UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 1996
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 No.)
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 September 30, 1996, the registrant had outstanding 135,998,932 shares of
Class A common stock and 548,903,285 shares of common stock.
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PAGE 2
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
FORM 10-Q
For The Quarter Ended September 30, 1996
INDEX
Page No.
--------
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Income Statements for the three and nine months ended
September 30, 1996 and 1995 3
Balance Sheets as of September 30, 1996 and December 31, 1995 4-5
Statements of Cash Flows for the nine months ended
September 30, 1996 and 1995 6
Statement of Stockholders' Equity for the nine months
ended September 30, 1996 7
Notes to Interim Condensed Consolidated Financial
Statements 8-10
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11-23
PART II: OTHER INFORMATION
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 CORPORATION AND SUBSIDIARIES
INCOME STATEMENTS
(In millions, except per share amounts)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- -----------------
1996 1995 1996 1995
------ ------ ------ ------
REVENUE $4,685 $3,862 $13,741 $11,128
------ ------ ------ ------
OPERATING EXPENSES
Cost of services 2,370 2,001 7,056 5,741
Sales, operations and general 1,304 1,283 3,718 3,298
Depreciation 430 328 1,223 973
Asset write-down - 520 - 520
------ ------ ------ ------
TOTAL OPERATING EXPENSES 4,104 4,132 11,997 10,532
------ ------ ------ ------
INCOME (LOSS) FROM OPERATIONS 581 (270) 1,744 596
Interest expense (51) (35) (153) (109)
Interest income 7 36 27 131
Equity in income (losses) of
affiliated companies (28) (116) (128) (163)
Other income (expense), net (1) (2) (1) (23)
------ ------ ------ ------
INCOME (LOSS) BEFORE INCOME TAXES AND
TRUST DISTRIBUTIONS 508 (387) 1,489 432
Income tax (provision) benefit (189) 147 (570) (168)
Distributions on Trust preferred
securities 15 - 20 -
------ ------ ------ ------
NET INCOME (LOSS) $ 304 $ (240) $ 899 $ 264
====== ====== ====== ======
EARNINGS (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARES $ .44 $ (.35) $ 1.29 $ .38
Weighted average number of shares
of common stock and common stock
equivalents outstanding 691 688 695 686
Dividends declared per common share $ - $ - $ .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)
September 30, December 31,
1996 1995
----------- -----------
(In millions)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 250 $ 471
Marketable securities 130 373
Receivables, net of allowance for
uncollectibles of $265 and $260 million 3,331 2,912
Other assets 944 749
------- -------
TOTAL CURRENT ASSETS 4,655 4,505
------- -------
PROPERTY AND EQUIPMENT, net 11,658 10,309
OTHER ASSETS
Noncurrent marketable securities 67 -
Other assets and deferred charges, net 948 511
Investment in affiliates 399 495
Investment in News Corp. 1,350 1,000
Goodwill, net 2,432 2,481
------- -------
TOTAL OTHER ASSETS 5,196 4,487
------- -------
TOTAL ASSETS $21,509 $19,301
======= =======
See accompanying Notes to Interim Condensed Consolidated Financial Statements.
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PAGE 5
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
BALANCE SHEETS
(unaudited)
September 30, December 31,
1996 1995
----------- -----------
(In millions)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 895 $ 706
Accrued telecommunications expense 1,977 1,936
Other accrued liabilities 1,768 1,728
Long-term debt due within one year 439 500
------- -------
TOTAL CURRENT LIABILITIES 5,079 4,870
------- -------
NONCURRENT LIABILITIES
Long-term debt 3,722 3,444
Deferred taxes and other 1,629 1,385
------- -------
TOTAL NONCURRENT LIABILITIES 5,351 4,829
------- -------
COMPANY OBLIGATED MANDATORILY REDEEMABLE
PREFERRED SECURITIES OF SUBSIDIARY TRUST
HOLDING SOLELY JUNIOR SUBORDINATED
DEFERRABLE INTEREST DEBENTURES OF THE COMPANY 750 -
------- -------
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 million shares 60 60
Additional paid in capital 6,366 6,405
Retained earnings 4,945 4,063
Treasury stock, at cost,
44 and 43 million shares (1,056) (940)
------- -------
TOTAL STOCKHOLDERS' EQUITY 10,329 9,602
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $21,509 $19,301
======= =======
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)
Nine Months Ended
September 30,
----------------------
1996 1995
------- -------
(In millions)
OPERATING ACTIVITIES
Receipts from customers $13,267 $10,705
Payments to suppliers and employees (10,457) (8,476)
Taxes paid (620) (261)
Interest paid (163) (120)
Interest received 28 151
------ ------
CASH FROM OPERATING ACTIVITIES 2,055 1,999
------ ------
INVESTING ACTIVITIES
Capital expenditures for property and equipment (2,423) (2,261)
Purchases, maturities and sales of
marketable securities, net 176 1,371
Investment in News Corp. (350) (1,000)
Investment in DBS (268) -
Investment in affiliates (32) (145)
Acquisition of businesses, net of cash acquired (24) (194)
Other, net (8) 11
------ ------
CASH USED FOR INVESTING ACTIVITIES (2,929) (2,218)
------ ------
NET CASH FLOW BEFORE FINANCING ACTIVITIES (874) (219)
------ ------
FINANCING ACTIVITIES
Issuance (payment) of Debentures and other debt, net 492 (105)
Commercial paper and bank credit facility
activity, net (368) -
Issuance of Trust preferred securities, net 726 -
Issuance of common stock for employee plans 342 202
Purchase of treasury stock (522) (285)
Payment of dividends on common stock and
Class A common stock (17) (16)
------ ------
CASH FROM (USED FOR) FINANCING ACTIVITIES 653 (204)
------ ------
Net decrease in cash and cash equivalents (221) (423)
Cash and cash equivalents - beginning balance 471 1,429
------ ------
Cash and cash equivalents - ending balance $ 250 $1,006
====== ======
Reconciliation of net income to cash from
operating activities:
Net income $ 899 $264
Adjustments to net income:
Depreciation and amortization 1,267 1,012
Asset write-down - 520
Equity in (income) losses of affiliated companies 127 162
Deferred income tax provision 192 51
Net change in operating activity accounts
other than cash and cash equivalents:
Receivables (419) (456)
Operating accounts payable 122 173
Other operating activity accounts (133) 273
------ ------
Cash from operating activities $2,055 $1,999
====== ======
See accompanying Notes to Interim Condensed Consolidated Financial Statements.
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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, 1995 $ 14 $ 60 $6,405 $4,063 $ (940) $9,602
Common stock issued
for employee stock
and benefit plans
(19 million shares) - - (39) - 415 376
Net income - - - 899 - 899
Common stock dividends - - - (17) - (17)
Treasury stock
purchased
(20 million shares) - - - - (531) (531)
----- ----- ------ ------ ------- -------
Balance at
September 30, 1996 $14 $60 $6,366 $4,945 $(1,056) $10,329
===== ===== ====== ====== ======= =======
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 rules and regulations of the
Securities and Exchange Commission (SEC). The interim condensed consolidated
financial statements include the consolidated accounts of MCI Communications
Corporation and its majority-owned subsidiaries (collectively, the company) with
all significant intercompany transactions eliminated. 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. Certain prior
year information has been reclassified to conform to the current quarter
presentation. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such SEC rules and
regulations. These financial statements should be read in conjunction with the
company's Annual Report on Form 10-K for the year ended December 31, 1995.
NOTE 2. NEWS CORP. ALLIANCE
In May 1996, the company invested an additional $350 million in The News
Corporation Limited (News Corp.). Under certain circumstances, News Corp. has
the right until August 2000 to require the company to make an additional
investment of up to an aggregate of $650 million on the same terms and for the
same consideration as the company's initial investment. The company accounts for
its investment under the cost method.
