communications, MCI WorldCom International Operations,
Embratel, Operations and technology and Other. The Company's reportable segments
represent business units that primarily offer similar products and services;
however, the business units are managed separately due to the geographic
dispersion of their operations. MCI WorldCom Communications provides voice, data
and other types of domestic communications services including Internet services.
MCI WorldCom International Operations provides voice, data, Internet and other
similar types of communications services to customers primarily in Europe.
Embratel provides communications services in Brazil. Operations and technology
includes network operations, information services, engineering and technology,
and customer service. Other includes primarily the operations of MCI Systemhouse
Corp. and SHL Sytemhouse Co., wholly owned subsidiaries of the Company
(collectively, "SHL"), and other non-communications services. In April 1999, SHL
was sold to Electronic Data Systems Corporation ("EDS") - see Note H.
The Company's chief operating decision maker utilizes revenue information in
assessing performance and making overall operating decisions and resource
allocations. Communications services are generally provided utilizing the
Company's fiber optic networks, which do not make a distinction between the
types of services. As a result, the Company does not allocate line costs or
assets by segment. Profit and loss information is reported only on a
consolidated basis to the chief operating decision maker and the Company's board
of directors.
Information about the Company's segments for the three months ended March 31,
1999 and 1998 is as follows (in millions):
REVENUES FROM EXTERNAL CUSTOMERS
--------------------------------
1999 1998
-------- --------
MCI WorldCom Communications $ 7,555 $ 2,050
MCI WorldCom International Operations 357 230
Operations and technology -- --
Other 403 40
Corporate -- --
-------- --------
Total before Embratel 8,315 2,320
Embratel 686 --
-------- --------
Total $ 9,001 $ 2,320
======== ========
The following is a reconciliation of the segment information to income (loss)
before income taxes, minority interests and extraordinary items for the three
months ended March 31, 1999 and 1998 (in millions):
1999 1998
-------- --------
Revenues $ 9,001 $ 2,320
Operating expenses 7,506 2,392
-------- --------
Operating income (loss) 1,495 (72)
Other income (expense):
Interest expense (260) (102)
Miscellaneous (32) 12
-------- --------
Income (loss) before income taxes
minority interests and extraordinary items $ 1,203 $ (162)
======== ========
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(G) CONTINGENCIES
The Company is involved in legal and regulatory proceedings generally incidental
to its business and has included loss contingencies in other current liabilities
and other liabilities for certain of these matters. In some instances, rulings
by federal and some state regulatory authorities may result in increased
operating costs to the Company. Except as described herein, and while the
results of these various legal and regulatory matters contain an element of
uncertainty, MCI WorldCom believes that the probable outcome of these matters
should not have a material adverse effect on the Company's consolidated results
of operations or financial position.
GENERAL. MCI WorldCom is subject to varying degrees of federal, state, local and
international regulation. In the United States, the Company's subsidiaries are
most heavily regulated by the states, especially for the provision of local
exchange services. The Company must be certified separately in each state to
offer local exchange and intrastate long distance services. No state, however,
subjects MCI WorldCom to price cap or rate of return regulation, nor is the
Company currently required to obtain Federal Communications Commission ("FCC")
authorization for installation or operation of its network facilities used for
domestic services, other than licenses for specific terrestrial microwave and
satellite earth station facilities that utilize radio frequency spectrum. FCC
approval is required, however, for the installation and operation of its
international facilities and services. MCI WorldCom is subject to varying
degrees of regulation in the foreign jurisdictions in which it conducts business
including authorization for the installation and operation of network
facilities. Although the trend in federal, state and international regulation
appears to favor increased competition, no assurance can be given that changes
in current or future regulations adopted by the FCC, state or foreign regulators
or legislative initiatives in the United States or abroad would not have a
material adverse effect on MCI WorldCom.
In implementing the Telecommunications Act of 1996 (the "Telecom Act"), the FCC
established nationwide rules designed to encourage new entrants to participate
in the local services markets through interconnection with the ILECs, resale of
ILECs' retail services and use of individual and combinations of unbundled
network elements. Appeals of the FCC order adopting those rules were
consolidated before the United States Court of Appeals for the Eighth Circuit
(the "Eighth Circuit"). Thereafter, the Eighth Circuit held that constitutional
challenges to various practices implementing cost provisions of the Telecom Act
that were ordered by certain Public Utility Commissions ("PUCs") were premature;
it vacated, however, significant portions of the FCC's nationwide pricing rules
and an FCC rule requiring that unbundled network elements be provided on a
combined basis. The United States Supreme Court (the "Supreme Court") reviewed
the decision of the Eighth Circuit and on January 25, 1999, reversed the Eighth
Circuit in part and reinstated, with one exception, all of the FCC local
competition rules. The Court vacated and remanded to the FCC for reconsideration
the rule determining which unbundled network elements must be provided by ILECs
to new entrants. The Eighth Circuit will now consider the ILECs' challenges to
the substance of pricing rules which it previously had found to be premature.
