PAGE 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 1995
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
Commission File Number 0-6547
MCI COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 52-0886267
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
1801 Pennsylvania Avenue, N.W., Washington, D.C. 20006
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (202) 872-1600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
As of June 30, 1995, the registrant had outstanding 135,998,932 shares of Class
A common stock and 541,798,208 shares of common stock.
<PAGE>
PAGE 2
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
FORM 10-Q
For The Quarter Ended June 30, 1995
INDEX
Page No.
--------
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Income Statements for the three and six months ended
June 30, 1995 and 1994 3
Balance Sheets as of June 30, 1995 and December 31, 1994 4-5
Statements of Cash Flows for the six months ended
June 30, 1995 and 1994 6
Statement of Stockholders' Equity for the six months
ended June 30, 1995 7
Notes to Interim Condensed Consolidated Financial
Statements 8-10
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11-22
PART II: OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 23
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 24
SIGNATURE 25
EXHIBIT INDEX 26
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PAGE 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MCI COMMUNICATIONS AND SUBSIDIARIES
INCOME STATEMENTS
(In millions, except per share amounts)
(unaudited)
Three months Six months
ended June 30, ended June 30,
----------------- -----------------
1995 1994 1995 1994
------ ------ ------ ------
REVENUE $3,706 $3,309 $7,267 $6,530
------ ------ ------ ------
OPERATING EXPENSES
Telecommunications 1,921 1,715 3,740 3,387
Sales, operations and general 1,023 933 2,016 1,839
Depreciation 325 272 645 536
------ ------ ------ ------
TOTAL OPERATING EXPENSES 3,269 2,920 6,401 5,762
------ ------ ------ ------
INCOME FROM OPERATIONS 437 389 866 768
Interest expense (36) (40) (75) (71)
Interest income 49 1 96 2
Other expense, net (9) (9) (21) (18)
------ ------ ------ ------
INCOME BEFORE INCOME TAXES AND
RESULTS OF AFFILIATED COMPANIES 441 341 866 681
Income tax provision 163 127 315 258
------ ------ ------ ------
INCOME BEFORE RESULTS
OF AFFILIATED COMPANIES 278 214 551 423
Equity in income (loss) of
affiliated companies (18) 1 (47) 1
------ ------ ------ ------
NET INCOME $ 260 $ 215 $ 504 $ 424
====== ====== ====== ======
Dividends on preferred stock - 1 - 1
------ ------ ------ ------
Earnings applicable to
common stockholders $ 260 $ 214 $ 504 $ 423
====== ====== ====== ======
EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARES $ .38 $ .37 $ .74 $ .73
Weighted average number of shares
of common stock and common stock
equivalents outstanding 684 575 685 577
Dividends declared per common share $ .025 $ .025 $ .025 $ .025
See accompanying Notes to Interim Condensed Consolidated Financial Statements.
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PAGE 4
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
BALANCE SHEETS
(unaudited)
June 30, December 31,
1995 1994
---------- -----------
(In millions)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,113 $ 1,429
Marketable securities 452 839
Receivables, net of allowance for
uncollectibles of $222 and $226 million 2,478 2,266
Other assets 533 354
-------- --------
TOTAL CURRENT ASSETS 4,576 4,888
-------- --------
COMMUNICATIONS SYSTEM, net 9,978 9,059
OTHER ASSETS
Goodwill, net 1,094 1,103
Noncurrent marketable securities 1,090 824
Investment in affiliates 264 199
Other assets and deferred charges, net 331 293
-------- --------
TOTAL OTHER ASSETS 2,779 2,419
-------- --------
TOTAL ASSETS $ 17,333 $ 16,366
======== ========
See accompanying Notes to Interim Condensed Consolidated Financial Statements.
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PAGE 5
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
BALANCE SHEETS
(unaudited)
June 30, December 31,
1995 1994
---------- -----------
(in millions)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accrued telecommunications expense $ 1,596 $ 1,505
Accounts payable 851 609
Other accrued liabilities 1,009 893
Long-term debt due within one year 126 130
-------- --------
TOTAL CURRENT LIABILITIES 3,582 3,137
-------- --------
NONCURRENT LIABILITIES
Long-term debt 2,931 2,997
Deferred taxes and other 1,389 1,228
-------- --------
TOTAL NONCURRENT LIABILITIES 4,320 4,225
-------- --------
STOCKHOLDERS' EQUITY
Class A common stock, $.10 par value,
authorized 500 million shares, issued
136 million shares 14 14
Common stock, $.10 par value, authorized
2 billion shares, issued
593 and 592 million shares 60 60
Additional paid in capital 6,326 6,227
Retained earnings 4,036 3,548
Treasury stock at cost, 51 and 48
million shares (1,005) (845)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 9,431 9,004
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 17,333 $ 16,366
======== ========
See accompanying Notes to Interim Condensed Consolidated Financial Statements.
