PAGE 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 1997
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 June 30, 1997, the registrant had outstanding 135,998,932 shares of Class
A common stock and 555,852,045 shares of common stock.
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MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
FORM 10-Q
For The Quarter Ended June 30, 1997
INDEX
Page No.
--------
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Income Statements for the three and six months ended
June 30, 1997 and 1996 3
Balance Sheets as of June 30, 1997 and December 31, 1996 4-5
Statements of Cash Flows for the six months ended
June 30, 1997 and 1996 6
Statement of Stockholders' Equity for the six months
ended June 30, 1997 7
Notes to Interim Condensed Consolidated Financial
Statements 8-10
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11-24
PART II: OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 25-26
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 27
SIGNATURE 28
EXHIBIT INDEX 29
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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 Six Months Ended
June 30, June 30,
------------------ ------------------
1997 1996 1997 1996
------- ------- ------- -------
REVENUE $ 4,843 $ 4,565 $ 9,726 $ 9,056
------- ------- ------- -------
OPERATING EXPENSES
Cost of services 2,547 2,342 5,072 4,686
Sales, operations and general 1,265 1,229 2,584 2,414
Depreciation 479 412 932 793
------- ------- ------- -------
TOTAL OPERATING EXPENSES 4,291 3,983 8,588 7,893
------- ------- ------- -------
INCOME FROM OPERATIONS 552 582 1,138 1,163
Interest expense (58) (52) (116) (102)
Interest income 4 9 10 20
Equity in income (losses) of
affiliated companies (24) (45) (61) (100)
Other income (expense), net (4) 3 (7) (1)
------- ------- ------- -------
INCOME BEFORE INCOME TAXES AND
TRUST DISTRIBUTIONS 470 497 964 980
Income tax provision 175 192 359 380
Distributions on subsidiary Trust
mandatorily redeemable preferred
securities 15 5 30 5
------- ------- ------- -------
NET INCOME $ 280 $ 300 $ 575 $ 595
======= ======= ======= =======
EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE $ .40 $ .43 $ .82 $ .85
Weighted average number of shares
of common stock and common stock
equivalents outstanding 708 698 705 698
Dividends declared per common share $ .025 $ .025 $ .025 $ .025
See accompanying Notes to Interim Condensed Consolidated Financial Statements.
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PAGE 4
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
BALANCE SHEETS
(unaudited)
June 30, December 31,
1997 1996
----------- -----------
(In millions)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 55 $ 187
Marketable securities 95 161
Receivables, net of allowance for
uncollectibles of $306 and $273 million 3,670 3,480
Other assets 845 888
------- -------
TOTAL CURRENT ASSETS 4,665 4,716
------- -------
PROPERTY AND EQUIPMENT, net 13,286 12,174
OTHER ASSETS
Noncurrent marketable securities 33 58
Other assets and deferred charges, net 884 678
Investment in affiliates 662 690
Investment in News Corp. 1,350 1,350
Investment in DBS 980 893
Goodwill, net 2,391 2,419
------- -------
TOTAL OTHER ASSETS 6,300 6,088
------- -------
TOTAL ASSETS $24,251 $22,978
======= =======
See accompanying Notes to Interim Condensed Consolidated Financial Statements.
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PAGE 5
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
BALANCE SHEETS
(unaudited)
June 30, December 31,
1997 1996
----------- -----------
(In millions)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 975 $ 992
Accrued telecommunications expense 2,134 2,045
Other accrued liabilities 1,807 1,806
Long-term debt due within one year 1,930 203
-------- --------
TOTAL CURRENT LIABILITIES 6,846 5,046
-------- --------
NONCURRENT LIABILITIES
Long-term debt 3,259 4,798
Deferred taxes and other 2,046 1,723
-------- --------
TOTAL NONCURRENT LIABILITIES 5,305 6,521
-------- --------
COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED
SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY
JUNIOR SUBORDINATED DEFERRABLE INTEREST
DEBENTURES OF THE COMPANY 750 750
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 6,373 6,410
Retained earnings 5,789 5,231
Treasury stock, at cost,
37 and 44 million shares (886) (1,054)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 11,350 10,661
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 24,251 $ 22,978
======== ========
See accompanying Notes to Interim Condensed Consolidated Financial Statements.
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MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
June 30,
------------------------
1997 1996
------ ------
(In millions)
OPERATING ACTIVITIES
Receipts from customers $ 9,311 $ 8,796
Payments to suppliers and employees (7,499) (6,926)
Taxes paid (167) (266)
Interest paid (145) (86)
Interest and dividends received 5 37
------- -------
CASH FROM OPERATING ACTIVITIES 1,505 1,555
------- -------
INVESTING ACTIVITIES
Capital expenditures for property and equipment (1,710) (1,607)
Purchases, maturities and sales of
marketable securities, net 91 168
Investment in News Corp. 0 (350)
Investment in DBS (127) (215)
Investment in affiliates (42) (30)
Acquisition of businesses 0 (24)
Other, net 35 (43)
------- -------
CASH USED FOR INVESTING ACTIVITIES (1,753) (2,101)
------- -------
NET CASH FLOW BEFORE FINANCING ACTIVITIES (248) (546)
------- -------
FINANCING ACTIVITIES
Issuance (payment) of Debentures and other debt, net (160) 234
Commercial paper and bank credit facility
activity, net 135 (352)
Issuance of Trust preferred securities, net 0 726
Issuance of common stock for employee plans 251 243
Purchase of treasury stock (93) (344)
Payment of dividends on common stock and
Class A common stock (17) (17)
------- -------
CASH FROM FINANCING ACTIVITIES 116 490
------- -------
Net decrease in cash and cash equivalents (132) (56)
Cash and cash equivalents - beginning balance 187 471
------- -------
Cash and cash equivalents - ending balance $ 55 $ 415
======= =======
Reconciliation of net income to cash from
operating activities:
Net income $ 575 $ 595
Adjustments to net income:
Depreciation and amortization 953 821
Equity in (income) losses of affiliated companies 61 100
Deferred income tax provision 34 146
Net change in operating activity accounts
other than cash and cash equivalents:
Receivables (190) (226)
Operating accounts payable (204) 216
Other operating activity accounts 276 (97)
------- -------
Cash from operating activities $ 1,505 $ 1,555
======= =======
See accompanying Notes to Interim Condensed Consolidated Financial Statements
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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, 1996 $ 14 $ 60 $ 6,410 $ 5,231 $(1,054) $10,661
Common stock issued
for employee stock
and benefit plans and
other activity
(9 million shares) - - (37) - 255 218
Net income - - - 575 - 575
Common stock dividends - - - (17) - (17)
Treasury stock
purchased
(2 million shares) - - - - (87) (87)
----- ----- ------- ------- -------- --------
Balance at
June 30, 1997 $ 14 $ 60 $ 6,373 $ 5,789 $ (886) $11,350
===== ===== ======= ======= ======== ========
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. The preparation
of the financial statements includes estimates that are used when accounting for
revenue, allowances for uncollectible receivables, telecommunications expense,
depreciation and amortization, employee benefit plans and taxes. Actual results
could differ from those estimates. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles (GAAP) 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, 1996.
