PAGE 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) March 9, 1994
(February 27, 1994)
MCI COMMUNICATIONS CORPORATION
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-6457 52-0886267
-------------- ---------------- -------------
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
1801 Pennsylvania Avenue, N.W., Washington, D.C. 20006
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (202) 872-1600.
Page 1 of 4.
<PAGE> PAGE 2
Item 5. Other Events
On February 27, 1994, the registrant 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 registrant 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 registrant will provide to Nextel marketing and other
services to support Nextel's efforts to offer wireless
telecommunications services and products. The consummation of the
transactions contemplated by the letter agreement are subject to
various conditions including the execution of definitive
documentation and the receipt of regulatory approvals which have
not yet been obtained. The above is a summary of certain terms and
conditions of the letter agreement, which is attached hereto as
Exhibit 10(a), and is qualified in its entirety by reference to
such letter agreement.
Page 2 of 4.
<PAGE> PAGE 3
Item 7. Financial Statements and Exhibits.
Exhibit No. Description
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10(a) Letter Agreement dated February 27,
1994 by and among registrant, Nextel
Communications, Inc. and Comcast
Corporation.
12 Computation of Ratio of Earnings to
Fixed Charges.
24 Consent of Independent Accountants.
99(a) Report of Independent Accountants.
99(b) Income Statement for the years ended
December 31, 1993, 1992 and 1991.
99(c) Balance Sheet as of December 31,
1993 and 1992.
99(d) Statement of Cash Flows for the
years ended December 31, 1993, 1992
and 1991.
99(e) Statement of Stockholders' Equity
for the years ended December 31,
1993, 1992 and 1991.
99(f) Notes to Consolidated Financial
Statements.
Page 3 of 4.
<PAGE> PAGE 4
SIGNATURES
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 hereunto duly authorized.
MCI COMMUNICATIONS CORPORATION
/s/ Edward G. Freitag
------------------------------
Edward G. Freitag
Assistant Secretary
Date: March 9, 1994
Page 4 of 4.
EXHIBIT INDEX
Exhibit No. Description
----------- ------------------------------------
10(a) Letter Agreement dated February 27,
1994 by and among registrant, Nextel
Communications, Inc. and Comcast
Corporation.
12 Computation of Ratio of Earnings to
Fixed Charges.
24 Consent of Independent Accountants.
99(a) Report of Independent Accountants.
99(b) Income Statement for the years ended
December 31, 1993, 1992 and 1991.
99(c) Balance Sheet as of December 31,
1993 and 1992.
99(d) Statement of Cash Flows for the
years ended December 31, 1993, 1992
and 1991.
99(e) Statement of Stockholders' Equity
for the years ended December 31,
1993, 1992 and 1991.
99(f) Notes to Consolidated Financial
Statements.
Page 1 of 1
<PAGE> Exhibit 10 (a)
--------------
(Page 1 of 30)
CONFORMED COPY
MCI Communications Corporation Comcast Corporation
1801 Pennsylvania Avenue, N.W. 1234 Market Street
Washington, D.C. 20006 Philadelphia, PA 19107
February 27, 1994
Nextel Communications, Inc.
201 Route 17 North
Rutherford, New Jersey 07070
Gentlemen:
This letter agreement confirms the understanding among
Nextel Communications, Inc. ("Nextel"), Comcast Corporation
("Comcast") and MCI Communications Corporation ("MCI") to pursue
the objectives and transactions set forth herein. Nextel, MCI
and Comcast have agreed, subject to the terms and conditions set
forth herein, to enter certain relationships described herein the
primary goal of which is to facilitate the effectuation of
Nextel's overall principal strategic objective of becoming the
leading North American provider of wireless telecommunications
services and products. Nextel, MCI and Comcast believe that such
relationships will enhance the overall value of Nextel and its
ability to achieve its strategic objectives.
Subject to the terms and conditions set forth herein,
it is the understanding of the parties hereto that the following
agreements will be entered into at the earliest practicable date
providing for the arrangements and transactions contemplated
therein (collectively, the "Transactions"):
(a) a shareholders agreement among Nextel, MCI and
Comcast (the "Shareholders Agreement") providing for the
transactions and relationships contemplated by Annex A
hereto;
(b) a product and services marketing agreement between
Nextel and MCI (the "Marketing Agreement") providing for the
transactions and relationships contemplated by Annex B
hereto;
(c) a services agreement between Nextel and MCI
relating to the provision by MCI to Nextel of certain
services to be agreed upon between the parties. Such
agreement will appoint MCI as the exclusive supplier to
Nextel (except as required by law or if a customer
unilaterally insists on another carrier) of long distance
and back haul services and such other services as the
parties may agree. Other services to be offered by MCI to
Nextel (which may be offered on either an exclusive or a
non-exclusive basis as the parties may agree) will include
IN/OSS, consulting to architect and engineer and the use of
MCI's backbone network. Except for those services for which
MCI is the exclusive supplier, the services to be offered
<PAGE> Exhibit 10 (a)
--------------
(Page 2 of 30)
under the services agreement may, subject to the terms
hereof, also be provided internally by Nextel or obtained by
Nextel from third party suppliers. All services would be
provided by MCI to Nextel on terms and conditions that are
no less favorable to Nextel than those that MCI makes
available to other purchasers of such products or services
in comparable circumstances. Nextel has informed MCI that
certain existing arrangements between Nextel and Nippon
Telegraph and Telephone Corporation ("NTT") already are in
place which contemplate that NTT may be furnishing to Nextel
services relating to network design, engineering and
architecture. Subject to MCI's understanding the extent and
nature of such commitments to NTT, Nextel and MCI intend to
work together in good faith to develop arrangements in such
service areas that are consistent with Nextel's existing
commitments to NTT and are satisfactory to Nextel and MCI or
to approach NTT with joint proposals for modifications to
such commitments which shall be designed to provide to NTT
the full benefit of its existing bargains with Nextel after
such proposed modifications have been taken into account;
(d) a services agreement providing for the services to
be offered by Comcast to Nextel, which may include building-
out Nextel's local sites and the overall management of local
site operations, including advertising and marketing,
customer service arrangements and billing, development of
operational strategy and budgeting. All such services which
Comcast and Nextel agree will be provided under such
services agreement will be provided to Nextel on an arms-
length basis. Nextel shall have the right to use the
Comcast brand name in connection with the provision of
products and services so long as such products and services
meet Comcast's standards therefor and in a manner consistent
with Nextel's marketing plan, Comcast may market those
Nextel products and services which Comcast and Nextel agree
to include in such services agreement, either as a seller
for its own account or as a sales agent for Nextel as may be
agreed between Comcast and Nextel; and
(e) a co-investment agreement between Comcast and MCI
(the "Co-Investment Agreement") governing certain aspects of
their mutual relationship relating to their investments in
Nextel as outlined on Annex C hereto.
The parties understand and intend that the transactions
contemplated hereby are designed to create various relationships
between and among them, including the core relationship between
Nextel and MCI pursuant to which, subject to the terms and
conditions contemplated herein, it is contemplated that MCI would
utilize Nextel as its principal wireless telecommunications
service provider and strategic ally in the United States and,
subject to the terms and conditions contemplated herein, would
seek to present to Nextel all wireless telecommunications
business opportunities that MCI might otherwise consider acting
upon itself in the United States.
<PAGE> Exhibit 10 (a)
--------------
(Page 3 of 30)
Nextel, MCI and Comcast will (a) cooperate with each
other in good faith in the preparation of definitive
documentation providing for the Transactions, the making of all
required governmental filings and the obtaining at the earliest
practicable date of all necessary approvals and consents from
governmental entities and third parties and (b) negotiate in good
faith towards reaching agreement on the definitive documentation
providing for the Transactions at the earliest practicable date.
In connection with the negotiation and preparation of
the definitive documentation providing for the Transactions,
Nextel will, and will cause its officers, directors, employees
and agents to, afford to MCI and Comcast and their respective
advisors, officers, employees and agents reasonable access at all
reasonable times to its officers, employees, agents, properties,
books, records and contracts and will furnish to MCI and Comcast
and their respective advisors all financial, operating and other
data and information as MCI or Comcast, respectively, or their
respective advisors may reasonably request. Each of MCI and
Comcast will, and will cause its officers, employees and agents
to, provide all reasonable cooperation requested by Nextel in
connection with Nextel's continuing analysis and review of the
transactions contemplated by this letter agreement. Nextel, MCI
and Comcast will cause any information received in connection
with the transactions contemplated by this letter agreement to be
held in confidence except to the extent required by law.
Nextel represents and warrants that the Board of
Directors of Nextel (the "Board") (with the director designees of
Comcast present but abstaining and those disinterested directors
present acting separately) has taken all necessary action to
approve the execution, delivery and performance of this letter
agreement and has taken all necessary action to ensure that
neither MCI nor Comcast is an "interested stockholder" for
purposes of Section 203 of the Delaware General Corporation Law
("Section 203"). Each of MCI and Comcast represent and warrant
that such party has or has caused to be taken any necessary
corporate action to authorize the execution, delivery and
performance of this letter agreement.
Nextel's, MCI's and Comcast's respective obligations to
consummate the transactions contemplated by this letter agreement
will be subject to satisfaction of the following conditions: (a)
negotiation and execution of definitive documentation with
respect to the matters described herein in form and substance
satisfactory to each of Nextel, MCI and Comcast and satisfaction
of all conditions precedent to such party's obligations set forth
in such definitive documentation, (b) receipt of all necessary
governmental and regulatory approvals containing no condition or
restriction which, in such party's reasonable opinion, would
materially diminish such party's rights and protections, taken as
a whole, under the Shareholders Agreement, the Co-Investment
Agreement, the Marketing Agreement or the servicing agreements,
(c) the Board (including the disinterested directors acting
separately) having approved the definitive agreements and the
transactions contemplated thereby, (d) in the case of MCI and
<PAGE> Exhibit 10 (a)
--------------
(Page 4 of 30)
Comcast only, the Board having taken all necessary action to
ensure that neither MCI nor Comcast is an "interested
stockholder" for purposes of Section 203, (e) each of the MCI and
Comcast Boards of Directors having approved the definitive
agreements to which MCI or Comcast, respectively, is a party and
the transactions contemplated thereby, (f) in the case of Nextel
only, the receipt by Nextel of a written opinion from Merrill
Lynch & Co., Inc., Nextel's independent financial advisors, to
the effect that the Transactions are fair, from a financial point
of view, to the shareholders of Nextel (other than MCI and
Comcast); (g) the absence of any injunction or order prohibiting
consummation; (h) in the case of MCI and Comcast only, the
execution of definitive agreements between Motorola and Nextel in
form and substance satisfactory to Comcast and MCI providing for
the transactions between Motorola and Nextel that have previously
been publicly announced and the closing of such transactions; (i)
the approval of the shareholders of Nextel to the extent Nextel
considers such approval necessary based on the advice of counsel
(and if such shareholder approval is sought, Nextel will use all
reasonable efforts in good faith to hold such meeting no later
than that relating to the Motorola, Inc. ("Motorola")
transaction) and, if shareholder approval is sought, the
reaffirmation of the independent financial advisors opinion
referred to in clause (f) above to a date not prior to the second
day before proxy materials are first sent to Nextel shareholders;
and (j) for MCI only, that MCI and Nextel will have designated
MCI's IN/OSS as a service to be provided exclusively by MCI under
the services agreement.
Nextel shall not nor shall Nextel permit any of its
subsidiaries or any of its or their respective officers,
directors, employees, agents or advisers to initiate, solicit or
encourage, or take any other action to facilitate (including by
way of furnishing nonpublic information), any inquiries or the
making of any proposal which constitutes, or may reasonably be
expected to lead to, any takeover proposal (as defined below),
or, except to the extent determined in good faith by the Board
based on the advice of counsel to be legally required for the
discharge by the Board of its fiduciary duties, agree to or
endorse any takeover proposal, or participate in any discussions
or negotiations, or provide third parties with any nonpublic
information, relating to any such inquiry or proposal. Nextel
shall promptly advise the other parties hereto orally and in
writing of any such inquiry or proposal. As used herein,
"takeover proposal" shall mean any tender or exchange offer,
proposal for a merger, consolidation or other business
combination involving Nextel or any of its subsidiaries (other
than that involving solely an acquisition of a business or assets
by Nextel or any of its subsidiaries) or any proposal or offer to
acquire in any manner a significant (i.e. more than 10% of the
then outstanding shares of Nextel) equity interest in, or a
significant portion of the assets of (including the stock or
assets of subsidiaries) Nextel, but excluding the Transactions
and all transactions that have been publicly announced (or
privately disclosed to MCI and Comcast) prior to the date hereof
<PAGE> Exhibit 10 (a)
--------------
(Page 5 of 30)
and any related exercise of pre-emptive rights by Comcast in
connection therewith. It is specifically understood and agreed
that Nextel has no obligations to either of MCI or Comcast
hereunder, and shall have no liability to either of MCI or
Comcast hereunder, for the consummation or the failure to
consummate any transaction between or involving Nextel and any
third party that has been previously announced publicly (or
previously disclosed privately to MCI and Comcast) and
specifically shall have no obligation or liability to either of
Comcast or MCI hereunder in the event no transaction (or not all
of the transactions) between Motorola and Nextel is consummated,
or is consummated on terms different than those that have
previously been publicly announced, or is to be consummated
pursuant to definitive agreements that are not in form and
substance satisfactory to Comcast and MCI (it being understood
that the foregoing provisions shall not be construed to make the
consummation of the Motorola transactions or any other
transactions with third parties a condition precedent to Nextel's
obligations to consummate the Transactions).
