<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 March 31, 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 March 31, 1994, there were outstanding 539,902,769 shares of the
registrant's common stock.
<PAGE> PAGE 2
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
F O R M 1 0 - Q
For The Quarter Ended March 31, 1994
INDEX
Page No.
--------
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Balance Sheet at March 31, 1994 and December 31, 1993 3-4
Income Statement for the three months ended
March 31, 1994 and 1993 5
Statement of Cash Flows for the three months ended
March 31, 1994 and 1993 6
Notes to Consolidated Financial Statements 7-12
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13-19
PART II: OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 20
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 21
SIGNATURE 22
<PAGE> PAGE 3
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
BALANCE SHEET
(unaudited)
March 31, December 31,
1994 1993
------------ ------------
(In millions)
Assets
Current assets:
Cash and cash equivalents $ 344 $ 165
Receivables, net of allowance for
uncollectibles of $240 and $211 million 2,321 2,131
Deferred income taxes 84 116
Other 263 189
------- -------
Total current assets 3,012 2,601
------- -------
Communications system:
System in service 9,247 8,563
Other property and equipment 2,183 2,172
------- -------
Total communications system in service 11,430 10,735
Accumulated depreciation (4,572) (4,297)
Construction in progress 1,003 883
------- -------
Total communications system, net 7,861 7,321
------- -------
Other assets:
Excess of cost over net assets acquired, net 1,115 1,093
Other assets and deferred charges, net 283 261
------- -------
Total other assets 1,398 1,354
------- -------
Total assets $12,271 $11,276
======= =======
See accompanying Notes to Consolidated Financial Statements
<PAGE> PAGE 4
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
BALANCE SHEET
(unaudited)
March 31, December 31,
1994 1993
------------ ------------
(In millions)
Liabilities and stockholders' equity
Current liabilities:
Accrued telecommunications expense $ 1,471 $ 1,507
Accounts payable 779 742
Long-term debt due within one year 117 215
Other accrued liabilities 960 737
------- -------
Total current liabilities 3,327 3,201
------- -------
Noncurrent liabilities:
Long-term debt 3,057 2,366
Deferred income taxes 965 927
Other 60 69
------- -------
Total noncurrent liabilities 4,082 3,362
------- -------
Stockholders' equity:
Series D convertible preferred stock, $.10 par
value, authorized and outstanding 13,736 shares 1 1
Common stock, $.10 par value, authorized 800
million shares, issued 592 million shares 60 60
Additional paid in capital 2,540 2,493
Retained earnings 2,994 2,785
Treasury stock at cost, 52 and 51 million shares (733) (626)
------- -------
Total stockholders' equity 4,862 4,713
------- -------
Total liabilities and stockholders' equity $12,271 $11,276
======= =======
See accompanying Notes to Consolidated Financial Statements
<PAGE> PAGE 5
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
INCOME STATEMENT
(unaudited)
Three months ended
March 31,
--------------------
1994 1993
---- ----
(In millions, except
per share amounts)
Revenue:
Sales of communications services $3,221 $2,810
------ ------
Operating expenses:
Telecommunications 1,672 1,505
Sales, operations and general 906 732
Depreciation 264 233
------ ------
Total operating expenses 2,842 2,470
------ ------
Income from operations 379 340
Interest expense (31) (58)
Other expense, net (8) (11)
------ ------
Income before income taxes and
extraordinary item 340 271
Income tax provision 131 103
------ ------
Income before extraordinary item 209 168
Extraordinary loss on early debt retirement,
less applicable income tax benefit - 17
------ ------
Net income $ 209 $ 151
====== ======
Earnings applicable to
common stockholders $ 209 $ 151
====== ======
Earnings per common and common equivalent shares:
Income before extraordinary item $ .36 $ .31
Loss on early debt retirement - (.03)
------ ------
Total $ .36 $ .28
====== ======
Weighted average number of shares
of common stock and common stock
equivalents outstanding 580 538
See accompanying Notes to Consolidated Financial Statements
<PAGE> PAGE 6
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
STATEMENT OF CASH FLOWS
(unaudited)
Three months ended
March 31,
------------------
1994 1993
---- ----
(In millions)
Operating activities:
Cash received from customers $3,111 $2,700
Cash paid to suppliers and employees (2,502) (2,066)
Taxes paid (78) (88)
Interest paid (32) (32)
------ ------
Cash from operating activities 499 514
------ ------
Investing activities:
Cash outflow for communications system (746) (388)
Businesses and investments acquired (117) (22)
Other, net (2) 3
------ ------
Cash used for investing activities (865) (407)
------ ------
Net cash flow before financing activities (366) 107
------ ------