NOTE 2. MERGER AGREEMENT WITH BRITISH TELECOMMUNICATIONS PLC
On November 3, 1996, the company entered into an Agreement and Plan of Merger
(the Merger Agreement) with British Telecommunications plc (BT), a public
limited liability company organized under the laws of England and Wales. As a
result of the proposed merger (the Merger), the stockholders of the company and
BT will become the owners of a combined company, to be named Concert plc
(Concert). Under the terms of the Merger Agreement, each outstanding share of
the company's common stock (other than treasury shares and shares owned by BT,
including shares of Class A common stock, all of which will be canceled upon
consummation of the Merger) will be converted into the right to receive (i) .54
American Depository Share (ADS) of Concert, each ADS representing ten ordinary
shares of 25 pence each of Concert, with cash being paid in lieu of fractional
ADSs, and (ii) $6.00 in cash.
<PAGE>
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MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The Merger was approved by the stockholders of the company and BT in April 1997
and the European Commission on May 14, 1997. On July 7, 1997, the United States
(U.S.) Department of Justice (DOJ) moved to modify the existing consent decree
with the company that was entered in September 1994. The company and BT have
agreed to the amendments to this consent decree. Completion of the Merger, which
is subject to approval by the U.S. Federal Communications Commission (FCC), is
expected by the fall 1997. The Merger will be accounted for under the purchase
method of accounting under both U.S. and United Kingdom (U.K.) GAAP.
NOTE 3. DEBT
On April 30, 1997, the company entered into a revolving credit loan agreement
with several financial institutions, under which the company may borrow up to $4
billion. Borrowings under this agreement mature on April 28, 1998. This
agreement replaces the company's September 1996 $2 billion revolving credit loan
agreement.
NOTE 4. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 130, Reporting Comprehensive Income, which is effective
for fiscal years beginning after December 15, 1997. The Statement establishes
standards for reporting and displaying comprehensive income, as defined, and its
components. The company plans to adopt the Statement's disclosure standards in
1998.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information, which is effective for fiscal years
beginning after December 15, 1997. The Statement establishes standards for the
way companies report information about operating segments in annual and interim
financial statements. The company plans to adopt the Statement's disclosure
standards in 1998.
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MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 5. CONTINGENCIES
The company, in the normal course of business, is a party to a number of
lawsuits and regulatory and other proceedings. The company's management does not
expect that the results in these lawsuits and proceedings will have a material
adverse effect on the consolidated financial position or results of operations
of the company.
On November 4, 1996 and thereafter, the company and all of its directors,
including the two directors who are also executive officers of the company and
the three directors elected by BT, were named as defendants in twelve complaints
filed in the Court of Chancery in the State of Delaware. BT was named as a
defendant in ten of the complaints. The complaints were brought by alleged
stockholders of the company, individually and purportedly as class actions on
behalf of all other stockholders of the company. The complaints allege breaches
of fiduciary duty by the company's directors in connection with the Merger. Nine
of the complaints in which BT was named as a defendant allege that BT aided and
abetted those breaches of duty. One of the complaints in which BT was named as a
defendant alleges that BT owes fiduciary duties to the other stockholders of the
company and that it breached those duties in connection with the Merger. The
complaints seek damages and other relief. The defendants believe that the
complaints are without merit and the company does not expect that the above
actions will have a material adverse effect on the consolidated financial
position or results of operations of the company.
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PAGE 11
PART I.
ITEM 2.
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
GENERAL
- -------
The following discussion and analysis provides information that management
believes is relevant to an assessment and understanding of the consolidated
results of operations and financial condition of MCI Communications Corporation
and its subsidiaries (collectively, the company). 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, 1996.
GLOBAL MERGER AGREEMENT
- -----------------------
On November 3, 1996, the company entered into an Agreement and Plan of Merger
(the Merger Agreement) with British Telecommunications plc (BT), a public
limited liability company organized under the laws of England and Wales. As a
result of the proposed merger (the Merger), the stockholders of the company and
BT will become the owners of a combined company, to be named Concert plc
(Concert).
- -------------------------------------------------------------------------------
Forward-looking Statements May Prove Inaccurate
The company has made certain forward-looking statements in Management's
Discussion and Analysis that are subject to risks and uncertainties.