If (a) between the date hereof and the termination of
this letter agreement: (i) any takeover proposal is made; (ii)
any proposal to engage in any takeover proposal is communicated
in any manner to Nextel or an intention to propose any takeover
proposal or engage in any takeover proposal is communicated to
Nextel, or (iii) there shall have been a public announcement of a
takeover proposal or any intention to make or propose a takeover
proposal and (b) within one year after the termination of this
letter agreement: (i) any person consummates a takeover
proposal; or (ii) Nextel or any of its subsidiaries shall have
authorized, recommended, proposed or publicly announced an
intention to authorize, recommend or propose, or entered into, a
takeover proposal or an agreement with any person to effect a
takeover proposal; then Nextel shall promptly, but in no event
later than one day after the first of such events described in
clause (b) shall occur, pay MCI and Comcast a fee of $25 million
in the aggregate, which amount shall be payable in same day
funds.
Whether or not the parties enter into definitive
agreements with respect to the transactions contemplated hereby,
the parties hereto will be responsible for all of their own costs
incurred by them with respect to the investigation and
negotiation of this letter agreement and the transactions
contemplated hereby.
Nextel, MCI and Comcast shall mutually agree on the
form and content of any public announcement which shall be made
concerning this letter agreement or the transactions contemplated
hereby and none of Nextel, MCI or Comcast shall make any such
public announcement without the consent of the other, provided
that nothing herein shall prohibit Nextel, MCI or Comcast from
making any public announcement or other disclosure required by
<PAGE> Exhibit 10 (a)
--------------
(Page 6 of 30)
law or the policy of any exchange on which such party's
securities are listed.
This letter agreement may be terminated and the
transactions contemplated hereby may be abandoned or terminated
by written notice to that effect given by any party to the others
on or after June 30, 1994, if by such date the parties hereto
shall not have executed definitive documentation to effectuate
the parties' understanding set forth herein. Upon any such
termination, the parties shall each be released from all further
obligations and liabilities hereunder other than confidentiality
obligations of the parties hereunder and any liability of Nextel
under the third preceding paragraph, provided that each party
shall remain liable for any breach or violation of the terms
hereof by such party prior to such termination.
This letter agreement may be executed in one or more
counterparts.
This letter agreement, which shall be governed by and
construed in accordance with New York law, is binding upon the
parties hereto and any of its terms may only be modified, waived
or supplemented in a writing executed by authorized
representatives of each of Nextel, Comcast and MCI.
Sincerely,
MCI COMMUNICATIONS CORPORATION
/s/ RICHARD T. LIEBHABER
----------------------------------
Title: Executive Vice President
and Chief Technology &
Strategy Officer
COMCAST CORPORATION
/s/ LAWRENCE S. SMITH
-------------------------------
Title: Senior Vice President
Acknowledged and agreed:
NEXTEL COMMUNICATIONS, INC.
/s/ MORGAN E. O'BRIEN
- ----------------------------
Title: Chairman of the Board
and General Counsel
<PAGE> Exhibit 10 (a)
--------------
(Page 7 of 30)
ANNEX A
TERM SHEET FOR SHAREHOLDERS AGREEMENT
Among MCI, Comcast And Nextel
1. Investment by MCI in Nextel.
Subject to Comcast then or previously effecting the waiver of
rights described in paragraph 2(b) below, at closing (the
"Closing") (which shall occur as soon as practicable following
the execution and delivery of definitive documentation for the
Transactions and the satisfaction or waiver of the conditions to
Closing thereunder) MCI will purchase for cash from Nextel an
aggregate of 22 million shares of Nextel Class A Common Stock
("Shares") at a purchase price of $36 per share, for an aggregate
purchase price of $792 million.
In addition, subject only to consummation of the closing and
absence of prohibitions imposed by law, MCI will be
unconditionally obligated to purchase for cash and Nextel will be
obligated to sell an aggregate of 15 million Shares (the
"Subscription Shares") (subject to adjustment as described below)
as follows:
(a) 5 million Shares (subject to adjustment as
described below) on the first anniversary of closing at a
purchase price of $37 per share (the "First Tranche");
(b) 5 million Shares (subject to adjustment as
described below) on the second anniversary of closing at a
purchase price of $38 per share (the "Second Tranche"); and
(c) 5 million Shares (subject to adjustment as
described below) on the third anniversary of closing at a
purchase price of $39 per share (the "Third Tranche").
MCI may, in its sole discretion, purchase all or any portion of
the First Tranche, the Second Tranche and/or the Third Tranche at
any time prior to the date that it is obligated to purchase such
Shares. In addition, if any operating budget of Nextel approved
by the Board (which approval shall include the affirmative vote
of each MCI designee) reflects the purchase of all or any portion
of the First Tranche, the Second Tranche and/or the Third Tranche
at a time prior to the date that such Tranche is required to be
purchased due to a need for such funds to satisfy Nextel's
capital requirements, MCI shall be obligated to purchase and
Nextel shall be obligated to sell such shares at such times as
are reflected in such budget.
A-1
<PAGE> Exhibit 10 (a)
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(Page 8 of 30)
If MCI in its sole discretion shall have purchased (or have
entered into a firm commitment to purchase) Shares ("Other
Shares") from Motorola prior to the Closing, the number of the
remaining Subscription Shares will be reduced by the number of
Other Shares (such reduction to be made in such Tranche or
Tranches as MCI shall elect).
2. Amendments to Purchase Agreement; Waiver of Comcast's Pre-
Emptive Rights.
In connection with and conditioned on the Closing:
(a) The pre-emptive rights under the existing Nextel-
Comcast Purchase Agreement (the "Purchase Agreement") will be
replaced per paragraph 4 below.
(b) Comcast will waive its pre-emptive rights under
the Purchase Agreement in connection with (i) certain pending
transactions publicly announced by Nextel prior to the date
hereof (which will represent the right to acquire no more than an
aggregate of 22 million Shares) and (ii) the transactions
described in paragraph 1 above. To the extent MCI would
otherwise be entitled to preemptive rights in connection with any
of the transactions described in the foregoing clause (i), MCI
will also waive such rights.
(c) All standstill provisions under the Purchase
Agreement will be terminated in connection with entering into the
standstill in paragraph 3 below.
(d) The registration rights provisions under the
Purchase Agreement will be replaced per paragraph 5 below.
(e) The transfer restrictions under the Purchase
Agreement will be replaced per paragraph 6 below.
(f) The Board representation provisions under the
Purchase Agreement will be replaced per paragraph 9 below.
3. Standstill by Comcast and MCI.
(a) MCI, Comcast and their affiliates will not
increase their fully diluted ownership in Nextel above 60% of
Nextel's fully diluted voting securities other than (i) on or
after the second anniversary of closing of the transactions under
the Shareholders Agreement pursuant to (x) a business combination
that is approved by a majority of the disinterested directors of
the Board and the holders of a majority of the outstanding Shares
which are not beneficially owned by MCI, Comcast or their
affiliates or (y) a tender or exchange offer recommended by a
majority of the disinterested directors or (ii) in the event that
A-2
<PAGE> Exhibit 10 (a)
--------------
(Page 9 of 30)
any third party commences a bona fide tender or exchange offer
for more than 30% of Nextel's outstanding Shares or acquires
beneficial ownership of more than 20% of Nextel's outstanding
Shares (if the pending transaction with Motorola shall close,
such 20% trigger as it may relate to Motorola would not be deemed
satisfied unless and until Motorola has both a fully diluted
beneficial ownership of more than 20% and has increased its fully
diluted percentage ownership of Shares by more than 2% of the
outstanding Shares as compared to its percentage ownership upon
closing of its pending transactions with Nextel).
(b) During the four year period following closing,
provided that (1) no other person has acquired beneficial
ownership of more than 20% of Nextel's outstanding Shares (if the
pending transaction with Motorola shall close, such 20% trigger
as it may relate to Motorola would not be deemed satisfied unless
and until Motorola has both a fully-diluted beneficial ownership
of more than 20% and has increased its percentage ownership of
Shares by more than 2% of the outstanding Shares as compared to
its percentage ownership upon closing of its pending transactions
with Nextel) and (2) no person has been elected to the Board
other than nominees put forth by the Board:
(i) each of MCI and Comcast will vote all Shares
owned by such party in favor of the persons nominated by the
Nextel Board for election as directors;
(ii) except on matters subject to the stockholder
consent rights described in paragraph 11 below (the "Consent
Rights"), each of MCI and Comcast will vote its Shares at
the option of Nextel either (x) in the same proportion as
other stockholders with respect to any matter or (y) at
Nextel's direction; provided that from and after the
Closing, each of MCI and Comcast will vote its Nextel shares
in accordance with clause (y) in favor of the proposed
business combination(s) involving Nextel that are required
to effect the transactions between Motorola and Nextel which
have been publicly announced (or privately disclosed to MCI
and Comcast) prior to the date of the letter agreement;
(iii) neither MCI nor Comcast will solicit proxies or
consents, become a participant in any such solicitation,
become part of a voting group (other than with Comcast or
MCI, respectively and/or Motorola) or deposit Shares in a
voting trust; and
(iv) in the event of any third party tender or
exchange offer for Shares, neither MCI nor Comcast will (x)
tender any of their Shares into such offer prior to twenty-
four hours before the then currently announced expiration
time of such offer or (y) except as required by law,
announce any intention to tender their Shares into such
offer.
A-3
<PAGE> Exhibit 10 (a)
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(Page 10 of 30)
The restrictions set forth in this clause (b) shall
terminate in the event that MCI and Comcast hold in the aggregate
more than 60% of the outstanding Shares on a fully diluted basis.
(c) The Shareholders Agreement will contain
appropriate provisions to assure that if a proposal for a merger
or other business combination has been presented to Nextel which
the Board is considering (and has not rejected) and which either
MCI or Comcast is unwilling to block, the party that would like
to block the transaction is fully able to make its own
acquisition proposal and take such steps as it deems necessary to
attempt to acquire Nextel.
(d) After the Closing, neither MCI nor Comcast will
purchase Shares in a privately negotiated transaction from any
third party that has a fully diluted beneficial ownership of 5%
or more of Nextel's outstanding Shares on a fully diluted basis
at above the then current market price of such Shares, except
that such restriction shall not apply to any acquisition of
Shares from Motorola if an above market purchase price is offered
by MCI or Comcast in connection with a bona fide offer received
by Motorola from a third party to acquire such Shares at or above
the then current market price.
(e) The provisions in this paragraph 3 will terminate
at such time as the consent rights in paragraph 11 terminate.
4. Pre-Emptive Rights of Comcast and MCI.
MCI and Comcast will be granted pre-emptive rights on the same
terms and conditions as Comcast's existing pre-emptive rights set
forth under the Purchase Agreement, provided that (a) either
party's pre-emptive rights will be freely assignable to the
other, (b) neither MCI nor Comcast will be entitled to pre-
emptive rights in respect of any share issuances to the other
(except share issuances arising from the exercise of pre-emptive
rights), (c) the pre-emptive rights will entitle MCI and Comcast
to maintain their collective fully diluted ownership interest at
Closing, and such increases in such percentage interest that
result solely from any acquisition by Comcast and/or MCI of
Shares from Motorola to the extent such acquisitions are made in
compliance with the terms of all applicable agreements with
Nextel and (d) to the extent the pre-emptive rights relate to
Shares acquired for non-cash consideration, reasonable provisions
will be included to provide that only one investment banking firm
will be required to provide the valuation for MCI, Comcast and
other shareholders who have pre-emptive rights. The Shareholders
Agreement will contain appropriate provisions so that if Shares
are issued between the date hereof and the Closing (other than
Shares in respect of which Comcast will waive its pre-emptive
rights in accordance with paragraph 2), Comcast and MCI will have
pre-emptive rights with respect to such additional Shares as are
A-4
<PAGE> Exhibit 10 (a)
--------------
(Page 11 of 30)
necessary to assure that MCI's and Comcast's collective fully
diluted ownership percentage at Closing would not be reduced as a
result of such Share issuances (it being understood that if the
Closing does not occur, the only applicable pre-emptive rights
would be Comcast's under the Purchase Agreement).
5. Registration Rights.
MCI and Comcast will each receive registration rights in respect
of Shares owned by such party on substantially the same terms and
conditions as those set forth in the Purchase Agreement. Each of
MCI's and Comcast's registration rights will be freely assignable
to the other party.
