<PAGE> PAGE 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1994
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 0-6547
MCI COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 52-0886267
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
1801 Pennsylvania Avenue, N.W., Washington, D.C. 20006
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (202) 872-1600
N/A
(Former name, former address and former fiscal year, if changed since last
report).
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
As of September 30, 1994, the registrant had outstanding 135,998,932 shares of
Class A common stock and 543,551,697 shares of common stock.
<PAGE> PAGE 2
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
F O R M 1 0 - Q
For The Quarter Ended September 30, 1994
INDEX
Page No.
--------
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Balance Sheet at September 30, 1994 and December 31, 1993 3-4
Income Statement for the three and nine months ended
September 30, 1994 and 1993 5
Statement of Cash Flows for the nine months ended
September 30, 1994 and 1993 6
Notes to Interim Consolidated Financial Statements 7-11
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12-18
PART II: OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 19
SIGNATURE 20
<PAGE> PAGE 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
BALANCE SHEET
(unaudited)
September 30, December 31,
1994 1993
------------ -----------
(In millions)
Assets
Current assets:
Cash and cash equivalents $ 3,154 $ 165
Marketable securities 219 -
Receivables, net of allowance for
uncollectibles of $240 and $211 million 2,297 2,131
Other 364 305
------- -------
Total current assets 6,034 2,601
------- -------
Communications system:
System in service 9,515 8,563
Other property and equipment 2,414 2,172
------- -------
Total communications system in service 11,929 10,735
Accumulated depreciation (4,491) (4,297)
Construction in progress 1,111 883
------- -------
Total communications system, net 8,549 7,321
------- -------
Other assets:
Excess of cost over net assets acquired, net 1,111 1,093
Other assets and deferred charges, net 424 261
------- -------
Total other assets 1,535 1,354
------- -------
Total assets $16,118 $11,276
======= =======
See accompanying Notes to Interim Consolidated Financial Statements
<PAGE> PAGE 4
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
BALANCE SHEET
(unaudited)
September 30, December 31,
1994 1993
------------ -----------
(In millions)
Liabilities and stockholders' equity
Current liabilities:
Accrued telecommunications expense $ 1,510 $ 1,507
Accounts payable 683 742
Long-term debt due within one year 98 215
Other accrued liabilities 909 737
------- -------
Total current liabilities 3,200 3,201
------- -------
Noncurrent liabilities:
Long-term debt 3,010 2,366
Deferred taxes and other 1,073 996
------- -------
Total noncurrent liabilities 4,083 3,362
------- -------
Stockholders' equity:
Series D convertible preferred stock, $.10 par
value, authorized 13,736 shares, outstanding
0 and 13,736 shares, respectively - 1
Class A common stock, $.10 par value, authorized
500 million shares, issued 136 million and 0 14 -
shares, respectively
Common stock, $.10 par value, authorized
2 billion and 800 million shares, respectively,
issued 592 million shares 60 60
Additional paid in capital 6,136 2,493
Retained earnings 3,415 2,785
Treasury stock at cost, 48 and 51 million shares,
respectively (790) (626)
------- -------
Total stockholders' equity 8,835 4,713
------- -------
Total liabilities and stockholders' equity $16,118 $11,276
======= =======
See accompanying Notes to Interim Consolidated Financial Statements
<PAGE> PAGE 5
MCI COMMUNICATIONS AND SUBSIDIARIES
INCOME STATEMENT
(In millions, except per share amounts)
(unaudited)
Three months Nine months
ended ended
September 30, September 30,
-------------- --------------
1994 1993 1994 1993
---- ---- ---- ----
Revenue:
Sales of communication services $3,407 $3,054 $9,937 $8,793
------ ------ ------ ------
Operating Expenses:
Telecommunications 1,765 1,636 5,152 4,714
Sales, operations and general 952 814 2,791 2,318
Depreciation 282 245 818 714
------ ------ ------ ------
Total operating expenses 2,999 2,695 8,761 7,746
------ ------ ------ ------
Income from operations 408 359 1,176 1,047
Interest expense 43 35 114 145
Other expense, net 10 11 25 31
------ ------ ------ ------
Income before income taxes and
extraordinary item 355 313 1,037 871
Income tax provision 135 139 393 351
------ ------ ------ ------
Income before extraordinary item 220 174 644 520
Extraordinary loss on early debt retirement,
less applicable income tax benefit - - - 45
------ ------ ------ ------
Net income $ 220 $ 174 $ 644 $ 475
Dividends on preferred stock - - 1 1
