PAGE 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 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 March 31, 1996, the registrant had outstanding 135,998,932 shares of Class
A common stock and 554,501,029 shares of common stock.
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MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
FORM 10-Q
For The Quarter Ended March 31, 1996
INDEX
Page No.
--------
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Income Statements for the three months ended March 31, 1996
and 1995 3
Balance Sheets as of March 31, 1996 and December 31, 1995 4-5
Statements of Cash Flows for the three months ended
March 31, 1996 and 1995 6
Statement of Stockholders' Equity for the three months
ended March 31, 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 11-20
PART II: OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 21
SIGNATURE 22
EXHIBIT INDEX 23
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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
March 31,
-----------------------
1996 1995
------- -------
REVENUE $ 4,491 $ 3,561
------- -------
OPERATING EXPENSES
Cost of services 2,344 1,819
Sales, operations and general 1,185 993
Depreciation 381 319
------- -------
TOTAL OPERATING EXPENSES 3,910 3,131
------- -------
INCOME FROM OPERATIONS 581 430
Interest expense (50) (38)
Interest income 11 46
Equity in income (losses) of
affiliated companies (55) (29)
Other expense, net (3) (12)
------- -------
INCOME BEFORE INCOME TAXES 484 397
Income tax provision 189 153
------- -------
NET INCOME $ 295 $ 244
======= =======
EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARES $ .42 $ .36
Weighted average number of shares
of common stock and common stock
equivalents outstanding 701 685
See accompanying Notes to Interim Condensed Consolidated Financial Statements.
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PAGE 4
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
BALANCE SHEETS
(unaudited)
March 31, December 31,
1996 1995
--------- ---------
(In millions)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 424 $ 471
Marketable securities 206 373
Receivables, net of allowance for
uncollectibles of $270 and $260 million 3,139 2,954
Other assets 836 749
------- -------
TOTAL CURRENT ASSETS 4,605 4,547
------- -------
PROPERTY AND EQUIPMENT, net 10,843 10,309
OTHER ASSETS
Noncurrent marketable securities 10 -
Other assets and deferred charges, net 627 469
Investment in affiliates 453 495
Investment in News Corp. 1,000 1,000
Goodwill, net 2,445 2,481
------- -------
TOTAL OTHER ASSETS 4,535 4,445
------- -------
TOTAL ASSETS $19,983 $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)
March 31, December 31,
1996 1995
--------- ---------
(In millions)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 987 $ 706
Accrued telecommunications expense 1,991 1,936
Other accrued liabilities 1,580 1,728
Long-term debt due within one year 472 500
-------- --------
TOTAL CURRENT LIABILITIES 5,030 4,870
-------- --------
NONCURRENT LIABILITIES
Long-term debt 3,579 3,444
Deferred taxes and other 1,418 1,385
-------- --------
TOTAL NONCURRENT LIABILITIES 4,997 4,829
-------- --------
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 6,421 6,405
Retained earnings 4,358 4,063
Treasury stock, at cost,
38 and 43 million shares (897) (940)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 9,956 9,602
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 19,983 $ 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)
Three Months Ended
March 31,
--------------------
1996 1995
------- -------
OPERATING ACTIVITIES (In millions)
Receipts from customers $ 4,302 $ 3,385
Payments to suppliers and employees (3,375) (2,729)
Taxes paid (206) (101)
Interest paid (61) (61)
Interest received 10 41
------- -------
CASH FROM OPERATING ACTIVITIES 670 535
------- -------
INVESTING ACTIVITIES
Capital expenditures for property and equipment (782) (713)
Purchases, maturities and sales of
marketable securities, net 157 (202)
Investment in affiliates (12) (27)
Other, net (146) (7)
------- -------
CASH USED FOR INVESTING ACTIVITIES (783) (949)
------- -------
NET CASH FLOW BEFORE FINANCING ACTIVITIES (113) (414)
------- -------
FINANCING ACTIVITIES
Payment of Senior Notes and other debt (175) (60)
Commercial paper and bank credit facility
activity, net 214 -
Issuance of common stock for employee plans 142 54
Purchase of treasury stock (115) (70)
------- -------
CASH FROM (USED FOR) FINANCING ACTIVITIES 66 (76)
------- -------
Net decrease in cash and cash equivalents (47) (490)
Cash and cash equivalents - beginning balance 471 1,429
------- -------
Cash and cash equivalents - ending balance $ 424 $ 939
======= =======
Reconciliation of net income to cash from
operating activities:
Net income $ 295 $ 244
Adjustments to net income:
Depreciation and amortization 396 324
Equity in (income) losses of affiliated companies 55 29