Forward-looking statements include information concerning the possible future
results of operations of the company, its long distance telecommunication
services (core) business, its investments in ventures and developing markets
(VDM) businesses, the possible future results of operations of the company and
Concert after the Merger and statements preceded by, followed by or that include
the words "believes", "expects", "anticipates", or similar expressions. For
those statements, the company claims the protection of the safe-harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995. The reader is cautioned that the following important factors among
others, in addition to those contained elsewhere in Management's Discussion and
Analysis, could adversely affect the future results of the company, its long
distance telecommunication services and VDM businesses and the company and
Concert after the Merger and could cause those results to differ materially from
the statements and information expressed in the forward-looking statements:
material adverse changes in the economic conditions in the markets served by the
company; a significant delay in the expected closing of the Merger; future
regulatory actions and conditions in the company's operating areas, including
the ability of the company to implement its local strategy and obtain local
facilities at competitive rates and resulting changes in the implementation of
its local strategy; and competition from others in the U.S. and international
long distance markets, including the entry of the regional Bell operating
companies (RBOCs) and other companies into the long distance markets in the U.S.
For additional information about other important factors that should be
considered, the reader should read the company's Annual Report on Form 10-K for
the year ended December 31, 1996 and all of the company's filings with the
Securities and Exchange Commission subsequent thereto.
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PAGE 12
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
Under the terms of the Merger Agreement, each outstanding share of the company's
common stock (other than treasury shares and shares owned by BT, including
shares of Class A common stock, all of which will be canceled upon consummation
of the Merger) will be converted into the right to receive (i) .54 American
Depository Share (ADS) of Concert, each ADS representing ten ordinary shares of
25 pence each of Concert, with cash being paid in lieu of fractional ADSs, and
(ii) $6.00 in cash.
The Merger was approved by the stockholders of the company and BT in April 1997
and the European Commission on May 14, 1997. On July 7, 1997, the United States
(U.S.) Department of Justice (DOJ) moved to modify the existing consent decree
with the company that was entered in September 1994. The company and BT have
agreed to the amendments to this consent decree. Completion of the Merger, which
is subject to approval by the U.S. Federal Communications Commission (FCC), is
expected by the fall 1997. The Merger will be accounted for under the purchase
method of accounting under both U.S. and United Kingdom (U.K.) GAAP. The company
believes that Concert, operating with the combined networks, financial
resources, management, personnel and technical expertise of the company and BT,
will be better able to capitalize on growth opportunities in the
telecommunications industry, both domestically and internationally. In addition,
the company expects Concert will be able to derive significant advantages from
the more efficient utilization of their combined assets, management and
personnel. Under the terms of the Merger Agreement, the company and BT will
continue to sell and service customers using their own brand names in their
respective home countries.
GLOBAL ALLIANCES
- ----------------
On April 14, 1997, the company, BT and Portugal Telecom formed a strategic
alliance to provide communication services in Portugal and Latin America. The
voice products of Concert Communications Services (CCS), the company's existing
joint venture with BT, will be exclusively distributed by Portugal Telecom in
Portugal. The company will acquire a 0.5% equity stake in Portugal Telecom later
in 1997.
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PAGE 13
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
On April 18, 1997, the company, BT and Telefonica de Espana (Telefonica) formed
a strategic alliance to provide telecommunication services and to explore growth
opportunities in the Americas and Europe. Telefonica Internacional SA (TISA),
Telefonica's international unit, and the company will create an equally owned
Pan American joint venture, managed by TISA, called Telefonica Panamericana-MCI.
The joint venture will pursue new opportunities in the Latin American
telecommunications market. As part of the alliance, Telefonica will have an
opportunity to invest in Avantel, S.A. de C.V. (Avantel) and will form a joint
venture with MCI Systemhouse (Systemhouse) to service the Latin American systems
integration market.
TELECOMMUNICATIONS REGULATORY ENVIRONMENT
- -----------------------------------------
The Telecommunications Act of 1996 (the Act) was enacted by Congress to help
minimize legal barriers to local telephone market entry while affording
residential and business consumers protection from unfair competition by
incumbent local exchange carriers (ILECs). A company is permitted to enter the
local market by constructing new facilities, leasing unbundled network elements,
reselling local network capacity or by partnering with other new market
entrants. The regional Bell operating companies' (RBOCs) are permitted to offer
long distance services outside their regions but are barred from offering
in-region long distance services until they open their own markets and encounter
facilities-based local competition. The Act establishes criteria pursuant to
which RBOCs applications to provide in-region long distance service may be
approved by the FCC, in consultation with the relevant state regulatory agencies
as well as the DOJ.
In order to implement the Act, the FCC outlined a trilogy of issues to be
resolved to ensure competition in the local market-interconnection, universal
service and access charge reform. On May 7, 1997, the FCC completed action on
the trilogy when it rendered its access charge and universal service reform
decisions. The FCC adopted a plan in a price cap order that it stated would
reduce interstate access charges approximately $1.7 billion on an industry-wide
basis. However, only $1.6 billion of such access charge reductions went into
effect on July 1, 1997. As part of its effort to establish cost based services,
the FCC, in its access charge order, has reclassified certain access charges
from usage based to line based. The company anticipates that it will pass
through to consumers the realized savings from switched access charge
reductions, net of pre-subscribed interconnect carrier costs and new universal
service obligations, which are discussed below. The company has appealed the
price cap and the access charge reform orders.
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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 AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
The FCC's universal service order, which includes current subsidies paid by long
distance carriers and new obligations to fund discounted services for schools,
libraries, rural health care providers and low income consumers, will become
effective on January 1, 1998 and be funded by all telecommunications carriers.
This order is currently being appealed by several parties. These challenges
could materially affect the size of the universal service fund and the company's
required contributions.