Financing activities:
Issuance of Senior Notes and other debt 938 707
Retirement of Senior Notes and other debt (133) (710)
Commercial paper and bank credit facility
activity, net (234) 26
Purchase of treasury stock (100) (63)
Issuance of common stock for employee plans 74 70
------ ------
Cash from financing activities 545 30
------ ------
Net increase in cash and cash equivalents 179 137
Cash and cash equivalents - beginning balance 165 232
------ ------
Cash and cash equivalents - ending balance $ 344 $ 369
====== ======
See accompanying Notes to Consolidated Financial Statements
<PAGE> PAGE 7
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1: GENERAL
The accompanying unaudited 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 are of a normal
recurring nature and are necessary for a fair statement of the financial
position, cash flows and results of operations for the interim periods
presented. 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 invested
in short-term interest-bearing securities to be available for general
corporate purposes. These debt issuances, which totaled $950 million,
utilized the company's remaining amount available under its existing shelf
registration. During the first quarter of 1994, the company also repaid $83
million of Senior Notes, leaving $2,395 million of debt securities
outstanding at a weighted average interest rate of 7.24%.
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 will result in an effective fixed interest cost
of 6.37% with respect to the Senior Floating Rate Notes.
The company has a $1.25 billion bank credit facility expiring in June 1996.
This credit facility supports the company's commercial paper program and is
used, in conjunction with this program, to fund short-term fluctuations in
working capital and for other general corporate requirements. At March 31,
1994 no amounts were outstanding under the credit facility.
During the three months ended March 31, 1994, the company issued $2,977
million and repaid $3,211 million of commercial paper borrowings leaving $5
million of commercial paper borrowings outstanding at March 31, 1994, at a
weighted average interest rate of 3.56%. Borrowings under the commercial
paper program are classified as noncurrent if the remaining term of the
credit facility agreement 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 CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 3: STOCKHOLDERS' EQUITY
Changes in stockholders' equity are:
Preferred Common Addit'l Treasury Stock-
Stock Stock Paid in Retained Stock, holders'
Par Value Par Value Capital Earnings at Cost Equity
--------- --------- ------- -------- -------- -------
(In millions)
Balance at
December 31, 1993 $1 $60 $2,493 $2,785 ($626) $4,713
Net income - - - 209 - 209
Common stock issued
for employee stock
and benefit plans
(5.0 million shares) - - 47 - 35 82
Treasury stock purchased
(5.7 million shares) - - - - (142) (142)
--- --- ------ ------ ---- ------
Balance at
March 31, 1994 $1 $60 $2,540 $2,994 ($733) $4,862
=== === ====== ====== ==== ======
<PAGE> PAGE 9
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO 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:
Three months ended
March 31,
------------------
1994 1993
---- ----
(In millions)
Net income $209 $151
Adjustments to earnings:
Depreciation and amortization 274 252
Deferred income tax provision 70 57
Net change in operating activity accounts
other than cash and cash equivalents:
Receivables (190) 90
Accounts payable 25 143
Other operating activity accounts 111 (179)
---- ----
Cash from operating activities $499 $514
==== ====
NOTE 5: ADOPTION OF NEW ACCOUNTING STANDARDS
Effective January 1, 1994, the company adopted two new Statements of Financial
Accounting Standards: Number 112, Employers' Accounting for Postemployment
Benefits (SFAS 112), and Number 115, Accounting for Certain Investments in Debt
and Equity Securities (SFAS 115).
SFAS 112 requires that if defined conditions are met, certain postemployment
benefits, such as continuation of insurance coverage, should be estimated and
accrued, rather than recognized as an expense when paid. Adoption of this
standard did not have a material impact on the company's financial position or
results of operations.
SFAS 115 established new accounting and reporting requirements for certain
investments in debt and equity securities. At the time of adoption of this new
standard, the company did not have any investments that met the requirements of
SFAS 115. This standard will be applied to the company's planned investment in
Nextel, which is expected to occur later in 1994 (see Note 7). In accordance
with the provisions of SFAS 115, any holding gains and losses related to this
investment will be excluded from earnings and reported as a net amount in a
separate component of stockholders' equity until realized. This standard will
also be applied to other applicable investments that may arise in the future.