Deferred income tax provision 37 83
Net change in operating activity accounts
other than cash and cash equivalents:
Receivables (185) (177)
Operating accounts payable 237 94
Other operating activity accounts (165) (62)
------- -------
Cash from operating activities $ 670 $ 535
======= =======
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
(9 million shares) - - 16 - 174 190
Net income - - - 295 - 295
Treasury stock
purchased
(4 million shares) - - - - (131) (131)
------ ------ ------- ------- ------- -------
Balance at
March 31, 1996 $14 $60 $6,421 $4,358 $(897) $9,956
====== ====== ======= ======= ======= =======
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
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. PROPERTY AND EQUIPMENT
March 31, December 31,
1996 1995
-------- ---------
(In millions)
Communications system in service $ 11,978 $ 11,318
Furniture, fixtures and equipment 2,457 2,432
Other property 500 493
-------- --------
Total 14,935 14,243
Accumulated depreciation (5,514) (5,238)
Construction in progress 1,422 1,304
-------- --------
Total property and equipment, net $ 10,843 $ 10,309
======== ========
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PAGE 9
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 3. NEWS CORP. ALLIANCE
In August 1995, the company made an initial investment of $1 billion in The News
Corporation Limited (News Corp.). The company also 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.
has the right to cause the company to make the additional $1 billion investment
or a portion thereof. In January 1996, News Corp. exercised a portion of this
right by requiring the company to invest $350 million in the first half of 1996.
The company accounts for its investment in News Corp., which is in the form of
preferred stock and a warrant to obtain News Corp. ordinary shares, under the
cost method. For the first quarter of 1996, the company recorded dividend income
of $11 million 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. The company has paid $136 million of
the license fee, which is included in "other assets and deferred charges, net",
on the accompanying balance sheet. The remainder will be due upon receipt of the
license, which is expected later this year. In the first quarter of 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 to provide digital satellite
services to homes and businesses 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. Each company will own 50% of the joint venture and
will share the costs equally.
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PAGE 10
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 4. 1995 SPECIAL CHARGE FOR REORGANIZATION
During the third quarter of 1995, the company implemented a reorganization
designed to increase efficiency, enhance marketplace effectiveness and improve
business focus. The reorganization was largely in response to the rapid changes
in business scope, technology and regulation affecting the telecommunications
industry. The total pretax operating charge associated with the reorganization
was $736 million, which included a $520 million asset write-down and a workforce
reduction of approximately 2,800 employees. As of March 31, 1996, approximately
2,500 employees had left the company; the remaining employees are expected to
leave during the remainder of 1996. The unexpended portion of the reorganization
accrual amounted to $155 million at March 31, 1996, the majority of which will
be utilized during the remainder of 1996. This remaining accrual is primarily
comprised of costs associated with lease obligations, modification and
termination of contracts, employee severance, other business reorganization
costs and certain accrued legal costs.
NOTE 5. SUBSEQUENT EVENTS
In April 1996, the company filed a Registration Statement on Form S-3 with the
Securities and Exchange Commission ("SEC") that, when declared effective by the
SEC, will allow the company to offer, on a delayed or continuous basis, up to
$750 million aggregate principal amount of fixed rate cumulative quarterly
income preferred securities with a range of maturities. The proceeds from the
offering will be used for general corporate purposes.
On May 9, 1996, the company invested the additional $350 million in News Corp.,
which is discussed in Note 3.
<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 MONTHS ENDED MARCH 31, 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 predominantly 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 businesses.
CONSOLIDATED RESULTS
- --------------------
Total revenue for the first quarter of 1996 was $4,491 million, a 26% increase
over total revenue of $3,561 million for the year-ago quarter. Core business
revenue growth accounted for approximately 55% of the total year-over-year
growth. The remainder of the growth was from activities of companies acquired in
1995, primarily SHL Systemhouse Inc. (SHL) and Nationwide Cellular Service, Inc.