In July 1997, the U.S. Court of Appeals for the Eighth Circuit (Eighth Circuit)
determined that the FCC had exceeded its authority when it established a
national pricing structure for interconnection with the ILECs pursuant to the
Act. The Eighth Circuit also held that certain portions of the FCC rules, such
as the scope of its enforcement activities, are invalid. Although the Act was
designed by Congress to deregulate the telephone industry and spur competition
in the local and long distance markets, the company believes the Eighth
Circuit's ruling may delay local phone competition because potential competitors
to the ILECs, including the company, will have to continue to negotiate
interconnection agreements in individual states without the benefit of uniform
pricing rules guided by a national policy.
EARNINGS HIGHLIGHTS
- -------------------
Income from operations was $552 million and $1,138 million for the three and six
months ended June 30, 1997, respectively, decreasing approximately 5% and 2%
from the comparable periods in 1996. Operating margin for the three and six
months ended June 30, 1997 decreased to 11.4% and 11.7%, respectively, from
12.7% and 12.8%, in the comparable periods in 1996, respectively. These declines
were due primarily to higher costs of services and depreciation expense as a
percentage of revenue partially offset by a decrease in sales operations and
general expenses as a percentage of revenue. Net income for the three and six
months ended June 30, 1997 decreased to $280 million and $575 million, or $0.40
and $.82 per share, respectively, from $300 million and $595 million, or $0.43
and $0.85 per share, for the comparable periods in 1996, respectively.
<PAGE>
PAGE 15
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
The company believes that it may be prevented from executing its local strategy
as it had anticipated. As a result, and as explained below, the company expects
that it will not generate the anticipated revenue and will incur greater than
expected operating expenses and losses in its local business through the
remainder of 1997 and in 1998. In addition, the company is presently exploring a
series of steps to improve financial performance and to continue to respond to
the increasingly competitive environment in the core business. While these
decisions have not been finalized, if taken, they could result in material
charges to the company's 1997 results of operations. The following provides a
discussion of the company's consolidated operating results, comprised of its
core and VDM businesses. Refer to "Enterprise Reporting" below for further
discussion of these businesses.
CONSOLIDATED RESULTS OF OPERATIONS
- ----------------------------------
Consolidated revenue for the three and six months ended June 30, 1997 increased
6.1% and 7.4% to $4.8 billion and $9.7 billion, respectively, from the
comparable periods in 1996. For the three and six months ended June 30, 1997,
core business revenue increased by $195 million and $529 million or 4.7% and
6.4%, respectively, from the prior year periods. VDM revenue increased by $136
million and $239 million for the three and six months ended June 30, 1997,
respectively, over the comparable periods in 1996 primarily due to increased
Information Technology Services revenue.
Cost of services consists of telecommunications expense and costs of other
products and services primarily associated with the VDM businesses.
Telecommunications expense is primarily comprised of access facilities fees paid
to ILECs and other domestic service providers, and payments made to foreign
telephone companies (international settlements) to complete calls made to
foreign countries from the U.S. by the company's customers. In the VDM
businesses, costs of other products and services primarily include equipment,
software and technology service costs. Consolidated cost of services for the
three and six months ended June 30, 1997 increased 8.8% and 8.2% to $2.5 billion
and $5.1 billion, respectively, from the comparable periods in 1996, primarily
as a result of increased revenue in each period. Telecommunications expense
decreased as a percent of core business revenue for the three and six months
ended June 30, 1997 primarily due to lower international settlement expense and
continued efficient network use.
<PAGE>
PAGE 16
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
Sales, operations and general expense increased 2.9% and 7% to $1.3 billion and
$2.6 billion for the three and six months ended June 30, 1997, respectively,
from the comparable periods in 1996. In the core business, sales, operations and
general expense for the three and six months ended June 30, 1997 as a percentage
of revenue decreased to 23.4% and 24.4%, respectively, from 26% and 25.7% in the
same periods in 1996, respectively, primarily as a result of continued
redeployment of certain resources and operations to local services and other
cost containment efforts. In the VDM businesses, sales, operations and general
expense as a percentage of revenue for the three and six months ended 1997
increased to 41.3% and 38.9%, respectively, from 31.2% and 32.2% in the same
periods in 1996, respectively, which was attributable to the continued
development in local services markets and information technology services and
the related increases in marketing efforts and personnel expenditures.
Depreciation expense increased 16.3% and 17.5% for the three and six months
ended June 30, 1997 to $479 million and $932 million, respectively, from the
comparable periods in 1996. The increase is primarily the result of 1996 and
1997 additions to the communications system network to increase network
capacity, redundancy and reliability, add product features and functionality and
support the company's local services business.
Interest expense increased $6 million and $14 million, respectively, from the
comparable periods in 1996 due to increased 1997 debt balances.
Equity in income (losses) of affiliates improved as the company recognized
reductions of $21 million and $39 million in net losses of its affiliates for
the three and six months ended June 30, 1997, respectively. The decrease in
losses for each period was primarily due to reduced net losses associated with
several of the company's investments and ventures, including the former on-line
project, which ceased operations in 1996, with The News Corporation Limited
(News Corp.), partially offset by increased operating losses of Avantel. As
further discussed in "Enterprise Reporting" below, due to the start-up nature
and current operations of several of these affiliates, the company expects
equity in losses of affiliated companies to continue for the remainder of 1997.
Distributions on subsidiary Trust mandatorily redeemable securities, issued in
May 1996, totaled $15 million and $30 million for the three and six months ended
June 30, 1997, respectively.
<PAGE>
PAGE 17
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
ENTERPRISE REPORTING
- --------------------
This section segregates the performance of the company's core business from its
VDM businesses and investments. Core business services comprise a wide spectrum
of domestic and international voice and data services, including long distance
telephone, data communication, teleconferencing, Internet and electronic
messaging services. The company has invested in VDM businesses outside of its
core business through acquisitions, alliances and other strategic initiatives in
the local, information technology, wireless, international and multimedia
markets. Investments in these VDM businesses are included in the company's
financial statements as consolidated subsidiaries, unconsolidated equity
investments, or cost investments such as News Corp.