In January 1996, the company won the last national direct broadcast satellite
(DBS) license with a bid of $682 million. The company has paid $136 million of
the license fee as of September 30, 1996. The company expects the Federal
Communications Commission (FCC) to issue an Order granting the post auction
application and awarding the license conditioned upon payment of the balance of
the bid. The company expects the issuance of the Order and the payment of the
balance to occur prior to the end of this year. The company and News Corp. have
agreed to form a joint venture, in which the company anticipates owning less
than a 20% interest, to provide digital satellite services to homes and
businesses beginning in late 1997.
NOTE 3. LONG-TERM DEBT
During the nine months ended September 30, 1996, the company issued two series
of debt under its $1 billion shelf registration. On June 24, 1996, the company
issued $500 million aggregate principal amount of 7 1/8% Debentures due June 15,
2027 and on August 9, 1996, the company issued $300 million aggregate
<PAGE>
PAGE 9
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
principal amount of 6.95% Senior Notes due August 15, 2006. As of September 30,
1996, $200 million was available for issuance under the shelf registrations. The
proceeds of the issuances were used for general corporate purposes, including
the repayment of short-term borrowings under the company's commercial paper
program. On September 30, 1996, the company filed a new $1 billion shelf
registration that, together with the $200 million available under the prior $1
billion shelf registration, will allow the company to issue up to $1.2 billion
aggregate principal amount of debt securities with a range of maturities at
either fixed or variable rates.
On September 26, 1996, the company entered into a revolving credit loan
agreement with several parties, under which the company may borrow up to $2
billion. This agreement expires in September 2001 and replaces the $2 billion
revolving credit loan agreement of July 1994. There are no amounts outstanding
under this credit facility at September 30, 1996.
NOTE 4. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEFERRABLE INTEREST
DEBENTURES OF THE COMPANY
On May 29, 1996, MCI Capital I, a wholly-owned Delaware statutory business trust
(Trust), issued $750 million of 8% Cumulative Quarterly Income Preferred
Securities, Series A (preferred securities) due June 30, 2026. The Trust exists
for the sole purpose of issuing the preferred securities and investing the
proceeds in the company's 8% Junior Subordinated Deferrable Interest Debentures,
Series A (Subordinated Debt Securities) due June 30, 2026, the only assets of
the Trust. The proceeds from the issuance of the Subordinated Debt Securities
were used for general corporate purposes.
Holders of the preferred securities are entitled to receive preferential
cumulative cash distributions from the Trust, on a quarterly basis, provided the
company has not elected to defer the payment of interest due on the Subordinated
Debt Securities to the Trust. The company may elect this deferral from time to
time, provided that the period of each such deferral does not exceed five years.
The preferred securities are subject to mandatory redemption, in whole or in
part, upon repayment of the Subordinated Debt Securities at maturity or earlier
in an amount equal to the amount of Subordinated Debt Securities maturing or
being repaid. In addition, in the event the company terminates the Trust, the
Subordinated Debt Securities will be distributed to the then holders of the
preferred securities of the Trust.
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PAGE 10
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
In connection with the issuance of the preferred securities, the company
executed a Trust Agreement, an Indenture, a Guarantee Agreement and an Expense
Agreement. These agreements, taken together with the issuance of the
Subordinated Debt Securities, constitute a full, irrevocable and unconditional
guarantee by the company of all of the Trust's obligations under the preferred
securities (the Guarantee). The Guarantee Agreement covers payment of the
preferred securities' quarterly distributions and payments on maturity or
redemption of the preferred securities, but only in each case to the extent of
funds held by the Trust. If the company does not make interest payments on the
Subordinated Debt Securities held by the Trust, the Trust will have insufficient
funds to pay such distributions. The obligations of the company under the
Guarantee and the Subordinated Debt Securities are subordinate and junior in
right of payment to all senior debt of the company.
NOTE 5. 1995 SPECIAL CHARGE FOR REORGANIZATION
Other accrued liabilities at September 30, 1996 include approximately $115
million related to the reorganization accrual recorded in the third quarter of
1995. The remaining accrual primarily consists of lease obligations for excess
facilities, contract termination costs and accrued legal and other business
costs.
NOTE 6. SUBSEQUENT EVENT
On November 3, 1996, the company entered into an Agreement and Plan of Merger
with British Telecommunications, plc (BT), a public limited company incorporated
under the laws of England and Wales, and Tadworth Corporation (Tadworth), a
Delaware corporation and a wholly-owned subsidiary of BT, pursuant to which the
company will merge with and into Tadworth (the Merger). As a result of the
Merger, each outstanding share of the company's common stock, par value $.10 per
share (other than shares held in the treasury of the company or owned by BT or
Tadworth or any persons who shall have properly exercised their rights to
appraisal under Delaware law), will be converted into the right to receive
(i).54 American Depository Share (ADS) of BT, each representing ten ordinary
shares of 25 pence each of BT (with cash being paid in lieu of fractional ADSs),
and (ii) $6.00 in cash. The combined company will be named Concert plc and will
operate under the BT and MCI brand names in the United Kingdom and the United
States, respectively.
Consummation of the Merger is subject to certain conditions, including the
approval of the Merger and the transactions contemplated thereby by the
stockholders of the company and BT and receipt of required regulatory approvals.
It is expected that the merger will be accounted for under the purchase method
of accounting.
<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 NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
GENERAL
- -------
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 and the company's Annual Report on Form 10-K for
the year ended December 31, 1995.
The company operates primarily in a single industry segment, the long distance
telecommunications industry (core business). Through acquisitions and
investments in ventures and alliances, the company has expanded its business
into certain developing markets. Provided below is a discussion of the company's
consolidated results, along with additional information about the company's core
business and its ventures and developing markets (VDM) businesses.
RECENT DEVELOPMENTS
- --------------------
On November 3, 1996, the company entered into an Agreement and Plan of Merger
with British Telecommunications, plc (BT), a public limited company incorporated
under the laws of England and Wales, and Tadworth Corporation (Tadworth), a
Delaware corporation and a wholly-owned subsidiary of BT, pursuant to which the
company will merge with and into Tadworth (the Merger). As a result of the
Merger, each outstanding share of the company's common stock, par value $.10 per
share (other than shares held in the treasury of the company or owned by BT or
Tadworth or any persons who shall have properly exercised their rights to
appraisal under Delaware law), will be converted into the right to receive
(i).54 American Depository Share (ADS) of BT, each representing ten ordinary
shares of 25 pence each of BT (with cash being paid in lieu of fractional ADSs),
and (ii) $6.00 in cash. The combined company will be named Concert plc and will
operate under the BT and MCI brand names in the United Kingdom and the United
States, respectively.
Consummation of the Merger is subject to certain conditions, including the
approval of the Merger and the transactions contemplated thereby by the
stockholders of the company and BT and receipt of required regulatory approvals.
It is expected that the merger will be accounted for under the purchase method
of accounting.
<PAGE>
PAGE 12
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
CONSOLIDATED RESULTS
- --------------------
Consolidated revenues for the three and nine months ended September 30, 1996
increased 21% and 24% to $4.7 billion and $13.7 billion, respectively, from the
comparable periods in 1995. As further explained below under "Core Business
Results", the company's long distance telecommunications service revenue growth
accounted for approximately 53% and 54% of the total year-over-year growth for
the three and nine months ended September 30, 1996. The remaining growth is
primarily due to the company's entrance into the information technology market
through the acquisition of SHL Systemhouse, Inc. (Systemhouse) in November 1995
and into the cellular market and the expansion of its paging services through
the acquisition of Nationwide Cellular, Inc. (Nationwide) in September 1995.