6. Transfers of Nextel Shares.
Except as required by law or regulatory directive, each of MCI
and Comcast will not transfer any Shares, or any voting rights in
respect of Shares, owned by such party until the fifth
anniversary of the Closing without the consent of Nextel, which
consent shall not in the case of Comcast as transferor be
unreasonably withheld, except no such consent will be required in
connection with any transfer (i) in a tender or exchange offer
(subject to paragraph 3(b)(iv) above), merger, recapitalization
or similar transaction pursuant to which all other holders of
Shares may participate on an equal basis, and (ii) transfers to
MCI, Comcast or any "qualified controlled affiliate" of MCI or
Comcast, provided that prior to the third anniversary of closing
neither MCI nor Comcast will be permitted to transfer any of
their Shares to the other party (or any qualified controlled
affiliate of such other party) under this clause (ii) if such
transfer will result in either party's Relative Interest (as
defined in Annex C) exceeding 66-2/3%. Notwithstanding the
foregoing, MCI and Comcast will be permitted to transfer their
Shares in accordance with paragraph 9 of Annex C. The rights and
obligations under the Shareholders Agreement may not be assigned
to any third party except (a) either party may assign all (but
not less than all) of its rights and obligations under the
Shareholders Agreement to a purchaser of all of such party's
equity interest in Nextel in a single block sale and (b) if
either MCI or Comcast (the "Purchasing Party") acquires all of
the equity interest in Nextel (the "Acquired Interests") owned by
the other party (the "Selling Party"), the Purchasing Party may
transfer all rights and obligations which the Selling Party had
under the Shareholders Agreement to any purchaser of the Acquired
Interests in a single block sale. If, prior to the fifth
anniversary of the Closing, MCI acquires all of Comcast's equity
interest in Nextel (the "Comcast Equity Interest"), MCI will be
subject to the same transfer and related provisions in respect of
the Comcast Equity Interest as would be applicable to Comcast if
it owned the Comcast Equity Interest. If, prior to the fifth
anniversary of the Closing, Comcast acquires all of MCI's equity
A-5
<PAGE> Exhibit 10 (a)
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interest in Nextel (the "MCI Equity Interest"), the transfer of
the MCI Equity Interest by Comcast will be subject to the same
restrictions as those applicable to any other Shares owned by
Comcast except that, prior to the fifth anniversary of the
Closing, the consent of Nextel (which it may grant or withhold in
its discretion) will be required for Comcast to transfer to a
third party the rights and obligations of MCI under the
Shareholders Agreement together with the MCI Equity Interest.
Comcast or MCI, as the case may be, will continue to possess all
rights under the Shareholders Agreement after the other party
(and, if applicable, its permitted assigns) no longer owns any
Shares. The provisions of this paragraph 6 will terminate at
such time as the consent rights in paragraph 11 terminate.
7. Amendments to Certain Agreements.
Neither MCI nor Comcast will amend, supplement or otherwise
modify any non-competition or similar covenant or agreement with
third parties existing on the date hereof (or enter into any
similar agreement or arrangement after the date hereof) if such
amendment, supplement, modification, covenant or agreement would
impose any contractual limitations on the conduct of Nextel's
operations within its Core Business (as defined in paragraph
11(g)) in the Americas for the three year period after the
Closing and, thereafter, anywhere in the world.
8. Covenants of Nextel.
The Transactions will be dependent upon performance of customary
pre-closing covenants for similar transactions, including:
(a) Access on reasonable terms of MCI and Comcast to
financial information, books, records and employees of
Nextel and its subsidiaries.
(b) Except for the consummation of transactions
publicly disclosed (or privately disclosed to each of
Comcast and MCI by Nextel), prior to the date hereof on
terms not less favorable to Nextel in any material respect
than such previously disclosed terms, no extraordinary
transactions by Nextel or any of its subsidiaries including,
without limitation, any transaction that, if it had occurred
after the execution of the definitive agreements, would
trigger the supermajority vote requirement described in
clause (a) or (b) of paragraph 10 below or the Consent
Rights.
(c) Nextel would agree to "no-shop" and termination
fee provisions comparable to those contained in this letter
agreement.
A-6
<PAGE> Exhibit 10 (a)
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(Page 13 of 30)
9. Board of Directors Representation.
MCI and Comcast will have representation on the Board (and all
committees thereof) that is proportionate to the aggregate number
of Shares owned by MCI and Comcast on a fully diluted basis
(determined in a manner consistent with paragraph 10) (rounded
down to the next whole number if MCI and Comcast collectively own
in the aggregate less than 50% of the outstanding Shares on a
fully diluted basis or, if otherwise, rounded up to the next
whole number), subject to each of MCI and Comcast having at least
two designees on the Board except as otherwise agreed by MCI and
Comcast. Nextel will not give any other stockholder the right to
designate more than two directors nor will all other stockholders
with contractual rights to designate directors be entitled to
designate more than four directors in the aggregate. MCI and
Comcast will be deemed to own any Shares that it has the
irrevocable right to acquire from Nextel.
10. Supermajority Vote Requirement of Board of Directors.
For so long as (a) (x) MCI and Comcast collectively own more than
20% of the outstanding Shares (determined by including all shares
which MCI and Comcast have a firm commitment to acquire but
excluding all options to purchase Shares), (y) MCI's and
Comcast's aggregate percentage ownership on a fully diluted basis
(determined by excluding any option to purchase Shares acquired
by Comcast or MCI from any third party other than Nextel) has not
been reduced below 30% (without giving effect to an ownership
percentage reduction of up to 5% due to dilution) (the provisions
of clause (x) and (y) are collectively referred to as the
"Minimum Ownership Percentage") and (z) MCI and Comcast
collectively own less than 50% of the outstanding Shares on a
fully diluted basis, the following matters will, in addition to
the normal approval requirement, require the approval of at least
one MCI-Comcast designee or (b) MCI and Comcast collectively own
more than 50% but not more than 60% of the outstanding Shares on
a fully diluted basis, the following matters will, in addition to
the normal approval requirement, require the approval of at least
one director who is not a MCI-Comcast designee:
(a) any single or related series of acquisitions by
Nextel and its subsidiaries (including participation in
joint ventures) or any investments in, or loans to third
parties having an aggregate purchase price in excess of $250
million (except any such transactions or commitments that
have been publicly disclosed (or privately disclosed to each
of Comcast and MCI) prior to the date hereof);
(b) any single or related series of dispositions or
encumbrances of assets by Nextel and its subsidiaries having
a fair market value in excess of $250 million (except any
such transactions or commitments that have been publicly
A-7
<PAGE> Exhibit 10 (a)
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disclosed or privately disclosed to each of Comcast and MCI
prior to the date hereof); and
(c) the adoption of any marketing plan, capital
expenditure plan or operating budget by Nextel or its
subsidiaries (with appropriate provisions for rolling forth
previous plans or budgets in the event that a new plan or
budget is not adopted); any material deviation from a
marketing plan by Nextel and its subsidiaries (other than
deviations in sales volumes); and the incurrence of capital
expenditures in any year which in the aggregate exceed 125%
of that year's capital expenditure budget.
Notwithstanding the foregoing, in the event the director
designees of MCI and Comcast abstain from voting on any of the
matters enumerated above, such matters will require approval of a
majority of the remaining members of the Board present and voting
on such matters. MCI's and Comcast's designees will vote, or
abstain from voting, in accordance with paragraph 8 of Annex C.
11. Consent Rights of MCI and Comcast.
At all times when MCI and Comcast collectively own at least the
Minimum Ownership Percentage, the following actions will require
the consent of MCI and Comcast, which consent will only be
withheld in accordance with the provisions of paragraph 6 of
Annex C:
(a) material amendment to Nextel's By-Laws or
Certificate of Incorporation;
(b) approval by Nextel or any of its subsidiaries of
any merger or other business combination with any person in
which the beneficial ownership of the capital stock of
Nextel or of the sole surviving corporation immediately
after consummation of the transaction is not substantially
the same as that of Nextel immediately prior to such
consummation or the voluntary liquidation of Nextel or any
of its significant subsidiaries;
(c) issuance by Nextel of any class of stock having
supervoting rights or a class vote on any matter (except to
the extent required by Delaware corporate law);
(d) adoption by Nextel of any stockholder rights plan
(or any arrangement which is designed to disadvantage any
stockholder on the basis of the size of its shareholding);
(e) equity issuances by Nextel (excluding Shares
issuable upon exercise of employee stock options and similar
stock-based management incentive plans) in excess of (i) 10%
of the total Shares outstanding during any twelve month
A-8
<PAGE> Exhibit 10 (a)
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(Page 15 of 30)
period or (ii) 15% during any thirty-six month period
(except pursuant to any transactions that have been publicly
disclosed (or privately disclosed to each of Comcast and
MCI) prior to the date hereof);
(f) issuance of Shares to any person who thereafter
would own more than 5% of the outstanding Shares (other than
issuances applicable to all stockholders generally on an
equal basis or as contemplated by the Shareholders
Agreement and related documents or pursuant to any
transactions that have been publicly disclosed (or
privately disclosed to each of Comcast and MCI) prior
to the date hereof); and
(g) Nextel or any of its subsidiaries engaging
(subject to certain incidental exceptions) in any business
other than the Core Business of Nextel (defined as the
provision of wireless telecommunications products and
services including the provision of value added services (i)
in the Americas during the first three years after closing
and (ii) anywhere in the world after the third anniversary
of Closing).
12. Access.
For so long as either MCI or Comcast controls at least 5% of the
outstanding Shares on a fully diluted basis, such party will have
access on reasonable terms to the books, records and employees of
Nextel and its subsidiaries and provision by Nextel of all
information reasonably requested by such party, subject to
confidentiality obligations that at the time may be owed by
Nextel to third parties, to appropriate confidentiality
arrangements and requirements of law.
13. Representations.
MCI and Comcast will make representations and warranties to
Nextel and Nextel will make representations to MCI and Comcast in
connection with the transactions contemplated hereby which are
typical for transactions of this nature, subject to standard
materiality qualifications, which representations (including, in
the case of Nextel, with regard to the absence of any material
adverse change in the business, financial condition and results
of operations of Nextel and its subsidiaries taken as a whole
since the 1993 audited financial statements, other than as a
result of changes in general business conditions, legal or
regulatory changes affecting the U.S. telecommunications industry
generally, or actions by an industry competitor) will be brought
down to Closing but will not survive the Closing.
A-9
<PAGE> Exhibit 10 (a)
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(Page 16 of 30)
14. Outstanding Indebtedness.
MCI and Comcast will not acquire ownership of Shares that would
result in a "Change in Control" under the terms of the indentures
(as in effect on the date hereof) relating to the bonds of Nextel
issued thereunder unless such parties provide or arrange
replacement debt financing (on no less favorable financial terms
taken as a whole and at no additional cost to Nextel) for all
outstanding bonds issued under such indenture prior to the date
hereof that are tendered to Nextel under the offer to acquire all
outstanding bonds required by such indenture. The foregoing
provisions will not apply if the "Change of Control" results from
Nextel repurchasing Shares or other circumstances not
attributable to MCI and Comcast.
15. Competing Transactions.
Without the prior written consent of MCI, neither Nextel nor any
of its subsidiaries will (i) enter into any marketing or other
material agreement or transaction with American Telephone and
Telegraph Company ("AT&T") or Sprint Corporation ("Sprint")
(except as and to the extent required by law) or (ii) directly or
indirectly engage in any business outside the Core Business of
Nextel in competition with MCI or any of its affiliates. Without
the prior written consent of Comcast, neither Nextel nor any of
its subsidiaries will directly or indirectly engage in any
business outside the Core Business of Nextel in competition with
Comcast or any of its affiliates.
16. Wireless Opportunities.
MCI and Comcast will offer to Nextel (a) all wireless
opportunities in the United States and (b) an opportunity to
participate in any wireless opportunity outside the United States
but in the Americas that such party plans to pursue if it is able
(after exercising all reasonable efforts to be or become able to
do so) to offer such opportunity, except that (x) Comcast may (i)
pursue PCS or PCN in conjunction with its local cable operations
or jointly with other cable operators and (ii) acquire additional
frequencies in connection with Comcast's existing cellular
operations in either case without offering Nextel the right to
participate in such pursuits or acquisitions and (y) in
conjunction with MCI Metro, MCI may pursue PCS or PCN frequencies
as are incidental to its MCI Metro network. If Nextel fails to
pursue an opportunity presented to it, MCI and Comcast will be
free to pursue such opportunity unless Nextel's failure resulted
from MCI and Comcast blocking such action (whether through their
consent or supermajority board rights or their failing to vote in
favor of any required stockholder action). Each of MCI and
Comcast understand that their present and/or future interests in
other wireless ventures may create conflicts with respect to
their respective relationships with Nextel and the other party
A-10
<PAGE> Exhibit 10 (a)
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(Page 17 of 30)
and agree in connection with the Transactions as a matter of
policy to undertake to resolve and eliminate any conflicts with
its relationship with Nextel and the other party in a manner
satisfactory to all parties. The definitive documentation will
include appropriate provisions relating to the resolution or
elimination of such conflicts.