Access charges, both interstate and intrastate, are a principal component of MCI
WorldCom's telecommunications expense. On the interstate side, the U.S. Court of
Appeals for the D.C. Circuit is presently considering multiple appeals of the
FCC's 1997 changes to the price cap system for regulating interstate access
charges. Several PUCs have initiated proceedings to address reallocation of
implicit subsidies contained in the access rate and retail service rates to
state universal service funds. In addition, the FCC is presently considering
further universal service reforms, access reform, and pricing flexibility for
ILEC access charges. Currently, the total annual revenues that the FCC requires
that telecommunications carriers raise for its universal service fund is
approximately $3.6 billion. On May 5, 1999, the FCC announced its intention to
raise the portion of the universal service fund that subsidizes
telecommunications services for schools and libraries from its current funding
level of $1.3 billion per year to $2.25 billion per year, effective July 1,
1999. Like other carriers, MCI WorldCom's obligation to the universal service
fund is determined as a percentage of its total revenues. MCI WorldCom attempts
to recover its share of the universal service fund costs through a separate
universal service charge on its customers, but there is no assurance that MCI
WorldCom can fully recover its universal service costs through these charges. In
addition, MCI WorldCom cannot predict the outcome of the pending FCC proceedings
or whether or not the result(s) will have a material adverse impact upon its
consolidated financial position or results of operations.
Page 11
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In August 1998, in response to petitions filed by several ILECs under the guise
of Section 706 of the Telecom Act, the FCC issued its Advanced Services Order.
This order clarifies that the interconnection, unbundling, and resale
requirements of Section 251(c) of the Telecom Act, and the interLATA
restrictions of Section 271 of this Act, apply fully to so-called "advanced
telecommunications services," such as Digital Subscriber Line ("DSL"). An appeal
of this order by US WEST Communications Group is currently pending before the
U.S. Court of Appeals for the District of Columbia circuit. In a companion
notice, the FCC sought comment on how to implement Section 706 of the Telecom
Act, which directs the FCC to (1) encourage the deployment of advanced
telecommunications capability to Americans on a reasonable and timely basis, and
(2) complete an inquiry concerning the availability of such services no later
than February 8, 1999. The Commission's rulemaking notice included a proposal
that, if adopted, would allow the ILECs the option of providing advanced
services via a separate subsidiary free from the unbundling and resale
obligations of Section 251(c), as well as other dominant carrier regulatory
requirements.
In early February 1999, the FCC issued its report to Congress, concluding that
the deployment of advanced services is proceeding at a reasonable and timely
pace. The FCC has not yet issued its Section 706 rulemaking order.
On February 26, 1999, the FCC issued a Declaratory Ruling and Notice of Proposed
Rulemaking regarding the regulatory treatment of calls to ISPs. Prior to the
FCC's order, approximately thirty PUCs issued orders unanimously finding that
carriers, including MCI WorldCom, are entitled to collect reciprocal
compensation for completing calls to ISPs under the terms of their
interconnection agreements with ILECs. Many of these PUC decisions have been
appealed by the ILECs and, since the FCC's order, many have filed new cases at
the PUCs or in court. Moreover, MCI WorldCom has appealed the FCC's order to the
Court of Appeals for the D.C. Circuit. MCI WorldCom cannot predict either the
outcome of these appeals and the FCC's rulemaking proceeding or whether or not
the result(s) will have a material adverse impact upon its consolidated
financial position or results of operations.
In 1996 and in 1997, the FCC issued decisions that would require nondominant
telecommunications carriers to eliminate interstate and international service
tariffs, except in limited circumstances. MCI WorldCom has challenged this
decision in the U.S. Court of Appeals for the D.C. Circuit, and has successfully
obtained a stay of the FCC's decision. MCI WorldCom's appeal has been held in
abeyance pending FCC action with respect to petitions for reconsideration. The
FCC recently issued an order addressing those petitions for reconsideration, and
the proceedings in the U.S. Court of Appeals for the D.C. Circuit could
therefore resume shortly. MCI WorldCom cannot predict the ultimate outcome of
its appeal. Should the FCC prevail, MCI WorldCom could no longer rely on its
federal tariff to limit liability or to establish its interstate and
international rates for customers. Per the FCC's decision, MCI WorldCom would
need to develop a means to contract individually with its millions of customers
in order to establish lawfully enforceable rates.
INTERNATIONAL. In February 1997, the United States entered into a World Trade
Organization Agreement (the "WTO Agreement") that is designed to have the effect
of liberalizing the provision of switched voice telephone and other
telecommunications services in scores of foreign countries over the next several
years. The WTO Agreement became effective in February 1998. In light of the
United States commitments to the WTO Agreement, the FCC implemented new rules in
February 1998 that liberalize existing policies regarding (1) the services that
may be provided by foreign affiliated United States international common
carriers, including carriers controlled or more than 25 percent owned by foreign
carriers that have market power in their home markets, and (2) the provision of
alternative traffic routing. The new rules make it much easier for foreign
affiliated carriers to enter the United States market for the provision of
international services.
In August 1997, the FCC adopted mandatory settlement rate benchmarks. These
benchmarks are intended to reduce the rates that United States carriers pay
foreign carriers to terminate traffic in their home countries. The FCC will also
prohibit a United States carrier affiliated with a foreign carrier from
providing facilities-based service to the foreign carrier's home market until
and unless the foreign carrier has implemented a settlement rate at or below the
benchmark. The FCC also adopted new rules that will liberalize the provision of
switched services over private lines to World Trade Organization member
countries. These rules allow such services on routes where 50% or more of United
States billed traffic is being terminated in the foreign country at or below the
applicable settlement rate benchmark or where the
Page 12
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foreign country's rules concerning provision of international switched services
over private lines are deemed equivalent to United States rules. On January 12,
1999, the FCC's benchmark rules were upheld in their entirety by the U.S. Court
of Appeals for the D.C. Circuit. On March 11, 1999 the D. C. Circuit denied
petitions for rehearing of the case.