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PAGE 6
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(unaudited) Six months ended
June 30,
--------------------
1995 1994
------- -------
OPERATING ACTIVITIES (In millions)
Receipts from customers $ 7,078 $ 6,461
Payments to suppliers and employees (5,553) (5,239)
Taxes paid (168) (147)
Interest paid (62) (34)
Interest received 104 1
------- -------
CASH FROM OPERATING ACTIVITIES 1,399 1,042
------- -------
INVESTING ACTIVITIES
Cash outflow for communications system (1,518) (1,394)
Purchases, maturities and sales of
marketable securities, net 136 -
Investment in affiliates (122) (20)
Acquisition of businesses (21) (111)
Other, net 12 (54)
------- -------
CASH USED FOR INVESTING ACTIVITIES (1,513) (1,579)
------- -------
NET CASH FLOW BEFORE FINANCING ACTIVITIES (114) (537)
------- -------
FINANCING ACTIVITIES
Issuance of Senior Notes and other debt - 938
Payments of Senior Notes and other debt (79) (153)
Commercial paper and bank credit facility
activity, net - (239)
Purchase of treasury stock (217) (230)
Issuance of common stock for employee plans 110 134
Payment of dividends on common, Class A common
and preferred stock (16) (14)
------- -------
CASH (USED FOR) FROM FINANCING ACTIVITIES (202) 436
------- -------
Net decrease in cash and cash equivalents (316) (101)
Cash and cash equivalents - beginning balance 1,429 165
------- -------
Cash and cash equivalents - ending balance $ 1,113 $ 64
======= =======
Reconciliation of net income to cash from
operating activities:
Net income $ 504 $ 424
Adjustments to net income:
Depreciation and amortization 654 556
Deferred income tax provision 181 110
Net change in operating activity accounts
other than cash and cash equivalents:
Receivables (212) (141)
Payables 226 101
Other operating activity accounts 46 (8)
------- -------
Cash from operating activities $ 1,399 $ 1,042
======= =======
See accompanying Notes to Interim Condensed Consolidated Financial Statements.
<PAGE>
PAGE 7
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
STATEMENT OF STOCKHOLDERS' EQUITY
(unaudited)
Treas. Total
Class A Addit'l Stock, Stock-
Common Common Paid in Retained at holders'
Stock Stock Capital Earnings Cost Equity
------ ------ ------- -------- ------ -------
(In Millions)
Balance at
December 31, 1994 $14 $60 $6,227 $3,548 $ (845) $9,004
Common stock issued
for employee stock
and benefit plans
(8 million shares) - - 74 - 57 131
Acquisition of business
(.793 million shares) - - 16 - - 16
Unrealized gain on
marketable securities - - 9 - - 9
Net income - - - 504 - 504
Common and Class A
common stock dividends - - - (16) - (16)
Treasury stock
purchased
(11 million shares) - - - - (217) (217)
---- ----- ------- ------- ------- ------
Balance at
June 30, 1995 $14 $60 $6,326 $4,036 $(1,005) $9,431
==== ===== ======= ======= ======= ======
See accompanying Notes to Interim Condensed Consolidated Financial Statements.
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PAGE 8
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1: GENERAL
The accompanying unaudited interim condensed consolidated financial statements
have been prepared in accordance with the instructions to Quarterly Reports on
Form 10-Q. In the opinion of management, all adjustments (consisting only of
normal recurring adjustments) necessary for a fair statement of the financial
position, results of operations and cash flows for the interim periods presented
have been made. These financial statements should be read in conjunction with
the company's Annual Report on Form 10-K for the year ended December 31, 1994.
NOTE 2: MARKETABLE SECURITIES
As of June 30, 1995, all of the company's marketable securities were classified
as available-for-sale and stated at fair value. Marketable securities were
classified as cash and cash equivalents and current and noncurrent marketable
securities consisting of certificates of deposit, U.S. Government agency
securities, corporate debt securities, U.S. Treasury securities and asset-backed
securities.
NOTE 3: COMMUNICATIONS SYSTEM
June 30, December 31,
1995 1994
-------- ---------
(in millions)
Communications system in service $ 10,659 $ 9,766
Furniture and fixtures 2,008 1,796
Other property and equipment 659 656
-------- --------
Total 13,326 12,218
Accumulated depreciation (4,756) (4,349)
Construction in progress 1,408 1,190
-------- --------
Total communications system, net $ 9,978 $ 9,059
======== ========
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PAGE 9
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 4: NEWS CORP INVESTMENT
On August 2, 1995, the company, after approval by its board of directors of
definitive agreements with The News Corporation Limited (News Corp), acquired
for $1 billion, (i) an aggregate of 51 million preferred shares of two U.S.
subsidiaries of News Corp (News Triangle Finance, Inc. and News T Investments,
Inc.) bearing a dividend coupon rate of 5.147%, and (ii) a 4 year warrant to
acquire up to approximately 155 million ordinary shares of News Corp for $850
million. The exercise price of the warrant is payable, at the company's option,
in cash or through the surrender of the preferred shares. In addition, the
company has an option for five years to invest an additional $1 billion under
the same terms and for the same consideration as its initial investment. Under
certain circumstances, News Corp shall have the right to cause the company to
make the additional $1 billion investment or a portion thereof. If the $2
billion investment is made and the related warrants were exercised today, the
company would hold a 14.0% voting interest (9.8% economic interest) in News Corp
(13.0% voting interest [9.0% economic interest] on a fully diluted basis).