As reported, income from operations increased $851 million and $1,148 million
for the three and nine months ended September 30, 1996, respectively. Operating
margins were 12.4% and 12.7% during these periods versus (7)% and 5.4% in the
comparable periods of 1995. Net income during the three and nine months ended
September 30, 1996 was $304 million and $899 million, respectively, versus a net
loss of $240 million and net income of $264 million reported in the comparable
periods of 1995, respectively. Reflected in these period-over-period comparisons
is the impact of an $831 million pre-tax special charge ($518 million or $.75
per share, after tax) recorded in the third quarter of 1995. This charge was
comprised of a pre-tax operating charge of $736 million, which included an asset
write-down of $520 million and a $216 million charge in sales, operations and
general expenses for reorganization costs. The charge also included a $95
million pre-tax charge relating to certain of the company's equity investments.
Excluding the 1995 special charges, the company's comparative income and
earnings results were as follows: Income from operations increased 25% and 31%
for the three and nine months ended September 30, 1996, respectively, from the
comparable periods in 1995. This growth was predominantly in the core business.
The company's VDM businesses reported operating losses during these periods in
1996 of $(32) million and $(80) million, respectively. Consolidated operating
margins for the three and nine months ended September 30, 1996 improved to 12.4%
and 12.7% from 12.1% and 12% for the same periods in 1995, respectively. Net
income increased 11% and 15% year-over-year for the three and nine months ended
September 30, 1996, respectively. Core business net income increased 27% and 34%
year-over-year for the three and nine months ended September 30, 1996,
respectively, while the company's VDM businesses for the same periods in 1996
reported net losses of $(73) million and $(225)
<PAGE>
PAGE 13
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
million, respectively, which losses include the company's equity in the net
results of affiliated companies. Third quarter earnings per share increased 10%
from the year-ago quarter to $.44 per share and the 1996 nine months earnings
per share increased 13% from the first nine months of 1995 to $1.29 per share.
Cost of services increased 18% and 23% year-over-year for the three and nine
months ended September 30, 1996, respectively. Cost of services primarily
consists of telecommunications expense and other costs of products and services
associated with the VDM businesses. Other costs of products and services include
equipment, software and information technology services costs. As a percentage
of revenue, cost of services decreased to 50.6% for the three months ended
September 30, 1996 from 51.8% for the same period in 1995. On a year-to-date
basis, cost of services decreased to 51.3% year-over-year from 51.6%. These
decreases were primarily in the core business where telecommunications expense
as a percentage of revenue decreased in the third quarter of 1996 to 49.4% from
52.3% in the year-ago quarter and, on a year-to-date basis, to 50.2% in 1996
from 51.9% in 1995. These declines were largely a result of continued
maximization of network efficiencies, use of alternative carriers and reductions
in international settlement rates.
As reported, sales, operations and general expense increased 2% year over year.
Absent the 1995 special charge, sales, operations and general expense increased
year-over-year 22% and 21% for the three and nine months ended September 30,
1996, respectively. For the comparative quarter periods, core business accounted
for approximately 54% of the total increase primarily due to increases in sales
and marketing costs in the quarter to support business markets growth. The
remaining 46% is primarily attributable to expenses incurred by Systemhouse and
Nationwide. For the nine months ended September 30, 1996, core business results
accounted for 41% of the increase due to increases in sales and marketing costs
in the second and third quarter of 1996 offset by cost savings related to the
company's 1995 reorganization. The remaining increase is due to the operating
results of Systemhouse and Nationwide acquired in late 1995 and included in the
nine months ended September 30, 1996.
Depreciation expense increased 31% and 26% year-over-year for the three and nine
months ended September 30, 1996, respectively. Additions to the communications
system network, in order to increase network capacity, redundancy and
reliability, accounted for approximately 69% and 67% of the increase for the
three and nine months ended September 30, 1996, respectively,
<PAGE>
PAGE 14
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
offset by depreciation savings related to the asset write-down in September
1995. The remaining increase was primarily comprised of additional depreciation
on Systemhouse and Nationwide property and equipment and amortization associated
with these acquired companies, representing approximately 23% and 28% of the
increase in depreciation expense for the three and nine months ended September
30, 1996, respectively.
Interest expense for the three and nine months ended September 30, 1996
increased $16 million and $44 million, respectively, from the year-ago periods
due to increased debt balances as a result of commercial paper and Debenture
issuances during the current quarter and year. Interest income declined $29
million year-over-year due to the lower cash balances that resulted from the
continued use of cash to fund capital network expenditures, investments in DBS
and the company's investments in its VDM businesses.
As reported, equity in losses of affiliated companies improved by $88 million
and $35 million for the quarter and year to date period in 1996. Excluding the
1995 special charge, equity in losses of affiliated companies increased by $7
million and $60 million from the comparable quarter and year to date periods in
1995. The increase in losses for the nine months ended September 30, 1996 is
primarily the result of increased losses associated with the company's
investment in ICS, the company's equity share of its investment in Avantel, a
development stage enterprise, and its share of operating expenses of its on-line
project.
Other expense, net, decreased by $1 million and $22 million for the three and
nine months ended September 30, 1996, respectively, from the comparable periods
during 1995 due to dividend income of $15 million and $39 million for the three
months and nine months ended September 30, 1996, respectively, from the
company's preferred stock investment in News Corp. made in August 1995.
Distributions on Trust preferred securities, issued in May 1996, totaled $15
million for the quarter.
<PAGE>
PAGE 15
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
ENTERPRISE REPORTING
- --------------------
This section segregates the performance of the company's core business from its
investments in VDM businesses. The following unaudited information was prepared
using all amounts included in the company's interim condensed consolidated
financial statements and reflects estimates and allocations that management
believes provide a reasonable basis on which to present such information.
CORE BUSINESS RESULTS
- ---------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
(In millions)
1996 1995 1996 1995
------ ------ ------ ------
REVENUE $4,274 $3,837 $12,482 $11,078
------ ------ ------ ------
OPERATING EXPENSES
Cost of services 2,111 2,005 6,266 5,754
Sales, operations and general 1,151 1,238 3,258 3,215
Depreciation 395 325 1,127 959
Asset write-down - 481 - 481
------ ------ ------ ------
TOTAL OPERATING EXPENSES 3,657 4,049 10,651 10,409
------ ------ ------ ------
INCOME (LOSS) FROM OPERATIONS 617 (212) 1,831 669
Non-operating (expense) income,
net (3) 1 (1) 1
------ ------ ------ ------
INCOME BEFORE INCOME TAXES 614 (211) 1,830 670
Income tax (provision) benefit (233) 80 (699) (258)
------ ------ ------ ------
NET INCOME (LOSS) $ 381 $ (131) $ 1,131 $ 412
====== ====== ====== ======
<PAGE>
PAGE 16
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
For the third quarter of 1996, core business revenue grew 11.4% and core
business traffic grew 11% year-over-year, which resulted in a revenue to traffic
variance of .4%. The revenue to traffic variance, which was an improvement from
the year-over-year variance reported in the second quarter of 1996, was a result
of the improved mix of higher margin product sales in the business and consumer
markets, a more comparable mix of carrier traffic over the third quarter of 1995
and a reduction in consumer promotional activities. These revenue gains were
partially offset by increased provisions for uncollectibles during the quarter
as a result of tightening credit policies. For the first nine months of 1996,
core business revenue grew 12.7% and core business traffic grew 15.4%
year-over-year, which resulted in a revenue to traffic variance of (2.7)%. The
company expects the year-over-year annual revenue to traffic variance to
continue to narrow in the fourth quarter of 1996.
Most segments of the business market increased year-over-year revenue and
traffic in the third quarter 1996 and nine months ended September 30, 1996.
Year-over-year product revenue increases were primarily attributable to growth
in Prism I*, data, 800, prepaid cards, Internet and conference calling products.