In April 1999, the FCC modified its rules to permit United States international
carriers to exchange international public switched voice traffic on many routes
to and from the United States outside of the traditional settlement rate and
proportionate return regimes.
Although the FCC's new policies and implementation of the WTO Agreement may
result in lower settlement payments by MCI WorldCom to terminate international
traffic, there is a risk that the payments 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. The Company
meanwhile, may continue to face substantial obstacles in obtaining from foreign
governments and foreign carriers the authority and facilities to provide such
end-to-end services.
EMBRATEL. The 1996 General Telecommunications Law (the "General Law") provides a
framework for telecommunications regulation for Embratel. Article 8 of the
General Law created Agencia Nacional de Telecomunicacoes ("Anatel") to implement
the General Law through development of regulations and to enforce such
regulations. According to the General Law, companies wishing to offer
telecommunications services to consumers are required to apply to Anatel for a
concession or an authorization. Concessions are granted for the provision of
services under the public regime (the "Public Regime") and authorizations are
granted for the provision of services under the private regime (the "Private
Regime"). The Public Regime is differentiated from the Private Regime primarily
by the obligations imposed on the companies rather than the type of services
offered by those companies. Service providers subject to the Public Regime
(concessionaires) are subject to obligations concerning network expansion and
continuity of service provision and are subject to rate regulation. These
obligations and the tariff conditions are provided in the General Law and in
each company's concession contract. The network expansion obligations (called
universal service obligations) are also provided in the Plano Geral de
Universalizacao ("General Plan on Universal Service").
The only services provided under the Public Regime are the switched fixed
telephone services (local and national and international long distance) provided
by Embratel and the three regional Telebras holding companies ("Teles"). All
other telecommunications companies, including other companies providing switched
fixed telephone services ("SFTS"), operate in the Private Regime and, although
they are not subject to the Public Regime, individual authorizations may contain
certain specific expansion and continuity obligations.
Therefore, when providing SFTS, Embratel and the Teles are subject to the Public
Regime obligations provided in the General Law, in their concession contracts
and in the General Plan on Universal Service, among other regulations.
The main restriction imposed on these companies by the General Plan on Universal
Service, is that, until December 31, 2003, the three Teles are prohibited from
offering inter-regional and international long distance service, while Embratel
is prohibited from offering local services. These companies can start providing
the mentioned services two years sooner if they meet their network expansion
obligations by December 31, 2001.
Embratel and the three Teles were granted their concessions at no fee, until
2005. After 2005, the concessions may be renewed for a period of 20 years, upon
the payment, every two years, of a fee equal to 2% of annual net revenues
calculated based on the provision of SFTS in the prior year, excluding taxes and
social contributions.
Embratel also offers a number of ancillary telecommunications services pursuant
to authorizations granted in the Private Regime. Such services include the
provision of dedicated analog and digital lines, packet switched network
services, circuit switched network services, mobile marine telecommunications,
telex and telegraph, radio signal satellite retransmission and television signal
satellite retransmission. Some of these services are subject to specific
continuity obligations and rate conditions.
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All providers of telecommunications services are subject to quality and
modernization obligations provided in the Plan Geral de Qualidade ("General Plan
on Quality").
LITIGATION. On November 4, 1996, and thereafter, and on August 25, 1997, and
thereafter, MCI and all of its directors were named as defendants in a total of
15 complaints filed in the Court of Chancery in the State of Delaware. BT was
named as a defendant in 13 of the complaints. The complaints were brought by
alleged stockholders of MCI, individually and purportedly as class actions on
behalf of all other stockholders of MCI. In general, the complaints allege that
MCI's directors breached their fiduciary duty in connection with the MCI BT
Merger Agreement, dated November 3, 1996 (the "MCI BT Merger Agreement"), that
BT aided and abetted those breaches of duty, that BT owes fiduciary duties to
the other stockholders of MCI and that BT breached those duties in connection
with the MCI BT Merger Agreement. The complaints seek damages and injunctive and
other relief.
On or about October 8, 1997, all of MCI's directors were named as defendants in
a purported derivative complaint filed in the Court of Chancery in the State of
Delaware. BT and Tadworth Corporation, a wholly owned subsidiary of BT, 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 MCI WorldCom's exchange offer.
The complaint seeks injunctive relief, damages and other relief. On or about
April 15, 1999, the court dismissed the complaint with prejudice in response to
a stipulation of dismissal filed by the parties.
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 MCI WorldCom and TC
Investments Corp., a wholly owned subsidiary of the Company, as additional
defendants. These plaintiffs generally allege that the defendants breached their
fiduciary duties to stockholders in connection with the MCI Merger and the
agreement to pay a termination fee to WorldCom. They further allege
discrimination in favor of BT in connection with the MCI Merger. The plaintiffs
seek, inter alia, damages and injunctive relief prohibiting the consummation of
the MCI Merger and the payment of the inducement fee to BT. On or about April
30, 1999, the court dismissed with prejudice the complaint in Brown v. MCI
Communications Corporation, et al. in response to a stipulation of dismissal
filed by the parties to that case.
Three complaints were filed in the U.S. District Court for the District of
Columbia, as class actions on behalf of purchasers of MCI shares. The three
cases were consolidated on April 1, 1998. On or about May 8, 1998, the
plaintiffs in all three cases filed a consolidated amended complaint alleging,
on behalf of purchasers of MCI's shares between July 11, 1997 and August 21,
1997, inclusive, that MCI and certain of its officers and directors failed to
disclose material information about MCI, including that MCI was renegotiating
the terms of the MCI BT Merger Agreement. The consolidated amended complaint
seeks damages and other relief. The Company and the other defendants have moved
to dismiss the consolidated amended complaint.