Subject to certain exceptions, prior to the occurrence of certain events
relating to a change of control of News Corp or News Corp entering into
specified arrangements with a competitor of the company, the company shall vote
in any shareholder vote in the same proportion as all other votes.
On August 9, 1995, the company and News Corp announced that they will form a
joint venture through the contribution of their current on-line and interactive
operations. This joint venture will create and distribute electronic
information, educational, and entertainment services to businesses and consumers
in the Americas, initially. The company and News Corp each plan to initially
invest $200 million in cash and net assets in this and another joint venture.
NOTE 5: CONTINGENCIES
The company, in the normal course of business, is a party to a number of
lawsuits and regulatory and other proceedings. The company's management does not
expect that the results in these lawsuits and proceedings will have a material
adverse effect on the consolidated financial position or results of operations
of the company.
<PAGE>
PAGE 10
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
In December 1992, the company petitioned the United States District Court for
the District of Columbia for a declaratory ruling that certain patents being
asserted against the company by AT&T Corp. (AT&T) were invalid and that AT&T
should therefore, and for other reasons, 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
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 still
in their early stages, the company does not expect that either will have a
material adverse effect on the consolidated financial position or results of
operations of the company.
NOTE 6: REORGANIZATION PLAN
On August 1, 1995, the company announced a reorganization plan designed to
increase efficiency, enhance marketplace effectiveness and improve business
focus. Accordingly, the company will reduce its workforce by an estimated 2,500
to 3,000 employees over the remainder of the year and abandon excess facilities.
Costs to implement this reorganization will primarily include severance
associated with the workforce reduction, lease obligations associated with
abandoned excess facilities and costs to modify and terminate contracts
associated with changes in product offerings.
In conjunction with the plan, the company also expects to write-down certain of
its communications system and administrative assets to reflect a decline in
value caused by changes in its business strategy and new product offerings. The
write-down is intended to align the company's asset base with its strategic
objectives. The charges will primarily relate to the write-down of
communications system and administrative assets that have become redundant or no
longer aligned with product offerings.
The total pretax charge associated with the reorganization plan is expected to
be between $600 million and $800 million.
<PAGE>
PAGE 11
PART I.
ITEM 2.
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1995 AND 1994
OVERVIEW
--------
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the company's
consolidated results of operations and financial condition. The discussion
should be read in conjunction with the interim condensed consolidated financial
statements and notes thereto.
The company operates predominantly in a single industry segment, the long
distance telecommunications industry. More than 90% of the company's operating
revenues and identifiable assets relate to the company's activities in this
industry. Management is also embarking on a strategy that is designed to expand
the company's business into other aligned markets and industries (see Strategic
Initiatives).
FINANCIAL SUMMARY
-----------------
Revenue grew $397 million or 12% to $3.7 billion in the second quarter of 1995
versus the second quarter of 1994. Revenue for the first half of 1995 was $7.3
billion compared to $6.5 billion in the same period last year. The company had a
negative variance between revenue and traffic growth of 2.6% and 0.6% for the
three and six months ended June 30, 1995, respectively, which was due to
increased volume and promotional discounts during the second quarter of 1995,
partially offset by tariff rate increases and revenue growth from international
traffic and data products.
Three months Six months
ended June 30, ended June 30,
1995 vs. 1994 1995 vs. 1994
------------- -------------
Increase in revenue 12.0% 11.3%
Increase in traffic 14.6% 11.9%
----- -----
Revenue to traffic variance (2.6)% (0.6)%
----- -----
The volume and promotional discount feature of the company's consumer products
is expected to increase the negative variance between revenue and traffic in the
third quarter of 1995. The company expects the year-over-year quarterly negative
variance to narrow from the third quarter to the fourth quarter of 1995 as a
result of anticipated higher revenue rates.
<PAGE>
PAGE 12
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1995 AND 1994
Income from operations increased more than 12% for the three and six months
ended June 30, 1995 compared to the year-ago periods. Net income was $260
million and $504 million for the three and six months ended June 30, 1995,
respectively, compared to net income in the year-ago periods of $215 million and
$424 million, respectively. Weighted average shares increased approximately 19%
year-over-year for the three and six months ended June 30, 1995 due to the
issuance in September 1994 of 108.5 million shares of the total 136 million
shares of Class A common stock issued to British Telecommunications plc (BT).
RESULTS OF OPERATIONS
--------------------- Increase for Increase for
the three months the six months
ended June 30, ended June 30,
(In millions, except % change) 1995 vs. 1994 1995 vs. 1994
--------------- ---------------
Revenue $397 12.0% $737 11.3%
---- ---- ---- ----
Operating expenses
Telecommunications 206 12.0% 353 10.4%
Sales, operations and general 90 9.6% 177 9.6%
Depreciation 53 19.5% 109 20.3%
---- ---- ---- ----
Total operating expenses 349 12.0% 639 11.1%
---- ---- ---- ----
Income from operations $ 48 12.3% $ 98 12.8%
==== ==== ==== ====
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PAGE 13
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1995 AND 1994
Revenue
-------
In the business market, year-over-year revenue and traffic showed continued
growth for the three and six months ended June 30, 1995. Year-over-year revenue
and traffic increases for both periods were primarily attributable to growth in
international traffic, which grew more than 50%, and the company's various data
products, which continued to grow in excess of 30% on a year-to-date basis. In
addition, the company's MCI Vision**, MCI Preferred**, Vnet** and 800 dedicated
products continued to show strong results.