<PAGE> PAGE 10
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 6: BRITISH TELECOMMUNICATIONS PLC AGREEMENTS
In June 1993, the company and British Telecommunications plc (BT and,
collectively with the company, the Parties) entered into a letter of intent and,
in August 1993, entered into superseding definitive agreements, providing for,
among other things, (a) the purchase by BT at closing of a number of shares of
a new class of voting common stock (Class A Common Stock) of the company, for
approximately $3.5 billion in cash, (b) the formation of an international joint
venture between BT and the company to provide global enhanced and value-added
telecommunications services and (c) several other transactions, including the
January 31, 1994 purchase of substantially all of the operations of BT North
America Inc. by the company for $108 million.
In June 1993, the company issued 13,736 shares of Series D nonvoting convertible
preferred stock (preferred stock) to BT at a purchase price of $60,400 per
share, which, if converted on that date, would have equated to approximately
4.9% of the outstanding common stock of the company. Each share of the
preferred stock is entitled to receive dividends equal to 2,000 times the
dividends or other distributions, if any, declared on the company's common
stock. Each share of preferred stock will automatically convert into 2,000
shares of the company's common stock, subject to certain anti-dilution
protections, upon expiration or termination of the waiting period, including
any extensions thereof, under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended (the HSR Act), applicable to the conversion of the
preferred stock. Each share of the company's common stock so issuable will
be exchanged for one share of Class A Common Stock upon consummation of the
transactions contemplated by the definitive agreements. In addition, if the
Parties have terminated the transactions contemplated by the definitive
agreements, each share of the preferred stock will be convertible into
2,000 shares of the company's common stock, subject to the satisfaction of
certain conditions. BT has agreed not to transfer the preferred stock or common
stock issuable upon conversion until June 1995 and thereafter may transfer such
shares subject to compliance with the registration requirements of U.S. federal
securities laws. Generally, any shares of preferred stock will automatically
convert into common stock on transfer.
The Class A Common Stock of the company to be issued to BT under the definitive
agreements will be equivalent on a per share basis to the existing common stock
of the company, except with respect to voting rights. BT's Class A shares will
entitle it to proportionate representation on the company's board of directors,
which currently equates to three seats. In addition to board representation, BT
will be entitled to investor protections with respect to certain corporate
actions of the company. Any shares of Class A Common Stock would automatically
convert into common stock on transfer. The transactions remain subject to a
number of conditions, including the required approvals by the European
Commission, United Kingdom regulatory authorities and Federal Communications
Commission, and the expiration of the waiting period under the HSR Act.
<PAGE> PAGE 11
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 6: BRITISH TELECOMMUNICATIONS PLC AGREEMENTS (continued)
The shares of Class A Common Stock issuable to BT upon conversion of the
preferred stock and the shares of Class A Common Stock to be issued to BT under
the definitive agreements will represent approximately 20% of the company's
outstanding common stock at that time. The blended purchase price of the Class
A Common Stock is $32 per share.
The Parties plan to invest approximately $1 billion in the joint venture over
the next five years. At inception, BT will hold 75.1% of the new venture's
equity, with the company holding the remaining 24.9%. Each of the Parties
will be exclusive distributors, in their respective territories, for marketing
the global services produced by the joint venture.
NOTE 7: INVESTMENT IN NEXTEL COMMUNICATIONS, INC.
On February 27, 1994, the company entered into a letter agreement with Nextel
Communications, Inc. (Nextel) and Comcast Corporation under which the parties
have agreed, subject to the terms and conditions thereof, to use their
reasonable best efforts to enter into definitive documentation providing for,
among other things, the investment by the company of approximately $1.3
billion in Nextel over the next three years to purchase approximately a 17%
equity interest. In addition, the letter agreement contemplates that the
company will provide to Nextel marketing and other services to support
Nextel's efforts to offer wireless telecommunications services and products.
Under the terms of the agreement, the company will make an initial investment of
$792 million to acquire 22 million shares of Nextel Class A common stock, which
is expected to occur later in 1994. The company has also committed to purchase
another 15 million shares of Class A common stock over the next three years, at
an average price of $38 per share, to bring its total investment to
approximately $1.3 billion.
The consummation of the transactions contemplated by the letter agreement is
subject to various conditions including the execution of definitive
documentation and the receipt of regulatory approvals which have not yet been
obtained.