At least nine class action complaints have been filed that arise out of the
FCC's decision in Halprin, Temple, Goodman and Sugrue v. MCI Telecommunications
Corp., and allege that MCI WorldCom has improperly charged "Pre-Subscribed"
customers "Non-Subscriber" or so-called "casual" rates for certain direct-dialed
calls. Plaintiffs assert that this conduct violates the Communications Act and
various state laws; they seek rebates to all affected customers and (in some
cases) punitive damages. In response to a motion filed by MCI WorldCom, the
Judicial Panel on Multi-District Litigation has consolidated these matters in
the U.S. District Court for the Southern District of Illinois. The Company
intends to move to dismiss the cases or, in the alternative, to stay them,
pending the FCC's resolution of MCI WorldCom's outstanding motion for
reconsideration and any subsequent appeals of the FCC decision.
On September 3, 1998, WorldCom and MCI entered into a Stock Purchase Agreement
("SPA") with Cable & Wireless, pursuant to which MCI sold the iMCI Business to
Cable & Wireless. That transaction closed on September 14, 1998, simultaneously
with the closing of the MCI Merger.
On February 18, 1999, pursuant to the indemnity provisions of the SPA, Cable &
Wireless notified MCI WorldCom that it was claiming that MCI WorldCom had
breached representations and warranties in, and had failed to comply with other
provisions of, the SPA. Cable & Wireless here alleged that it had suffered
damages of approximately $1.16 billion. As MCI WorldCom advised Cable & Wireless
on March 19, 1999, the Company denies these allegations.
On March 31, 1999, Cable & Wireless filed a complaint against MCI WorldCom in
the United States District Court for the District of Delaware, alleging that MCI
WorldCom had breached the SPA. In the lawsuit, Cable & Wireless seeks
unspecified damages and specific performance. On May 11, 1999, MCI WorldCom
filed a motion to stay the litigation and to compel compliance with the dispute
resolution/arbitration provisions in the SPA and affiliated agreements.
The Company believes that all of the complaints are without merit, and based on
information currently available, MCI WorldCom 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.
Page 14
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(H) SUBSEQUENT EVENTS
In April 1999, the Company completed the sale of SHL to EDS for $1.65 billion in
cash. In addition, both companies agreed in February 1999 to significant
outsourcing contracts and a marketing relationship to explore opportunities in
electronic business and networking solutions which will capitalize on the
individual strengths of each company. The definitive agreements for the
outsourcing contracts and marketing relationship will most likely be finalized
by the end of the second quarter, 1999.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Management's Discussion and Analysis of Financial Condition and Results of
Operations may be deemed to include forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, that involve risk and
uncertainty, including financial, regulatory environment and trend projections,
estimated costs to complete or possible future revenues from IPR&D programs, the
likelihood of successful completion of such programs, and the outcome of year
2000 or Euro conversion efforts, as well as any statements preceded by, followed
by, or that include the words "intends," "estimates," "believes," "expects,"
"anticipates," "should," "could," or similar expressions; and other statements
contained herein regarding matters that are not historical facts.
Although the Company believes that its expectations are based on reasonable
assumptions, it can give no assurance that its expectations will be achieved.
The important factors that could cause actual results to differ materially from
those in the forward-looking statements herein (the "Cautionary Statements")
include, without limitation: (1) uncertainties associated with the success of
acquisitions and the integration thereof; (2) risks of international business;
(3) the impact of technological change on the Company's business and dependence
on availability of transmission facilities; (4) regulation risks including the
impact of the Telecom Act; (5) contingent liabilities; (6) the impact of
competitive services and pricing; (7) risks associated with year 2000
uncertainties and Euro conversion efforts; (8) risks associated with debt
service requirements and interest rate fluctuations; (9) the Company's degree of
financial leverage; and (10) other risks referenced from time to time in the
Company's filings with the SEC, including the Form 10-K. All subsequent written
and oral forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by the Cautionary
Statements. The Company does not undertake any obligation to release publicly
any revisions to such forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
The following discussion and analysis relates to the financial condition and
results of operations of the Company for the three month periods ended March 31,
1999 and 1998, after giving effect to the BFP Merger, which was accounted for as
a pooling-of-interests. The information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and consolidated financial statements and notes thereto contained
herein and in the Form 10-K.
Unless otherwise defined, capitalized terms used herein have the meanings
assigned to them in the Notes to Consolidated Financial Statements contained
herein.
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.
Page 15
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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 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 R$2.65 billion (US$2.3 billion). The purchase price
will be paid in local currency installments of which R$1.06 billion (US$916
million) was paid on August 4, 1998 with the remaining R$1.59 billion (US$927
million at March 31, 1999) 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 relay 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 services to business. 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 CompuServe Network
Services division. ANS provides Internet access to AOL and AOL's subscribers in
the United States, Canada, the United Kingdom, Sweden and Japan. The AOL
Transaction was accounted for as a purchase, accordingly, operating results for
ANS have been included from the date of acquisition.
In connection with the above business combinations, the Company made allocations
of the purchase price to acquired IPR&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.
Management expects to continue supporting these research and development ("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 give any assurance that
any will meet with either technological or commercial success.
If none of these R&D projects are 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
Page 16
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Network Services 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 Network Services 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.