------ ------ ------ ------
Earnings applicable to
common stockholders $ 220 $ 174 $ 643 $ 474
====== ====== ====== ======
Earnings per common and common
equivalent shares:
Income before extraordinary item $ .38 $ .30 $ 1.11 $ .93
Loss on early debt retirement - - - .08
------ ------ ------ ------
Total $ .38 $ .30 $ 1.11 $ .85
====== ====== ====== ======
Weighted average number of shares
of common stock and common stock
equivalents outstanding 579 580 578 557
Dividends declared per common share $ - $ - $ .025 $ .025
See accompanying Notes to Interim Consolidated Financial Statements
<PAGE> PAGE 6
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
STATEMENT OF CASH FLOWS
(unaudited)
Nine months ended
September 30,
------------------
1994 1993
---- ----
(In millions)
Operating activities:
Cash received from customers $9,852 $8,468
Cash paid to suppliers and employees (7,777) (6,733)
Taxes paid (321) (229)
Interest paid (98) (135)
------ ------
Cash from operating activities 1,656 1,371
------ ------
Investing activities:
Cash outflow for communications system (2,081) (1,420)
Investment in marketable securities (219) -
Investment in affiliates (284) (35)
------ ------
Cash used for investing activities (2,584) (1,455)
------ ------
Net cash flow before financing activities (928) (84)
------ ------
Financing activities:
Issuance of Senior Notes and other debt 939 757
Retirement of Senior Notes and other debt (216) (1,380)
Commercial paper and bank credit facility
activity, net (239) (442)
Purchase of treasury stock (269) (110)
Issuance of preferred stock - 830
Issuance of Class A common stock 3,522 -
Issuance of common stock for employee plans 194 263
Payment of dividends on common and
preferred stock (14) (14)
------ ------
Cash from (used for) financing activities 3,917 (96)
------ ------
Net increase (decrease)
in cash and cash equivalents 2,989 (180)
Cash and cash equivalents - beginning balance 165 232
------ ------
Cash and cash equivalents - ending balance $ 3,154 $ 52
====== ======
See accompanying Notes to Interim Consolidated Financial Statements
<PAGE> PAGE 7
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1: GENERAL
The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with the instructions to Quarterly Reports on
Form 10-Q. In the opinion of management, all adjustments (consisting only
of normal recurring adjustments) necessary for a fair statement of the
financial position, results of operations and cash flows for the interim
periods presented have been made. These financial statements should be
read in conjunction with the company's Annual Report on Form 10-K for the
year ended December 31, 1993.
NOTE 2: LONG-TERM DEBT AND CREDIT FACILITY
In March 1994, the company issued $450 million principal amount of 7 3/4%
Senior Debentures due March 23, 2025, $300 million principal amount of 6
1/4% Senior Notes due March 23, 1999 and $200 million principal amount of
Senior Floating Rate Notes due March 16, 1999 (Senior Floating Rate Notes).
A substantial portion of the net proceeds from these issuances was used to
repay commercial paper borrowings while the remaining proceeds were used
for general corporate purposes. These debt issuances utilized the
company's remaining amount available under its existing shelf registration.
During the first nine months of 1994, the company also repaid $93 million
of Senior Notes, leaving $2,385 million of debt securities outstanding at a
weighted average annual interest rate of 7.27% as of September 30, 1994.
In conjunction with the issuance of the Senior Floating Rate Notes, the
company entered into an interest rate swap agreement for a notional
principal amount of $200 million which results in an effective fixed annual
interest cost of 6.37% with respect to the Senior Floating Rate Notes.
On July 8, 1994, the company executed a $2.0 billion bank credit facility
agreement (Credit Facility) which replaced its previous $1.25 billion bank
credit facility. The Credit Facility, which expires in July 1999, supports
the company's commercial paper program and will be used, in conjunction
with this program, to fund short-term fluctuations in working capital and
for other general corporate requirements. On September 30, 1994, there
were no amounts outstanding under the Credit Facility.
During the nine months ended September 30, 1994, the company issued $6,627
million and repaid $6,866 million of commercial paper borrowings leaving no
commercial paper borrowings outstanding at September 30, 1994. Borrowings
under the commercial paper program are classified as noncurrent if the
remaining term of the Credit Facility exceeds one year, and the unused
commitment thereunder equals or exceeds the amount of commercial paper then
outstanding.