(Nationwide).
Total operating expenses increased $779 million or 25% to $3,910 million in the
first quarter of 1996 from $3,131 million in the first quarter of 1995.
Approximately 60% of the increase was due to the operating expenses of the
company's new ventures and developing markets businesses. Operating income
increased 35% to $581 million in the first quarter of 1996 compared with the
year-ago quarter of $430 million. Operating income for the core business
increased 41%, while the ventures and developing markets businesses showed an
operating loss in the first quarter of 1996 of $(33) million. Total operating
margin improved in the first quarter of 1996 to 12.9% from 12.1% in the first
quarter of 1995.
<PAGE>
PAGE 12
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
Net income was $295 million in the first quarter of 1996, a 21% increase over
net income for the year-ago quarter of $244 million. Core business net income
increased 42% year-over-year which was partially offset by the net loss of the
company's ventures and developing markets businesses of $(83) million. First
quarter earnings per share increased 17% to $.42 per share from $.36 per share
for the first quarter of 1995.
Cost of services increased 29% and as a percentage of revenue was 52.2% for the
first quarter of 1996 compared to 51.1% for the year-ago quarter. Cost of
services primarily consists of telecommunications expense and other costs of
products and services associated with the ventures and developing markets
businesses. Other costs of products and services include equipment, software and
information technology services costs. The first quarter year-over-year cost of
services increase was attributable to the core business revenue growth and the
inclusion of SHL's and Nationwide's operations in the first quarter of 1996,
which were not included in the year-ago quarter due to their acquisitions in the
second half of 1995.
In the core business, telecommunications expense as a percentage of revenue
decreased in the first quarter of 1996 to 50.9% from 51.4% in the year-ago
quarter. This decline was a result of decreases in the access and international
settlement rates and changes in product mix. The U.S. local exchange carriers
have recently filed annual access rate increases to be effective July 1, 1996.
While these rate increases will have a minimal impact on access rates the
company pays, the company does not expect to see as steep a decline in access
and interconnection rates in 1996 as it experienced in 1995.
Sales, operations and general expense increased 19% in the first quarter of 1996
over the year-ago quarter. A majority of this increase was attributable to the
inclusion of SHL's and Nationwide's expenses, as well as additional expenditures
for increased sales campaigns and customer service. Sales, operations and
general expense decreased as a percentage of revenue to 26.4% in the first
quarter of 1996 from 27.9% in the year-ago quarter. The decrease was primarily
due to cost savings realized from the reorganization initiated in the third
quarter of 1995.
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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 MONTHS ENDED MARCH 31, 1996 AND 1995
Depreciation expense increased 19% or $62 million from the first quarter of
1995. Almost half of the increase was attributable to the depreciation and
amortization costs of SHL and Nationwide. The remaining increase was as a result
of additions to the communications system network in order to increase network
capacity, redundancy and reliability, partially offset by depreciation savings
associated with the third quarter 1995 asset write-down. Depreciation expense as
a percentage of revenue decreased to 8.5% in the first quarter of 1996 from 8.9%
for the year-ago quarter.
Interest expense in the first quarter of 1996 increased $12 million from the
year-ago quarter due to increased debt balances as a result of commercial paper
issuances and the debt of SHL. Interest income decreased significantly
year-over-year due to the lower cash balances that resulted from using cash to
fund business acquisitions and investments in ventures and developing markets
during the second half of 1995. Equity in losses of affiliated companies
increased $(26) million year-over-year to $(55) million for the first quarter of
1996, which is discussed in more detail under the ventures and developing
markets results section of the enterprise reporting discussion below. Other
expense, net, decreased $9 million from the first quarter of 1995 due to the
additional $11 million of dividend income from the investment in News Corp.
preferred stock.
ENTERPRISE REPORTING
- --------------------
This section segregates the performance of the company's core business from its
investments in ventures and developing markets. 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.