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.
The Company's strategy is to further develop as a fully integrated
telecommunications company 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 and
allow provision of end-to-end bundled service over global networks, which will
provide new or enhanced capabilities for the Company's customers.
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. With respect to access
charges on the interstate side, the U.S. Court of Appeals for the D.C. Circuit
is presently considering multiple appeals of the FCC's 1997 changes to the price
cap system for regulating interstate access charges. Several PUCs have initiated
proceedings to address reallocation of implicit subsidies contained in the
access rate and retail service rates to state universal service funds. In
addition, the FCC is presently considering further universal service reforms,
access reform, and pricing flexibility for ILEC access charges. Currently, the
total annual revenues that the FCC requires that telecommunications carriers
raise for its universal service fund is approximately $3.6 billion. On May 5,
1999, the FCC announced its intention to raise the portion of the universal
service fund that subsidizes telecommunications services for schools and
libraries from its current funding level of $1.3 billion per year to $2.25
billion per year, effective July 1, 1999. Like other carriers, MCI WorldCom's
obligation to the universal service fund is determined as a percentage of its
total revenues. MCI WorldCom attempts to recover its share of the universal
service fund costs through a separate universal service charge on its customers,
but there is no assurance that MCI WorldCom can fully recover its universal
service costs through these charges. In addition, MCI WorldCom cannot predict
the outcome of the pending FCC proceedings or whether or not the result(s) will
have a material adverse impact upon its consolidated financial position or
results of operations. The Company will continue to manage transport costs
through effective utilization of its networks, favorable contracts with carriers
and network efficiencies made possible as a result of expansion of the Company's
customer base through 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 revenues for the three months ended March
31, 1999 and 1998:
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1999 1998
-------- --------
Revenues ............................................................. 100% 100%
Line costs ........................................................... 45.7 48.1
Selling, general and administrative .................................. 25.7 20.6
Depreciation and amortization ........................................ 12.0 12.9
In-process research and development and other charges ................ -- 21.5
-------- --------
Operating income (loss) .............................................. 16.6 (3.1)
Other income (expense):
Interest expense .................................................. (2.9) (4.4)
Miscellaneous ..................................................... (0.3) 0.5
-------- --------
Income (loss) before income taxes, minority interests
and extraordinary items ........................................... 13.4 (7.0)
Provision for income taxes ........................................... 6.0 5.1
-------- --------
Income (loss) before minority interests
and extraordinary items ........................................... 7.4 (12.1)
Minority interests ................................................... 0.7 --
Extraordinary items .................................................. -- (5.6)
Distributions on subsidiary trust and other mandatorily redeemable
preferred securities .............................................. 0.2 --
Preferred dividend requirement ....................................... -- 0.3
-------- --------
Net income (loss) applicable to common shareholders .................. 7.9% (18.0)%
======== ========
THREE MONTHS ENDED MARCH 31, 1999 VS.
THREE MONTHS ENDED MARCH 31, 1998
Revenues for the three months ended March 31, 1999 increased 288% to $9.0
billion as compared to $2.3 billion for the three months ended March 31, 1998.
The increase in total revenues is attributable to the MCI Merger and Embratel
acquisition as well as internal growth. Results include MCI and Embratel
operations from September 14, 1998 and CompuServe Network Services and ANS from
February 1, 1998.
Actual reported revenues by category for the three months ended March 31, 1999
and 1998 reflect the following changes by category (dollars in millions):
ACTUAL ACTUAL PERCENT
1999 1998 CHANGE
-------- -------- --------
REVENUES
Voice $ 5,095 $ 1,162 338
Data 1,702 496 243
Internet 758 392 93
International 357 230 55
-------- --------
COMMUNICATIONS SERVICES 7,912 2,280 247
Other 403 40 908
-------- --------
TOTAL REVENUES BEFORE EMBRATEL 8,315 2,320 258
Embratel 686 -- --
-------- --------
Total reported revenues $ 9,001 $ 2,320 288
======== ========
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The following table provides supplemental pro forma detail for MCI WorldCom
revenues. Since actual results for the three months ended March 31, 1998 do not
reflect the operations of MCI and only two months of CompuServe Network Services
and ANS, the pro forma results are more indicative of internal growth for the
combined company. The pro forma revenues, excluding Embratel, for the three
months ended March 31, 1999 and 1998 reflect the following changes by category
(dollars in millions):
ACTUAL PRO FORMA PERCENT
1999 1998 CHANGE
-------- -------- --------
REVENUES
Voice $ 5,095 $ 4,754 7
Data 1,702 1,304 31
Internet 758 474 60
International 357 230 55
-------- --------
COMMUNICATIONS SERVICES 7,912 6,762 17
Other 403 490 (18)
-------- --------
TOTAL REVENUES $ 8,315 $ 7,252 15
======== ========
The following discusses the revenue increases for the three month period ended
March 31, 1999 as compared to pro forma results for the comparable prior year
period. The pro forma revenues assume that the MCI Merger, CompuServe Merger and
the AOL Transaction occurred at the beginning of 1998. These pro forma revenues
do not include Embratel or the iMCI Business that was sold. Changes in actual
results of operations are shown in the Consolidated Statements of Operations and
the foregoing tables and, as noted above, primarily reflect the MCI Merger, the
CompuServe Merger, the AOL Transaction and internal growth of the Company.