<PAGE> PAGE 8
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 3: STOCKHOLDERS' EQUITY
Changes in total stockholders' equity are:
Class A
Preferred Common Common Treas. Total
Stock Stock Stock Addit'l Stock, Stock-
Par Par Par Paid in Retained at holders'
Value Value Value Capital Earnings Cost Equity
--------- ------ ----- ------- -------- ------ -------
(In Millions)
Balance at
December 31, 1993 $ 1 - $60 $2,493 $2,785 ($626) $4,713
Class A common stock
issued and preferred
stock converted (1) 14 - 3,496 - - 3,509
Common stock issued
for employee stock
and benefit plans
(14 million shares) - - - 147 - 96 243
Net income - - - - 644 - 644
Common and preferred
dividends declared - - - - (14) - (14)
Treasury stock
purchased
(11 million shares) - - - - - (260) (260)
--- --- --- ------ ----- ---- -----
Balance at
September 30, 1994 $ 0 $14 $60 $6,136 $3,415 ($790) $8,835
=== === === ====== ====== ==== ======
On September 30, 1994, British Telecommunications plc (BT) completed the
purchase of 136 million shares of the company's recently authorized Class A
common stock for $4.3 billion, resulting in a 20 percent voting interest in
the company. This purchase was achieved by the company's issuance of 108.5
million shares of Class A common stock to BT for a cash payment of $3.5
billion on September 30, 1994, and BT's conversion of the 13,736 shares of
Series D convertible preferred stock, purchased for $830 million in June 1993,
into 27.5 million shares of Class A common stock.
<PAGE> PAGE 9
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 3: STOCKHOLDERS' EQUITY (continued)
The Class A common stock issued to BT is equivalent on a per share basis to
the existing common stock, except with respect to voting rights. BT is
entitled to proportionate representation on the company's board of directors,
which currently equates to three seats. In addition to board representation,
BT is entitled to investor protections with respect to certain corporate
actions of the company. (Shares of Class A common stock convert into common
stock upon transfer.)
On September 30, 1994, the company amended its certificate of incorporation
which increased the number of authorized shares of preferred stock from 20
million to 50 million and of common stock from 800 million to 2 billion and
authorized 500 million shares of Class A common stock. These changes, which
became effective September 30, 1994, had been previously approved by the
company's stockholders at a special meeting held on March 11, 1994. On
September 7, 1994, the company's board of directors also adopted a
stockholders rights plan (Rights Plan), effective September 30, 1994, and
declared a rights dividend, payable on October 11, 1994, of one preferred
share purchase right (Right) for each outstanding share of common stock and
Class A common stock (Common Shares) to the stockholders of record on that
date. The Rights will also be attached to future issuances of Common Shares.
Upon the occurrence of certain specific events, each Right entitles the holder
to purchase for $100 one one-hundredth of a share of the company's Series E
Junior Participating Preferred Stock, par value $.10 per share (Series E). In
the event that any person or group acquires 10% or more (more than 20.1% in
BT's case) of the company's outstanding Common Shares, each holder of a Right
(other than the acquiring person or group) will be entitled to purchase that
number of Common Shares having a market value of two times the exercise price
of the Right. For purposes of the Rights Plan, the company's board of
directors has authorized 10 million shares of Series E which amount may be
increased or decreased by the board of directors. All Rights expire on
September 30, 2004, unless this date is extended or the Rights are earlier
redeemed or exchanged by the company in accordance with the Rights Plan.
<PAGE> PAGE 10
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 4: CASH FLOW INFORMATION
The reconciliation of net income in the Income Statement to cash from
operating activities in the Statement of Cash Flows is as follows:
Nine months ended
September 30,
-------------------
1994 1993
---- ----
(In millions)
Net income $ 644 $ 475
Adjustments to earnings:
Depreciation and amortization 849 754
Deferred income tax provision 175 214
Net change in operating activity accounts
other than cash and cash equivalents:
Receivables (166) (333)
Accounts payable 132 272
Other operating activity accounts 22 (11)
------ ------
Cash from operating activities $1,656 $1,371
====== ======
NOTE 5: ADOPTION OF NEW ACCOUNTING STANDARD
Effective January 1, 1994, the company adopted Statement of Financial
Accounting Standard No. 115 (SFAS 115), Accounting for Certain Investments in
Debt and Equity Securities. SFAS 115 established new accounting and reporting
requirements for certain debt and equity securities. The proceeds received
from BT were invested in various short-term interest-bearing securities,
including U.S. Government and various corporate securities, which the company
does not intend to hold until maturity or for trading purposes. SFAS 115
requires the company to classify and record its securities as available-for-
sale. In accordance with the provisions of SFAS 115, investments classified
as available-for-sale are recorded at fair value and any holding gains and
losses are excluded from earnings and reported as a net amount in a separate
component of stockholders' equity until realized. As of September 30, 1994,
there were no material differences between the fair value and cost of these
securities.