International traffic grew approximately 50% year-over-year for the three and
nine months ended September 30, 1996.
In the mass markets, which includes the former consumer and small business
market groups, competitive pressures continued to affect revenue and traffic
growth. While customer churn has increased on a year-over-year basis, efforts to
focus on revenue per customer and profitability have resulted in a sequential
decline in churn. On a year-over-year basis, mass markets' growth was primarily
in Intralata, Personal 800* and 1-800-COLLECT* products.
Excluding the 1995 special charges, income from operations increased 27% and
operating margin increased to 14.4% from 12.6% in the third quarter of 1996
versus the year-ago quarter. In the first nine months of 1996, income from
operations increased 34% year-over-year and operating margin increased to 14.7%
in 1996 from 12.3% in 1995. Operating margin improvements were attributable to
reductions in international settlement costs, productivity improvements in the
sales force, efficiencies in managing the network and streamlining actions taken
in the third quarter of 1995.
<PAGE>
PAGE 17
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Excluding the 1995 special charges, EBITDA (earnings before interest, taxes,
depreciation and amortization), excluding equity in income (losses) of
affiliated companies and other income (expense), net, increased 25% to $1,012
million for the third quarter of 1996 from $810 million for the year-ago
quarter. On a year-to-date basis, EBITDA increased 27% year-over-year to $2,958
million from $2,325 million. EBITDA, a measure of the company's ability to
generate cash flows, does not represent net income or cash flows from operating,
investing and financing activities as defined by generally accepted accounting
principles and 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.
VENTURES AND DEVELOPING MARKETS RESULTS
- ---------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
(In millions)
1996 1995 1996 1995
----- ----- ----- -----
REVENUE $ 474 $50 $1,427 $107
----- ----- ----- -----
OPERATING EXPENSES
Cost of services 318 22 951 45
Sales, operations and general 153 44 460 82
Depreciation 35 3 96 13
Asset write-down - 39 - 39
----- ----- ----- -----
TOTAL OPERATING EXPENSES 506 108 1,507 179
----- ----- ----- -----
LOSS FROM OPERATIONS (32) (58) (80) (72)
Non-operating (expense) income, net (57) (2) (146) (2)
Equity in income (losses)
of affiliated companies (28) (116) (128) (163)
----- ----- ----- -----
LOSS BEFORE INCOME TAXES (117) (176) (354) (237)
Income tax benefit 44 67 129 89
----- ----- ----- -----
NET LOSS $ (73) $(109) $(225) $(148)
===== ===== ===== =====
<PAGE>
PAGE 18
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
The significant year-over-year changes in the VDM business results reflect the
acquisitions in late 1995 of Systemhouse and Nationwide. The 1995 operating
results consisted primarily of the operations of MCImetro, Inc. (MCImetro*), a
wholly-owned subsidiary of the company.
Excluding the 1995 special charge, loss from operations increased year-over-year
for the three and nine months ended September 30, 1996 compared to the same
periods in the prior year primarily due to product operating costs and losses
from wireless services and MCImetro. Equity in losses of affiliated companies
increased for the three and nine months ended September 30, 1996 compared to the
same periods in the prior year. The increased losses for the three and nine
months ended September 30, 1996 as compared to 1995 were largely due to
increased losses of ICS, initial start-up costs for Avantel S.A. de C.V.
(Avantel), the company's 44.5% owned business venture with Grupo Financiero
Banamex-Accival in Mexico, and costs associated with the company's on-line
project with News Corp.
Information Technology Services
- -------------------------------
Revenue from information technology services, which was primarily generated from
Systemhouse's operations, for the three and nine months ended September 30, 1996
was $339 million and $1,010 million, respectively. Income from operations was $2
million and $29 million for the three and nine months ended September 30, 1996
and net loss, which includes allocated interest, was $(19) million and $(46)
million, respectively. EBITDA was $21 million and $87 million for the same
periods. A discussion of results of operations and EBITDA for comparable periods
during 1995 is not meaningful due to the company's acquisition of Systemhouse in
November 1995. Systemhouse has increased its mix of revenue from deployment
services which has resulted in reduced operating margins during the three months
ended September 30, 1996. In addition, Systemhouse has incurred expenses
relating to infrastructure investment to expand its systems integration practice
in the United States. Systemhouse's backlog at September 30, 1996 was
approximately $2 billion, the majority of which was from its 10 largest
customers. The company expects that approximately 14% of this estimated backlog
will be delivered in the fourth quarter of 1996.
Wireless Services
- -----------------
Revenue from wireless services, which is comprised primarily of the operations
of Nationwide, amounted to $83 million and $267 million for the three and nine
months ended September 30, 1996, respectively, as compared to $9 million and $11
million for the comparable periods of 1995. Wireless revenues are derived from
cellular and paging services and equipment sales. The increase in revenues
<PAGE>
PAGE 19
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
for the three and nine month periods in 1996 is the direct result of the
acquisition of Nationwide in September 1995.
Loss from operations was $(9) million and $(26) million and net loss was $(9)
million and $(27) million for the three and nine months ended September 30,
1996, respectively. EBITDA was $(4) million and $(14) million for the three and
nine months ended September 30, 1996, respectively. A discussion of results of
operations and EBITDA for the corresponding periods of 1995 is not meaningful
due to the acquisition of Nationwide in September 1995. At September 30, 1996,
the company had 407 thousand cellular service subscribers, up 28% from the
comparable period in 1995, and 342 thousand paging service subscribers. Paging
subscribers declined during the third quarter of 1996 as the company proactively
terminated paging offerings to consumers in the second quarter of 1996 to revise
the infrastructure. The company anticipates re-launching the service late in the
fourth quarter of 1996 or the first quarter of 1997.
Local Services
- --------------
During the three and nine months ended September 30, 1996, MCImetro*, the
company's local services provider, reported revenue of $45 million and $129
million, respectively, on sales of fiber-optic capacity and competitive access
services, substantially all of which were to the company's core business. For
the three and nine months ended September 30, 1996, loss from operations was
$(25) million and $(58) million and net loss was $(19) million and $(44)
million, respectively. EBITDA was $(15) million and $(35) million, respectively,
for the same periods. During the third quarter of 1996, MCImetro added 6 local
city networks, which brought the total number of operational local city networks
to 61 in 34 cities. During the third quarter of 1996, MCImetro increased its
route miles to 2,769 from 2,625 and its right-of-way miles to 4,114 from 4,050.
Global Services
- ---------------
For the three and nine months ended September 30, 1996, Concert Communications
Company** product sales by its distributors amounted to $160 million and $404
million, respectively, an increase of greater than 100% from the comparable
year-ago periods. Concert's virtual network service continued to grow with over
90 sites active or becoming operational around the world. For the three and nine
months ended September 30, 1996, the company's share of Concert's losses
reported in accordance with U.S. generally accepted accounting principles was
$(7) million and $(23) million, respectively.
<PAGE>
PAGE 20
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
On August 12, 1996, Avantel became the first company to provide competitive long
distance service in the Mexican telecommunications market and launched the first
branded Mexico to United States collect calling product and two new dialing
products targeted to consumers and businesses. Avantel increased its fiber-optic
network in Mexico during the quarter by 31% to 3,355 route miles at September
30, 1996. Avantel's capital expenditures, substantially related to the
development of its communication system, were approximately $400 million for the
nine months ended September 30, 1996. Avantel's operating expenses are expected
to increase in the fourth quarter directly related to the launch of long
distance service and the need for additional workforce to support new customers.
The company's share of Avantel's losses was $(9) million and $(20) million for
the three and nine months ended September 30, 1996, respectively.
Multimedia Services
- -------------------
For the three and nine months ended September 30, 1996, the company recorded
dividend income of $15 million and $39 million, respectively, on its preferred
stock investment in News Corp.