In the consumer market, year-over-year revenue and traffic growth for the three
and six months ended June 30, 1995, resulted from continued growth in the
company's collect-calling product, 1-800-COLLECT**, Personal 800 product, which
grew more than 50%, and international traffic. NEW Friends & Family**, which was
introduced in January 1995, continued to be well-received during the second
quarter of 1995. Year-over-year revenue growth was mitigated by increases in new
product discounts and promotions.
Telecommunications Expense
--------------------------
Telecommunications expense as a percentage of revenue was 51.8% for the second
quarter of both 1995 and 1994. On a year-to-date basis, telecommunications
expense as a percentage of revenue decreased to 51.5% in 1995 from 51.9% in 1994
due to reductions in domestic access rates and international settlement rates
and continued network optimization.
On April 14, 1995, the Federal Communications Commission (FCC) issued its
Revisions to Tariff Review Plan for Price Cap Companies and Order, effective
August 1, 1995. The effect of these revisions will be to decrease the costs that
long distance companies pay local exchange companies for access. On May 9, 1995,
the affected local exchange companies filed their revised tariffs with the FCC.
Although domestic access rates are expected to ultimately decrease in the second
half of 1995 as a result of this ruling, the company cannot determine the exact
impact of the rate reductions on its results of operations. Any favorable impact
may be somewhat offset by revenue rates, seasonality and product mix.
<PAGE>
PAGE 14
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1995 AND 1994
Sales, Operations and General
-----------------------------
Sales, operations and general expense increased 9.6% for the three and six
months ended June 30, 1995 from the comparable periods in 1994. The increase was
due primarily to increased personnel costs for customer service and sales and
sales support staff associated with the introduction of new products and
services. Sales and marketing costs increased largely due to the introduction of
NEW Friends & Family, as well as the impact of costs associated with the
company's networkMCI BUSINESS*** and 1-800-COLLECT programs. Facilities costs
also increased year-over-year as a result of new and expanding service centers.
Sales, operations and general expense as a percentage of revenue decreased
slightly to 27.6% and 27.7% for the three and six months ended June 30, 1995,
respectively, from 28.2% for the corresponding periods in 1994.
Depreciation Expense
--------------------
Depreciation expense increased 19.5% and 20.3% for the three and six month
periods ended June 30, 1995, respectively. This increase was primarily a result
of additions to the communications network which were made in order to increase
network capacity, redundancy and reliability.
Interest Expense
----------------
Interest expense for the second quarter of 1995 declined $4 million from the
comparable 1994 period primarily as a result of a decrease in the average level
of debt outstanding and an increase in capitalized interest. On a year-to-date
basis, interest expense increased $4 million due to the issuance of $950 million
aggregate principal amount of Senior Notes and Debentures in March 1994, which
was partially offset by an increase in capitalized interest.
<PAGE>
PAGE 15
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1995 AND 1994
Interest Income
---------------
Interest income increased significantly in the three and six month periods ended
June 30, 1995 versus the same periods a year ago due to the investment of the
funds received from BT in September 1994. The company expects interest income to
decline in the second half of 1995 as cash is used to fund its ventures and
alliances.
Reorganization Plan
-------------------
On August 1, 1995, the company announced a reorganization plan designed to
increase efficiency, enhance marketplace effectiveness and improve business
focus. Accordingly, the company will reduce its workforce by an estimated 2,500
to 3,000 employees over the remainder of the year and abandon excess facilities.
Costs to implement this reorganization will primarily include severance
associated with the workforce reduction, lease obligations associated with
abandoned excess facilities and costs to modify and terminate contracts
associated with changes in product offerings.
In conjunction with the plan, the company also expects to write-down certain of
its communications system and administrative assets to reflect a decline in
value caused by changes in its business strategy and new product offerings. The
write-down is intended to align the company's asset base with its strategic
objectives. The charges will primarily relate to the write-down of
communications system and administrative assets that have become redundant or no
longer aligned with product offerings.
The total pretax charge associated with the reorganization plan is expected to
be between $600 million and $800 million. After the applicable tax benefit, the
charge will result in a reduction of earnings of between $372 million and $496
million, or $.54 and $.72 per share.
The company does not expect to realize the full benefit of the workforce
reductions until 1996, due to the fact that the reductions are not expected to
be completed until the end of 1995. Depreciation savings from the asset
write-down will partially offset increases in depreciation expense from
continuing additions to the communications system for the remainder of 1995.
<PAGE>
PAGE 16
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1995 AND 1994
STRATEGIC INITIATIVES
---------------------
The company has investments in activities which are in the early stages of
development. These investments fall into two categories: subsidiaries and equity
investees. Investments in subsidiaries, entities in which the company owns a
majority interest, are consolidated in the financial statements and all
significant intercompany transactions are eliminated. Equity investees are
entities in which the company has less than a majority interest but can exercise
significant influence. Investments in equity investees are presented on the
balance sheet as investment in affiliates, and the company's related share of
investee income (losses) is presented on the income statement as equity in
income (losses) of affiliated companies.