Voice revenues for the first quarter experienced a 7% pro forma increase over
the prior year pro forma amount, driven by a gain of 8% in traffic. Voice
revenues include both long distance and local domestic switched revenues. 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 95% in the first quarter of 1999 versus the
same period of the prior year. While the Company continues to show significant
percentage gains in switched local, it is still a relatively small component of
total Company revenues.
Data revenues for the three month period ended March 31, 1999 increased 31% over
the same pro forma period of the prior year. Data includes both long distance
and local dedicated bandwidth sales. 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 also by
applications that are becoming more strategic, far reaching and complex;
additionally, bandwidth consumption is driving an acceleration in growth for
higher capacity circuits. Rapidly growing demand for high-speed data access has
contributed to a 40% pro forma year over year local data revenue growth for the
first quarter of 1999. As of March 31, 1999, the Company had approximately 20
million domestic local voice grade equivalents and approximately 35,000
buildings in the United States connected over its high-capacity circuits.
Domestic local route miles of connected fiber exceed 7,800 and domestic long
distance route miles exceed 47,000.
Internet revenues for the three month period ended March 31, 1999 increased 60%,
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.
MCI's Internet revenues for 1998 have been excluded from the above table, due to
the divestiture of MCI's Internet business on September 14, 1998.
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International revenues - those revenues originating outside of the United
States, excluding Embratel - for the first quarter of 1999 were $357 million, an
increase of 55% as compared with $230 million for the same pro forma period of
the prior year. In July 1998, the pan-European network was commissioned for
service and, along with the Gemini undersea cable, now provides MCI WorldCom the
capability to connect from end-to-end over 6,500 buildings in Europe all over
its own high-capacity circuits.
The Pan-European networks and newly constructed national networks in the U.K.,
France, Germany and Belgium are driving higher growth of enhanced data sales
internationally. The resulting revenue mix shift is expected to contribute to
improved margins in spite of the competitive pricing environment.
Other revenues, which consist primarily of the operations of SHL, for the first
quarter of 1999 were $403 million, down 18% as compared with the pro forma first
quarter of 1998. In April 1999, the Company completed the sale of SHL to EDS for
$1.65 billion in cash. In addition, both companies agreed in February 1999 to
significant outsourcing contracts and a marketing relationship to explore
opportunities in electronic business and networking solutions which will
capitalize on the individual strengths of each company. The definitive
agreements for the outsourcing contracts and marketing relationship will most
likely be finalized by the end of the second quarter, 1999. Excluding SHL, the
year over year decline primarily reflects the negative impact of eliminating
certain lines of operations.
The following discusses the actual results of operations for the three months
ended March 31, 1999 as compared to the three months ended March 31, 1998.
LINE COSTS. Line costs as a percentage of revenues for the first quarter of 1999
were 45.7% as compared to 48.1% reported for the same period of the prior year.
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 MCI, CompuServe Network Services and ANS into the Company's
operations. Additionally, access charge reductions that occurred in July 1998
and January 1999 reduced total line cost expense by approximately $85 million
for the first quarter of 1999. While access charge reductions were primarily
passed through to customers, line costs as a percentage of revenues were
positively affected by approximately half a percentage point for the first
quarter of 1999. The Company anticipates that line costs as a percentage of
revenues may continue to decline as a result of synergies and economies of scale
resulting from network efficiencies achieved from the continued assimilation of
the former MCI and WorldCom networks. 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. Selling, general and administrative
expenses for the first quarter of 1999 were $2.31 billion or 25.7% of revenues
as compared to $478 million or 20.6% of revenues for the first quarter of 1998.
The increase in selling, general and administrative expenses as a percentage of
revenues for the three month period ended March 31, 1999 reflects the Company's
expanding operations, primarily through the MCI Merger. The Company expects to
achieve additional selling, general and administrative synergies in connection
with the MCI Merger through the assimilation of MCI into the Company's strategy
of cost control.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense for the
first quarter of 1999 increased to $1.08 billion or 12.0% of revenues from $299
million or 12.9% of revenues for the first quarter of 1998. These increases
reflect increased amortization and depreciation associated with the MCI Merger,
CompuServe Merger and AOL Transaction as well as additional depreciation related
to capital expenditures. As a percentage of revenues, these costs decreased due
to the higher revenue base.
IN-PROCESS RESEARCH AND DEVELOPMENT AND OTHER CHARGES. In the first quarter of
1998, the Company recorded a pre-tax charge of $38 million for employee
severance, alignment charges, loss contingencies and direct merger costs
associated with the BFP Merger and $31 million for the write-down of a
permanently impaired asset.
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In connection with the CompuServe Merger and the AOL Transaction, the Company
made allocations of the purchase price to acquired IPR&D totaling $429 million
in the first quarter of 1998. The in-process technology acquired in the
CompuServe Merger and the AOL Transaction consisted of three main R&D efforts
underway at CompuServe Network Services and two main R&D efforts underway at
ANS. These projects included next generation network technologies and new
value-added networking applications, such as applications hosting, multimedia
technologies and virtual private data networks.
INTEREST EXPENSE. Interest expense in the first quarter of 1999 was $260 million
or 2.9% of revenues, as compared to $102 million or 4.4% of revenues reported in
the first quarter of 1998. The increase in interest expense is attributable to
higher debt levels as a result of the MCI Merger, higher capital expenditures
and the 1998 fixed rate debt financings, offset by lower interest rates as a
result of certain tender offers for outstanding debt in the first quarter of
1998 and slightly lower rates in effect on the Company's variable rate debt. For
the three months ended March 31, 1999 and 1998, weighted average annual interest
rates on the Company's long-term debt were 6.9% and 7.3%, respectively, while
weighted average annual levels of borrowings were $20.23 billion and $7.88
billion, respectively.