The following 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
- ---------------------
(In millions) Three Months Ended Six Months Ended
June 30, June 30,
----------------- -----------------
1997 1996 1997 1996
------ ------ ------ ------
Revenue $4,353 $4,158 $8,737 $8,208
Income from operations 661 600 1,314 1,214
Equity in income (losses)
of affiliated companies - - - -
Net income 404 372 807 750
Depreciation 433 384 845 732
Net interest, income taxes
and other expense (257) (228) (507) (464)
EBITDA* 1,094 984 2,159 1,946
* EBITDA, as defined by management, consists of earnings, excluding equity in
income (losses) of affiliates, other income (expense), net, and distributions on
subsidiary Trust mandatorily redeemable preferred securities, before interest,
income taxes, depreciation and amortization. EBITDA represents a measure of the
company's ability to generate cash flows and does not represent net income or
cash flows from operating, investing and financing activities as defined by
GAAP. EBITDA should be considered in addition to, but not as a substitute for,
or superior to, measures of financial performance reported in accordance with
GAAP. EBITDA is often used by analysts when evaluating the performance of a
company. Readers are cautioned that the company's definition of EBITDA may not
be comparable to similar titled measures used by other companies or analysts.
<PAGE>
PAGE 18
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
The following discussion focuses on significant financial and operational
results of the company's core business.
Core business revenue for the three months ended June 30, 1997 increased 4.7%
from the year ago period, while traffic grew 5.5%, resulting in a revenue to
traffic variance of (.8%). This negative variance reflects the company's
strategic decision to de-emphasize the carrier channel, a tough pricing
environment and the industry-wide moderation of residential revenue growth. The
variance improved from the year ago period due to the company's proactive
transition away from acquisition promotions in the mass market. Core business
revenue for the six months ended June 30, 1997 increased 6.4% from the
comparable year ago period while traffic grew 4.7%, resulting in a revenue to
traffic variance of 1.7%. This variance reflects the transition away from the
high level of customer acquisition promotions in the first half of 1996 and the
strategic shift in the first half of 1997 in product and service offerings.
In the business market, revenue continued to grow in the three and six months
ended June 30, 1997 from the comparable periods in 1996 with enhanced, data and
virtual data products accounting for a majority of the revenue growth. However,
revenue and volume growth slowed in the carrier channel as the company continued
to focus efforts on improving its margins on sales to and collections from
resellers. Revenue in the mass market for the three and six months ended June
30, 1997 decreased from the comparable periods in 1996. These declines were the
result of the company's focus on value, service and integration for customer
acquisition rather than price through discounting or acquisition promotions as
well as the industry-wide moderation of residential revenue growth. The company
continued selectively to target high value customers through its integrated
package offering of inbound, outbound, wireless and Internet services and
programs aimed at customer retention while curtailing the use of customer
acquisition programs in the first half of 1997. As a result, customer spending
and churn rates improved during the first half of 1997 from the year ago period.
While mass markets operating trends have improved in 1997, the company expects
that through the next few quarters, revenue trends on a year-over-year basis
will continue to be adversely affected as the company continues its migration
from the volatile price-shopping customer and builds and retains a more loyal
customer base. In addition, the company expects 1997 operating income in the
core business to be similar to last year due to lower than expected synergies
from the company's local efforts, increased Year 2000 efforts, several new
product launches, implementation of payphone compensation reform, renegotiation
of business customer contracts, tighter credit policies for sales to resellers
and higher depreciation resulting from increased capital projects placed in
service over the remainder of 1997.
<PAGE>
PAGE 19
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
VENTURES AND DEVELOPING MARKETS RESULTS
- ---------------------------------------
(In millions) Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1997 1996 1997 1996
------- ------- ------- -------
Revenue $ 613 $ 477 $ 1,192 $ 953
Loss from operations (97) (15) (159) (48)
Equity in income (losses)
of affiliated companies (24) (45) (61) (100)
Net loss (116) (69) (219) (152)
Depreciation 46 28 87 61
Net interest, income taxes
and other expense 5 (9) 1 (4)
EBITDA* (51) 13 (72) 13
During the second quarter of 1997, the company continued to make investments in
its VDM businesses and strategic initiatives in an effort to expand its business
opportunities in these markets. The company invested approximately $125 million
in local services, $41 million in direct broadcast satellite (DBS) development
costs and $26 million in affiliated companies during the second quarter of 1997.
Certain information about the company's results of operations in these
businesses and strategic initiatives are provided below.
LOCAL
- -----
The company provides facilities-based switched and dedicated local services,
local fiber-optic capacity and competitive access services to business customers
and the company's core business. The company also provides local resale services
to business and residential customers in several states. The company intends to
become a single-source provider of comprehensive local telecommunication
services and to compete in the local services market, while also reducing the
company's access and interconnection costs. As of June 30, 1997, the company had
been granted authority to offer local exchange services in 35 states and had
applications for such services pending in 10 other states.
<PAGE>
PAGE 20
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
Local service revenue, substantially all of which continues to be derived from
sales to and through the core business, increased by $36 million and $61 million
year-over-year to $80 million and $145 million for the three and six months
ended June 30, 1997, respectively. Net loss for the three and six months ended
June 30, 1997 increased by $46 million and $86 million year-over-year to $61
million and $111 million, respectively. EBITDA for the three and six months
ended June 30, 1997 decreased by $61 million and $111 million year-over-year to
$(73) million and $(131) million, respectively. The increase in net losses and
the decrease in EBITDA for the three and six months ended June 30, 1997
primarily reflect the increased operating costs associated with the continued
investment in the local market. During the second quarter of 1997, the company
added 2 local city networks, bringing the total number of operational local city
networks to 69 in 36 markets, compared to 55 operational networks in 31 markets
at the end of the second quarter of 1996. In addition, route miles increased 23%
year-over-year to 3,218 miles as of June 30, 1997. At present, the company
provides facilities-based switched local services in 25 markets and intends to
have service operational in over 30 markets by the end of 1997.