<PAGE> PAGE 11
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 6: INVESTMENTS IN JOINT VENTURES
In conjunction with the equity investment discussed in Note 3 between the
company and BT on September 30, 1994, the company purchased for approximately
$79 million, a 24.9 percent equity interest in Concert Communications Company
(Concert), a joint venture launched by the parties in June 1994. Concert
will provide global telecommunications services for business customers.
Including the initial investment made on September 30, 1994, the company
expects to invest approximately $250 million in this venture over the next
five years.
In October 1994, the company and Grupo Financiero Banamex-Accival (Banacci)
formed AVANTEL, S.A. (AVANTEL), a joint venture incorporated to provide
competitive domestic and international long-distance telecommunications
services in Mexico. AVANTEL, the result of a strategic alliance announced in
January 1994, will initially provide private line and value-added services to
businesses and government customers. The joint venture will also provide
competitive switched telecommunications services commencing on or about
January 1997, subject to the grant of a concession from the government of
Mexico, which is anticipated shortly after the new Mexican government takes
office in December 1994. AVANTEL will be owned 55 percent by Banacci and 45
percent by the company. The company plans to make available certain
technology to AVANTEL which will facilitate the completion of the company's
integrated North American network. The cash investment in AVANTEL by the
company over the next several years is expected to approximate $450 million,
of which $150 million is expected to be made in 1995. This transaction is
subject to the grant of a concession from the government of Mexico and the
satisfaction of various other conditions.
<PAGE> PAGE 12
PART I.
ITEM 2.
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993
OVERVIEW
- --------
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the company's
consolidated results of operations and financial condition. The discussion
should be read in conjunction with the interim consolidated financial
statements and notes thereto.
The company operates in a single industry segment, the long-distance
telecommunications industry. More than 90% of the company's operating revenues
and identifiable assets relate to the company's activities in this industry.
networkMCI* Initiatives
- -----------------------
In January 1994, the company announced its MCI Metro initiative, which will
provide a full range of basic and enhanced local telecommunications services
through fiber optic rings and local switching networks throughout the U.S. as
regulatory authorities permit. In October 1994, MCI Metro filed applications to
provide competitive local phone service with utility regulators in five states:
Illinois, Maryland, Michigan, Pennsylvania and Washington. MCI Metro recently
received approval from the states of Maryland and Washington, in addition it has
authority to provide local phone service in New York, Massachusetts and
Wisconsin. MCI Metro is engineering and constructing networks in numerous
cities and currently owns and operates conduit and fiber cable facilities in
more than 200 U.S. cities. The company is expected to make significant
investments in MCI Metro over the next several years.
In September 1994, the company launched networkMCI BUSINESS***, a software
application that provides e-mail and fax messaging, information
services/automated news monitoring, document sharing, videoconferencing
capability and access to online multimedia business catalogs and the Internet.
In August 1994, the company terminated negotiations with Nextel Communications,
Inc. (Nextel) regarding a contemplated investment in Nextel.
In October 1994, the company and Grupo Financiero Banamex-Accival (Banacci)
formed AVANTEL, S.A., a joint venture incorporated to provide competitive
domestic and international long-distance telecommunications services in Mexico.
The company's cash investment in the joint venture is expected to be $450
million over the next several years, of which $150 million is expected to be
made in 1995. The transaction with Banacci is subject to the grant of a
concession from the government of Mexico and the satisfaction of various
other conditions (see Note 6 of the Notes to Interim Consolidated Financial
Statements included in this Quarterly Report on Form 10-Q).
<PAGE> PAGE 13
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993
Earnings Summary
- ----------------
Net income increased to $220 million and $644 million for the three and nine
months ended September 30, 1994 from $174 million and $475 million for the same
periods in 1993, respectively. This represents year-over-year increases of 26%
(15% excluding the impact of the tax law change in 1993) and 36% (31% excluding
the impact of the tax law change in 1993) for the three and nine months ended
September 30, 1994, respectively. Net income for the nine months ended
September 30, 1993 reflects an extraordinary charge of $45 million, net of
tax benefit, for a loss on the early retirement of debt. Earnings per common
and common equivalent shares for the three and nine months ended
September 30, 1994 were $.38 and $1.11, respectively, compared to $.30 and
$.85, for the same periods in 1993. Earnings per common and common
equivalent shares for the nine months ended September 30, 1993 were $.93
before the extraordinary item. Due to the timing of the closing of the
British Telecommunications, plc (BT) investment in the company, earnings per
common and common equivalent shares for the three and nine months ended
September 30, 1994 were not materially impacted. However, there will be a
greater dilutive impact from this investment on earnings per common and
common equivalent shares in the fourth quarter and for the year ended
December 31, 1994. The company declared and paid a common stock dividend, of
$.025 per share, in June 1994.