MISCELLANEOUS INCOME AND EXPENSE. Miscellaneous expense for the first quarter of
1999 was $32 million or 0.3% of revenues. Miscellaneous expense included $152
million of foreign currency translation losses related to the impact of the
local currency devaluation in Brazil and its effect on Embratel's holdings of
U.S. dollar and other foreign currency denominated debt. After the elimination
of minority interests, this charge totaled approximately $30 million on a pretax
basis. Also included was a $28 million charge related to the redemption of
certain outstanding senior notes of the Company. These amounts were somewhat
offset by a $67 million gain on the sale of an equity investment and a gain on
an international joint venture.
EXTRAORDINARY ITEMS. In the first quarter of 1998, the Company recorded an
extraordinary item totaling $129 million, net of income tax benefit of $78
million. The charge was recorded in connection with the tender offers and
certain related refinancings of the Company's outstanding debt from the BFP
Merger.
NET INCOME (LOSS) APPLICABLE TO COMMON SHAREHOLDERS. For the quarter ended March
31, 1999, the Company reported net income of $709 million as compared to a net
loss of $416 million reported in the first quarter of 1998. Diluted income per
common share was $0.37 compared to loss per common share of $0.41 for the
comparable 1998 period.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, the Company's total debt was $20.23 billion, a decrease of
$606 million from December 31, 1998. Additionally, at March 31, 1999, the
Company had available liquidity of $5.86 billion under its credit facilities and
commercial paper program (which are described in the Form 10-K) and from
available cash.
In January 1999, the Company and one of its wholly owned subsidiaries redeemed
all of its outstanding 9.375% Senior Notes due January 15, 2004 (the "Senior
Notes"). Holders of the Senior Notes received 103.52% of the principal amount
plus accrued and unpaid interest to January 15, 1999 of $46.875 per $1,000
aggregate principal amount of such Senior Notes. The total redemption cost of
$743 million was obtained from available liquidity under the Company's credit
facilities and commercial paper program. The Company recorded a $28 million
charge related to the redemption.
In March 1999, $300 million and $200 million of MCI senior notes, with interest
rates of 6.25% and 6.37%, respectively, matured. The funds utilized to repay the
maturing MCI senior notes were obtained from available liquidity under the
Company's credit facilities and commercial paper program.
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As noted below, the Brazilian real has experienced significant devaluation
against the U.S. dollar since MCI invested in Embratel in August 1998. The
Company previously designated the remaining $927 million note payable in local
currency installments, resulting from the Embratel investment, as a hedge of its
investment in Embratel. As of March 31, 1999, the Company recorded the change in
value of the note as a reduction of the note payable with the offset through
foreign currency translation adjustment in shareholders' investment.
As of March 31, 1999, Embratel had $613 million of long-term debt outstanding,
of which approximately $555 million was denominated in U.S. dollars and $58
million denominated in other currencies including the French Franc and Deutsche
Mark. The effective cost to Embratel of borrowing in foreign currencies, such as
the U.S. dollar, depends principally on the exchange rate between the Brazilian
real and the currencies in which its borrowings are denominated. As of March 31,
1999, the Brazilian real devalued over 30% against the U.S. dollar since
December 31, 1998. As a result, the Company recorded a $152 million foreign
currency loss to miscellaneous expense during the quarter. After the elimination
of minority interests, this charge totaled approximately $30 million on a pretax
basis. If this devaluation is sustained, or worsens, Embratel would record a
similar charge to its future earnings equal to the increase in the U.S. dollar
liability resulting from such devaluation. The net effect to the Company's
operations would be 19.26% of such charge after elimination of minority
interests.
For the three months ended March 31, 1999, the Company's cash flow from
operations increased $1.65 billion to $1.93 billion from the comparable period
for 1998. 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.
Cash used in investing activities for the three months ended March 31, 1999
totaled $2.82 billion and included capital expenditures of $1.64 billion.
Primary capital expenditures include purchases of switching, transmission,
communications and other equipment. The Company anticipates that approximately
$6.6 billion will be spent during the remainder of 1999 for transmission and
communications equipment, construction and other capital expenditures without
regard to Embratel or possible future acquisitions or the redeployment of SHL
proceeds into additional spending opportunities. Acquisitions and related costs
includes the costs associated with the MCI Merger, CompuServe Merger, AOL
Transaction and a smaller acquisition completed during 1999.
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. The
Company believes that it 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.
Absent significant capital requirements for other acquisitions, the Company
believes that cash flow from operations and available liquidity, including the
Company's credit facilities and commercial paper program and available cash will
be sufficient to meet the Company's capital needs for the remainder of 1999.
However, the Company believes that funding needs in excess of internally
generated cash flow and availability under the Company's credit facilities and
commercial paper program could be met by accessing favorable debt markets.
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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 June
15, 1999 and 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 believes that the adoption of this standard will not have a material
effect on the Company's consolidated results of operations or financial
position.
YEAR 2000 READINESS DISCLOSURE
Due to 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 consolidated these strategies into a
single program. 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 project management 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 achieved 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 remediated
solutions throughout the Company's network targeted for completion by September
30, 1999.