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PAGE 14
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
CORE BUSINESS RESULTS
- --------------------- %
Three months ended March 31, 1996 1995 Change
------ ------ ------
(In millions)
Revenue $4,050 $3,550 14.1
EBITDA 962 751 28.1
Income from operations 614 436 40.8
Net income $ 378 $ 266 42.1
Core business revenue for the first quarter of 1996 grew 14.1% year-over-year
and core business traffic grew 21.3%, which resulted in a revenue to traffic
variance of (7.2%). The variance was attributable to increased promotional and
volume discounts, partially offset by tariff rate increases and revenue growth
from international traffic and data products. Also contributing to the variance
were lower revenue rates associated with increased sales to resellers and slower
year-over-year traffic growth in consumer international products. The company
expects the revenue to traffic variance to narrow during the remainder of 1996.
In the business market, year-over-year revenue and traffic continued to grow in
the first quarter of 1996 as a result of increases in most segments of the
business market, especially in the reseller market. Year-over-year revenue
increases were primarily attributable to growth in data products of
approximately 30%, 800 products, MCI Vision* and Vnet* products. International
traffic grew more than 50% in the first quarter of 1996 from the first quarter
of 1995.
For mass markets, which includes the former consumer market group and small
business market group, revenue and traffic also grew year-over-year in the first
quarter of 1996 due to growth in the company's Friends & Family*, MCI Card* and
800 products. Revenue from the company's collect-calling product,
1-800-COLLECT*, also contributed to the year-over-year revenue growth.
<PAGE>
PAGE 15
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
EBITDA (earnings before interest, taxes, depreciation and amortization),
excluding equity in income (losses) of affiliated companies and other expense,
net, increased 28% to $962 million in the first quarter of 1996 from $751
million for the year-ago quarter, primarily due to the cost savings realized in
sales, operations and general expense as a result of the reorganization in the
third quarter of 1995. 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 margin increased to 23.8% for
the first quarter of 1996 from 21.2% for the year-ago period. Operating income
increased 41% year-over-year and operating margin increased from 12.3% to 15.2%
in the first quarter of 1996.
VENTURES AND DEVELOPING MARKETS RESULTS
- ---------------------------------------
Three months ended March 31, 1996 1995
----- -----
(In millions)
Revenue $476 $ 24
EBITDA 0 (2)
Loss from operations (33) (6)
Equity in income (losses)
of affiliated companies (55) (29)
Net loss $(83) $(22)
The significant year-over-year quarterly changes in the ventures and developing
markets business results reflect the impact of several acquisitions in late
1995. The first quarter of 1996 results include the operations of SHL, which was
acquired in November 1995, and Nationwide, which was acquired in September 1995.
The results of operations for the first quarter of 1995 include primarily the
operations of MCImetro, Inc. (MCImetro*). Accordingly, a comparison of
year-over-year results is not meaningful and, therefore, is not discussed.
<PAGE>
PAGE 16
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
Operating losses of $(33) million for the first quarter of 1996 were driven by
multimedia product operating costs and losses from wireless services and
MCImetro, which more than offset operating income from SHL's operations. Equity
in losses of affiliated companies increased to $(55) million for the first
quarter of 1996 from $(29) million for the same period a year-ago. The increase
was largely due to costs associated with the company's on-line project with News
Corp.; initial start-up costs for Avantel S.A. de C.V. (Avantel), the 44.5%
owned business venture with Grupo Financiero Banamex-Accival in Mexico; and the
company's share of increased operating losses of ICS Communications, Inc. The
increased losses were partially offset by a decrease in the losses of Concert
Communications Company (Concert**), a global services venture with British
Telecommunications plc (BT) in which the company has a 24.9% interest.
Information Technology Services
- ------------------------------------
Revenue from information technology services for the first quarter of 1996,
which includes SHL's operations, was $341 million, which was comprised of $67
million for outsourcing services, $94 million for consulting and systems
integration and $180 million for equipment deployment and educational services.
EBITDA was $34 million and net loss was $(11) million for the same period.
Backlog at March 31, 1996 was $1.5 billion, the majority of which was from the
10 largest customers. The company expects that approximately 25% of the backlog
will be delivered in 1996.