RESULTS OF OPERATIONS
- ---------------------
Income from Operations Increase for the Increase for the
(In millions, except % change) Three months ended Nine months ended
September 30, September 30,
1994 vs. 1993 1994 vs. 1993
------------------ -----------------
Revenue:
Sales of communications services $ 353 11.6% $1,144 13.0%
---- ----- ----- -----
Operating expenses:
Telecommunications 129 7.9% 438 9.3%
Sales, operations and general 138 17.0% 473 20.4%
Depreciation 37 15.1% 104 14.6%
---- ----- ----- -----
Total operating expenses 304 11.3% 1,015 13.1%
---- ----- ----- -----
Income from operations $ 49 13.6% $ 129 12.3%
==== ===== ===== =====
<PAGE> PAGE 14
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993
Revenue
- -------
Traffic volume for the three and nine month periods ended September 30, 1994
grew 10.2% and 13.5%, respectively, versus the corresponding periods in 1993.
Revenue during these same periods increased 11.6% and 13.0%, respectively. The
three month period ended September 30, 1994 was the first period since 1989
in which, on a year-over-year basis, revenue growth exceeded traffic growth.
This reflects increases in tariff rates and higher revenue from international,
1-800-COLLECT**, data and 800 products, offset by product promotions and
discounts.
In the business market, revenue and traffic volume grew in the three and nine
months ended September 30, 1994, versus the corresponding periods in 1993. The
primary component of this growth was traffic and revenue derived from the
company's MCI Vision** and MCI Preferred** products, particularly the 800
components of these products. This 800 growth was primarily attributable to
the increase in signed contracts following the Federal Communications
Commission's 800 portability ruling which took effect in May 1993. Growth in
these products was also attributable to the company's Proof Positive* service,
introduced in mid-1993, as well as increased sales and marketing efforts. The
company's various data products also experienced revenue growth during the
three and nine months ended September 30, 1994, attributable in part to the
company's purchase of BT North America Inc. (BTNA) in January 1994.
In the consumer market, year-over-year revenue growth for the three and nine
months ended September 30, 1994 resulted from the continued success of the
company's collect-calling product, 1-800-COLLECT which was introduced in May
1993, and Friends & Family II* which was introduced in June 1994 as an
extension of Friends & Family**. The rate of traffic and revenue growth
continues to be subject to increasing competitive pressure which will likely
cause a slight decline in the company's overall revenue in the fourth quarter
when compared to the third quarter of 1994.
<PAGE> PAGE 15
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993
Telecommunications Expense
- --------------------------
Telecommunications expense for the three and nine months ended September 30,
1994 increased versus the corresponding periods in 1993, primarily because of
volume increases in both international and domestic traffic, partially offset by
reductions in domestic access rates, international settlement rates and
efficiencies resulting from operator services automation. As a result of these
reductions, telecommunications expense as a percentage of revenue decreased to
51.8% for the third quarter and first nine months of 1994, compared to 53.5% and
53.6% for the corresponding periods in 1993.
Sales, Operations and General
- -----------------------------
The increase in sales, operations and general expenses for the three and nine
months ended September 30, 1994 versus the corresponding periods in 1993 was
primarily attributable to higher personnel costs and higher levels of
advertising and related marketing costs. The increase in personnel costs was
primarily associated with the introduction of new products and services which
required increases in customer service, sales and sales support staff. The
increase in advertising and related marketing costs was due to the introduction
of Friends & Family II, networkMCI, Best Friends* and WorldPhone** and the
impact of costs associated with the company's Proof Positive and
1-800-COLLECT programs. Accordingly, sales, operations and general expenses
as a percentage of revenue increased to 27.9% and 28.1% for the three and
nine months ended September 30, 1994, respectively, compared to 26.7% and
26.4% for the corresponding periods of 1993. In the fourth quarter of 1994,
the company expects to incur one-time incremental expenses of up to $70
million associated with the launching of networkMCI BUSINESS.