The company's expansion and traffic growth in the local market continued to be
hampered by changes in Federal and state regulations governing the opening of
local markets, exacerbated by anti-competitive behavior and delaying tactics by
the ILECS. Due to this anti-competitive environment, the company will not
generate anticipated revenue and will incur higher than expected costs as it
enhances its local market presence. The company believes that its local business
losses in 1997 could reach as much as $800 million, including interest on
capital deployed, and perhaps exceed this level in 1998 given its present plans
to expand its local market penetration, increase residential resale efforts and
absorb excessive non-recurring costs levied by the ILECs. These projected losses
also reflect increased costs associated with operating system requirements
necessary to provide local service as well as legal, regulatory and lobbying
efforts to contest the ILEC actions.
<PAGE>
PAGE 21
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
INFORMATION TECHNOLOGY SERVICES
- -------------------------------
Information Technology Services include the results of operations of Systemhouse
and Call Center Services. Revenue for the three and six months ended June 30,
1997 increased by $113 million and $205 million to $444 million and $877
million, respectively, from the comparable periods in 1996. These increases were
due to growth in Systemhouse's outsourcing, desktop and systems integration
services, and Call Center Services' automation and outsourcing services. Net
loss for the three and six months ended June 30, 1997 increased by $12 million
and $16 million, respectively, over the comparable periods in 1996 to $27
million and $42 million, respectively. EBITDA for the three and six months ended
June 30, 1997 was $22 million and $59 million, respectively, compared to $32
million and $66 million for the same periods in 1996, respectively. The increase
in net loss and the decrease in EBITDA for the periods was primarily the result
of product mix and higher sales, operations and general expenses related to
advanced staffing for delivery of awarded contracts and transition support of
new large contracts.
Backlog, which includes amounts committed under executed contracts or letters of
intent, at June 30, 1997 was approximately $1.8 billion, the majority of which
was from Systemhouse's largest customers, of which 20% is expected to be
delivered by the end of 1997.
WIRELESS
- --------
Wireless services primarily include the operations of MCI Wireless, Inc., the
company's cellular provider, and paging services. Revenue for the three and six
months ended June 30, 1997 decreased by $13 million and $26 million,
respectively, from the year ago periods to $83 million and $158 million,
respectively. This decrease was primarily attributable to the decrease in paging
subscribers from 474,000 at June 30, 1996 to 227,000 at June 30, 1997 as the
company continued to concentrate on profitability per customer in the mass
market, to de-emphasize stand-alone paging services and to revise its paging
service offerings cost and infrastructure. As of June 30, 1997, the number of
cellular customers increased by approximately 11% from June 30, 1996 to 434,000
due to the company's focus on integrated product offerings and expansion into
new markets during the last half of 1996. For the three and six months ended
June 30, 1997, net loss was $10 million and $19 million, respectively, and
EBITDA was $(3) million and $(6) million, respectively.
<PAGE>
PAGE 22
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
INTERNATIONAL SERVICES
- ----------------------
CCS is the company's 24.9% owned international services venture with BT that
provides a broad portfolio of advanced global communication services, including
virtual network, frame relay, managed bandwidth and packet services, to
multinational business customers worldwide. CCS' distributor revenues increased
30% and 42% year-over-year to $182 million and $347 million for the three and
six months ended June 30, 1997, respectively. The company's share of CCS' losses
reported in accordance with U.S. GAAP was unchanged at $6 million for the three
months ended June 30, 1997 and decreased by $4 million to $12 million for the
six months ended June 30, 1997 compared to the comparable periods in 1996.
Avantel is the company's 44.5% owned Mexican business venture which began
offering a full range of competitive switched long distance services to
residential and business customers on January 1, 1997. During the second quarter
of 1997, Avantel's network became almost fully operational as Avantel began
offering services throughout most of Mexico. In addition, by the end of the
second quarter of 1997, Avantel had obtained more than a 10% share in the total
Mexican long distance market. The company's share of Avantel's losses reported
in accordance with U.S. GAAP for the three and six months ended June 30, 1997
increased by $10 million and $24 million to $14 million and $35 million,
respectively, from the comparable periods in 1996. The company expects to incur
additional losses on its investment during 1997 as Avantel continues to expand
its service and customer bases in the Mexican telecommunications market.
MULTIMEDIA SERVICES
- -------------------
The company's investments in News Corp. and DBS comprise Multimedia Services.
Dividend income on the company's investment in News Corp. for the three and six
months ended June 30, 1997 was approximately $15 million and $30 million,
respectively, compared to $13 million and $24 million for the comparable periods
in 1996, respectively. The company invested an additional $87 million in DBS
construction costs during the first half of 1997, bringing its total investment
in the project to $980 million as of June 30, 1997.
<PAGE>
PAGE 23
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
In May 1997, the company renegotiated its investment agreement with News Corp.
to terminate the company's remaining investment obligation of $650 million. In
addition, the company and News Corp. agreed to form a joint venture to engage in
the DBS business. The company will own 19.9% of the joint venture. The company
and News Corp. will each contribute to the joint venture two satellites under
construction, as well as other assets relating to the DBS business. In addition,
the joint venture will acquire the company's rights to the spectrum of DBS
frequencies (the DBS license) for an amount equal to the $682.5 million paid by
the company, plus interest (the fee). Concurrently, the company will make an
investment in a subsidiary of News Corp. in an amount equal to the fee. This
investment will be repaid on the sixth anniversary or upon certain circumstances
on the third anniversary of the agreement.