<PAGE> PAGE 12
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 8: JOINT VENTURE WITH GRUPO FINANCIERO BANAMEX-ACCIVAL
In January 1994, the company announced its intention to form a joint venture
with Grupo Financiero Banamex-Accival (Banacci) to provide competitive
domestic and international long-distance telecommunications services in
Mexico. Subject to the grant of a concession from the government of Mexico,
which is expected later in 1994, the joint venture will provide competitive
switched telecommunications services commencing in August 1996. The joint
venture will be 55 percent owned by Banacci and 45 percent by the company.
The company plans to make available certain technology to the joint venture
which will facilitate the completion of the company's integrated North
American network. The total cash investment to be made by the company, over
the next several years, is expected to approximate $450 million, of which $150
million will be made in 1994.
The transactions with Banacci are subject to the execution of definitive
agreements and the satisfaction of various other conditions, including the
receipt of regulatory approvals which have not yet been obtained.
<PAGE> PAGE 13
PART I. ITEM 2.
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1994 AND 1993
OVERVIEW
- - --------
Earnings Summary
- - ----------------
For the three months ended March 31, 1994, net income was $209 million, compared
to $151 million for the three months ended March 31, 1993, which reflects an
extraordinary charge of $17 million, net of income tax benefit, for losses
on the early redemption of debt. Earnings per share for the quarter ended
March 31, 1994 were $.36, compared to earnings per share for the quarter
ended March 31, 1993 of $.31 before the extraordinary item and $.28 after the
extraordinary item.
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.
British Telecommunications plc Investment
- - -----------------------------------------
In August 1993, the company and British Telecommunications plc (BT) entered into
a definitive agreement providing for a total investment by BT of $4.3 billion in
exchange for a new class of common stock giving them a 20% voting interest in
the company. In June 1993, BT purchased $830 million of newly issued shares of
convertible preferred stock which will be exchanged for shares of the new class
of common stock upon the receipt of the remaining $3.5 billion from BT. The
company expects these transactions to be consummated later in 1994 (see Note 6
of the Notes to Consolidated Financial Statements included in this Quarterly
Report on Form 10-Q).
The company and BT also entered into several other definitive agreements in
August 1993, one of which provided for the formation of a joint venture to
provide global enhanced and value-added telecommunications services. The
company expects to invest approximately $250 million in this venture over the
next five years. Another agreement provided for the company's purchase of
substantially all of the operations of BT North America Inc. (BTNA), a data
services provider. This transaction was completed on January 31, 1994 for a
purchase price of $108 million and was funded by proceeds from the issuance
of commercial paper and cash from operations.
networkMCI* Initiatives
- - ----------------------
In January 1994, the company announced networkMCI, its long-term strategic
vision. Initiatives relating to networkMCI will involve a variety of
activities, including the expansion of the company's network to create and
deliver a wide variety of new branded services. The company estimates that
networkMCI will involve substantial investment through the end of the decade,
a portion of which is expected to be provided through alliances with other
companies.
<PAGE> PAGE 14
PART I. ITEM 2.
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1994 AND 1993
networkMCI Initiatives (continued)
- - ----------------------
One of the announced networkMCI initiatives is the implementation of high-speed
Synchronous Optical Network (SONET) technology throughout the company's domestic
network and on international routes across the Atlantic and Pacific. In
addition to the implementation of SONET technology, the company plans to
increase its network switching capabilities through the implementation of
Asychronous Transfer Mode (ATM) technology, which enables a wide range of
data communications and wireless communications. The company also announced
the creation of MCI Metro Inc., (MCI Metro) a new subsidiary that will
construct fiber rings and local switching infrastructure in major U.S.
metropolitan markets over the next several years. This initiative is
intended to make local access facilities available to long-distance
telecommunications carriers at a reasonable cost and, subject to
regulatory constraints, permit MCI Metro to compete in the local tele-
communications services market. The total investment in MCI Metro will be
approximately $2 billion over the next several years, a portion of which is
expected to be provided by alliances with other companies.