Interest Expense
- ----------------
Interest expense for the three months ended September 30, 1994 increased by
22.9% to $43 million from $35 million in the prior year period due to a
higher average debt balance. For the nine months ended September 30, 1994,
interest expense decreased by 21.4% to $114 million from $145 million in the
prior period. The decrease resulted from a lower average debt balance
combined with an increase in capitalized interest, which is in line with the
company's increased investment in the communications system during the nine
months ended September 30, 1994 versus the year ago period (see Liquidity and
Capital Resources).
<PAGE> PAGE 16
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993
Other
- -----
The company expects interest income to increase in the fourth quarter of 1994
from the investment of the proceeds received from the BT investment discussed
above. Also in the fourth quarter of 1994, the company expects to recognize
losses related to its ownership share of the newly formed joint venture,
Concert Communications Company (Concert). Losses are expected to continue
into 1995 due to the start-up nature of Concert.
In October 1994, the company sold its investment in AAP Telecommunications which
resulted in a $10 million gain to be recognized in the fourth quarter 1994.
In the fourth quarter of 1994, the company expects to take a one-time charge
against earnings of up to $25 million in connection with the settlement of two
class action suits relating to the provision of 900 services.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
On September 30, 1994, the company formally completed a transaction by which it
entered into a worldwide alliance with BT. BT purchased a 20% voting interest
in the company for approximately $4.3 billion (or $32 per share) including $830
million paid by BT in 1993. Concurrently, the company invested approximately
$79 million for a 24.9% interest in Concert, a joint venture formed by the
company and BT in June 1994 to provide global telecommunications services for
business customers. As a result of the equity infusion from BT, the
company's ratio of debt to total debt plus equity has been reduced to 26% at
September 30, 1994, from 35% at December 31, 1993.
Cash and cash equivalents increased significantly, by $2,989 million, at
September 30, 1994 from December 31, 1993, as a result of the BT investment.
Changes in cash and cash equivalents result from changes in cash flows from
operating, financing and investing activities which are explained below.
Net cash provided by operating activities for the nine months ended September
30, 1994 increased to $1,656 million from $1,371 million in the corresponding
period of 1993. The increase was primarily a result of an increase in cash
received from customers due to the growth in the company's revenue, which was
only partially offset by an increase in cash paid to suppliers and employees.
<PAGE> PAGE 17
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993
LIQUIDITY AND CAPITAL RESOURCES (continued)
- -------------------------------
Net cash used for investing activities increased to $2,584 million for the nine
months ended September 30, 1994 from $1,455 million for the corresponding period
of 1993. The increase in 1994 was a result of the increased investment
in the company's communications system due to the continued investment in its
transmission and switching facilities to meet customers' demands for new
services, redundancy and enhanced network intelligence. Also affecting this
increase were investments including the purchase of substantially all the
operations of BTNA in January 1994 for $108 million, and the investment in
Concert in September 1994 of approximately $79 million.
Net cash from (used for) financing activities was $3,917 million and ($96
million) for the nine months ended September 30, 1994 and 1993, respectively.
Cash from financing activities increased significantly in 1994 as a result of
the completion of the BT investment for $3.5 billion on September 30, 1994.
Also contributing to the inflow of cash provided by financing activities were
increased debt issuances and decreased debt redemptions versus the prior year.
In March 1994, the company issued an aggregate principal amount of $950
million in Senior Notes and Debentures and used a substantial portion of the
net proceeds to repay commercial paper borrowings while the remaining proceeds
were used for general corporate purposes.
The company believes that it will be able to meet its current and long-term
liquidity and capital requirements, including its fixed charges, through its
cash flows from operating activities, existing cash and cash equivalents and
short-term investments, its credit facility and other external financing. As
discussed in Note 2 of Notes to Interim Consolidated Financial Statements
(included in this Quarterly Report on Form 10-Q), the company has available a
newly issued $2 billion bank credit facility which it will use in conjunction
with its commercial paper program to fund short-term fluctuations in working
capital and other general corporate requirements. The credit facility expires
in July 1999. At September 30, 1994, there were no amounts outstanding under
the commercial paper program or the credit facility.
<PAGE> PAGE 18
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993
Other Matters
- -------------
The company adopted SFAS 115, Accounting for Certain Investments in Debt and
Equity Securities in the first quarter of 1994. It did not have a material
effect on the company's financial position or results of operations for the
three and nine months ended September 30, 1994. The proceeds received from
the BT investment were invested in various short-term interest bearing
securities classified as available-for-sale. Unrealized holding gains and
losses were not material at September 30, 1994.
- -----------------------------------------------
* networkMCI, MCI Metro, Friends & Family II and Best Friends are service
marks of MCI Communications Corporation.