In January 1996, the company won the last national direct broadcast satellite
(DBS) license with a bid of $682 million, of which the company has paid $136
million and expects to pay the remainder prior to the end of this year. In March
1996, the company entered into contracts for the insurance, construction and
launch of two high-powered satellites at a cost of approximately $430 million.
The company and News Corp. have agreed to form a joint venture, in which the
company anticipates owning less than a 20% interest, to provide digital
satellite services to homes and businesses in the United States beginning in
late 1997. The total cost required to initiate service, including the cost of
the license, construction and launch of the satellites, and the related ground
facilities, is expected to be approximately $1.3 billion.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------------------------
Cash Flows
- ----------
Cash from operating activities for the first nine months of 1996 increased to
$2,055 million from the comparable period in 1995 primarily due to the 24%
growth in revenues and the associated collections from customers offset by
increased cash paid to local exchange carriers, suppliers and employees.
<PAGE>
PAGE 21
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Net cash used for investing activities increased by $711 million. The net
increase was primarily due to a reduction from the prior year in cash proceeds
received from the sale of marketable securities of $1.2 billion offset by a $650
million decrease in the amount the company invested in News Corp. in 1996. Also
contributing to the net increase in cash used for investing activities were
increases in capital expenditures of $162 million, primarily related to the
continuing investment in networking capabilities, $136 million for the 20%
downpayment of the license fee for the DBS orbital spectrum slot and $132
million of DBS satellite construction costs.
Cash proceeds from financing activities increased by approximately $860 million
due to the issuances of the $750 million of 8% Cumulative Quarterly Income
Preferred Securities due June 30, 2026, $500 million aggregate principal amount
of 7 1/8% debentures due June 15, 2027 and $300 million aggregate principal
amount of 6.95% senior notes due August 15, 2006. Additionally, $342 million was
received for issuances of stock under the employee stock and benefit plans.
Gross proceeds received under these issuances were offset by repayments of
commercial paper and other debt of approximately $370 million and $310 million,
respectively, treasury stock repurchases of approximately $520 million and
dividends paid on common stock and Class A common stock of $17 million.
Capital Resources and Liquidity
- ----------------------------------
The company believes that it will be able to meet its current and long-term
liquidity and capital requirements, including the $247.5 million planned
investment in Avantel, planned DBS venture costs, and investments in News Corp.
and MCImetro, through its cash flows from operating activities, bank credit
facility, debt shelf registrations and access to the capital markets. During
September 1996, the company replaced its bank credit facility with a new $2
billion bank credit facility expiring in September 2001. There are no amounts
currently outstanding under this facility.
During the first nine months of 1996, the company issued $6,221 million and
repaid $6,589 million of commercial paper borrowings, leaving $338 million of
such borrowings outstanding at September 30, 1996.
<PAGE>
PAGE 22
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
On May 29, 1996, MCI Capital I, a wholly-owned Delaware statutory business trust
(Trust), issued $750 million of 8% Cumulative Quarterly Income Preferred
Securities, Series A (preferred securities) due June 30, 2026. The Trust exists
for the sole purpose of issuing the preferred securities and investing the
proceeds in the company's 8% Junior Subordinated Deferrable Interest Debentures,
Series A (Subordinated Debt Securities) due June 30, 2026, the only assets of
the Trust. The proceeds from the issuance of the Subordinated Debt Securities
were used for general corporate purposes.
During the nine months ended September 30, 1996, the company issued two series
of debt under its $1 billion shelf registration. On June 24, 1996, the company
issued $500 million aggregate principal amount of 7 1/8% Debentures due June 15,
2027 and on August 9, 1996, the company issued $300 million aggregate principal
amount of 6.95% Senior Notes due August 15, 2006. The proceeds of the issuances
were used for general corporate purposes, including the repayment of short-term
borrowings under the company's commercial paper program.
On September 30, 1996, the company filed a new $1 billion shelf registration
that, together with the $200 million available under the prior $1 billion shelf,
will allow the company to issue up to $1.2 billion aggregate principal amount of
debt securities with a range of maturities at either fixed or variable rates.
Consolidated EBITDA
- -------------------
EBITDA (earnings before interest, taxes, depreciation and amortization),
excluding equity in income (losses) of affiliated companies, other income
(expense), net, and distributions on Trust preferred securities, increased 42%
to $2,967 million for the nine months ended September 30, 1996 from $2,089
million from the prior year to date period and from $2,305 million, or 29%,
excluding the 1995 special charges. Improvement in consolidated EBITDA is
primarily the result of the improvement in core business results, partially
offset by EBITDA declines in the local and multimedia and international markets.
EBITDA, a measure of the company's ability to generate cash flows, does not
represent net income or cash flows from operating, investing and financing
activities as defined by generally accepted accounting principles and 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.
<PAGE>
PAGE 23
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
CURRENT INDUSTRY ENVIRONMENT
- ----------------------------
In April 1996, two separate mergers among four of the seven Regional Bell
Operating Companies (RBOCs) were proposed. Each of the RBOC mergers requires
approval of the FCC, the Department of Justice (DOJ) and regulatory commissions
in a number of states. In November 1996, the DOJ closed its investigation of one
merger having determined that there are no antitrust violations. Both mergers
still require FCC and other regulatory approvals. The company believes that the
consummation of these mergers could slow the development of competition in local
services markets because it removes competing parties.
On August 8, 1996, pursuant to the Telecommunications Act of 1996 (the Act), the
FCC adopted rules relating to the manner in which and the price at which new
entrants into local services markets will be able to interconnect with the
incumbent local exchange carriers (ILECs). On October 15, 1996, the United
States Court of Appeals stayed key provisions of the FCC Interconnection Order,
pending the appeal of the FCC's decision. The decision suspends pricing rules,
thereby permitting individual state regulatory agencies to interpret the pricing
provisions in the Act without regard to the FCC's interpretation of those
provisions. The company believes that the October 15 decision may hinder the
company's ability to obtain ILEC services and facilities on an economic basis
and will delay broad-based competition in the local services markets. The
company will continue to pursue revenue growth and expand local service
capabilities in cities where the company has existing and planned local
switches. MCImetro currently has 13 switches installed in major U.S. cities and
plans installation of an additional 11 switches by the end of 1996.
- -----------------------------------------------
* MCImetro, Personal 800, 1-800-COLLECT and Prism I are registered service
marks of MCI Communications Corporation.
**Concert is a mark of Concert Communications Company and is used under license.
<PAGE>
PAGE 24
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
FORM 10-Q
PART II. OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
a)Exhibits
Exhibit No. Description
- ----------- -----------
10(a) Executive Severance Policy.
11 Computation of Earnings per Common Share.
12 Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule as of September 30, 1996.
99(a) Capitalization Schedule as of September 30, 1996.
b)Reports on Form 8-K
The company filed a Current Report on Form 8-K on August 8, 1996, which reported
matters under Items 5 and 7.
<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: November 14, 1996 Signed: /s/ David M. Case
-----------------------
David M. Case
Vice President and Controller
<PAGE>
PAGE 26
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
FORM 10-Q
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
10(a) Executive Severance Policy.
11 Computation of Earnings per Common Share.
12 Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule as of September 30, 1996.
99(a) Capitalization Schedule as of September 30, 1996.
EXECUTIVE SEVERANCE POLICY
INTRODUCTION
MCI Communication Corporation (the "Company"), a Delaware
corporation, and British Telecommunications plc intend to effect a merger (the
"Merger") pursuant to the Agreement and Plan of Merger dated as of November 2,
1996. In order to induce Executive to continue to serve as an executive officer
of the Company during the period prior to the Merger and thereafter, the Company
desires to provide Executive with certain protections on the terms and
conditions set forth in this Executive Severance Policy (the "Policy");
1. Term. The term of this Policy shall commence on
November 2, 1996 and shall terminate on December 31, 1999. (the "Termination
Date").