In addition, in February 1994, the company entered into a letter agreement with
Nextel Communications, Inc. (Nextel) and Comcast Corporation to provide digital
wireless personal communications services throughout the U.S. The company plans
to invest approximately $1.3 billion in Nextel over the next three years. In
January 1994, the company also announced its plans to form a joint venture with
Grupo Financiero Banamex-Accival (Banacci) to provide competitive domestic and
international long-distance telecommunications services in Mexico. The
company's total planned investment in the joint venture will be $450 million
over the next several years. These transactions with Nextel and Banacci are
subject to the execution of definitive agreements and other conditions and
approvals that have yet to be obtained (see Notes 7 and 8 of the Notes to the
Consolidated Financial Statements included in this Quarterly Report on
Form 10-Q).
The company expects to fund the aforementioned investments from operating cash
flow, the proceeds from the remaining BT investment and access to the capital
markets.
<PAGE> PAGE 15
PART I. ITEM 2.
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1994 AND 1993
Results of Operations
- - ---------------------
Income from Operations Three months ended
(In millions, except % change) March 31,
1994 1993 $ change % change
------------------ -------- --------
Revenue:
Sales of communications services $3,221 $2,810 $411 14.6%
------ ------ ---- -----
Operating expenses:
Telecommunications 1,672 1,505 167 11.1%
Sales, operations and general 906 732 174 23.8%
Depreciation 264 233 31 13.3%
------ ------ ---- -----
Total operating expenses 2,842 2,470 372 15.1%
------ ------ ---- -----
Income from operations $ 379 $ 340 $ 39 11.5%
====== ====== ==== =====
Revenue
- - -------
The growth in revenue for the three months ended March 31, 1994, versus the same
period in 1993, is primarily due to the continued growth in traffic volumes.
This traffic volume growth was approximately 16.1%. The gap between traffic and
revenue growth is due to the impact of various product promotions and discounts,
offset by an increase in international revenue, 1-800-COLLECT** revenue, the
inclusion of BTNA revenue, and tariff increases.
Revenue from the consumer market for the three months ended March 31, 1994,
versus the prior year quarter, reflects the continued growth of the company's
Friends & Family** product. Contributing to this growth was an increase in
international volumes resulting from the company's efforts in this high-growth
area. The company's collect-calling product, 1-800-COLLECT, introduced in May
1993, also contributed to year-over-year growth.
In the business market, revenue and traffic volume grew in the three months
ended March 31, 1994, versus the prior year quarter. The primary component
of this growth was traffic derived from the company's 800-calling products.
This traffic growth is primarily attributable to the initial net gain in signed
contracts following the Federal Communications Commission's 800 portability
ruling which took effect in May 1993. Revenue and traffic volume also grew
in the current quarter from the company's MCI Vision** and MCI Preferred**
products. Growth in these products is partially attributable to the company's
Proof Positive* service, introduced in mid-1993, as well as increased sales
and marketing efforts.
<PAGE> PAGE 16
PART I. ITEM 2.
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1994 AND 1993
Revenue (continued)
- - -------
The company's various data products also experienced growth in the first quarter
of 1994 versus the same quarter in 1993, partly attributable to the purchase of
BTNA, in January 1994.
Telecommunications Expense
- - --------------------------
Telecommunications expense for the three months ended March 31, 1994 increased
versus the corresponding period in 1993, primarily because of volume increases
in both international and domestic traffic, partially offset by reductions in
international settlement and domestic switched access rates. Accordingly,
telecommunications expense as a percentage of revenue decreased to 51.9%
compared to 53.6% in the corresponding period in 1993.
Sales, Operations and General
- - -----------------------------
The increase in sales, operations and general expenses for the three months
ended March 31, 1994 versus the corresponding period in 1993 is primarily
attributable to higher personnel costs and higher levels of advertising and
related marketing costs. The increase in personnel costs is primarily
associated with the introduction of new products such as Proof Positive and
increases in customer service, sales and sales support staff. The increase
in advertising costs is due to the introduction of networkMCI, Best Friends*
and WorldPhone** and the advertising 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 28.1% compared to
26.0% for the first quarter of 1993.
Interest Expense
- - ----------------
Interest expense was $31 million for the three months ended March 31, 1994
versus $58 million for the year ago period. This decrease primarily reflects
the interest savings as a result of retirements and redemptions of debt
during 1993.
The company anticipates an increase in interest expense in the second quarter of
1994 versus the first quarter of 1994 due to an increase in debt from the March
1994 issuance of $950 million of debt securities.
<PAGE> PAGE 17
PART I. ITEM 2.