** Proof Positive, 1-800-COLLECT, Friends & Family, MCI Vision, MCI Preferred
and WorldPhone are registered service marks of MCI Communications
Corporation.
*** networkMCI BUSINESS is a trademark of MCI Communications Corporation.
<PAGE> PAGE 19
PART II. OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit No. Description
----------- -----------
11 Computation of Earnings per Common Share.
12 Computation of Ratio of Earnings to Fixed
Charges.
27 Financial Data Schedule as of September 30,
1994.
99(a) Capitalization Schedule as of September 30,
1994.
b) Reports on Form 8-K
No reports on Form 8-K were filed by the company during the three
month period ended September 30, 1994.
<PAGE> PAGE 20
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto
duly authorized.
MCI COMMUNICATIONS CORPORATION
Date: November 14, 1994 Signed:
-----------------------
Bradley E. Sparks
Vice President
and Controller
<PAGE> PAGE 21
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
FORM 10-Q
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
11 Computation of Earnings per Common Share.
12 Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule as of September 30, 1994.
99(a) Capitalization Schedule as of September 30, 1994.
Exhibit 11
-------------
(Page 1 of 2)
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
(In millions, except per share amounts)
(unaudited)
Three months Nine months
ended ended
September 30, September 30,
------------- -------------
1994 1993 1994 1993
---- ---- ---- ----
Primary
- -------
Income before extraordinary item.......... $220 $174 $644 $520
Loss on early debt retirement, less
applicable income tax benefit........... - - - 45
---- ---- ---- ----
Net income................................ 220 174 644 475
Dividends on preferred stock.............. - - 1 1
---- ---- ---- ----
Earnings applicable to common
stockholders............................ 220 174 643 474
==== ==== ==== ====
Add back:
Convertible preferred stock dividends..... - - 1 1
---- ---- ---- ----
Earnings as adjusted for purposes of
computing earnings per share............ $220 $174 $644 $475
==== ==== ==== ====
Adjustment of shares outstanding:
Weighted average shares of common stock
outstanding............................. 571 539 569 518
Assumed conversion of preferred stock..... - 27 - 27
Assumed exercise of common stock options.. 44 53 44 53
Shares of common stock assumed repurchased
for treasury(a)......................... (36) (39) (35) (41)
---- ---- ---- ----
Adjusted shares of common stock and common
stock equivalents for computation....... 579 580 578 557
==== ==== ==== ====
Earnings per common and common equivalent shares:
Income before extraordinary item.......... $.38 $.30 $1.11 $.93
Loss on early debt retirement............. - - - .08
---- ---- ----- ----
$.38 $.30 $1.11 $.85
==== ==== ===== ====
- --------------------------------
(a) At an average market price of $23.44 and $24.29 for the three and nine
months ended September 30, 1994, respectively, and $28.17 and $24.79
for the three and nine months ended September 30, 1993, respectively.
<PAGE> Exhibit 11
-------------
(Page 2 of 2)
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
(In millions, except per share amounts)
(unaudited)
Three months Nine months
ended ended
September 30, September 30,
------------- -------------
1994 1993 1994 1993
---- ---- ---- ----
Assuming Full Dilution
- ----------------------
Income before extraordinary item.......... $220 $174 $644 $520
Loss on early debt retirement, less
applicable income tax benefit........... - - - 45
---- ---- ---- ----
Net income................................ 220 174 644 475
Dividends on preferred stock.............. - - 1 1
---- ---- ---- ----
Earnings applicable to common
stockholders............................ 220 174 643 474
==== ==== ==== ====
Add back:
Convertible preferred stock dividends..... - - 1 1
---- ---- ---- ----
Earnings as adjusted for purposes of
computing earnings per share............ $220 $174 $644 $475
==== ==== ==== ====
Adjustment of shares outstanding:
Weighted average shares of common stock
outstanding............................. 571 539 569 518
Assumed conversion of preferred stock..... - 27 - 27
Assumed exercise of common stock options.. 43 53 44 53
Shares of common stock assumed repurchased
for treasury(a)......................... (33) (39) (34) (37)
---- ---- ---- ----
Adjusted shares of common stock and common
stock equivalents for computation....... 581 580 579 561
==== ==== ==== ====
Earnings per common and common equivalent shares:
Income before extraordinary item.......... $.38 $.30 $1.11 $.93
Loss on early debt retirement............. - - - .08
---- ---- ----- ----
$.38 $.30 $1.11 $.85
==== ==== ===== ====
- --------------------------------
(a) At the ending market price of $25.38 for the three and nine months ended
September 30, 1994, which is higher than the average market price of $23.44
and $24.29 for the three and nine months.