The company is currently evaluating the creation of separate classes of its
common stock, referred to as targeted stock, and the sale of minority interests
in one or more of the company's subsidiaries.
MCImetro*
---------
MCImetro, Inc. (MCImetro), the company's wholly-owned local services subsidiary,
is a provider of local fiber-optic capacity and competitive access services to
the company and other long distance carriers, large businesses and government
users of telecommunications services. MCImetro intends to become a single source
provider of comprehensive local wireline telecommunications services,
encompassing voice, data and enhanced services throughout the U.S. as regulatory
authorities permit. As of June 30, 1995, MCImetro had filed for authority to
offer local phone service in 12 states, of which 7 have granted such authority.
MCImetro currently owns or operates conduit and fiber cable facilities in more
than 200 U.S. cities.
MCImetro continued to expand its coverage area and service offerings during the
second quarter of 1995. MCImetro's Local Choice Direct* service is currently
available in Atlanta, Baltimore, Boston, Cleveland, Dallas, Los Angeles, New
York, Northern New Jersey, San Diego, San Francisco, Seattle and Washington,
D.C. This family of access services provides businesses with high quality
dedicated access connections to a long distance carrier or other service
provider. In addition, through Local Choice Custom*, MCImetro provides complete
network design and implementation for customized network solutions.
<PAGE>
PAGE 17
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1995 AND 1994
During the second quarter of 1995, MCImetro increased its fiber route miles to
2,182 and local city networks to 17 in 12 cities.
Summary financial information for MCImetro as of and for the three months ended
June 30, 1995 was as follows:
June 30, 1995
--------------
(in millions)
Assets $278
Revenue 22
Operating Loss (4)
The company remains MCImetro's largest customer.
Equity Investees
----------------
During the second quarter of 1995, the company invested an additional $79
million in certain of its equity investees for a total of $122 million
year-to-date.
The company invested an additional $47 million in Concert Communications Company
(Concert), a 24.9% owned international services venture with BT, which
represents the company's percentage share of required ongoing capital infusions
to the venture.
During the second quarter of 1995, the company also invested an additional $19
million in IFP Holdings, Inc. (IFP), the parent of In-Flight Phone Corporation
which is a provider of digital air-to-ground communications. In August 1995, the
company purchased additional shares and increased its voting interest in IFP to
approximately 45%.
In June 1995, the company exercised warrants, for approximately $13 million, to
acquire additional shares of ICS Communications, Inc. (ICS), a provider of cable
television and local and long distance telephone services to the high density
residential market, including apartment complexes, condominiums and other
multi-family residential properties. However, the company's ownership percentage
decreased from 34.6% to 25.7% due to a substantial investment in ICS by News
Corp and the exercise of warrants by other existing investors.
<PAGE>
PAGE 18
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1995 AND 1994
AVANTEL, S.A. (AVANTEL), the company's 45% owned business venture formed with
Grupo Financiero Banamex-Accival to provide competitive domestic and
international long distance telecommunications in Mexico, filed with the
Secretariat of Communications and Transportation for a license to construct and
operate a nationwide fiber-optic telecommunications network in Mexico. AVANTEL
plans to provide long distance telecommunications services when the market opens
for competition, which is currently expected to occur in August 1996. The
company's cash investment in AVANTEL is expected to be approximately $500
million over the next several years.
The company also has several other investments including a 23.5% interest in
Belize Telecommunications, Ltd., a 25% interest in CLEAR Communications, Ltd.,
of New Zealand and a 30.9% interest in General Communication, Inc., of Alaska.
The company reported equity in losses from its ventures of $18 million and $47
million for the three and six months ended June 30, 1995, respectively, a
majority of which resulted from its share of Concert's losses. Concert is
expected to continue to generate losses in 1995 due to its start-up nature. The
company's share of Concert's losses is anticipated to be between $10 million and
$15 million per quarter.
Recent Developments
-------------------
On August 2, 1995, the company, after approval by its board of directors of
definitive agreements with The News Corporation Limited (News Corp), acquired
for $1 billion, preferred shares of two U.S. subsidiaries of News Corp (News
Triangle Finance, Inc. and News T Investments, Inc.) and a 4 year warrant to
acquire ordinary shares of News Corp for $850 million. The exercise price of the
warrant is payable, at the company's option, in cash or through the surrender of
the preferred shares. In addition, the company has an option for five years to
invest an additional $1 billion under the same terms and for the same
consideration as its initial investment. Under certain circumstances, News Corp
shall have the right to cause the company to make the additional $1 billion
investment or a portion thereof. (See also Note 4 of the Interim Condensed
Consolidated Financial Statements on this Form 10-Q).
On August 9, 1995, the company and News Corp announced that they will form a
joint venture through the contribution of their current on-line and interactive
operations. This joint venture will create and distribute electronic
information, educational and entertainment services to businesses and consumers
in the Americas, initially. The company and News Corp each plan to initially
invest $200 million in cash and net assets in this and another joint venture.