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1994 AND 1993
LIQUIDITY AND FINANCIAL CONDITION
- - ---------------------------------
Balance Sheet
- - -------------
(In millions, Mar. 31, Dec. 31,
except % change) 1994 1993 $ change % change
-------- -------- -------- --------
Current assets $ 3,012 $ 2,601 $411 15.8%
Communications system, net 7,861 7,321 540 7.4%
Other assets 1,398 1,354 44 3.2%
------- ------- ------ -----
Total assets $12,271 $11,276 $ 995 8.8%
======= ======= ====== =====
Current liabilities $ 3,327 $ 3,201 $126 3.9%
Noncurrent liabilities 4,082 3,362 720 21.4%
Stockholders' equity 4,862 4,713 149 3.2%
------- ------ ------ -----
Total liabilities and
stockholders' equity $12,271 $11,276 $ 995 8.8%
======= ======= ====== =====
The increase in current assets during the three months ended March 31, 1994,
is primarily due to an increase in accounts receivable associated with the
increased revenue reported during the same period. The company also had an
increase in cash and cash equivalents due to the investment, in short-term
interest-bearing securities, of a portion of the proceeds from the issuance
of $950 million of debt securities.
The change in the company's net communications system primarily reflects the
company's continued investment in its transmission and switching facilities
to meet customers' demands for new services, redundancy and enhanced network
intelligence.
The increase in current liabilities reflects the growth of the company's
ongoing business, offset by a decrease in long-term debt due within one year,
which came due and was paid in the first quarter of 1994.
<PAGE> PAGE 18
PART I. ITEM 2.
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1994 AND 1993
Noncurrent liabilities increased due to the net increase in long-term debt
and an increase in the net deferred income tax liability. 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). 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 will result in an effective fixed interest cost of 6.37% with respect
to the Senior Floating Rate Notes. These increases in long-term debt were
offset by a decrease in commercial paper borrowings repaid with a portion of
the aforementioned debt proceeds.
Stockholders' equity increased as a result of additions to retained earnings
from net income for the first quarter of 1994 and common stock issued in
connection with employee benefit plans. These increases were partially
offset by purchases of treasury stock during the same time period.
As discussed in Note 2 of Notes to Consolidated Financial Statements, the
company uses its $1.25 billion bank credit facility in conjunction with its
commercial paper program to fund short-term fluctuations in working capital
and other general corporate requirements. At March 31, 1994, $5 million of
commercial paper borrowings were outstanding and no amounts were outstanding
under the credit facility.
The company's ratio of debt to total debt plus equity increased to 40% at
March 31, 1994, from 35% at December 31, 1993, primarily as a result of the
issuance of debt in the first quarter.
Cash Flows
- - ---------- Three months ended
(In millions, except March 31,
% change) 1994 1993 $ change % change
------ ------ -------- --------
Cash from operating
activities $499 $514 $(15) (2.9%)
Cash used for
investing activities (865) (407) (458) 100+%
Cash from financing
activities 545 30 515 100+%
---- ---- ---- -----
Net increase in cash and
cash equivalents $179 $137 $ 42 30.7%
==== ==== ==== =====
<PAGE> PAGE 19
PART I. ITEM 2.
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1994 AND 1993
The decrease in cash from operating activities is due to an increase in
cash paid to suppliers and employees offset by an increase in cash received
from customers due to the overall growth in the company's business.
The increase in cash used for investing activities is primarily
attributable to the increased investment in the company's communications
system due to the continued investment in its transmission and switching
facilities to meet customers' demand for new services, redundancy and
enhanced network intelligence. Also affecting this increase was the
purchase of substantially all the operations of BTNA in January 1994 for
$108 million.
The increase in cash from financing activities is due to the increase in
issuances of Senior Notes and other debt and a decrease in the level of
retirements of Senior Notes and other debt. These increases were offset by
a decrease in net commercial paper and bank credit facility activity and an
increase in treasury stock purchased.
Other Matters
- - -------------
In May 1993, the FASB issued SFAS 115, Accounting for Certain Investments
in Debt and Equity Securities, effective for fiscal years beginning after
December 15, 1993. This standard established new accounting and reporting
requirements for certain investments in debt and equity securities. Upon
adoption of this new standard in the first quarter of 1994, there was not a
material impact on the company's financial position or results of
operations. This standard will be applied to the company's planned
investment in Nextel, which is expected to occur later in 1994. In
accordance with the provisions of SFAS 115, any holding gains and losses
related to this investment will be excluded from earnings and reported as a
net amount in a separate component of stockholders' equity until realized.