In June 1997, the company and News Corp. entered into an agreement with
Primestar Partners, L.P. (Primestar) for the sale and transfer of substantially
all of their assets relating to the DBS business, including the DBS license but
excluding two of the four satellites under construction. This transaction is
part of a larger transaction which involves the consolidation of Primestar and
TCI Satellite Entertainment, Inc. into a newly formed entity (New Primestar).
The company will receive from Primestar consideration for its 19.9% joint
venture interest in the form of cash and interest bearing non-voting New
Primestar securities. The transaction is subject to regulatory approvals,
including approval by the FCC of the company's transfer of the DBS license to
New Primestar.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------------------------
CASH FLOWS
- ----------
Cash from operating activities decreased to $1,505 million in the first half of
1997 from $1,555 million in the first half of 1996 due to an increase in cash
paid to suppliers and employees.
Cash used for investing activities decreased by $348 million year-over-year to
$1,753 million primarily due to a decrease in investments in News Corp. and
affiliates in the first half of 1997 which was partially offset by an increase
in capital expenditures.
Cash from financing activities decreased to $116 million in the first half of
1997 from $490 million in the first half of 1996. This decrease was due to a net
decrease in debt issuances and the issuance of $750 million of preferred
securities in May 1996, as well as a decrease in treasury stock purchases.
During the first half of 1997, the company issued $3,518 million and repaid
$3,383 million of commercial paper borrowings, leaving $1,557 million of such
borrowings outstanding at June 30, 1997.
<PAGE>
PAGE 24
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
The company believes that it will be able to meet its current and foreseeable
liquidity and capital requirements, including continued investments in its local
services and other VDM businesses, through its cash flows from operating
activities and existing debt facilities. On April 30, 1997, the company entered
into a new $4 billion credit facility expiring on April 28, 1998. This new
facility replaces a $2 billion credit facility. In addition, on July 23, 1997,
the company entered into a $500 million notional amount forward-starting swap
agreement to hedge future debt issuances.
EBITDA
- ------
Consolidated EBITDA increased 5.8% to $2,070 million for the first half of 1997
from $1,956 million for the year ago period due to increased revenue. EBITDA, as
defined by management, consists of earnings, excluding equity in income (losses)
of affiliates, other income (expense), net, and distributions on subsidiary
Trust mandatorily redeemable preferred securities, before interest, income
taxes, depreciation and amortization. EBITDA represents a measure of the
company's ability to generate cash flows and does not represent net income or
cash flows from operating, investing and financing activities as defined by
GAAP. EBITDA should be considered in addition to, but not as a substitute for,
or superior to, measures of financial performance reported in accordance with
GAAP. EBITDA is often used by analysts when evaluating the performance of the
company. Readers are cautioned that the company's definition of EBITDA may not
be comparable to similar titled measures used by other companies or analysts.
<PAGE>
PAGE 25
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
FORM 10-Q
PART II. OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a)The company's annual meeting of stockholders was held on April 2, 1997.
(b)The nominees for directors of the company set forth in full in the
company's Proxy Statement dated March 3, 1997 (Proxy Statement) were
elected at the annual meeting.
(c) Holders of common stock and Class A common stock voted at the annual
meeting on the following matters which were set forth in the
company's Proxy Statement.
(1) Of the 683,736,032 shares outstanding as of the Record Date,
526,804,108 shares were voted for, and 1,598,946 shares were voted
against, the approval of the merger agreement between the company and
British Telecommunications plc, with 977,263 abstaining from voting
and 45,215,272 broker non-votes.
(2) To elect four directors by the holders of common stock, each to
serve for a three-year term.
VOTES (In millions):
Nominee For Abstain
-------------------------- --- -------
Clifford L. Alexander, Jr 430 8
Richard M. Jones 430 8
K. Rupert Murdoch 430 8
John R. Worthington 430 8
Broker non-votes: None
(3)To elect three Class A directors by the holders of Class A common
stock, each to serve a one-year term.
VOTES (In millions):
Nominee For Abstain
-------------------------- --- -------
Sir Peter L. Bonfield 136 -
Sir Colin Marshall 136 -
J. Keith Oates 136 -
Broker non-votes: None
<PAGE>
PAGE 26
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
FORM 10-Q
(4)To approve the appointment by the Board of Directors of Price
Waterhouse LLP as independent accountants for the year ending December
31, 1997 by the holders of common stock and Class A common stock.
VOTES (In millions):
For: 573
Against: 1
Abstain: -
Broker non-votes: None
<PAGE>
PAGE 27
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
FORM 10-Q
PART II. OTHER INFORMATION (continued)
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
a)Exhibits
Exhibit No. Description
- ----------- -----------
11 Computation of Earnings per Common Share.
12 Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule as of June 30, 1997.
99(a) Capitalization Schedule as of June 30, 1997.
b)Reports on Form 8-K
The company did not file any Current Reports on Form 8-K during the quarter
ended June 30, 1997.
<PAGE>
PAGE 28
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
FORM 10-Q
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MCI COMMUNICATIONS CORPORATION
Date: August 14, 1997 Signed: /s/ David M. Case
-----------------------
David M. Case
Vice President and Controller
<PAGE>
PAGE 29
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
FORM 10-Q
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
11 Computation of Earnings per Common Share.
12 Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule as of June 30, 1997.
99(a) Capitalization Schedule as of June 30, 1997.