17. Provision of Services and Other Support to Nextel.
The parties acknowledge that the Transactions constitute a
strategic alliance among Nextel, MCI and Comcast relating to the
provision of wireless telecommunications services in North
America. Consistent with the relationship among the parties, it
is intended that appropriate provisions be included such that if
Nextel is to obtain a service from an outside party (other than
instances where Nextel at the date hereof is a party to
agreements or commitments obligating Nextel to deal with a
specific outside party or parties, which instances MCI, Comcast
and Nextel will address separately in the definitive
documentation for the Transactions), MCI and Comcast will be the
preferred suppliers of such service to the extent they can
provide such service on terms, including price, quality and
service, that are no less favorable in the aggregate to Nextel
than the terms on which Nextel is able to obtain such services
from any outside party.
18. Certain Amendments to Shareholders Agreement.
Any proposed amendment to the Shareholders Agreement that would
adversely affect the rights of Nextel (or any benefits to Nextel
thereunder) will require the approval of a majority of the
disinterested directors of the Board.
19. Sale of Certain Comcast Business.
In connection with the Transactions, the parties have agreed that
Comcast will sell to Nextel a certain business previously
identified by Comcast to Nextel for an aggregate consideration
not less than $12 million nor more than $15 million and which
shall be determined pursuant to procedures to be mutually agreed
upon by Nextel and Comcast. The purchase price for such business
will be payable in Shares to be valued at $36 per Share and shall
reduce the $50 million committed subscription by Comcast under
the Purchase Agreement by an equal amount.
A-11
<PAGE> Exhibit 10 (a)
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(Page 18 of 30)
ANNEX B
TERM SHEET FOR BILATERAL TELECOMMUNICATIONS
PRODUCTS AND SERVICES MARKETING AGREEMENT
The parties will approach all significant decisions
regarding the marketing of all of Nextel's products and services,
in conjunction with the marketing of MCI's products and services
to be utilized by customers in conjunction with Nextel Products
and Services as contemplated below (hereinafter referred to as
"Joint Value Added Services"), with the objective of achieving
the maximum market penetration reasonably achievable through the
utilization of the parties' combined marketing talents, strengths
and resources in as cost effective a manner as possible. The
parties recognize and acknowledge that, to structure appropriate
and acceptable marketing arrangements, specific aspects and
elements of the parties' respective product and service
offerings, product and service development and marketing
strategies and capabilities will need to be analyzed in greater
detail in the negotiation of a definitive agreement. In
conducting such negotiation, the parties shall adhere to the
following general principles and objectives: (i) all such
product and service marketing efforts are intended to be on a
non-exclusive basis; (ii) Nextel will obtain marketing, billing,
customer service and other functions from MCI, any third party
(which may include Comcast) or its own organization depending on
which of the foregoing can provide the required services or
functions on the best terms of price, quality, service and other
relevant factors; (iii) MCI will make available to Nextel for
sale directly by Nextel any product or service (or terms or
conditions applicable thereto) to be utilized by customers in
conjunction with Nextel Products and Services that MCI offers to
others under similar circumstances unless it would be reasonable
for MCI to withhold such product or service; and (iv) subject to
suitable confidentiality obligations and restrictions to internal
use purposes only, MCI will provide Nextel with full access to
all information regarding MCI's United States customers, usage
patterns and marketing information that Nextel may reasonably
require in connection with its wireless communications business,
prospects and strategies.
Subject to the foregoing, the parties agree that the
definitive marketing agreements will contain provisions
consistent with the following, except as MCI and Nextel otherwise
agree:
1. Major Accounts.
MCI will be designated the marketer of choice for all of Nextel's
Products and Services to Major Accounts (who shall be identified
B-1
<PAGE> Exhibit 10 (a)
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(Page 19 of 30)
by agreement between MCI and Nextel), and may market such
products and services to such accounts as either a seller for its
own account or as a sales agent for Nextel as MCI elects, and on
such other terms and conditions as shall be agreed to between MCI
and Nextel, including the following:
(i) Nextel's Products and Services shall be marketed
to Major Accounts under the brand "MCI" if MCI so
elects, so long as such products and services meet
MCI's standards therefor (which shall be no more
stringent than MCI's then existing standards,
where applicable, unless MCI and Nextel agree
otherwise; in the area of wireless service and
product performance, quality and functionality
standards, MCI will consult in good faith with
Nextel in connection with Nextel's establishment
of acceptance standards with Motorola, with the
objective of arriving at standards reasonably
acceptable to MCI for purposes of qualifying for
usage of the "MCI" brand for such services);
(ii) MCI will have sole responsibility for billing and
servicing all Major Accounts to which MCI sells
Nextel's Products and Services for MCI's own
account, and Nextel will determine the means for
billing and servicing all other Major Accounts
which use Nextel's Products and Services;
(iii) MCI will be free to charge any rates it deems
appropriate for Nextel Products and Services sold
by MCI to Major Accounts, except where MCI is
acting as a sales agent, in which case MCI will
charge such rates as are established for such
products and services by Nextel (in consultation
with MCI); and
(iv) Nextel will make Nextel Products and Services
available to MCI, for marketing either for sale
for MCI's own account or as a sales agent to Major
Accounts, at prices or rates and terms that are no
less favorable to MCI than those that Nextel makes
available to other sellers or sales agents of such
products or services in comparable circumstances.
2. Nextel Accounts.
Nextel will be designated the marketer of choice in the United
States for all Joint Value Added Services to Nextel Accounts (who
shall be identified by agreement between MCI and Nextel), and may
market MCI's products and services to such accounts as either a
sales agent or, to the extent permitted by law and Nextel so
elects, as a seller for Nextel's own account, and on such other
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<PAGE> Exhibit 10 (a)
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terms and conditions as shall be agreed to between MCI and
Nextel, including the following:
(i) MCI's Products and Services shall be marketed to
Nextel Accounts under the same MCI or MCI-
sponsored brands as are employed by MCI in
marketing such products and services so long as
Nextel's marketing program meets MCI's standards
therefor (which shall be no more stringent than
MCI's then existing standards, where applicable,
unless MCI and Nextel agree otherwise);
(ii) Nextel will determine the means for billing and
servicing all Nextel Accounts;
(iii) Nextel will charge such rates for MCI's Products
and Services as are established for such products
and services by MCI (in consultation with Nextel),
except where Nextel is acting as a seller of such
products and services for its own account, in
which case Nextel shall be free to charge any
rates it deems appropriate therefor; and
(iv) MCI will make MCI Products and Services available
to Nextel for marketing as contemplated above as
either a seller for Nextel's own account or as a
sales agent to Nextel Accounts at prices or rates
and terms that are no less favorable to Nextel
than those that MCI makes available to other
sellers or sales agents of such products or
services in comparable circumstances. Nextel may
market Nextel Products and Services to Nextel
Accounts under the brand "MCI" if Nextel so
elects, so long as such products and services meet
MCI's standards therefor (which shall be
determined in the same manner as indicated in
clause (i), Section 1 above).
3. Middle Market and Small Business/Consumer Accounts.
With respect to all accounts other than those treated in Sections
1 and 2 above, which remaining accounts shall include the middle
market and small business/consumer accounts of MCI and the other
customers and customer prospects of each of MCI and Nextel (such
customer accounts collectively, the "Remaining Accounts"), the
appropriate party and method for marketing Nextel Products shall
be established by Nextel (in consultation with MCI), and such
marketing approach as is so established shall be presented at
least annually to the Board of Nextel for review and approval
(and shall be subject to the super-majority approval provisions
described in Annex A, Section 10). Such marketing programs and
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<PAGE> Exhibit 10 (a)
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(Page 21 of 30)
efforts shall otherwise be on terms and conditions as are
determined by agreement between Nextel and MCI, subject to the
following:
(i) Nextel shall have sole responsibility for
determining the means for billing and servicing
all Remaining Accounts which use Nextel Products
and Services except for those accounts to which
(in accordance with the provisions set forth above
in this paragraph 3) MCI is selling directly for
its own account;
(ii) Nextel shall establish (in consultation with MCI)
the appropriate rates and/or prices for the Nextel
Products and Services marketed to the Remaining
Accounts except for those accounts to which (in
accordance with the provisions set forth above in
this paragraph 3) MCI is selling directly for its
own account and MCI shall establish (in
consultation with Nextel) the appropriate rates
and/or prices for the Joint Value Added Services
marketed to the Remaining Accounts; and
(iii) Nextel shall make available all Nextel Products
and Services, and MCI shall make available all
Joint Value Added Services, for marketing to the
Remaining Accounts unless MCI and Nextel jointly
agree otherwise and Nextel Products and Services
that are marketed to the Remaining Accounts shall
be marketed under the brand "MCI" if Nextel so
elects, so long as such products and services meet
MCI's standards therefor (which shall be
determined in the same manner as indicated in
clause (i), Section 1 above).
Notwithstanding the foregoing, under no circumstances will the
criteria used to determine whether and the extent to which MCI
will market to such accounts be less advantageous to MCI than the
criteria used to determine whether and the extent to which
Comcast will market to such accounts (which criteria will be no
less favorable to Nextel than those which are applicable to
determine whether and the extent to which such activities will be
performed by other third parties or directly by Nextel).
4. Conflicting Existing Billing and Service Arrangements.
Each of Nextel and MCI shall use reasonable efforts in good faith
to attempt to restructure or otherwise modify existing billing,
marketing and/or servicing commitments to third parties that may
interfere with the parties' desired flexibility to structure
product and service arrangements as contemplated herein. If such
efforts are not successful in accomplishing such restructurings
B-4
<PAGE> Exhibit 10 (a)
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or modifications, MCI and Nextel shall negotiate in good faith in
an attempt to incorporate such third party commitments into their
joint marketing and other arrangements or, if such cannot be
accomplished in a manner reasonably acceptable to each of MCI and
Nextel, MCI and Nextel will discuss in good faith and attempt to
reach an equitable agreement on other potential solutions, such
as potential buy-outs of such third party commitments. It is
understood and acknowledged that the parties' intended product
and service arrangements detailed herein are not to be
interpreted to require either of Nextel or MCI to breach or
violate any existing marketing and/or service commitments they
may have to third parties. During the negotiation of definitive
agreements, Nextel will disclose to MCI all such material third
party commitments to which Nextel is bound and MCI will disclose
to Nextel all such material third party commitments to which MCI
is bound.
5. Information Sharing.
Each of MCI and Nextel agrees, subject to appropriate parallel
confidentiality arrangements and restrictions to prevent external
use of such information, that all customer, marketing and/or
product and service usage information in the possession of (or
reasonably accessible to) either MCI or Nextel will be made
available to the other as reasonably requested.
6. Availability of MCI Products and Services.
The full range of MCI and MCI-sponsored products and services
shall be available for sale as a Joint Value Added Service to be
utilized by customers in conjunction with Nextel Products and
Services (in all circumstances subject to the terms and
conditions of the appropriate agreed marketing arrangement)
regardless of whether such Joint Value Added Service together
with the related Nextel Product or Service is to be offered
directly through MCI, directly through Nextel, or (by agreement
of MCI and Nextel) through a third party, subject only to such
Joint Value Added Services that MCI and Nextel agree to exclude
from particular product combinations or where the use of such MCI
or MCI-sponsored product or service in conjunction with the
relevant Nextel Product or Service is shown to be infeasible for
causes beyond the reasonable control of either party, such as
where the technology employed in or required for a particular
Nextel product or service is not compatible with the technology
employed in or required for a particular MCI Product or Service.
In all cases where the use of a "MCI" or a "Nextel" brand is
permitted in connection with the marketing efforts of either
party, there shall be no royalty, fee or like charge imposed for
such use of a brand name unless MCI and Nextel otherwise agree.
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<PAGE> Exhibit 10 (a)
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(Page 23 of 30)
7. Certain Marketing Obligations.
MCI shall take such reasonable measures as are designed to assure
active marketing of Nextel Products and Services as an important
component of the overall marketing campaign employed by MCI for
the accounts to which it is marketing Nextel Products and
Services. With respect to such accounts, MCI shall devote
adequate resources, including appropriate targets and personnel
incentives for its sales and marketing personnel, to accomplish
such objectives and to increase the penetration of Nextel
Products and Services. The parties will discuss in good faith
(without any prior commitment or obligation to reach agreement
thereon) whether sales quotas, sales commission structuring or
special promotional efforts are appropriate measures in
particular circumstances or for particular Nextel Products and
Services or accounts, to achieve such objectives in a cost
effective manner.
8. Advertising and Similar Promotions.
At Nextel's request or with Nextel's approval, and in any event
only in reasonably appropriate contexts, MCI shall employ good
faith efforts to include or incorporate Nextel Products and
Services in MCI's national and local advertising campaigns;
provided that Nextel shall bear a fair share of the costs
associated with its participation in such advertising campaign,
as determined by agreement between MCI and Nextel. The parties
agree that, depending on the advertising approach and medium,
such "fair share of the costs" may be a proportionate part of
MCI's "all in" costs (e.g., television commercial advertising),
an allocable incremental cost assessment (e.g., a "stuffer"
mailing) or actual cost of MCI (e.g., charges paid to third party
telemarketers for customer "prospecting").