<PAGE>
PAGE 19
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1995 AND 1994
On June 30, 1995, the company acquired Darome Teleconferencing, Inc. (Darome)
for approximately $40 million in cash and common stock of the company. The
company will integrate Darome's teleconferencing product development and
marketing activities to target the fast-growing teleconferencing market.
On May 22, 1995, the company entered into a definitive merger agreement to
acquire all of the outstanding shares of Nationwide Cellular Service, Inc.
(Nationwide) for $190 million in cash. This acquisition represents part of the
company's strategy to provide national wireless services integrated with other
company services for both consumer and business customers by investing in the
creation and delivery of value-added wireless services. The merger is subject to
the approval of Nationwide's stockholders and certain regulatory approvals and
is anticipated to close in the third quarter of 1995.
During the third quarter of 1995, the company entered into agreements with GTE
Mobilnet, BellSouth, McCaw, Frontier and NewPar (a joint venture of Airtouch
Communications and Cellular Communications, Inc.) to purchase for resale
wireless services. These agreements, including arrangements that Nationwide has
with other cellular carriers, gives the company the ability to market wireless
services in the top 100 U.S. markets.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
----------------------------------------------------
Working Capital
---------------
The company had positive working capital (current assets less current
liabilities) of approximately $1 billion and $1.8 billion as of June 30, 1995
and December 31, 1994, respectively. The decrease in working capital was
primarily due to negative cash flow of $316 million during the first half of
1995 and a shift in the investment portfolio from current to noncurrent
marketable securities. This decrease is expected to continue in the third
quarter due primarily to the $1 billion investment in News Corp.
<PAGE>
PAGE 20
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1995 AND 1994
Communications System
---------------------
The company continued to invest in its communications system in order to enhance
network intelligence and increase network capacity and capability. Cash outflows
for its communications system were $1,518 million and $1,394 million for the six
months ended June 30, 1995 and 1994, respectively. The company also proceeded
with its plans to deploy advanced network technologies for improved reliability
and delivery of advanced services. In addition to the construction of MCImetro's
network, the company completed its deployment of Synchronous Optical Network
(SONET) rings around Boston and St. Louis during the second quarter of 1995. By
year end 1995, additional SONET rings are expected to be operational around
Atlanta, New York, Dallas, Detroit, Minneapolis and San Francisco.
Funding of Alliances, Investments and Initiatives
-------------------------------------------------
The company believes that it will be able to meet its current and long-term
liquidity and capital requirements, including its planned investments in News
Corp, MCImetro, AVANTEL and Nationwide, through its cash flows from operating
activities, existing cash and cash equivalents and marketable securities, its
bank credit facility and access to the public markets. Cash and cash equivalents
and marketable securities totaled approximately $2.7 billion as of June 30,
1995. The company has available a $2 billion bank credit facility, expiring in
July 1999, which supports the company's commercial paper program and may be used
in conjunction with the commercial paper program to fund short-term fluctuations
in working capital and other general corporate requirements. In addition, the
company has a $1 billion shelf registration in effect covering debt securities
with a range of maturities at either fixed or variable rates. As of June 30,
1995, there were no amounts outstanding under the bank credit facility,
commercial paper program or the shelf registration.
<PAGE>
PAGE 21
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1995 AND 1994
CASH FLOWS
---------- Six months ended
(in millions) June 30,
1995 1994 Change
------- ------- -------
Cash from operating
activities $ 1,399 $ 1,042 $ 357
Cash used for
investing activities (1,513) (1,579) 66
Cash (used for) from
financing activities (202) 436 (638)
------- ------- -------
Net decrease in cash
and cash equivalents $ (316) $ (101) $ (215)
======= ======= =======
EBITDA
------
Earnings before interest, taxes, depreciation and amortization (EBITDA), also
known as operating cash flow, increased nearly 16% to $1,511 million from $1,304
million for the six months ended June 30, 1995 and 1994, respectively. EBITDA, a
measure of the company's ability to generate cash flows, should be considered in
addition to but not as a substitute for, or superior to, other measures of
financial performance reported in accordance with generally accepted accounting
principles. EBITDA is often used by analysts when evaluating companies in the
telecommunications industry.
Cash from Operating Activities
------------------------------
Cash from operating activities increased significantly as a result of an
increase in cash received from customers due to the growth in the company's
revenue, which was only partially offset by an increase in cash paid to
suppliers and employees. Also contributing to the increase in cash was the
interest earned on the investment of funds received from BT in September 1994.
<PAGE>
PAGE 22
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1995 AND 1994
Cash used for Investing Activities
----------------------------------
Cash used for investing activities decreased year-over-year due primarily to
proceeds from the net investment activity associated with the company's
marketable securities portfolio acquired with BT funds received in September
1994. Capital expenditures increased in the first half of 1995 compared to 1994
due to the company's continued investment in its network.
Cash (used for) from Financing Activities
-----------------------------------------
Cash (used for) from financing activities for the six months ended June 30, 1995
decreased significantly from the year-ago period, primarily due to the March
1994 issuance of $950 million principal amount of Senior Notes and Debentures
which was partially offset by the repayment of commercial paper.
CURRENT LEGISLATION
-------------------
Congress is considering comprehensive legislation which affects every sector of
the telecommunications industry, including opening up local telephone markets to
competition and providing for Bell Operating Company (BOC) entry into the long
distance telecommunications market. The Senate acted on June 15, 1995 passing S.