Wireless Services
- -----------------
Revenue from wireless services for the first quarter of 1996, which includes
Nationwide's operations, was $88 million and was derived from cellular and
paging services, as well as equipment sales. EBITDA for the same period was $(4)
million and net loss was $(10) million. At March 31, 1996, the company had 373
thousand cellular service subscribers and 548 thousand paging service
subscribers.
<PAGE>
PAGE 17
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
Local Services
- --------------
During the first quarter of 1996, MCImetro, the company's wholly-owned local
services subsidiary, reported revenue of $40 million on sales of fiber-optic
capacity and competitive access services, substantially all of which was derived
from sales to the company's core business. EBITDA for the quarter ended March
31, 1996 was $(8) million and net loss was $(10) million. During the first
quarter of 1996, MCImetro added five local city networks, which brought the
total number of operational local city networks to 43 in 28 cities. MCImetro
installed an additional Class 5 local switch in the first quarter of 1996,
bringing the total to 11. MCImetro also increased its route miles during the
quarter from 2,338 to 2,524 and its right-of-way miles from 3,700 to 3,924.
International Services
- ----------------------
For the first quarter of 1996, Concert product sales amounted to approximately
$105 million in revenue to its distributors, an increase of approximately 90%
from the year-ago period. Concert virtual network service continued to grow with
over 90 sites active or becoming operational around the world. For the quarter
ended March 31, 1996, the company's share of Concert losses reported in
accordance with U.S. generally accepted accounting principles was $(10) million.
During the first quarter of 1996, Avantel continued to expand its network
coverage in preparation for the opening of the Mexican market to competition in
August 1996. Avantel increased its fiber-optic network in Mexico during the
quarter by 43% from 1,540 route miles to 2,200 route miles at March 31, 1996.
Capital expenditures for the first quarter of 1996 were $172 million. The
company's share of Avantel's losses was $(8) million for the first quarter of
1996.
Multimedia Services
- -------------------
During the first quarter of 1996, the company recorded $11 million in dividend
income from its preferred stock investment in News Corp. Under certain
circumstances, News Corp. has the right to cause the company to make an
additional $1 billion investment or a portion thereof. In January 1996, News
Corp. exercised a portion of this right by requiring the company to invest $350
million, which the company invested on May 9, 1996.
<PAGE>
PAGE 18
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
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. The remainder will be due upon receipt of the license, which is
expected later this year. In the first quarter of 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 to provide digital satellite services to
homes and businesses 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. Each company will own 50% of the joint venture and will share the
costs equally.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------------------------
Cash Flows
- ----------
EBITDA increased 28% to $962 million for the first quarter of 1996 from $749
million for the year-ago period and EBITDA margin increased to 21.4% in the
first quarter of 1996 from 21.0% for the first quarter of 1995. Cash from
operating activities for the first quarter of 1996 increased $135 million
year-over-year as a result of the growth in revenue, partially offset by an
increase in cash paid to suppliers and employees.
Cash used for investing activities decreased $166 million year-over-year due
primarily to the sale or maturity of a portion of the company's marketable
securities. Capital expenditures increased to $782 million for the first quarter
of 1996 compared to $713 million for the year-ago quarter. The company continues
to invest in its networking capabilities through the ongoing development of its
Information Technology and network reliability. Network reliability and
deployment of Synchronous Optical Network (SONET) and Asynchronous Transfer Mode
(ATM) technologies continue to be a priority to improve the reliability and
delivery of advanced services. In addition to the construction of MCImetro's
SONET-based local city networks, the company completed the deployment of five
additional long distance SONET rings around major metropolitan areas during the
first quarter of 1996, bringing the total to 17. By year end 1996, the company
expects to have a total of 26 long distance SONET rings operational.
<PAGE>
PAGE 19
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
Cash from financing activities was $66 million in the first quarter of 1996 due
to the issuance of commercial paper. Cash used for financing activities was
$(76) million in the first quarter of 1995 due to the repayment of debt.
Working Capital
- ---------------
The company had working capital (current assets less current liabilities) of
$(425) million at March 31, 1996 and $(323) million at December 31, 1995. The
decrease in working capital was primarily due to an increase in operating
liabilities.