9. Joint Efforts.
MCI and Nextel will endeavor in good faith to structure mutually
beneficial agreements in areas of common interest, including the
following: (a) arrangements for sharing market research and
segmentation and competitor analyses in connection with their
respective separate and joint product and service development and
marketing efforts; (b) arrangements for achieving as great a
level as possible of cooperation and coordination between MCI's
and Nextel's respective product and service marketing and
promotional programs; (c) arrangements for joint product
development efforts in agreed targeted areas, e.g., dual
mode/dual band wireless communications systems; (d) arrangements
for integration (where desirable and feasible) of MCI's in house
wireless communications staff with Nextel's staff; (e)
arrangements to provide for equipment and/or operations sharing,
where desirable and feasible; (f) training of sales forces in the
products/services and capabilities of the other party.
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<PAGE> Exhibit 10 (a)
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(Page 24 of 30)
10. Limitation on Sales.
Nextel will not sell any Nextel products to or through AT&T
and/or Sprint except for sales of bulk capacity required by law
and under no circumstances (unless and only to the extent
required by law) will Nextel provide any branded or value added
services to or through AT&T or Sprint; provided, that Nextel
shall not be precluded from offering or selling any Nextel
Products or Services to a customer who expressly indicates on an
unsolicited basis that such customer's telecommunications
provider will be AT&T or Sprint.
B-7
<PAGE> Exhibit 10 (a)
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(Page 25 of 30)
ANNEX C
TERM SHEET FOR CO-INVESTMENT AGREEMENT
BETWEEN MCI AND Comcast
MCI and Comcast will enter into an agreement
effectuating their intention to maintain their 50/50 relationship
which will contain the following provisions:
1. Restrictions on Transfer.
Neither MCI nor Comcast will dispose of its interests in Nextel
for a period of five years after which sales pursuant to Rule
144, registration rights or private sales would be permitted,
provided that any such sales would be subject to a right of first
offer in favor of the non-selling party. Any purchaser who is
assigned a party's rights and obligations under the Shareholders
Agreement will become a party to the Co-Investment agreement.
2. Additional Purchases.
Neither MCI nor Comcast will purchase additional Nextel
securities other than (a) through exercise of pre-emptive rights
or pre-existing options or warrants or (b) if not pursuant to any
such exercise, through private or market purchase of additional
Shares or purchases from Nextel (excluding the acquisition in
connection with the transaction described in paragraph 19 of
Annex A and any acquisitions of Shares from Motorola that reduce
the number of Shares to be purchased by MCI from Nextel) subject
to a participation right of the other party (based on the
parties' Relative Interest at that time) (which participation
right shall be subject to such "catch-up" opportunities for the
party not exercising its participation right as MCI and Comcast
shall agree) and the standstill described in paragraph 3 below.
A party's Relative Interest in Nextel will equal the percentage
equivalent of a fraction, the numerator of which equals the
number of Shares owned by such party and the denominator of which
equals the aggregate number of Shares owned by MCI and Comcast.
A party shall be deemed to own any Shares which it has the
irrevocable right to acquire from Nextel.
3. Standstill.
Neither Comcast nor MCI will purchase additional Shares if such
purchase would result in a breach of the standstill provisions of
the Shareholders Agreement. For so long as the Shareholders
Agreement remains in effect, neither Comcast nor MCI will,
without the other's consent; (a) solicit proxies or consents,
become a participant in any such solicitation or become part of a
voting group or deposit Shares in a voting trust with respect to
Nextel other than as contemplated herein or in the Shareholders
C-1
<PAGE> Exhibit 10 (a)
--------------
(Page 26 of 30)
Agreement, (b) make any proposal for a business combination or
propose or commence a tender or exchange offer, in respect of
Nextel in violation of the standstill in favor of Nextel or (c)
facilitate, endorse or vote in favor of any merger, consolidation
or other business combination between Nextel and any third party.
4. Other Wireless Opportunities.
Consistent with Annex A, MCI and Comcast will offer wireless
opportunities to Nextel except that (x) Comcast may (i) pursue
PCS or PCN in conjunction with its local cable operations or
jointly with other cable operators and (ii) acquire additional
frequencies in connection with existing cellular operations in
either case without offering Nextel a right to participate in
such pursuits or acquisitions and (y) in conjunction with MCI
Metro, MCI may pursue PCS or PCN frequencies as are incidental to
its MCI Metro network. If Nextel does not pursue any such
opportunities within the United States (other than as a result of
MCI and Comcast blocking such action by Nextel by the use of
their consent or supermajority board rights or their failing to
vote in favor of any required stockholder action), MCI and
Comcast will cooperate with each other to reach 50/50
participation arrangements with respect to such opportunities
involving wireless products and services that may become
available from time to time unless either MCI or Comcast does not
wish to pursue such opportunity, in which event the other party
will be free to pursue such opportunity.
5. Exercise of Pre-Emptive Rights.
If either MCI or Comcast does not exercise any pre-emptive rights
in respect of Shares, it will give the other party the
opportunity to exercise such rights.
6. Voting of Nextel Shares; Exercise of Consent Rights.
For so long as the Shareholders Agreement remains in effect, MCI
and Comcast will vote their collective Shares on matters (other
than election of directors to the Board which shall be governed
by paragraph 7 below) as they shall mutually agree, provided that
if MCI and Comcast are unable to so agree, MCI and Comcast will
abstain from voting their Shares on such matters. MCI and
Comcast will not exercise their stockholder consent rights to
block any action by Nextel unless both MCI and Comcast agree to
do so. Notwithstanding the foregoing, (a) in the event either
party's Relative Interest exceeds 66-2/3%, such party will
control voting with respect to Consent Rights of MCI and Comcast
and the voting of MCI's and Comcast's Board designees on any
matter requiring supermajority consent (subject to such
C-2
<PAGE> Exhibit 10 (a)
--------------
(Page 27 of 30)
designee's fiduciary duties) and (b) if a Consent Right relates
to any matter in respect of which MCI or Comcast has a conflict
due to its interest in another wireless venture, the non-
conflicted party will be entitled to exercise such Consent Rights
alone.
7. Designation of Nextel Board Nominees.
For so long as the Shareholders Agreement remains in effect and
each party's Relative Interest is at least 33-1/3%, each of MCI
and Comcast will designate an equal number of nominees for
election as Nextel directors. If any party's Relative Interest
exceeds 66-2/3%, each party will designate a number of nominees
based on the Relative Interests, rounded up to the nearest whole
number if such party's Relative Interest is greater than 66-2/3%
and rounded down to the nearest whole number if such party's
Relative Interest is less than 33-1/3%.
Each party will agree to vote for the election of the
other party's designees to the Board.
8. Voting by Board Designees.
MCI and Comcast will, subject to paragraph 6 above, use their
reasonable best efforts to reach agreement on voting by their
designees on the Board, subject to the designees' fiduciary
duties, provided that if the parties are unable to agree, they
will cause their director designees to, subject to the designees'
fiduciary duties, abstain from voting on such matter.
9. Limited Exit Arrangements.
The parties do not contemplate that the coinvestment agreement
will have termination or "exit" provisions the exercise of which
are within the control of the parties or will provide for an
automatic termination upon the passage of a period of time or the
occurrence of one or more events except (a) that upon a change of
control (to be defined) of Comcast or (b) upon a sale by Comcast
to AT&T or Sprint of a controlling or other meaningful equity
interest (to be defined) in its cable or cellular system (and in
which Comcast retains a meaningful equity interest), MCI will
have the option to purchase Comcast's interest in Nextel at a
price equal to 125% of fair market value determined in accordance
with paragraph 3(ii)(y) of the definition of Neutralization
Process (as defined below). Additionally, the establishment by
Comcast of a business arrangement as contemplated by paragraph 4
of Annex C with AT&T and/or Sprint with respect to wireless
telephony in the United States and/or Mexico (the "Wireless
Business") which relationship constitutes a "Conflicting Business
Arrangement" (as defined below) will trigger a Neutralization
C-3
<PAGE> Exhibit 10 (a)
--------------
(Page 28 of 30)
Process. For the purposes of the Co-Investment Agreement a
business arrangement by Comcast with AT&T and/or Sprint with
respect to the Wireless Business shall not constitute a
Conflicting Business Arrangement unless:
(A) the relationship is material (to be defined) and
Comcast is an active strategic (to be defined) partner or
joint venturer with respect to the pursuit, development or
expansion of the Wireless Business,
(B) MCI shall not have first been offered a meaningful
opportunity to participate in such relationship without AT&T
or Sprint, as the case may be, and
(C)(i) following MCI's written notice to Comcast that
in MCI's good faith business judgment, due to identified and
articulated reasons the relationship is materially
inconsistent and incompatible with MCI's relationship with
Comcast (the "MCI Opinion"), the relationship is a
Conflicting Business Arrangement, (ii) Comcast has had a
reasonable opportunity, if it so requests, to resolve the
conflict (including, but not limited to, attempting to
resolve such conflict through restructuring the
relationship, or Comcast's investment in Nextel, in either
case which may be by constructing Chinese Walls separating
such relationships and investments), which opportunity shall
last for not less than 60 business days, and has been unable
to resolve the conflict in a manner satisfactory to MCI and
thus MCI's conclusion under (C)(i) remains the same, it
being understood that if so requested by Comcast, and
practicable in the circumstances, MCI will cooperate with
Comcast in resolving the conflict in a mutually satisfactory
manner consistent with both parties' fiduciary duties to
their respective stockholders and with their respective
legal obligations and (iii) if Comcast so elects to obtain a
third party opinion, an objective third party (the "Dispute
Resolver") reasonably acceptable to Comcast and MCI and who
is knowledgeable in the Wireless Business (which third party
may be a retired or non-active federal or state judge or
magistrate, or an arbitrator) concludes, on the basis of
information provided by and on behalf of Comcast and MCI,
that such relationship constitutes a Conflicting Business
Arrangement. In making any determination under (C)(iii),
the Dispute Resolver shall take into account relevant
factors, including (x)(1) the parties' objectives with
respect to their investments in and relationships with
Nextel as evidenced by the Co-Investment Agreement, the
Shareholders Agreement and other related agreements (to the
extent assignable to third parties) and (2) the likelihood,
if any, that the relationship of Comcast with AT&T and/or
Sprint would have a significant negative impact on the
C-4
<PAGE> Exhibit 10 (a)
--------------
(Page 29 of 30)
accomplishment of such objectives and (y) the MCI Opinion in
light of the matters referred to in (x).
"Neutralization Process" shall mean Comcast's election
to:
(1) terminate any material involvement in the business and
decision-making process with respect to Nextel (it
being understood that Comcast may retain its rights as
a stockholder of Nextel except rights with respect to
governance matters), including but not limited to by
causing its designees, if so requested by MCI, to
resign their positions as members of the board of
directors, officers or members of any board committees;
or
(2) limit its relationship with AT&T and/or Sprint (as the
case may be) such that Comcast is not involved, at the
board level or otherwise, in the strategic planning or
decision-making process with respect to the Wireless
Business, it being understood that Comcast may retain
its economic interest in such relationship and may seek
to enhance the value of and return on such interest
through Comcast's activities on a local level; or
(3) sell or otherwise divest itself of substantially all of
its ownership interest in Nextel:
(i) to a third party other than AT&T or Sprint
(subject to a right of first offer), provided that
Comcast may not sell such interest to a third
party who is not reasonably acceptable to MCI (a
"Rejected Buyer") unless MCI is unable or
unwilling to procure a buyer acceptable to MCI
(the "MCI Buyer") who will make such purchase on
substantially the same or more favorable terms as
those offered by the Rejected Buyer, except that
if only the price or other financial terms offered
by the MCI Buyer are not as favorable, MCI may
obligate itself to satisfy any shortfall in price
or other financial terms offered by the MCI Buyer;
(ii) to MCI at a price equal to (x) 125% of the 20 day
Average Trading Price (to be defined) of Nextel
shares or (y) at the fair market value of
Comcast's Nextel shares as determined through
independent appraisal by 2 nationally recognized
investment banking firms reasonably acceptable to
MCI and Comcast. In any appraisal under (y),
"Fair Market Value" shall be based upon what a
willing buyer (assuming such buyer is fully
acceptable to MCI and would enjoy the shared
position of influence possessed by Comcast under
C-5
<PAGE> Exhibit 10 (a)
--------------
(Page 30 of 30)
the Shareholders Agreement and the Co-Investment
Agreement) in a private transaction would pay
taking into account relevant factors, including
Comcast's rights under the Shareholders Agreement,
the Co-Investment Agreement and other related
agreements, with MCI being entitled to elect
pricing under (x) or (y);
(iii) (subject to a right of first offer of MCI) through
a spin-off (or other similar transaction) to
Comcast's stockholders, provided that following
such transaction the "Roberts Family" and/or their
controlled affiliates do not own alone or in the
aggregate in excess of 33-1/3% of Nextel's voting
power on a fully diluted basis; or
(iv) (subject to a right of first offer in favor of
MCI) through one or more registered public
offerings or in open market sales pursuant to Rule
144 (or another exemption from the registration
requirements of the Securities Act of 1933) in
which there is a wide distribution and reasonable
efforts made to ensure that no purchaser will
have, following such purchase, in excess of 5% of
the voting power of Nextel on a fully-diluted
basis.