2. Termination of Employment.
2.1 Compensation Upon Termination of Employment. (a) If, prior
to the Termination Date, the Executive's employment shall be terminated by the
Company for any reason other than (i) the Executive's Disability or (ii) for
Cause, or if during the term hereof, the Executive terminates Executive's
employment for Good Reason, the Company shall pay or cause to be paid to the
Executive an amount equal to two times the sum of (x) Executive's annual base
salary as in effect on the date of termination (without regard to any decrease
in Base Salary which could constitute Good Reason under this Policy) ("Base
Salary") and (y) the greater of (A) the average annual bonus paid to or accrued
for the Executive by the Company in respect of the three calendar years
preceding the termination of employment and (B) the annual bonus paid to or
accrued in respect of 1995. Such cash amounts shall be paid as follows: the
amount attributable to Base Salary shall be paid in a lump sum within 10
<PAGE>
business days following the termination of Executive's employment; provided,
however, that if Executive terminates his or her employment for Good Reason such
amount shall be payable over a six-month period in equal installments in
accordance with the ordinary payroll practices of the Company, but no less
frequently than monthly, and the amount attributable to the annual bonus shall
be paid in a lump sum within 10 business days following the termination of
Executive's employment.
In addition, Executive shall receive (i) the unpaid portion of
Executive's Base Salary accrued to the date of termination, and any accrued
vacation as of the date of termination; (ii) the unpaid portion of Executive's
annual bonus accrued with respect to the last full fiscal year of the Company
ended prior to the date of termination, at such time as such bonus would
otherwise be payable; (iii) continued medical, dental and life insurance
coverage for Executive and Executive's eligible dependents on the same basis as
in effect immediately prior to Executive's termination of employment (without
regard to any decreases in such benefits which would constitute "Good Reason"
under this Policy) until the earlier of (A) 24 months after the Executive's
termination of employment or (B) the commencement of coverage with a subsequent
employer, but only to the extent such coverage duplicates or exceeds the
coverage provided by the Company; provided, however, that with respect to any
such continued coverage, the Consolidated Omnibus Budget and Reconciliation Act
of 1985 coverage period shall not run during the period of continued coverage;
(iv) unless otherwise expressly elected by Executive prior to such termination
and as provided in (vi) below, payment, in a cash lump sum, of all amounts
deferred by Executive under any non-qualified plan of deferred compensation
maintained by the Company (notwithstanding the payment provisions of any such
plan to the contrary); (v) full acceleration of vesting and exercisability
<PAGE>
of any equity-based awards granted to the Executive prior to Executive's
termination of employment and (vi) 24 months of age and service credit for all
purposes under all defined benefit plans of the Company; provided, however, that
to the extent any increase in benefits which would result from such additional
age and service credits cannot be paid under the terms of any plan, the amount
of such increase shall be calculated under the terms of each such plan and paid
directly by the Company in the same form and at the same time that the benefits
under each such plan would otherwise be paid. Payments required hereunder shall
be made within 10 business days following the termination of the Executive's
employment except as otherwise provided in this Section 2.1.
(b) In the event of the termination of the Executive's
employment prior to the Termination Date due to executive's death or Disability,
the Company shall pay to the Executive (or Executive's beneficiaries, if
applicable) a lump sum cash amount equal to (i) the annual rate of Executive's
Base Salary as in effect on the date of termination and (ii) the highest bonus
paid to Executive under the Company's annual bonus plan during the three fiscal
years preceding the termination of employment. In addition, Executive shall
receive (i) the unpaid portion of Executive's Base Salary accrued to the date of
termination, and any accrued vacation as of the date of termination; (ii) the
unpaid portion of Executive's annual bonus accrued with respect to the last full
fiscal year of the Company ended prior to the date of termination, at such time
as bonus would otherwise be payable; and (iii) unless otherwise expressly
elected by Executive prior to such termination, payment, in a cash lump sum, of
all amounts deferred by Executive under any non-qualified plan of deferred
compensation (other than a defined benefit plan) maintained by the Company
(notwithstanding the payment provisions of any such plans to the contrary).
Payments required hereunder shall be made
<PAGE>
within 10 business days following the termination of the Executive's employment
except as otherwise provided in this Section 2.1.
(c) If the Executive's employment is terminated by the Company
for Cause or if the Executive resigns from Executive's employment without Good
Reason, the Executive shall be entitled to receive: (i) any Base Salary accrued
through the date of such resignation or termination and any accrued vacation as
of the date of termination; and (ii) the unpaid portion of any annual bonus
accrued in respect of any fiscal year of the Company preceding the year of
termination or resignation when such bonus would otherwise be payable.
(d) In the event of any termination of employment hereunder,
the Executive shall also receive, when due, any other compensation or benefit
payable to the Executive under any plan, program or arrangement maintained by
the Company, other than a severance plan or arrangement.
2.2 Definitions. For purposes of this Policy,
the following definitions shall apply:
(a) Disability. "Disability" shall mean the Executive's
absence from the full-time performance of the Executive's duties for a period of
180 consecutive days as a result of Executive's incapacity due to physical or
mental illness.
(b) Cause. For purposes of this Policy, "Cause" shall
mean:
(1) a deliberate and material act or omission by the
Executive with respect to Executive's duties and responsibilities
with the Company that results in material harm to the Company
(provided, that a financial harm of $500,000 shall be deemed to be
"material"), which act or omission is (A) either the product of
willful malfeasance or gross neglect, (B) committed in bad faith or
without reasonable belief that such act
<PAGE>
or omission is in, or not contrary to, the best interests of the
Company and (C) not remedied within 30 days after receipt of written
notice from the Company specifying such breach,
(2) Executive's willful and material breach of the provisions
of Section 8 of this Policy which is not remedied within 30 days after
receipt of written notice from the Company specifying such breach; or
(3) Executive's plea of guilty or nolo contendere to, or
nonappealable conviction of, a felony, which conviction or plea causes
material damage to the reputation or financial position of the Company.
(c) Good Reason. For purposes of this Policy, "Good
Reason" shall mean the occurrence of any of the following without the
Executive's express written consent:
(1) The assignment to the Executive, after the Merger, of any
duties inconsistent with the Executive's positions, duties,
responsibilities and status with the Company and its subsidiaries
immediately prior to the Merger; a change in the Executive's reporting
responsibilities, title or offices that is adverse to the Executive or
any removal of the Executive from or failure to re-elect the Executive
to any position with the Company or its subsidiaries except in
connection with the Executive's promotion or a termination of
employment for Cause; provided, that no change in Executive's
responsibilities that occurs as a result of the Company no longer being
a public company or becoming a subsidiary after the Merger shall
constitute Good Reason hereunder.
<PAGE>
(2) A reduction in the Executive's Base Salary, target annual
bonus or long-term incentive compensation in effect at the time of the
Merger, as such salary, bonus or compensation may be increased from
time to time thereafter;
(3) The failure to continue in effect any employee benefit
plan or compensation plan in which the Executive participates prior to
the Merger unless the Executive is provided with participation in other
plans that provide substantially comparable benefits in the aggregate
to the Executive; or the taking of any action that would substantially
reduce the Executive's benefits in the aggregate; and
(4) After the Merger, any relocation of Executive's principal
place of business on the effective date of the Policy to a location in
excess of 20 miles from such work location immediately prior to the
Merger;
provided, however, that an event specified in (1), (2) or (3) shall not
constitute "Good Reason" if it is remedied within 30 days after receipt of
written notice from Executive specifying such event.