This standard will also be applied to other applicable investments
including those that may arise as a result of the use of the remaining
proceeds from the BT transaction.
- - -----------------------------------------------
* networkMCI, Proof Positive and Best Friends are service marks of MCI
Communications Corporation.
** 1-800-COLLECT, Friends & Family, MCI Vision, MCI Preferred and
WorldPhone are registered service marks of MCI Communications
Corporation.
<PAGE> PAGE 20
PART II. OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) A special meeting of stockholders of the company was held on
March 11, 1994.
(b) Holders of common shares voted at this meeting on the following
matters, which were set forth in full in the company's Proxy
Statement and Notice of Special Meeting of Stockholders dated
February 4, 1994.
(1) To approve the Amended and Restated Investment Agreement,
dated as of January 31, 1994, between the company and British
Telecommunications plc (BT), as it may be amended from time to
time (Investment Agreement) and the performance by the company
of all transactions and acts on the part of the company
contemplated under the Investment Agreement, including the
issuance and sale to BT of shares of the company's Class A
Common Stock, par value $.10 per share (Class A Common Stock),
and issuance of shares of Common Stock, par value $.10 per
share (Common Stock), of the company upon the conversion of
the shares of Class A Common Stock in accordance with their
terms.
VOTES (in millions):
For: 423
Against: 6
Abstain: 1
Broker non-votes: None
(2) To adopt certain amendments to the company's Restated
Certificate of Incorporation (Restated Certificate) to, among
other things, (i) increase the number of authorized shares of
capital stock of the company, (ii) establish the terms of the
Class A Common Stock which includes class voting rights to
approve specified transactions and matters and the right to
elect a number of directors of the company, (iii) permit the
redemption of shares of the company's stock to the extent
necessary to prevent the loss or secure the renewal or
reinstatement of any license or franchise from any
governmental agency held by the company or any of its
subsidiaries, (iv) provide that, until the fourth anniversary
of the closing of the transactions under the Investment
Agreement, if any shares of Class A Common Stock remain
outstanding, the company may not redeem the rights to be
issued under a proposed stockholders rights plan of the
company without the approval of the holders of at least 75% in
voting power of the company's outstanding voting securities
(including the Class A Common Stock), (v) repeal Section 9 of
the Restated Certificate (which imposes special requirements
for business combinations with certain significant
stockholders) and Section 10 of the Restated Certificate
<PAGE> PAGE 21
PART II. OTHER INFORMATION (continued)
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (continued)
(which restricts the voting power of certain stockholders who
own more than 10% of the outstanding voting securities of the
company), (vi) prohibit the holders of Common Stock from
acting by written consent without a meeting, and (vii) move to
the Restated Certificate (from the by-laws of the company) and
revise certain provisions relating to the removal of
directors.
VOTES (in millions):
For: 348
Against: 33
Abstain: 2
Broker non-votes: None
(3) To approve the adoption by the Board of Directors of the
company of a stockholders rights plan.
VOTES (in millions):
For: 342
Against: 37
Abstain: 3
Broker non-votes: None
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.
99 Capitalization Schedule as of March 31, 1994.
b) Reports on Form 8-K
The company filed a Current Report on Form 8-K on each of March 9,
1994, which reported pursuant to Items 5 and 7 and March 15, 1994,
which reported pursuant to Item 7.
<PAGE> PAGE 22
SIGNATURE
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: May 12, 1994 Signed: Bradley E. Sparks
-----------------------
Bradley E. Sparks
Vice President
and Controller
<PAGE> PAGE 23
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
FORM 10-Q
EXHIBIT INDEX
Exhibit No. Description Page
----------- ----------- ----
11 Computation of Earnings per Common Share. 24
12 Computation of Ratio of Earnings to Fixed
Charges. 26
99 Capitalization Schedule as of March 31, 1994. 27
<PAGE> PAGE 24
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
ended
March 31,
-------------
1994 1993
---- ----
Primary
- - -------
Income before extraordinary item.......... $209 $168
Loss on early debt retirement, less
applicable income tax benefit .......... - 17
---- ----
Net income................................ 209 151
---- ----
Earnings applicable to common
stockholders............................ $209 $151
==== ====
Adjustment of shares outstanding:
Weighted average shares of common stock
outstanding (a)......................... 542 528
Assumed conversion of preferred stock... 27 -
Assumed exercise of common stock options 47 44
Shares of common stock assumed repurchased
for treasury(b)......................... (36) (34)
---- ----
Adjusted shares of common stock and common
stock equivalents for computation....... 580 538
==== ====
Earnings per common share:
Income before extraordinary item.......... $.36 $.31
Loss on early debt retirement............. - (.03)
---- ----
Earnings applicable to common stockholders $.36 $.28
==== ====
- - --------------------------------
(a) Amounts have been retroactively restated to reflect a two-for-one stock
split effected in the form of a 100% stock dividend declared in the second
quarter of 1993.