Capital Resources and Liquidity
- -------------------------------
The company believes that it will be able to meet its current and long-term
liquidity and capital requirements, including its planned investment in Avantel,
planned DBS venture costs, and investment in News Corp. and MCImetro, through
its cash flows from operating activities, bank credit facility and access to the
capital markets. The company has available a $2 billion bank credit facility,
expiring in July 2000, 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. During
the first quarter of 1996, the company issued $1,674 million and repaid $1,460
million of commercial paper borrowings, leaving $919 million of such borrowings
outstanding at March 31, 1996. 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. At March 31, 1996, there were no amounts
outstanding under the shelf registration.
In April 1996, the company filed a Registration Statement on Form S-3 with the
Securities and Exchange Commission ("SEC") that, when declared effective by the
SEC, will allow the company to offer, on a delayed or continuous basis, up to
$750 million aggregate principal amount of fixed rate cumulative quarterly
income preferred securities with a range of maturities. The proceeds from the
offering will be used for general corporate purposes.
<PAGE>
PAGE 20
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
1995 SPECIAL CHARGE FOR REORGANIZATION
- --------------------------------------
During the third quarter of 1995, the company implemented a reorganization
designed to increase efficiency, enhance marketplace effectiveness and improve
business focus. The reorganization was largely in response to the rapid changes
in business scope, technology and regulation affecting the telecommunications
industry. The total pretax operating charge associated with the reorganization
was $736 million, which included a $520 million asset write-down and a workforce
reduction of approximately 2,800 employees. As of March 31, 1996, approximately
2,500 employees had left the company; the remaining employees are expected to
leave during the remainder of 1996. The unexpended portion of the reorganization
accrual amounted to $155 million at March 31, 1996, the majority of which will
be utilized during the remainder of 1996. This remaining accrual is primarily
comprised of costs associated with lease obligations, modification and
termination of contracts, employee severance, other business reorganization
costs and certain accrued legal costs.
CURRENT INDUSTRY ENVIRONMENT
- ----------------------------
On February 8, 1996, the Telecommunications Act of 1996 ("the Act") was signed
into law. The Federal Communications Commission (FCC) has begun several rule
making proceedings mandated by the Act, including implementation of those
provisions aimed at opening local telephone markets to competition. The FCC is
expected to issue final regulations later this year.
In April 1996, four of the seven Regional Bell Operating Companies (RBOCs)
proposed two separate mergers. Each of the mergers requires approval by the FCC,
the U.S. Department of Justice, and regulatory commissions in a number of
states. The company believes that, if approved, these mergers could adversely
affect the development of competition in local telephone markets and could
ultimately have adverse consequences in other telecommunication markets as well.
However, it is too soon to predict whether either or both of the proposed
mergers will be approved and, if approved, under what conditions.
- -----------------------------------------------
* MCImetro, 1-800-COLLECT, Vnet, MCI Vision, MCI Card and Friends & Family are
registered service marks of MCI Communications Corporation.
** Concert is a mark of Concert Communications Company and is used under
license.
<PAGE>
PAGE 21
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
- ----------- -----------
11 Computation of Earnings per Common Share.
12 Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule as of March 31, 1996.
99(a) Capitalization Schedule as of March 31, 1996.
b)Reports on Form 8-K
No reports on Form 8-K were filed by the company during the three month period
ended March 31, 1996.
<PAGE>
PAGE 22
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: May 15, 1996 Signed: /s/ James M. Schneider
-----------------------
James M. Schneider
Senior Vice President, Finance
and Chief Accounting Officer
<PAGE>
PAGE 23
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 March 31, 1996.