10. Benefits of Agreement.
Except as described in the next sentence, the Co-Investment
Agreement is for the benefit of MCI and Comcast only and the
terms of the agreement may be amended, supplemented or otherwise
modified by MCI and Comcast without Nextel's consent. In the
Shareholders Agreement, each of MCI and Comcast will covenant for
the benefit of Nextel that (a) MCI and Comcast will comply with
the provisions referred to in (i) the second sentence of
paragraph 6 above (subject to the third sentence of such
paragraph); (ii) paragraph 7 above; and (iii) the proviso in
paragraph 8 above; and (b) MCI and Comcast will not amend any
provisions referred to in clause (a) above in any manner adverse
to Nextel without the consent of a majority of the disinterested
directors of Nextel.
C-6
<PAGE>
Exhibit 12
-----------
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Computation of Ratio of Earnings to Fixed Charges
(In millions, except ratio amounts)
(unaudited)
Year Ended December 31,
1993 1992 1991 1990 1989
Earnings: ---- ---- ---- ---- ----
Income before
income taxes and
extraordinary item
per income statement $1,045 $ 963 $ 848 $ 440 $ 804
Add:
Fixed charges 315 346 334 321 330
Less:
Capitalized interest 61 52 58 49 44
------ ------ ------ ------ ------
Total earnings $1,299 $1,257 $1,124 $ 712 $1,090
====== ====== ====== ====== ======
Fixed Charges:
Fixed charges on
indebtedness,
including amortization
of debt discount and
premium $ 239 $ 270 $ 270 $ 262 $ 282
Interest portion of
operating lease
rentals (a) 76 76 64 59 48
------ ------ ------ ------ ------
Total fixed charges $ 315 $ 346 $ 334 $ 321 $ 330
====== ====== ====== ====== ======
Ratio of earnings to
fixed charges 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> Exhibit 24
----------
(1 of 1)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the
Prospectus constituting part of the Registration Statement on
Form S-3 (No. 33-49387) of our report dated January 26, 1994,
which appears on page 1 of Exhibit 99(a) of this Form 8-K of MCI
Communications Corporation. We also consent to the reference to
us under the heading "Experts" in such Prospectus.
Price Waterhouse
- ----------------
PRICE WATERHOUSE
March 9, 1994
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Price Waterhouse
To the Board of Directors and Stockholders of
MCI Communications Corporation
In our opinion, the accompanying balance sheet and
the related consolidated income statement, statements of
cash flows and stockholders' equity present fairly, in all material
respects, the financial position of MCI Communications
Corporation and its subsidiaries at December 31, 1993 and 1992,
and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1993, in
conformity with generally accepted accounting principles. These
financial statements are the responsibility of the company's
management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the
opinion expressed above.
Price Waterhouse
- ----------------
PRICE WATERHOUSE
January 26, 1994
Washington, D.C.
<PAGE>
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
INCOME STATEMENT
Year ended December 31, 1993 1992 1991
(In millions, except per share amounts) ---- ---- ----
Revenue
Sales of communications services $11,921 $10,562 $9,491
------- ------- ------
Operating expenses
Telecommunications 6,373 5,684 5,112
Sales, operations and general 3,310 2,794 2,512
Depreciation 970 873 776
------- ------- ------
Total operating expenses 10,653 9,351 8,400
------- ------- ------
Income from operations 1,268 1,211 1,091
Interest expense (178) (218) (212)
Other expense, net (45) (30) (31)
------- ------- ------
Income before income taxes and
extraordinary item 1,045 963 848
Income tax provision 418 354 297
------- ------- ------
Income before extraordinary item 627 609 551
Extraordinary loss on early debt
retirements, less applicable tax
benefit of $26 million 45 - -
------- ------- ------
Net income $ 582 $ 609 $ 551
======= ======= ======
Dividends on preferred stock 1 20 29
------- ------- ------
Earnings applicable to common stockholders $ 581 $ 589 $ 522
======= ======= ======
Earnings per common and common equivalent shares
Income before extraordinary item $ 1.12 $ 1.11 $ 1.00
Loss on early debt retirements (.08) - -
------- ------- ------
Total $ 1.04 $ 1.11 $ 1.00
======= ======= ======
See accompanying Notes to Consolidated Financial Statements
<PAGE> MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
BALANCE SHEET
December 31, 1993 1992
(In millions) ---- ----
Assets
Current assets
Cash and cash equivalents $ 165 $ 232
Receivables, net of allowance for
uncollectibles of $211 and $189 million 2,131 1,764
Deferred income taxes 116 -
Other 189 185
------- ------
Total current assets 2,601 2,181
------- ------
Communications system
System in service 8,563 7,723
Other property and equipment 2,172 1,924
------- ------
Total communications system in service 10,735 9,647
------- ------
Accumulated depreciation (4,297) (4,151)
Construction in progress 883 669
------- ------
Total communications system, net 7,321 6,165
------- ------
Other assets
Excess of cost over net assets acquired, net 1,093 1,111
Other assets and deferred charges, net 261 221
------- ------
Total other assets 1,354 1,332
------- ------
Total assets $11,276 $9,678
======= ======
<PAGE>
Liabilities and stockholders' equity
Current liabilities
Accrued telecommunications expense $ 1,507 $1,175
Accounts payable 742 467
Long-term debt due within one year 215 215
Other accrued liabilities 737 607
------- ------
Total current liabilities 3,201 2,464
------- ------
Noncurrent liabilities
Long-term debt 2,366 3,432
Deferred income taxes 927 558
Other 69 74
------- ------
Total noncurrent liabilities 3,362 4,064
------- ------
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 and 296 million shares 60 30
Additional paid in capital 2,493 1,479
Retained earnings 2,785 2,231
Treasury stock at cost, 51 and 33 million shares (626) (590)
------- ------
Total stockholders' equity 4,713 3,150
------- ------
Total liabilities and stockholders' equity $11,276 $9,678
======= ======
See accompanying Notes to Consolidated Financial Statements
<PAGE> MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
STATEMENT OF CASH FLOWS
Year ended December 31, 1993 1992 1991
(In millions) ---- ---- ----
Operating activities
Cash received from customers $11,546 $10,328 $9,362
Cash paid to suppliers and employees (9,097) (8,154) (7,597)
Taxes paid (321) (292) (292)
Interest paid (150) (156) (202)
------- ------- ------
Cash from operating activities 1,978 1,726 1,271
------- ------- ------
Investing activities
Cash outflow for communications system (1,733) (1,272) (1,377)
Other, net (26) 11 1
------- ------- ------
Cash used for investing activities (1,759) (1,261) (1,376)
------- ------- ------
Net cash flow before financing activities 219 465 (105)
------- ------- ------
Financing activities
Issuance of Senior Notes and other debt 756 481 527
Retirement of Senior Notes and other debt (1,468) (218) (504)
Commercial paper and bank credit facility
activity, net (497) (69) (84)
Issuance of preferred stock 830 - -
Redemption of preferred stock - (400) -
Purchase of treasury stock (198) (180) -
Issuance of common stock for employee plans 319 168 79
Payment of dividends on common and
preferred stock (28) (56) (55)
------- ------- ------
Cash used for financing activities (286) (274) (37)
Net (decrease) increase in cash and cash equivalents (67) 191 (142)
Cash and cash equivalents at beginning of year 232 41 183
------- ------- ------
Cash and cash equivalents at end of year $ 165 $ 232 $ 41
======= ======= ======
See accompanying Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
STATEMENT OF STOCKHOLDERS' EQUITY
Preferred Stock Common Stock
Issued Issued
--------------- ------------ Additional Treasury Stock-
Par Par Paid in Retained Stock, holders'
(In millions) Shares Value Shares Value Capital Earnings at Cost Equity
--------------- ------------ ---------- -------- -------- -------
<S> <C> <C>
Balance at December 31, 1990 2 $ 1 296 $ 30 $1,745 $1,173 $(609) $2,340
Net income - - - - - 551 - 551
Common stock issued for employee
stock and benefit plans (5.6 million shares) - - - - 26 - 80 106
Common and preferred dividends - - - - - (55) - (55)
Tax benefit of common stock
transactions related to
employee benefit plans - - - - 17 - - 17
--------------- ------------ ---------- -------- --------- -------
Balance at December 31, 1991 2 1 296 30 1,788 1,669 (529) 2,959
Net income - - - - - 609 - 609
Preferred stock redeemed (2) (1) - - (399) - - (400)
Common stock issued for employee
stock and benefit plans (9.1 million shares) - - - - 72 - 129 201
Treasury stock purchased (5.6 million shares) - - - - - - (190) (190)
Common and preferred dividends - - - - - (47) - (47)
Tax benefit of common stock
transactions related to
employee benefit plans - - - - 18 - - 18
--------------- ------------ ---------- --------- --------- ---------
Balance at December 31, 1992 - - 296 30 1,479 2,231 (590) 3,150
Net income - - - - - 582 - 582
Common stock issued for employee
stock and benefit plans (22.9 million shares)- - - - 179 - 160 339
Treasury stock purchased (8.4 million shares) - - - - - - (196) (196)
Common and preferred dividends - - - - - (28) - (28)
Preferred stock issued (13,736 shares) 1 1 - - 829 - - 830
Stock split effected in the form of a 100%
stock dividend - - 296 30 (30) - - -
Tax benefit of common stock
transactions related to
employee benefit plans - - - - 36 - - 36
-------------- ------------ ---------- --------- --------- -------
Balance at December 31, 1993 1 $ 1 592 $ 60 $2,493 $2,785 $ (626) $4,713
============== ============ ========== ========= ========= =======
See accompanying Notes to Consolidated Financial Statements
</TABLE>
<PAGE> MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
- ---------------------------
The financial statements include the consolidated accounts of MCI
Communications Corporation and its majority-owned subsidiaries
(collectively, the company). All significant intercompany
transactions are eliminated in the financial statements. Investments
in 20% to 50% owned companies are accounted for under the equity
method. Other investments are recorded at cost.
Revenue
- -------
The company records as revenue the amount of communications services
rendered, as measured by the minutes of traffic processed, after
deducting an estimate of the traffic which will be neither billed nor
collected.
Communications System
- ---------------------
The investment in communications system is recorded at cost and
includes material, interest, labor and overhead. The costs of
construction and equipment are transferred to communications system in
service as construction projects are completed and/or equipment is
placed in service. Depreciation is recorded commencing with the first
full month that the assets are in service and is provided using the
straight-line method over their estimated useful lives. The company
periodically reviews and adjusts the useful lives assigned to fixed
assets to ensure that depreciation charges provide appropriate
recovery of capital costs over the estimated physical and
technological lives of the assets. Writedowns related to assets not
yet retired are included in accumulated depreciation. The weighted
average depreciable life of the assets comprising the communications
system in service approximates 11 years. Other property and equipment
includes buildings and administrative assets that are depreciated
using lives of up to 35 years. Most of the company's communications
system assets are depreciated under the group method. Under this
method the cost of equipment retired in the ordinary course of
business, less proceeds, is charged to accumulated depreciation.
Maintenance and repairs are charged to expense as incurred.
Excess of Cost Over Net Assets Acquired
- ---------------------------------------
Excess of cost over net assets acquired consists of the excess of the
cost to acquire subsidiaries over the estimated fair market value of
the net assets acquired. These amounts are being amortized by the use
of the straight-line method over lives ranging from 10 to 40 years.
Accumulated amortization at December 31, 1993 and 1992 was $101
million and $70 million, respectively.
<PAGE> MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Other Assets and Deferred Charges
- ---------------------------------
Included in other assets and deferred charges are investments in
nonconsolidated entities, right-of-way agreements with third parties,
debt issuance costs and unamortized customer discounts. Right-of-way
costs are amortized as the assets are placed in service, over the
lesser of the remaining term of the agreements or 25 years. Debt
issuance costs are amortized over the life of the applicable debt.
Deferred customer discounts are amortized over the life of the
specific contract to which the discount relates.
Capital Leases
- --------------
Certain of the company's lease obligations meet the criteria of a
capital lease. These obligations are recorded for financial reporting
purposes at the present value of the future lease payments, including
estimated bargain purchase options, discounted at the approximate
interest rate implicit in each lease. Corresponding amounts are
capitalized and depreciated over the estimated useful lives of the
equipment, which are generally longer than the terms of the leases.
Income Taxes
- ------------
The company files a consolidated federal income tax return on a
March 31 fiscal year-end. Deferred income taxes are provided on
transactions which are reported in the financial statements in
different periods than for income tax purposes. Tax credits are
recorded under the flow-through method of accounting. Effective
January 1, 1993, the company adopted Statement of Financial Accounting
Standards (SFAS) 109, Accounting for Income Taxes (see Note 7). SFAS
109 superseded a similar standard on income tax accounting, SFAS 96,
which the company had been using as the basis for recording its income
taxes. The adoption of SFAS 109 had no impact on the company's
results of operations. Income tax benefits of tax deductions related
to common stock transactions with the company's employee benefit plans
are recorded directly to additional paid in capital.