At an average market price of $28.17 for the three months ended
September 30, 1993, which is higher than the ending market price of $27.63;
at the ending market price of $27.63 for the nine months ended
September 30, 1993, which is higher than the average market price for the
period of $24.79.
<PAGE> Exhibit 12
----------
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In millions, except ratio amounts)
(unaudited)
Nine Months Ended
September 30, Year Ended December 31,
------------------ --------------------------------
1994 1993 1993 1992 1991 1990 1989
---- ---- ---- ---- ---- ---- ----
Earnings:
Income before
income taxes and
extraordinary item
per income statement $1,037 $871 $1,045 $ 963 $ 848 $440 $ 804
Add:
Fixed charges 236 245 315 346 334 321 330
Less:
Capitalized interest 58 43 61 52 58 49 44
----- ----- ------ ----- ------ ---- ------
Total earnings $1,215 $1,073 $1,299 $1,257 $1,124 $712 $1,090
===== ===== ====== ====== ====== ==== ======
Fixed Charges:
Fixed charges on
indebtedness,
including amortization
of debt discount and
premium $172 $ 188 $239 $ 270 $ 270 $262 $ 282
Interest portion of
operating lease
rentals(a) 64 57 76 76 64 59 48
---- ---- ------ ------ ------ ---- ------
Total fixed charges $236 $ 245 $315 $ 346 $ 334 $321 $ 330
==== ==== ====== ====== ====== ==== ======
Ratio of earnings to
fixed charges 5.15 4.38 4.12 3.63 3.37 2.22 3.30
==== ==== ====== ====== ====== ==== ======
(a) The interest portion of operating lease rentals is calculated as one third
of rent expense which represents a reasonable approximation of the interest
factor.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AT SEPTEMBER 30, 1994 AND THE INCOME STATEMENT FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1994 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000064079
<NAME> MCI COMMUNICATIONS CORPORATION
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
<CASH> 3,154
<SECURITIES> 219
<RECEIVABLES> 2,537
<ALLOWANCES> 240
<INVENTORY> 0
<CURRENT-ASSETS> 6,034
<PP&E> 13,040
<DEPRECIATION> 4,491
<TOTAL-ASSETS> 16,118
<CURRENT-LIABILITIES> 3,200
<BONDS> 3,010
<COMMON> 74
0
0
<OTHER-SE> 8,761
<TOTAL-LIABILITY-AND-EQUITY> 16,118
<SALES> 9,937
<TOTAL-REVENUES> 9,937
<CGS> 0
<TOTAL-COSTS> 8,761
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 295
<INTEREST-EXPENSE> 114
<INCOME-PRETAX> 1,037
<INCOME-TAX> 393
<INCOME-CONTINUING> 644
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 644
<EPS-PRIMARY> 1.11
<EPS-DILUTED> 1.11
</TABLE>
<PAGE> Exhibit 99(a)
-------------
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CAPITALIZATION SCHEDULE
(In millions)
Set forth below is the capitalization of the company as of September 30, 1994:
Debt (a):
Secured debt:
Capital lease obligations ............................ $ 598
Other secured obligations ............................ 7
------
Total secured debt ................................. 605
------
Unsecured debt:
Senior Notes, net .................................... 1,501
Senior Debentures, net ............................... 884
Other unsecured debt ................................. 118
------
Total unsecured debt ............................... 2,503
------
Total debt ...................................... $3,108
------
Stockholders' equity:
Class A common stock, $.10 par value, authorized
500 million shares, issued 136 million shares ... $ 14
Common stock, $.10 par value, authorized 2 billion
shares, issued 592 million shares ................. 60
Additional paid in capital .......................... 6,136
Retained earnings ................................... 3,415
Treasury stock at cost, 48 million shares ........... (790)
------
Total stockholders' equity ..................... 8,835
------
Total capitalization ........................... $11,943
======
(a) See Note 3 of Notes to Consolidated Financial Statements on pages 35 and
36 of the company's Annual Report on Form 10-K for the year ended
December 31, 1993 for additional information concerning the company's
capital lease obligations, which are obligations of subsidiaries of the
company that are guaranteed by the company. Interest rates on capital
lease obligations, on a weighted average basis, approximated 7.2% per
annum at September 30, 1994.
For additional information concerning the company's long-term debt, see
Note 4 of Notes to Consolidated Financial Statements on pages 36 through
38 of the company's Annual Report on Form 10-K for the year ended
December 31, 1993.