2.3 Gross Up. (a) In the event it shall be determined that any
payment, benefit or distribution (or combination thereof) by the Company or one
or more trusts established by the Company for the benefit of its employees, to
or for the benefit of Executive (whether paid or payable or distributed or
distributable pursuant to the terms of this Policy, or under the terms of any
other plan, program agreement or arrangement) (a "Payment") would be subject to
the excise tax imposed by Section 4999 of the Code or any interest or penalties
are incurred by Executive with respect to such excise tax (such excise tax,
together with any such interest and penalties, hereinafter collectively referred
to as the "Excise Tax"), Executive shall be entitled to receive an additional
payment (a "Gross-Up
<PAGE>
Payment") in an amount such that after payment by Executive of all taxes
(including any interest or penalties imposed with respect to such taxes),
including, without limitation, any income taxes (and any interest and penalties
imposed with respect thereto) and the Excise Tax imposed upon the Gross-Up
Payment, Executive retains an amount of the Gross-Up Payment equal to the Excise
Tax imposed upon the Payments.
(b) Subject to the provisions of Section 2.3(c), all
determinations required to be made under this Section 2.3, including whether and
when a Gross-Up Payment is required and the amount of such Gross-Up Payment and
the assumptions to be utilized in arriving at such determination, shall be made
by a nationally recognized certified public accounting firm as may be designated
by the Company (the "Accounting Firm") which shall provide detailed supporting
calculations both to the Company and Executive within fifteen (15) business days
of the receipt of notice from Executive that there has been a Payment, or such
earlier time as is requested by the Company. All fees and expenses of the
Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment shall
be paid by the Company to Executive within five (5) days after the receipt of
the Accounting Firm's determination.
(c) As soon as practicable, Executive shall notify the Company
in writing of any claim by the Internal Revenue Service that, if successful,
would require the payment by the Company of the Gross-Up Payment. If the Company
notifies Executive in writing that it desires to contest such claim, Executive
shall cooperate in all reasonable ways with the Company in such contest and the
Company shall be entitled to participate in all proceedings relating to such
claim; provided, however, that the Company shall bear and pay directly all costs
and expenses (including additional interest and penalties) incurred in
connection with
<PAGE>
such contest and shall indemnify and hold Executive harmless, on an after-tax
basis, for any Excise Tax or income tax (including interest and penalties with
respect thereto) imposed as a result of such representation and payment of costs
and expenses. Without limitation on the foregoing provisions of this Section
2.3, the Company shall control all proceedings taken in connection with such
contest and, at its sole option, may pursue or forego any and all administrative
appeals, proceedings, hearings and conferences with the taxing authority in
respect of such claim and may, at its sole option, either direct Executive to
pay the tax claimed and sue for a refund or contest the claim in any permissible
manner, and Executive agrees to prosecute such contest to a determination before
any administrative tribunal, in a court of initial jurisdiction and in one or
more appellate courts, as the Company shall determine; provided, however, that
if the Company directs Executive to pay such claim and sue for a refund, the
Company shall advance the amount of such payment to Executive, on an
interest-free basis, and shall indemnify and hold Executive harmless, on an
after-tax basis, from any Excise Tax or income tax (including interest or
penalties with respect thereto) imposed with respect to such advance or with
respect to any imputed income with respect to such advance; and provided,
further, that if Executive is required to extend the statute of limitations to
enable the Company to contest such claim, Executive may limit this extension
solely to such contested amount. The Company's control of the contest shall be
limited to issues with respect to which a Gross-Up Payment would be payable
hereunder and Executive
<PAGE>
shall be entitled to settle or contest, as the case may be, any other issue
raised by the Internal Revenue Service or any other taxing authority.
3. Obligations Absolute; No Mitigation. (a) Except as provided
in Section 8(d), the obligations of the Company to make the payments to, or
other arrangements with respect to, the Executive provided for herein shall be
absolute and unconditional and shall not be reduced by any circumstances,
including without limitation any setoff, counterclaim, recoupment, defense or
other right which the Company may have against the Executive or any third party
at any time.
(b) Executive shall not be required to mitigate damages or the
amount of any payment provided for under this Policy by seeking other employment
or otherwise. No amounts paid to or earned by the Executive following his
termination of employment with the Company shall reduce or be set off against
any amounts payable to the Executive under this Policy.
4. No Effect On Other Rights. The provisions of this Policy,
and any payment provided for herein, shall not supersede or in any way limit the
rights, benefits, duties or obligations which the Executive may now or in the
future have under any benefit, incentive or other plan or arrangement of the
Company or any other agreement with the Company; provided, however, that the
Executive shall not be eligible to receive severance benefits under the
Company's regular severance plan during the term of this Policy.
5. Dispute Resolution. Any dispute or controversy arising
under or in connection with this Policy shall be resolved exclusively by
arbitration in Washington D.C. in accordance with the Rules of the American
Arbitration Association then in effect. Judgment
<PAGE>
may be entered on an arbitrator's award relating to this Policy in any court
having jurisdiction.
6. Legal Fees. The Company shall pay all costs and expenses,
including attorney's fees and disbursements of Executive in connection with any
arbitration whether or not instituted by the Company or Executive, relating to
the interpretation or enforcement of any provision of this Policy, if Executive
prevails in such arbitration on any substantive issue.
7. Assignment. Neither this Policy nor any rights or
obligations hereunder shall be assignable or otherwise subject to hypothecation
by Executive (except by will or by operation of the laws of intestate
succession) or by the Company, except that the Company must assign this Policy
to any successor (whether by merger, purchase or otherwise) to all or
substantially all of the assets or businesses of the Company, and shall require
such successor to assume expressly the obligations of the Company hereunder.
8. Nondisclosure of Confidential Information; Non-Competition.
(a) Executive may not, without the prior written consent of the Company, use,
divulge, disclose or make accessible to any other person, firm, partnership,
corporation or other entity any Confidential Information pertaining to the
business of the Company or any of its affiliates, except (i) while employed by
the Company, in the business of and for the benefit of the Company, (ii) when
required to do so by a court of competent jurisdiction, by any governmental
agency having supervisory authority over the business of the Company, or by any
administrative body or legislative body (including a committee thereof) with
jurisdiction to order Executive to divulge, disclose or make accessible such
information or (iii) to Executive's counsel. For purposes of this Section 8(a),
"Confidential Information" shall mean non-public information concerning the
financial data, strategic business plans, product
<PAGE>
development (or other proprietary product data), customer lists, marketing plans
and other non-public, proprietary and confidential information of the Company
and its affiliates (the "Restricted Group") or customers, that, in any case, is
not otherwise available to the public (other than by Executive's breach of the
terms hereof).
(b) During the period of Executive's employment hereunder, and
in the event the Executive terminates his or her employment for Good Reason, for
six months thereafter, Executive may not (A) directly or indirectly, either as
principal, manager, agent, consultant, officer, stockholder, partner, investor,
lender or employee or in any other capacity, carry on, be engaged in or have any
financial interest in, any business which is in competition with the business of
the Company or any other member of the Restricted Group with which Executive has
been principally employed during the term of this Policy (an "Applicable Group
Member") and (B) on Executive's own behalf or on behalf of any person, firm or
company, other than the Restricted Group, solicit or offer employment to any
person who has been employed by the Restricted Group at any time during the 12
months immediately preceding such solicitation.
(c) For purposes of this Section 8, a business shall be deemed
to be in competition with the Company or Applicable Group Member if it is
principally involved in the purchase, sale or other dealing in any property or
the rendering of any service purchased, sold, dealt in or rendered by the
Company or Applicable Group Member as a material part of the business of the
Company or Applicable Group Member within the same geographic area in which the
Company or Applicable Group Member makes such purchases, sales or dealings or
renders such services. Nothing in this Section 8 shall be construed so as to
preclude Executive from investing in any publicly or privately held company,
provided Executive's
<PAGE>
beneficial ownership of any class of such company's securities does not exceed
1% of the outstanding securities of such class.