Earnings Per Share
- ------------------
Earnings per share are computed on the basis of the weighted average
number of shares of common stock outstanding during each year. These
weighted average shares are adjusted for the effect of common stock
equivalents arising from the assumed exercise of stock options and
subordinated convertible debt, if dilutive, and the assumed conversion
of the Series D preferred stock. The weighted average number of
shares used in the per share computations for each of the years was:
562 million shares in 1993, 532 million shares in 1992 and 520 million
shares in 1991. Fully diluted earnings per share are not materially
different from primary earnings per share.
<PAGE> MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Cash and Cash Equivalents
- -------------------------
At December 31, 1993 and 1992, checks not yet presented for payment of
$193 million and $163 million in excess of cash balances,
respectively, are included in current liabilities. The company had
sufficient funds available to cover these outstanding checks when they
were presented for payment.
Cash equivalents consist of short-term investments with original
maturities of ninety days or less. The carrying amount reported in
the accompanying balance sheet for cash equivalents approximates fair
value due to the short-term maturity of these instruments.
Reclassification
- ----------------
Certain prior year information has been reclassified to conform to the
current year presentation.
NOTE 2. BRITISH TELECOMMUNICATIONS PLC AGREEMENTS
On June 2, 1993, the company and British Telecommunications plc (BT
and, collectively with the company, the Parties) entered into a letter
of intent and, on August 4, 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, to be authorized by stock-
holders, 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.
<PAGE> MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. BRITISH TELECOMMUNICATIONS PLC AGREEMENTS - (Continued)
On June 4, 1993, the company issued 13,736 shares of Series D
nonvoting convertible 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
are subject to a number of conditions, including the approval of the
company's stockholders; required approvals by the European Commission,
United Kingdom regulatory authorities and Federal Communications
Commission; and the expiration of waiting periods under the HSR Act
and Exon-Florio statute.
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.
<PAGE> MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. LEASE TRANSACTIONS
The amounts included in the communications system financed by capital leases
are:
December 31, 1993 1992
(In millions)
System in service $ 783 $ 986
Other property and equipment 16 6
------ ------
799 992
Accumulated depreciation (440) (589)
------ ------
$ 359 $ 403
====== ======
Leases not capitalized are primarily for land on which communications equipment
is located and for administrative facilities, including office buildings,
vehicles, certain data processing equipment and office equipment. Total rental
expense for all operating leases was $227 million, $229 million and $192
million for the years ended December 31, 1993, 1992 and 1991, respectively.
At December 31, 1993, the future aggregate minimum rental commitments for
capital leases and noncancellable operating leases are:
Year ended Capital Operating
December 31, Leases Leases Total
(In millions) ------- --------- -----
1994 $ 139 $ 150 $ 289
1995 121 124 245
1996 103 101 204
1997 103 76 179
1998 50 57 107
thereafter 683 166 849
------ ------ ------
Minimum lease payments 1,199 $ 674 $1,873
====== ======
Amount representing interest (510)
------
Present value of future
lease payments $ 689
======
<PAGE> MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. LONG-TERM DEBT
Long-term debt consists of:
December 31, 1993 1992
(In millions) ---- ----
Senior Notes, with maturities
ranging from February 1994 to
August 2004, at a weighted
average interest rate of 7.2% $1,095 $ 868
Capital lease obligations at a
weighted average interest rate
of 7.6% 689 732
Senior Debentures, with maturities
of January 2023 and March 2024,
at a weighted average interest
rate of 8.0%, net of unamortized
discount of $3 million 437 -
Commercial paper and bank
credit facility borrowings at a
weighted average interest rate of 3.5% 239 736
Zero-Coupon Subordinated Convertible
Notes due December 11, 2004, net of
unamortized discount of $697 million - 608
10% Subordinated Debentures due
April 1, 2011, net of unamortized
discount of $9 million - 566
Other debt at a weighted average
interest rate of 3.2% 121 137
------ ------
Total debt 2,581 3,647
Debt due within one year (215) (215)
------ ------
Total long-term debt $2,366 $3,432
====== ======
Annual maturities of long-term debt for the five years after December 31, 1993
are as follows: $215 million in 1994; $107 million in 1995; $643 million in
1996; $119 million in 1997 and $88 million in 1998.
Total interest costs were $239 million in 1993, $270 million in 1992 and $270
million in 1991, of which $61 million, $52 million and $58 million,
respectively, were capitalized.
<PAGE> MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. LONG-TERM DEBT - (Continued)
At December 31, 1993, the estimated fair value of the company's long-term debt,
excluding capital lease obligations, is as follows. This valuation represents
either quoted market values, when available, or the company's estimate based
upon market prices of comparable debt instruments.
Estimated
Carrying Fair
Amount Value
(In millions) -------- ---------
Senior Notes $1,095 $1,159
Senior Debentures 437 462
Commercial paper and bank credit facility
borrowings 239 239
Other debt 121 121
Senior Notes and Debentures
- ---------------------------
During 1993, the company issued $760 million principal amount of Senior Notes
and Debentures under the current and previous shelf registrations. The company
also repaid $93 million principal amount of Senior Notes during 1993, leaving
$1,535 million principal amount of Senior Notes and Debentures outstanding at
December 31, 1993. On March 31, 1993, the company filed a $1 billion shelf
registration after issuing all the debt securities available under the previous
$750 million shelf registration. The current shelf registration renews the
company's ability to issue debt securities with a range of possible maturities
at either fixed or variable rates. At December 31, 1993, the company had $950
million of available borrowings under the current shelf registration.
Commercial Paper and Bank Credit Facility Borrowings
- ----------------------------------------------------
At December 31, 1993, the company had a $1.25 billion bank credit facility
which expires in June 1996. This credit facility supports the company's
commercial paper program and, in conjunction with this program, is used to fund
fluctuations in working capital and other general corporate requirements.
During 1993, the company issued commercial paper and borrowed under this credit
facility an aggregate of $4,906 million and repaid an aggregate of $5,403
million of credit facility and commercial paper borrowings, leaving $239
million of commercial paper outstanding and no amounts outstanding under the
credit facility at December 31, 1993. Borrowings under the commercial paper
program and credit facility 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> MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. LONG-TERM DEBT - (Continued)
Retirements and Redemptions
- ---------------------------
In March 1993, the company redeemed all $616 million, net of the unamortized
discount, of its Zero-Coupon Subordinated Convertible Notes due December 11,
2004. The funds for this redemption came from the issuance of Senior Notes and
Debentures and commercial paper and credit facility borrowings.
In April and May 1993, the company redeemed a total of $283 million principal
amount of its 10% Subordinated Debentures due April 1, 2011 (10% Debentures).
These redemptions were funded from segregated cash generated by the company's
operations and earnings during the fourth quarter of 1992 and the first quarter
of 1993. In June 1993, the remaining $292 million principal amount of 10%
Debentures were redeemed, funded with a portion of the proceeds from the sale
of preferred stock to British Telecommunications plc (see Note 2).
An extraordinary loss of $45 million, net of current income tax benefit of $26
million, was recorded for the 1993 redemptions. There were no redemptions or
early retirements of debt in 1992.
In 1991, the company retired its $250 million principal, 7.44% promissory note
due October 23, 1996. The funds for this retirement came from the issuance of
Senior Notes. The resulting gain on retirement was not significant.
NOTE 5. STOCKHOLDERS' EQUITY
Preferred Stock
- ---------------
The company is authorized to issue 20 million shares of preferred stock at $.10
par value per share. The terms and conditions are determined by the board of
directors at each issuance.
In June 1993, the company issued 13,736 shares of preferred stock, designated
as Series D Convertible preferred stock, to BT for $830 million. Each share of
preferred stock will automatically convert into 2,000 shares of the company's
common stock, subject to certain conditions and is entitled to receive
dividends equal to 2,000 times the dividends or other distributions, if any,
declared on the company's common stock (see Note 2). The company paid a
dividend of $100 per share on this convertible preferred stock in 1993.
At December 31, 1991, the company had outstanding two million shares of
preferred stock, designated as Increasing Rate Cumulative Preferred Stock,
totalling $400 million, which had semiannual dividends of $7.35 per share.
During September 1992, all two million outstanding shares were redeemed and
retired for $400 million plus accrued and unpaid dividends.
<PAGE> MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. STOCKHOLDERS' EQUITY - (Continued)
Common Stock
- ------------
On May 24, 1993, the company's board of directors declared a two-for-one stock
split in the form of a 100% stock dividend, which was paid on July 9, 1993, to
stockholders of record as of the close of business on June 11, 1993. The
following have been adjusted for the effect of the common stock dividend: all
per share amounts, current year treasury stock transactions, the December 31,
1993, treasury stock share balance and data as to common stock options and the
employee stock purchase plan.
In 1993, 1992 and 1991, the company paid dividends of $.05 per share on its
common stock.
NOTE 6. STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS
Employee and Directors' Stock Option Plans
- ------------------------------------------
The current Employee Stock Option Plan (the Plan) provides for the issuance of
up to 76 million shares of common stock. On an annual basis, pursuant to the
Plan, the board of directors may increase the maximum number of shares as of
each January 1, by up to 5% of the number of shares of common stock outstanding
at each such date. Options granted under the Plan are exercisable at such
times and in such installments as determined by the compensation committee of
the board of directors. Options granted under the Plan may not have an option
price less than the fair market value of common stock on the date of the
grant.
Stock appreciation rights may be granted in combination with a stock option
either at the time of the grant or anytime thereafter. No stock appreciation
rights had been granted as of December 31, 1993.
The compensation committee may also grant restricted stock awards and
performance share awards, subject to such conditions, restrictions and
requirements as the committee may determine in its sole discretion. As of
December 31, 1993, there were approximately 510,000 restricted shares issued.
No performance share awards had been issued as of December 31, 1993.
The compensation committee may grant both incentive stock options and non-
qualified options under the Plan. All options granted in the last three years
were non-qualified options. These non-qualified options expire after 10 years
and are exercisable to the extent of 33% of the option shares after one year,
66% after two years and 100% after three years. Incentive stock options expire
between five and 10 years after issuance and are exercisable to the extent of
33% of the option shares after one year, 66% after two years and 100% after
three years.
The Plan permits the holder of an option to pay the purchase price for stock
option exercises by surrendering shares of common stock having a fair market
value equal to, or greater than, the purchase price.
<PAGE> MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS - (Continued)
The company also has a stock option plan for non-employee directors (the
Directors' Plan) which provides for the issuance of up to one million shares of
common stock. Under the Directors' Plan each non-employee director has been
granted a five-year option to purchase up to 40,000 shares of common stock at
the closing price on the date of grant. The options are exercisable after the
first anniversary of the date of grant, in cumulative installments of 25% per
year. Similar options will be granted automatically to all new board members
who are not employees. Upon the fifth anniversary of the date of grant of
options, the unexercised portion of the grant shall be canceled and a new
option for 40,000 shares shall be granted automatically.
Additional information with respect to stock options under these plans is:
Option Amount
Number -----------------------
of Shares Per Common Share Total
--------- ---------------- -----
(In millions, except per common share amounts)
Shares under option, December 31, 1990 30.0 $ 2.69-22.44 $394.7
Options granted 21.4 9.94-14.44 215.1
Options exercised (4.0) 2.69-12.88 (24.9)
Options terminated (2.6) 2.69-19.57 (38.6)
---- ------------ ------
Shares under option, December 31, 1991 44.8 2.69-22.44 546.3
Options granted 17.0 15.82-17.38 269.7
Options exercised (9.0) 2.69-19.57 (85.2)
Options terminated (2.8) 2.69-22.44 (39.9)
---- ------------ ------
Shares under option, December 31, 1992 50.0 3.25-22.44 690.9
Options granted 18.6 20.56-28.75 394.5
Options exercised (15.0) 3.25-22.44 (202.4)
Options terminated (2.3) 9.38-28.75 (40.6)
---- ------------ ------
Shares under option, December 31, 1993 51.3 $ 3.44-28.75 $842.4
==== ============ ======
Options exercisable, December 31, 1993 18.0 $ 3.44-22.44 $255.6
==== ============ ======
Shares available for future grant,
December 31, 1993 12.5
====
Employee Stock Purchase Plan
- ----------------------------
Under the company's Employee Stock Purchase Plan (the ESPP Plan), 25 million
shares of common stock are available for purchase by eligible employees of
the company through payroll deductions of up to 15% of their eligible
compensation. The purchase price is equal to the lesser of (a) 85% of the
fair market value of the stock on the date it is purchased or (b) 85% of the
fair market value of the stock on certain specified valuation dates.
<PAGE> MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS - (Continued)
Common Stock Reserved
- ---------------------
At December 31, 1993, 70.8 million shares of the company's authorized common
stock were reserved for the Employee and Directors' Stock Option Plans and
the ESPP Plan. However, the company has opted to fund its obligation under
these plans with treasury shares for the three-year period ended December 31,
1993.