652, and the House approved H.R. 1555, its version of telecommunications
legislation, on August 4, 1995. It is not possible to determine which form of
the legislation, if any, will ultimately be enacted into law or its impact on
the company's results of operations.
-----------------------------------------------
* MCImetro, Local Choice Direct and Local Choice Custom are service marks of MCI
Communications Corporation.
** 1-800-COLLECT, Vnet, MCI Vision, MCI Preferred and NEW Friends & Family are
registered service marks of MCI Communications Corporation.
*** networkMCI BUSINESS is a registered trademark of MCI Communications
Corporation.
<PAGE>
PAGE 23
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
FORM 10-Q
PART II. OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a)The company's annual meeting of stockholders was held on April 17,
1995.
(b)The nominees for directors of the company set forth in full in the
company's Proxy Statement dated March 10, 1995 (Proxy Statement) were
elected at the annual meeting.
(c) Holders of common shares and Class A common shares voted at the
annual meeting on the following matters which were set forth in the
company's Proxy Statement.
(1) To elect four directors by the holders of common stock, each
to serve for a three year term.
VOTES (in millions):
Nominee For Abstain
------- --- -------
Michael H. Bader 449 4
Gordon S. Macklin 449 4
Bert C. Roberts 449 4
Richard B. Sayford 449 4
Broker non-votes: None
(2)To elect two Class A directors by the holders of Class A
common stock, each to serve a one year term.
VOTES (in millions):
Nominee For Abstain
------- --- -------
Michael L. Hepher 136 -
Alfred T. Mocket 136 -
Broker non-votes: None
(3) To approve the appointment by the company's board of
directors of Price Waterhouse LLP as independent accountants for
the year ending December 31, 1995.
VOTES ( in millions):
For: 587
Against: 1
Abstain: -
Broker non-votes: None
<PAGE>
PAGE 24
PART II. OTHER INFORMATION (continued)
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
a)Exhibits
Exhibit No. Description
----------- -----------
11 Computation of Earnings per Common Share.
12 Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule as of June 30, 1995.
99(a) Capitalization Schedule as of June 30, 1995.
b)Reports on Form 8-K
No reports on Form 8-K were filed by the company during the three month period
ended June 30, 1995.
<PAGE>
PAGE 25
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
FORM 10-Q
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MCI COMMUNICATIONS CORPORATION
Date: August 14, 1995 Signed: /s/ Douglas L. Maine
-----------------------
Douglas L. Maine
Executive Vice President
and Chief Financial Officer
<PAGE>
PAGE 26
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
FORM 10-Q
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
11 Computation of Earnings per Common Share.
12 Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule as of June 30, 1995.
99(a) Capitalization Schedule as of June 30, 1995.
Exhibit 11
-------------
(Page 1 of 2)
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
(In millions, except per share amounts)
(unaudited)
Three months Six months
ended ended
June 30, June 30,
------------- -------------
1995 1994 1995 1994
Primary ---- ---- ---- ----
-------
Net income ............................... $ 260 $ 215 $ 504 $ 424
Dividends on preferred stock ............. - (1) - (1)
------ ------ ------ ------
Earnings applicable to common
stockholders ........................... 260 214 504 423
Add back:
Convertible preferred stock dividends .... - 1 - 1
------ ------ ------ ------
Earnings as adjusted for purposes
of computing earnings per share ........ $ 260 $ 215 $ 504 $ 424
====== ====== ====== ======
Adjustment of shares outstanding:
Weighted average shares of common stock
outstanding ............................ 678 540 679 541
Assumed conversion of preferred stock .... - 27 - 27
Shares of common stock issuable upon the
assumed exercise of common stock
equivalents ............................ 46 45 46 45
Shares of common stock assumed repurchased
for treasury(a) ........................ (40) (37) (40) (36)
------ ------ ------ ------
Adjusted shares of common stock and common
stock equivalents for computation ...... 684 575 685 577
====== ====== ====== ======
Earnings per common and common
equivalent shares ........................ $ .38 $ .37 $ .74 $ .73
====== ====== ====== ======
(a) At an average market price of $20.91 and $20.19 for the three and six months
ended June 30, 1995, respectively, and $23.18 and $24.73 for the three and six
months ended June 30, 1994, respectively.