(d) In the event the Executive engages in conduct which is
proscribed by the terms of Section 8(a) or (b) of this Policy, the Company may,
in addition to pursuing any other remedies it may have in law or in equity,
cease providing any severance payments or benefits otherwise due under the terms
of this Policy.
9. Beneficiaries; References. Executive shall be entitled to
select (and change, to the extent permitted under any applicable law) a
beneficiary or beneficiaries to receive any compensation or benefit payable
hereunder following Executive's death, and may change such election, in either
case by giving the Company written notice thereof. In the event of Executive's
death or a judicial determination of Executive's incompetence, reference in this
Policy to Executive shall be deemed, where appropriate, to refer to Executive's
beneficiary, estate or other legal representative. Any reference to the
masculine gender in this Policy shall include, where appropriate, the feminine.
10. Separability. If any provision of this Policy shall
be declared to be invalid or unenforceable, in whole or in part, such
invalidity or unenforceability shall not affect the remaining provisions hereof
which shall remain in full force and effect.
11. Governing Law. This Policy shall be construed,
interpreted and governed in accordance with the laws of the State of New York,
without reference to rules relating to conflicts of law.
12. Withholding. The Company shall be entitled to
withhold from payment any amount of withholding required by law.
<PAGE>
13. Amendment. This Policy may not be amended or in any
way modified or terminated on or after the date of the Merger.
November 2, 1996
Exhibit 11
-------------
(Page 1 of 2)
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
(In millions, except per share amounts)
(unaudited)
Three months Nine months
ended ended
September 30, September 30,
------------- -------------
1996 1995 1996 1995
Primary ---- ---- ---- ----
-------
Net income (loss)........................... $304 $(240) $ 899 $264
==== ==== ==== ====
Adjustment of shares outstanding:
Weighted average shares of common stock
outstanding............................. 685 680 688 680
Shares of common stock issuable upon the
assumed exercise of common stock
equivalents............................. 42 55 57 55
Shares of common stock assumed repurchased
for treasury(a)......................... (36) (47) (50) (49)
---- ---- ---- ----
Adjusted shares of common stock and common
stock equivalents for computation....... 691 688 695 686
==== ==== ==== ====
Earnings (loss) per common and common
equivalent shares......................... $.44 $(.35) $1.29 $.38
==== ==== ==== ====
(a) At an average market price of $25.74 and $27.63 for the three and nine
months ended September 30, 1996, respectively, and $23.63 and $21.35 for the
three and nine months ended September 30, 1995, respectively.
<PAGE>
Exhibit 11
-------------
(Page 2 of 2)
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
(In millions, except per share amounts)
(unaudited)
Three months Nine months
ended ended
September 30, September 30,
------------- -------------
1996 1995 1996 1995
Assuming Full Dilution ---- ---- ---- ----
----------------------
Net income (loss)........................... $304 $(240) $ 899 $264
==== ==== ==== ====
Adjustment of shares outstanding:
Weighted average shares of common stock
outstanding............................. 685 680 688 679
Shares of common stock issuable upon the
assumed exercise of common stock
equivalents............................. 42 56 57 55
Shares of common stock assumed repurchased
for treasury(b)......................... (36) (43) (50) (40)
---- ---- ---- ----
Adjusted shares of common stock and common
stock equivalents for computation....... 691 693 695 694
==== ==== ==== ====
Earnings (loss) per common and common
equivalent shares......................... $.44 $(.35) $1.29 $.38
==== ==== ==== ====
(b) The three and nine months ended September 30, 1996 average market prices of
$25.74 and $27.63, respectively, were used as they are higher than the ending
market price of $25.63. The September 30, 1995 ending market price of $26.06
was used as it is higher than the average market price of $23.63 and $21.35 for
the three and nine months ended September 30, 1995, respectively.
Exhibit 12
----------
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In millions, except ratio amounts)
(unaudited)
Nine Months Ended
September 30, Year Ended December 31,
--------------- ------------------------------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
Earnings:
Income before
income taxes and
extraordinary item(a) $1,469 $432 $ 897 $1,280 $1,045 $ 963 $ 848
Add:
Fixed charges 333 253 344 315 315 346 334
Less:
Capitalized interest 79 68 93 78 61 52 58
------ ------ ------ ------ ------ ------ ------
Total earnings $1,723 $617 $1,148 $1,517 $1,299 $1,257 $1,124
====== ====== ====== ====== ====== ====== ======
Fixed Charges:
Fixed charges on
indebtedness,
including amortization
of debt discount and
premium(a) $ 252 $177 $ 242 $ 231 $ 239 $ 270 $ 270
Interest portion of
operating lease
rentals(b) 81 76 102 84 76 76 64
------ ------ ------ ------ ------ ------ ------
Total fixed charges $ 333 $253 $ 344 $ 315 $ 315 $ 346 $ 334
====== ====== ====== ====== ====== ====== ======
Ratio of earnings to
fixed charges 5.17 2.44 3.34 4.82 4.12 3.63 3.37
====== ====== ====== ====== ====== ===== ======
(a) Includes distributions on Trust preferred securities.
(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 September 30,1996
and the income statement for the nine months ended September 30, 1996 and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000064079
<NAME> MCI Communications Corporation
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 250
<SECURITIES> 130
<RECEIVABLES> 3,331
<ALLOWANCES> 265
<INVENTORY> 0
<CURRENT-ASSETS> 4,655
<PP&E> 17,943
<DEPRECIATION> 6,285
<TOTAL-ASSETS> 21,509
<CURRENT-LIABILITIES> 5,079
<BONDS> 3,722
750
0
<COMMON> 74
<OTHER-SE> 10,255
<TOTAL-LIABILITY-AND-EQUITY> 21,509
<SALES> 0
<TOTAL-REVENUES> 13,741
<CGS> 0
<TOTAL-COSTS> 11,997
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 409
<INTEREST-EXPENSE> 153
<INCOME-PRETAX> 1,489
<INCOME-TAX> 570
<INCOME-CONTINUING> 899
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 899
<EPS-PRIMARY> 1.29
<EPS-DILUTED> 1.29
</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 September 30, 1996:
Debt(a):
Secured debt:
Capital lease obligations............................ $ 519
Other secured obligations............................ 36
-------
Total secured debt...................................... 555
-------
Unsecured debt:
Senior Notes, net.................................... 1,735
Senior Debentures, net............................... 1,383
Commercial paper borrowings.......................... 338
Other unsecured debt................................. 150
-------
Total unsecured debt.................................... 3,606
-------
Total debt................................................ 4,161
-------
Company Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trust Holding Solely
Junior Subordinated Deferrable Interest
Debentures of the Company (b)........................ 750
-------
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........................... 6,366
Retained earnings.................................... 4,945
Treasury stock, at cost, 44 million shares........... (1,056)
-------
Total stockholders' equity................................ 10,329
-------
Total capitalization...................................... $15,240
=======
(a) For additional information concerning the company's capital lease
obligations, which are obligations of subsidiaries of the company that are
guaranteed by the company, and for additional information concerning the
company's long-term debt, see Note 9 of Notes to Consolidated Financial
Statements on pages 22 through 24 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, 1995. Interest rates on capital lease
obligations, on a weighted average basis, approximated 9% per annum at September
30, 1996.
(b) On May 29, 1996, MCI Capital I, a wholly-owned Delaware statutory business
trust (Trust), issued $750 million of 8% Cumulative Quarterly Income Preferred
Securities, Series A (preferred securities) and $23 million in common securities
(Common Securities). The company holds all of the outstanding Common Securities
of the Trust. The Trust exists for the sole purpose of issuing the preferred
securities and investing the proceeds in the company's 8% Junior Subordinated
Deferrable Interest Debentures, Series A (Subordinated Debt Securities) due June
30, 2026.