NOTE 7. INCOME TAXES
The components of the total income tax provision are:
Year ended December 31, 1993 1992 1991
(In millions) ---- ---- ----
Current
Federal $148 $121 $ 80
State and local 17 20 14
---- ---- ----
Current income tax provision 165 141 94
---- ---- ----
Deferred
Federal 227 193 181
State and local 26 20 22
---- ---- ----
Deferred income tax provision 253 213 203
---- ---- ----
Total income tax provision $418 $354 $297
==== ==== ====
A reconciliation of the statutory federal income tax rate to the company's
effective income tax rate is:
Year ended December 31, 1993 1992 1991
---- ---- ----
Statutory federal income tax rate 35% 34% 34%
State and local income taxes, net
of federal income tax effect 3 3 3
Nondeductible amortization 1 1 1
Adjustment of prior period estimates - (1) (3)
Changes in federal tax laws 1 - -
---- ---- ----
Effective income tax rate 40% 37% 35%
==== ==== ====
In 1993, 1992 and 1991 the company recorded a tax benefit of $36 million, $18
million and $17 million, respectively, to additional paid in capital for tax
deductions related to common stock transactions with its employee benefit
plans.
<PAGE> MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. INCOME TAXES - (Continued)
At December 31, 1993 and 1992, the company's net deferred income tax
liability is comprised of the following:
1993 1992
---- ----
(In millions)
Deferred income tax asset $ 338 $ 292
Deferred income tax liability (1,149) (850)
------- -----
Net deferred income tax liability $ (811) $(558)
======= =====
The components of these amounts are:
Communications system $(1,097) $(831)
Allowance for uncollectibles 20 50
Realignment expenses 56 -
License fees 29 35
Customer discounts (43) (5)
Alternative minimum and general
business tax credits 116 83
Other, net 108 110
------- -----
Net deferred income tax liability $ (811) $(558)
======= =====
The balance sheet presentation of deferred income taxes under SFAS 109 requires
the company to separately disclose its current and long-term deferred tax
balances on a different basis than that required by SFAS 96. Under SFAS 96, the
company's current deferred tax balances were immaterial and, therefore, deferred
taxes were presented as a single net liability in the 1992 balance sheet.
The company has not recorded any valuation allowances against its deferred
income tax assets, either upon adoption of SFAS 109 or during the year ended
December 31, 1993.
In August 1993, legislation was passed which changed various provisions of the
federal income tax laws, including an increase in the statutory federal income
tax rate for corporations from 34% to 35%, retroactively effective to January
1, 1993. The company's net deferred income tax liability was increased by
approximately $13 million to reflect the impact of the tax law changes on the
net deferred income tax liability as of December 31, 1992.
At December 31, 1993, for federal income tax purposes, the company has available
$35 million of net operating loss carryforwards, $35 million of Alternative
Minimum Tax (AMT) net operating loss carryforwards, $83 million of general
business tax credit carryforwards expiring after the year 2000 and $180 million
of AMT credit carryforwards which have no expiration date. At December 31, 1993
and 1992, there are no carryforwards for financial reporting purposes.
<PAGE> MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. EMPLOYEE BENEFIT PLANS
Pension Plans
- -------------
The company maintains a noncontributory defined benefit pension plan (MCI
Plan) and a supplemental pension plan (Supplemental Plan). Western Union
International, Inc. (WUI), a subsidiary of the company, also has a defined
benefit plan (WUI Plan). Collectively, these plans cover substantially all
full-time employees. The company's policy is to fund the MCI Plan and the
WUI Plan in accordance with the minimum funding requirements of the Employee
Retirement Income Security Act of 1974.
The MCI Plan and the Supplemental Plan provide pension benefits that are
based on the employee's compensation for each year of service prior to
retirement. The WUI Plan provides pension benefits based on the employee's
compensation for each year of service after 1990 and prior to retirement.
Net pension expense includes:
Year ended December 31, 1993 1992 1991
(In millions) ---- ---- ----
Service cost during the period $18 $15 $11
Interest cost on projected benefit obligation 14 12 10
Actual return on plan assets (36) (11) (28)
Net amortization and deferral 22 (2) 18
--- --- ---
Net pension expense $18 $14 $11
=== === ===
The discount rate and rate of increase in future compensation levels used in
determining the actuarial present value of the projected benefit obligation
for the MCI Plan were 7.75% and 5%, respectively. The expected long-term
rate of return on assets was 9%. The decrease in the funded status as of
December 31, 1993 is a direct result of the decrease in the discount rate
from the 8.5% rate used in 1992.
<PAGE> MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. EMPLOYEE BENEFIT PLANS - (Continued)
The MCI Plan pension obligation consists of:
December 31, 1993 1992
(In millions) ---- ----
Plan assets at fair value, primarily listed
stocks and U.S. bonds $110 $ 88
Projected benefit obligation for service
rendered to date (164) (105)
---- ----
Funded status (54) (17)
Unrecognized net results from past experience
different from that assumed 25 2
Prior service cost not yet recognized in net
periodic pension cost 17 11
Unrecognized net asset at January 1, 1986
being recognized over 16 years (4) (5)
---- ----
Total pension obligation $(16) $( 9)
==== ====
The actuarial present value of accumulated benefit obligations for the MCI
Plan is $127 million and $82 million, including vested benefits of
$111 million and $62 million, as of December 31, 1993 and 1992, respectively.
The discount rate and rate of increase in future compensation levels used in
determining the actuarial present value of the projected benefit obligation
for the WUI Plan were 7.25% and 5%, respectively. The expected long-term
rate of return on assets was 9%.
The WUI Plan pension (obligation)/asset consists of:
December 31, 1993 1992
(In millions) ---- ----
Plan assets at fair value, primarily listed
stocks and U.S. bonds $ 78 $ 72
Projected benefit obligation for service
rendered to date (60) (53)
---- ----
Funded status 18 19
Unrecognized net results from past experience
different from that assumed (20) (15)
Prior service cost not yet recognized in net
periodic pension cost 1 1
Unrecognized net asset at January 1, 1986
being recognized over 17 years (2) (2)
---- ----
Total pension (obligation)/asset $ (3) $ 3
==== ====
The actuarial present value of accumulated benefit obligations is $59 million
and $51 million, including vested benefits of $57 million and $50 million, as
of December 31, 1993 and 1992, respectively.
<PAGE> MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. EMPLOYEE BENEFIT PLANS - (Continued)
Employee Stock Ownership Plan and 401(k) Plans
- ----------------------------------------------
The company has combined employee stock ownership (ESOP) and 401(k)
retirement savings plans (RSP) covering substantially all of its employees.
The savings plans allow employees to contribute pre-tax income in accordance
with the requirements of Internal Revenue Code Section 401(k). Participants
vest in the company's matching contributions at a rate of 20% per year of
service and are 100% vested in their elective contributions.
In accordance with the terms of the ESOP, the company is entitled to make an
annual contribution to the ESOP, either in cash or shares of the company's
common stock, in amounts as determined by the board of directors. During
1993, the company announced an increase in the company's match on 401(k)
contributions for plan years beginning in 1994 and that it would not make an
ESOP contribution for 1993. In lieu of a 1993 ESOP contribution, the company
will make a similarly-calculated contribution for all eligible employees into
the 401(k) section of the plans during the first quarter of 1994. The
company contributed 1,015,414 and 1,137,588 shares of its common stock to the
ESOP for the plan years ended December 31, 1992 and 1991, respectively. The
company also contributed 791,447, 904,796 and 916,132 shares of its common
stock as the company's matching contribution to the RSP for the plan years
ended December 31, 1993, 1992 and 1991, respectively.
WUI sponsors a 401(k) savings plan for its collectively bargained employees
(WUI 401(k)). The savings plan is intended to meet requirements of Internal
Revenue Code Section 401(k). WUI 401(k) participants vest in the company's
matching contributions at a rate of 20% per year of service and are 100%
vested in their elective contributions. The company contributed 18,974,
27,486 and 28,550 shares of its common stock to the WUI 401(k) for the plan
years ended December 31, 1993, 1992 and 1991, respectively.
Postretirement and Postemployment Benefits
- ------------------------------------------
Effective January 1, 1993, the company adopted SFAS 106, Employers'
Accounting for Postretirement Benefits Other Than Pensions. SFAS 106
requires that certain postretirement benefits, such as medical insurance
coverage, be estimated and accrued over an employee's working years, rather
than recognized as an expense when paid. Except for pensions, the company
does not generally provide postretirement benefits to its employees.
Accordingly, adoption of SFAS 106 did not have a material impact on the
company's financial position or results of operations. The company elected
to amortize the transition obligation for the covered employees on a
straight-line basis over 20 years.
<PAGE> MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. EMPLOYEE BENEFIT PLANS - (Continued)
In November 1992, the Financial Accounting Standards Board issued SFAS 112,
Employers' Accounting for Postemployment Benefits, effective for fiscal
years beginning after December 15, 1993. This standard established financial
accounting and reporting standards for the estimated cost of benefits
provided by an employer to former or inactive employees after their
employment, but before their retirement, such as continuation of medical
coverage. It will require that if defined conditions are met, postemployment
benefits be estimated and accrued rather than recognized as an expense when
paid. The company intends to adopt this new standard in the first quarter of
1994. Adoption of this new standard will not have a material impact on the
company's financial position or results of operations.
NOTE 9. 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:
Year ended December 31, 1993 1992 1991
(In millions) ---- ---- ----
Net income $ 582 $ 609 $ 551
Adjustments to earnings:
Depreciation and amortization 1,019 955 855
Deferred income tax provision 253 213 203
Net change in operating activity accounts
other than cash and cash equivalents:
Receivables (370) (155) (157)
Accounts payable (68) (120) 128
Other operating activity accounts 562 224 (309)
------ ------ ------
Cash from operating activities $1,978 $1,726 $1,271
====== ====== ======
<PAGE> MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. CONTINGENCIES
The company is a party to a number of lawsuits and other proceedings arising
out of the conduct of its business, including certain regulatory
proceedings. While the ultimate results of lawsuits or other proceedings
cannot be predicted with certainty, the company's management does not expect
that these matters will have a material adverse effect on the consolidated
financial position or results of operations of the company.
In December 1992, the company petitioned the United States District Court for
the District of Columbia for a declaratory ruling that certain patents of
American Telephone & Telegraph Company (AT&T) were invalid or that AT&T
should be barred from enforcing them against the company. AT&T
counterclaimed that the company was violating certain additional patents. In
May 1993, AT&T and Unitel Communications Inc., a Canadian corporation in
which AT&T has an equity interest, filed a companion suit in the federal
court in Canada, alleging that the company and the Stentor Group of Canadian
telephone companies (with which the company has an alliance) are infringing
in Canada four of the patents at issue in the U.S. litigation. Although
these actions are in their early stages, the company does not expect that
either of these matters will have a material adverse effect on the
consolidated financial position or results of operations of the company.
In 1990, certain stockholders of the company filed an action in the United
States District Court for the District of Columbia alleging that the company
and three of its officers violated securities laws by making material
misstatements of, or omitting to state, material facts relating to its
financial condition and prospects. In May 1992, the District Court granted
the company's Motion to Dismiss, but the plaintiffs have filed an appeal.
The company will vigorously defend the District Court's dismissal of the
action in the Court of Appeals for the District of Columbia Circuit.
<PAGE> MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. SELECTED QUARTERLY INFORMATION (Unaudited)
Three months ended Dec. 31, Sept. 30, June 30, Mar. 31,
(In millions, except 1993 1993 1993 1993
per share amounts) -------- --------- -------- --------
Revenue $3,128 $3,054 $2,929 $2,810
Operating expenses:
Telecommunications 1,659 1,636 1,573 1,505
Sales, operations and general 992 814 772 732
Depreciation 256 245 236 233
Income from operations 221 359 348 340
Income before extraordinary item 107 174 178 168
Net income 107 174 150 151
Earnings applicable to
common stockholders 107 174 149 151
Earnings per common and common
equivalent shares:
Income before extraordinary item .18 .30 .32 .31
Loss on early debt retirements - - (.05) (.03)
------ ------ ------ ------
Total .18 .30 .27 .28
Weighted average number of shares of
common stock and common stock
equivalents outstanding 581 580 554 538
Three months ended Dec. 31, Sept. 30, June 30, Mar. 31,
(In millions, except 1992 1992 1992 1992
per share amounts) -------- --------- -------- --------
Revenue $2,761 $2,682 $2,606 $2,513
Operating expenses:
Telecommunications 1,472 1,447 1,407 1,358
Sales, operations and general 740 703 687 664
Depreciation 228 223 214 208
Income from operations 321 309 298 283
Net income 160 159 149 141
Earnings applicable to
common stockholders 160 154 141 134
Earnings per common share .30 .29 .26 .25
Weighted average number of shares of
common stock and common stock
equivalents outstanding 534 532 532 530
The three months ended December 31, 1993, includes a $150 million charge
primarily associated with the company's strategic realignment, streamlining
of engineering and network operations facilities and relocation of certain
operations to lower cost areas.
<PAGE> MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. SELECTED QUARTERLY INFORMATION (Unaudited) - (Continued)
The three months ended September 30, 1993, includes the effect of the
retroactive tax law change on the company's net income, which approximated
$13 million.
The three months ended December 31, 1992, includes revenue of $56 million,
net of expenses, from the intelligent network licensing agreement with the
Stentor companies of Canada and $47 million of restructuring charges largely
associated with the realignment of the company's Business Markets organization.
Since there are changes in the weighted average number of shares outstanding
each quarter, the sum of earnings per share by quarter does not equal the
earnings per share for the year.