<PAGE>
Exhibit 11
-------------
(Page 2 of 2)
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
(In millions, except per share amounts)
(unaudited)
Three months Six months
ended ended
June 30, June 30,
------------- -------------
1995 1994 1995 1994
Assuming Full Dilution ---- ---- ---- ----
----------------------
Net income ............................... $ 260 $ 215 $ 504 $ 424
Dividends on preferred stock ............. - (1) - (1)
------ ------ ------ ------
Earnings applicable to common
stockholders ........................... 260 214 504 423
Add back:
Convertible preferred stock dividends .... - 1 - 1
------ ------ ------ ------
Earnings as adjusted for purposes
of computing earnings per share ........ $ 260 $ 215 $ 504 $ 424
====== ====== ====== ======
Adjustment of shares outstanding:
Weighted average shares of common stock
outstanding ............................ 678 540 679 541
Assumed conversion of preferred stock .... - 27 - 27
Shares of common stock issuable upon the
assumed exercise of common stock
equivalents ............................ 46 45 46 45
Shares of common stock assumed repurchased
for treasury(b) ........................ (38) (37) (37) (36)
------ ------ ------ ------
Adjusted shares of common stock and common
stock equivalents for computation ...... 686 575 688 577
====== ====== ====== ======
Earnings per common and common
equivalent shares ........................ $ .38 $ .37 $ .73 $ .73
====== ====== ====== ======
(b) The June 30, 1995 ending market price of $22 was used as it is higher than
the average market price of $20.91 and $20.19 for the three and six months ended
June 30, 1995, respectively. The average market price of $23.18 and $24.73 for
the three and six months ended June 30, 1994 was used as it was higher than the
June 30, 1994 ending market price of $22.13.
Exhibit 12
----------
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In millions, except ratio amounts)
(unaudited)
Six Months Ended
June 30, Year Ended December 31,
-------------- ----------------------------------
1995 1994 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ----
Earnings:
Income before
income taxes and
extraordinary item(a) $819 $682 $1,280 $1,045 $ 963 $ 848 $440
Add:
Fixed charges 168 153 315 315 346 334 321
Less:
Capitalized interest 43 38 78 61 52 58 49
---- ---- ------ ------ ------ ------ ----
Total earnings $944 $797 $1,517 $1,299 $1,257 $1,124 $712
==== ==== ====== ====== ====== ====== ====
Fixed Charges:
Fixed charges on
indebtedness,
including amortization
of debt discount and
premium $118 $110 $ 231 $ 239 $ 270 $ 270 $262
Interest portion of
operating lease
rentals(b) 50 43 84 76 76 64 59
---- ---- ------ ------ ------ ------ ----
Total fixed charges $168 $153 $ 315 $ 315 $ 346 $ 334 $321
==== ==== ====== ====== ====== ====== ====
Ratio of earnings to
fixed charges 5.62 5.21 4.82 4.12 3.63 3.37 2.22
==== ==== ====== ====== ====== ====== ====
(a) Includes equity in income (losses) of affiliated companies.
(b) The interest portion of operating lease rentals is calculated as one third
of rent expense which represents a reasonable approximation of the interest
factor.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet of MCI Communications Corporation and Subsidiaries at June 30, 1995 and
the income statement for the six months ended June 30, 1995 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000064079
<NAME> MCI Communications Corporation
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 1,113
<SECURITIES> 452
<RECEIVABLES> 2,700
<ALLOWANCES> 222
<INVENTORY> 0
<CURRENT-ASSETS> 4,576
<PP&E> 14,734
<DEPRECIATION> 4,756
<TOTAL-ASSETS> 17,333
<CURRENT-LIABILITIES> 3,582
<BONDS> 2,931
<COMMON> 74
0
0
<OTHER-SE> 9,357
<TOTAL-LIABILITY-AND-EQUITY> 17,333
<SALES> 0
<TOTAL-REVENUES> 7,267
<CGS> 0
<TOTAL-COSTS> 6,401
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 201
<INTEREST-EXPENSE> 75
<INCOME-PRETAX> 866
<INCOME-TAX> 315
<INCOME-CONTINUING> 504
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 504
<EPS-PRIMARY> 0.74
<EPS-DILUTED> 0.73
</TABLE>
Exhibit 99(a)
-------------
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CAPITALIZATION SCHEDULE
(In millions)
(unaudited)
Set forth below is the capitalization of the company as of June 30, 1995:
Debt(a):
Secured debt:
Capital lease obligations ................................... $ 543
Other secured obligations ................................... 22
---------
Total secured debt ............................................. 565
---------
Unsecured debt:
Senior Notes, net ........................................... 1,501
Senior Debentures, net ...................................... 884
Other unsecured debt ........................................ 107
---------
Total unsecured debt ........................................... 2,492
---------
Total debt .................................................. $ 3,057
---------
Stockholders' equity:
Class A common stock, $.10 par value, authorized
500 million shares, issued 136 million shares ............. $ 14
Common stock, $.10 par value, authorized 2 billion
shares, issued 593 million shares ......................... 60
Additional paid in capital .................................. 6,326
Retained earnings ........................................... 4,036
Treasury stock at cost, 51 million shares ................... (1,005)
---------
Total stockholders' equity ..................................... 9,431
---------
Total capitalization ........................................... $ 12,488
=========
(a) See Note 6 of Notes to Consolidated Financial Statements on page 19 of
the company's Annual Report to Stockholders, which is included in Exhibit 13
to the company's Annual Report on Form 10-K for the year ended December 31,
1994, for additional information concerning the company's capital lease
obligations, which are obligations of subsidiaries of the company that are
guaranteed by the company. Interest rates on capital lease obligations, on a
weighted average basis, approximated 8.8% per annum at June 30, 1995.
For additional information concerning the company's long-term debt, see Note
5 of Notes to Consolidated Financial Statements on pages 17 and 18 of the
company's Annual Report to Stockholders, which is included in Exhibit 13 to
the company's Annual Report on Form 10-K for the year ended December 31,
1994.