The Company is continuing to develop new systems and services that are expected
to be implemented as year 2000 compliant throughout the year. Selected
international, enhanced service platform systems and internal
security/scheduling/mail systems are also expected to be implemented as year
2000 compliant in the third and fourth quarters of 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
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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 is participating in industry efforts to test interoperability of
networks for industry segments as well as multiple carriers. The ATIS and
Network Reliability and Interoperability Council ("NRIC") testing are examples
of this effort to assess the readiness of Interconnecting Carriers for both data
and voice services.
The Company has completed contingency plans to address potential year 2000
related business interruptions that may occur on January 1, 2000 or thereafter.
Additional detailed documentation will be completed before the end of the second
quarter, 1999. The Company anticipates that these contingency plans will
primarily address potential year 2000 problems due to failures to remediate
major systems successfully, or potential failure of the Company's
Interconnecting Carriers' and Primary Vendors' year 2000 compliance efforts. The
Company is incorporating many of the recommendations of the NRIC into the
contingency planning process. 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 MCI and WorldCom over the past five quarters
were approximately $260 million. This level of expenditures is consistent with
the planned expenditures for the related periods. The Company expects to incur
approximately $290 million in costs during the remainder of 1999 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 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.
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.
Embratel's year 2000 program began in 1997 and is managed separately from the
other MCI WorldCom year 2000 programs. The Embratel year 2000 program is
intended to address all its systems, infrastructure, networks and applications
and have them compliant by June 30, 1999.
Embratel has spent $12 million of an estimated $14 million on the year 2000
program and expects to come within the estimated costs. Embratel may, however,
be affected by year 2000 problems to the extent that other entities are
unsuccessful in achieving compliance. Despite preventive measures taken by
Embratel, no assurances can be given that
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the year 2000 issue will not have an effect on the financial condition and
results of operations of Embratel. Embratel is active in developing contingency
plans and working with the International Telecommunications Union on
interoperability testing.
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 established
fixed conversion rates between their existing currencies and the European
Union's common currency ("Euro"). The transition period for the introduction of
the Euro will be between January 1, 1999 to July 1, 2002. All of the final rules
and regulations have not yet been identified by the European Commission with
regard to the Euro. The Company is currently evaluating methods to address the
many issues involved with the introduction of the Euro, including the conversion
of information technology systems, recalculating currency risk, recalibrating
derivatives and other financial instruments, strategies concerning continuity of
contracts, and impacts on the processes for preparing taxation and accounting
records. At this time, the Company has not yet determined the cost related to
addressing this issue and there can be no assurance as to the effect of the Euro
on the consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to the impact of interest rate changes, foreign currency
fluctuations and changes in market values of investments.
The Company's policy is to manage interest rates through the use of a
combination of fixed and variable rate debt. Currently, the Company does not use
derivative financial instruments to manage its interest rate risk. The Company
has minimal cash flow exposure due to general interest rate changes for its
fixed rate, long-term debt obligations. The Company does not believe a
hypothetical 10% adverse rate change in the Company's variable rate debt
obligations would be material to the Company's results of operations.
The Company is exposed to foreign exchange rate risk primarily due to Embratel's
holding of approximately $555 million in U.S. dollar denominated debt, and
approximately $58 million of indebtedness indexed in other foreign currencies
which includes French Francs and Deutsche Marks. The potential immediate loss to
the Company that would result from a hypothetical 10% change in foreign currency
exchange rates based on this position would be approximately $12 million (after
elimination of minority interests). During January 1999, the Brazilian
government allowed its currency to trade freely against other currencies,
resulting in an immediate devaluation of the Brazilian real. As of March 31,
1999, the Brazilian real had devalued over 30% against the U.S. dollar since
December 31, 1998. As a result, the Company recorded a $152 million foreign
currency loss to miscellaneous expense during the quarter. After the elimination
of minority interests, this charge totaled approximately $30 million on a
pretax basis. If this devaluation is sustained, or worsens, the future net
impact to the Company's results of operations could be significant.
The Company is also subject to risk from changes in foreign exchange rates for
its other international operations which use a foreign currency as their
functional currency and are translated into U.S. dollars. Additionally, the
Company has designated the remaining $927 million note payable in local currency
installments, resulting from the Embratel investment, as a hedge of its
investment in Embratel. As of March 31, 1999, the Company recorded the change in
value of the note as a reduction to the note payable with the offset through
foreign currency translation adjustment in shareholders' investment.
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The Company believes its market risk exposure with regard to its marketable
equity securities is limited to changes in quoted market prices for such
securities. Based upon the composition of the Company's marketable equity
securities at March 31, 1999, the Company does not believe a hypothetical 10%
adverse change in quoted market prices would be material to net income.
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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, 1998, except as may be reflected in the discussion under Note G of
the Notes to Consolidated Financial Statements in Part I, Item 1,
above, which is hereby incorporated by reference herein.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Securities Holders
None.
Item 5. Other Information
The Company's principal executive offices are now located at 500
Clinton Center Drive, Clinton, Mississippi, 39056, and its telephone
number is (601) 460-5600.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
See Exhibit Index.
B. Reports on Form 8-K
None.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report on Form 10-Q to be signed on its behalf
by Scott D. Sullivan, thereunto duly authorized to sign on behalf of the
registrant and as the principal financial officer thereof.
MCI WORLDCOM, Inc.
By: /s/ Scott D. Sullivan
--------------------------------
Scott D. Sullivan
Chief Financial Officer
Dated: May 17, 1999.
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EXHIBIT INDEX
Exhibit No. Description
----------- -----------
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)
27.1 Financial Data Schedule
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