(b) At an average market price of $26.26 and $20.79 for the three months ended
March 31, 1994 and 1993, respectively.
<PAGE> PAGE 25
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
ended
March 31,
-------------
1994 1993
---- ----
Assuming Full Dilution
- - ----------------------
Income before extraordinary item.......... $209 $168
Loss on early debt retirement, less
applicable income tax benefit .......... - 17
---- ----
Net income................................ 209 151
---- ----
Earnings applicable to common
stockholders............................ $209 $151
==== ====
Adjustment of shares outstanding:
Weighted average shares of common stock
outstanding (a)......................... 542 528
Assumed conversion of preferred stock... 27 -
Assumed exercise of common stock options 47 44
Shares of common stock assumed repurchased
for treasury(c)......................... (36) (32)
---- ----
Adjusted shares of common stock and common
stock equivalents for computation....... 580 540
==== ====
Earnings per common share:
Income before extraordinary item.......... $.36 $.31
Loss on early debt retirement............. - (.03)
---- ----
Earnings applicable to common stockholders $.36 $.28
==== ====
- - --------------------------------
(c) The average market price of $26.26 for the three months ended March 31,
1994 was used as it is higher than the March 31, 1994 market price of
$23.38. The March 31, 1993 market price of $22.25 was used as it is
higher than the average market price of $20.79 for the three months ended
March 31, 1993.
<PAGE> PAGE 26
Exhibit 12
----------
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In millions, except ratio amounts)
(unaudited)
Three Months Ended
March 31, Year Ended December 31,
------------------ --------------------------------
1994 1993 1993 1992 1991 1990 1989
---- ---- ---- ---- ---- ---- ----
Earnings:
Income before
income taxes and
extraordinary item
per income statement $340 $271 $1,045 $ 963 $ 848 $440 $ 804
Add:
Fixed charges 71 92 315 346 334 321 330
Less:
Capitalized interest 18 13 61 52 58 49 44
---- ---- ------ ------ ------ ---- ------
Total earnings $393 $350 $1,299 $1,257 $1,124 $712 $1,090
==== ==== ====== ====== ====== ==== ======
Fixed Charges:
Fixed charges on
indebtedness,
including amortization
of debt discount and
premium $ 50 $ 72 $239 $ 270 $ 270 $262 $ 282
Interest portion of
operating lease
rentals (a) 21 20 76 76 64 59 48
---- ---- ------ ------ ------ ---- ------
Total fixed charges $ 71 $ 92 $315 $ 346 $ 334 $321 $ 330
==== ==== ====== ====== ====== ==== ======
Ratio of earnings to
fixed charges 5.54 3.80 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.
<PAGE> PAGE 27
Exhibit 99
----------
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CAPITALIZATION SCHEDULE
(In millions)
Set forth below is the capitalization of the company as of March 31, 1994:
Debt(a):
Secured debt:
Capital lease obligations ........................... $ 651
Other secured obligations ........................... 4
------
Total secured debt ................................ 655
------
Unsecured debt:
Senior Notes, net ................................... 1,511
Senior Debentures, net............................... 884
Commercial Paper .................................... 5
Other unsecured debt................................. 119
------
Total unsecured debt .............................. 2,519
------
Total debt ..................................... 3,174
------
Stockholders' equity:
Series D convertible preferred stock, $.10 par value,
authorized and outstanding 13,736 shares........... 1
Common stock, $.10 par value, authorized 800 million
shares, issued 592 million shares.................. 60
Additional paid in capital........................... 2,540
Retained earnings.................................... 2,994
Treasury stock at cost, 52 million shares............ (733)
------
Total stockholders' equity...................... 4,862
------
Total capitalization............................ $8,036
======
(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 7.7% per
annum at March 31, 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.