Exhibit 11
-------------
(Page 1 of 2)
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
(In millions, except per share amounts)
(unaudited)
Three months Six months
ended ended
June 30, June 30,
-------------- -------------
1997 1996 1997 1996
Primary ---- ---- ---- ----
- -------
Net income ................................. $ 280 $ 300 $ 575 $ 595
===== ===== ===== =====
Adjustment of shares outstanding:
Weighted average shares of common stock
outstanding ............................ 689 689 688 689
Shares of common stock issuable upon the
assumed exercise of common stock
equivalents ............................ 84 61 84 61
Shares of common stock assumed repurchased
for treasury(a) ........................ (65) (52) (67) (52)
----- ----- ----- -----
Adjusted shares of common stock and common
stock equivalents for computation ...... 708 698 705 698
===== ===== ===== =====
Earnings per common and common
equivalent shares ........................ $ .40 $ .43 $ .82 $ .85
===== ===== ===== =====
(a) At an average market price of $38.33 and $37.01 for the three and six
months ended June 30, 1997, respectively, and $28.46 and $28.57 for the three
and six months ended June 30, 1996, respectively.
<PAGE>
Exhibit 11
-------------
(Page 2 of 2)
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
(In millions, except per share amounts)
(unaudited)
Three months Six months
ended ended
June 30, June 30,
------------- -------------
1997 1996 1997 1996
Assuming Full Dilution ---- ---- ---- ----
----------------------
Net income ................................. $ 280 $ 300 $ 575 $ 595
===== ===== ===== =====
Adjustment of shares outstanding:
Weighted average shares of common stock
outstanding ............................ 689 689 688 689
Shares of common stock issuable upon the
assumed exercise of common stock
equivalents ............................ 84 61 83 61
Shares of common stock assumed repurchased
for treasury(b) ........................ (65) (52) (64) (52)
----- ----- ----- -----
Adjusted shares of common stock and common
stock equivalents for computation ...... 708 698 707 698
===== ===== ===== =====
Earnings per common and common
equivalent shares ........................ $ .40 $ .43 $ .81 $ .85
===== ===== ===== =====
(b) The three months ended June 30, 1997 average market price of $38.33 was
used as it was higher than the ending market price of $38.28. The ending market
price of $38.28 was used for the six months ended June 30, 1997 as it was
higher than the average market price of $37.01. The three and six months ended
June 30, 1996 average market price of $28.46 and $28.57, respectively, was used
as it was higher than the ending market price of $25.63.
Exhibit 12
----------
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In millions, except ratio amounts)
(unaudited)
Six Months Ended
June 30, Year Ended December 31,
-------------- ---------------------------------------
1997 1996 1996 1995 1994 1993 1992
----- ----- ---- ---- ---- ---- ----
Earnings:
Income before
income taxes and
extraordinary item(a) $934 $975 $1,955 $ 897 $1,280 $1,045 $ 963
Add:
Fixed charges 280 211 460 344 315 315 346
Less:
Capitalized interest 75 51 118 93 78 61 52
------ ------ ------ ------ ------ ------ ------
Total earnings $1,139 $1,135 $2,297 $1,148 $1,517 $1,299 $1,257
====== ====== ====== ====== ====== ====== ======
Fixed Charges:
Fixed charges on
indebtedness,
including amortization
of debt discount and
premium(a) $221 $158 $ 349 $ 242 $ 231 $ 239 $ 270
Interest portion of
operating lease
rentals(b) 59 53 111 102 84 76 76
----- ----- ------ ------ ------ ------ ------
Total fixed charges $280 $211 $ 460 $ 344 $ 315 $ 315 $ 346
===== ===== ====== ====== ====== ====== ======
Ratio of earnings to
fixed charges 4.07 5.38 4.99 3.34 4.82 4.12 3.63
===== ===== ====== ====== ====== ====== ======
(a) Includes distributions on subsidiary Trust mandatorily redeemable 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 June 30,
1997 and the income statement for the six months ended June 30, 1997 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000064079
<NAME> MCI Communications Corporation
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 55
<SECURITIES> 95
<RECEIVABLES> 3,670
<ALLOWANCES> 306
<INVENTORY> 0
<CURRENT-ASSETS> 845
<PP&E> 20,370
<DEPRECIATION> 7,084
<TOTAL-ASSETS> 24,251
<CURRENT-LIABILITIES> 6,846
<BONDS> 3,259
750
0
<COMMON> 74
<OTHER-SE> 11,276
<TOTAL-LIABILITY-AND-EQUITY> 24,251
<SALES> 0
<TOTAL-REVENUES> 9,726
<CGS> 0
<TOTAL-COSTS> 8,588
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 116
<INCOME-PRETAX> 964
<INCOME-TAX> 359
<INCOME-CONTINUING> 575
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 575
<EPS-PRIMARY> 0.82
<EPS-DILUTED> 0.81
</TABLE>
Exhibit 99(a)
-------------
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CAPITALIZATION SCHEDULE
(In millions)
(unaudited)
Set forth below is the capitalization of the company as of June 30, 1997:
Debt(a):
Secured debt:
Capital lease obligations ........................ $ 433
Other secured obligations ........................ 106
--------
Total secured debt .................................. 539
--------
Unsecured debt:
Senior Notes, net ................................ 1,557
Senior Debentures, net ........................... 1,383
Commercial paper borrowings ...................... 1,557
Other unsecured debt ............................. 153
--------
Total unsecured debt ................................ 4,650
--------
Total debt ............................................ $ 5,189
--------
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 ....................... 6,373
Retained earnings ................................ 5,789
Treasury stock, at cost, 37 million shares ....... (886)
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Total stockholders' equity ............................ $ 11,350
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Total capitalization .................................. $ 17,289
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(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 8 of Notes to Consolidated Financial
Statements on pages 19 and 20 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, 1996. Interest rates on capital lease obligations,
on a weighted average basis, approximated 9.2% per annum at June 30, 1997.
(b) On May 29, 1996, MCI Capital I, a wholly-owned Delaware statutory business
trust (Trust), issued $750 million aggregate principal amount of 8% Cumulative
Quarterly Income Preferred Securities, Series A (preferred securities) due on
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.