99(a) Capitalization Schedule as of March 31, 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 Ended
March 31,
--------------
1996 1995
Primary ----- -----
-------
Net income ............................... $ 295 $ 244
===== =====
Adjustment of shares outstanding:
Weighted average shares of common stock
outstanding ............................ 689 680
Shares of common stock issuable upon the
assumed exercise of common stock
equivalents ............................ 64 43
Shares of common stock assumed repurchased
for treasury(a) ........................ (52) (38)
----- -----
Adjusted shares of common stock and common
stock equivalents for computation ...... 701 685
===== =====
Earnings per common and common
equivalent shares ........................ $ .42 $ .36
===== =====
(a) At an average market price of $28.67 and $19.47 for the three months ended
March 31, 1996 and 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 Ended
March 31,
--------------
1996 1995
Assuming Full Dilution ----- -----
----------------------
Net income ............................... $ 295 $ 244
===== =====
Adjustment of shares outstanding:
Weighted average shares of common stock
outstanding ............................ 689 680
Shares of common stock issuable upon the
assumed exercise of common stock
equivalents ............................ 64 43
Shares of common stock assumed repurchased
for treasury(b) ........................ (49) (36)
----- -----
Adjusted shares of common stock and common
stock equivalents for computation ...... 704 687
===== =====
Earnings per common and common
equivalent shares ........................ $ .42 $ .36
===== =====
(b) The ending market price of $30.25 was used as it is higher than the average
market price of $28.67 for the three months ended March 31, 1996. The
ending market price of $20.63 was used as it is higher than the average
market price of $19.47 for the three months ended March 31, 1995.
Exhibit 12
----------
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In millions, except ratio amounts)
(unaudited)
Three Months Ended
March 31, Year Ended December 31,
---------------- -------------------------------------
1996 1995 1995 1994 1993 1992 1991
----- ----- ---- ---- ---- ---- ----
Earnings:
Income before
income taxes and
extraordinary item $ 484 $ 397 $ 897 $1,280 $1,045 $ 963 $ 848
Add:
Fixed charges 103 83 344 315 315 346 334
Less:
Capitalized interest 25 21 93 78 61 52 58
------ ------ ------ ------ ------ ------ ------
Total earnings $ 562 $ 459 $1,148 $1,517 $1,299 $1,257 $1,124
====== ====== ====== ====== ====== ====== ======
Fixed Charges:
Fixed charges on
indebtedness,
including amortization
of debt discount and
premium $ 75 $ 59 $ 242 $ 231 $ 239 $ 270 $ 270
Interest portion of
operating lease
rentals(a) 28 24 102 84 76 76 64
------ ------ ------ ------ ------ ------ ------
Total fixed charges $ 103 $ 83 $ 344 $ 315 $ 315 $ 346 $ 334
====== ====== ====== ====== ====== ====== ======
Ratio of earnings to
fixed charges 5.46 5.53 3.34 4.82 4.12 3.63 3.37
====== ====== ====== ====== ====== ====== ======
(a) The interest portion of operating lease rentals is calculated as one third
of rent expense which represents a reasonable approximation of the interest
factor.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet of MCI Communications Corporation and Subsidiaries at March 31, 1996 and
the income statement for the three months ended March 31, 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 424
<SECURITIES> 206
<RECEIVABLES> 3,409
<ALLOWANCES> 270
<INVENTORY> 0
<CURRENT-ASSETS> 4,605
<PP&E> 16,357
<DEPRECIATION> 5,514
<TOTAL-ASSETS> 19,983
<CURRENT-LIABILITIES> 5,030
<BONDS> 3,579
0
0
<COMMON> 74
<OTHER-SE> 9,882
<TOTAL-LIABILITY-AND-EQUITY> 19,983
<SALES> 0
<TOTAL-REVENUES> 4,491
<CGS> 0
<TOTAL-COSTS> 3,910
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 131
<INTEREST-EXPENSE> 50
<INCOME-PRETAX> 484
<INCOME-TAX> 189
<INCOME-CONTINUING> 295
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 295
<EPS-PRIMARY> 0.42
<EPS-DILUTED> 0.42
</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 March 31, 1996:
Debt(a):
Secured debt:
Capital lease obligations ........................ $ 552
Other secured obligations ........................ 38
--------
Total secured debt ................................ 590
--------
Unsecured debt:
Senior Notes, net ................................ 1,486
Senior Debentures, net ........................... 884
Commercial paper borrowings ...................... 919
Other unsecured debt ............................. 172
--------
Total unsecured debt .............................. 3,461
--------
Total debt .......................................... $ 4,051
--------
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 ....................... 6,421
Retained earnings ................................ 4,358
Treasury stock, at cost, 38 million shares ....... (897)
--------
Total stockholders' equity .......................... 9,956
--------
Total capitalization ................................ $ 14,007
========
(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 8.8%
per annum at March 31, 1996.
