SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) February 10, 1997 (December 31,
1996)
MCI COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 0-6457 52-0886267
(State or other (Commission File Number) (IRS Employer
jurisdiction of Identification No.)
incorporation)
1801 Pennsylvania Avenue, N.W., Washington, D.C. 20006
(Address of Principal Executive Offices)
Registrant's telephone number, including area code
(202) 872-1600
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Item 7. Financial Statements and Exhibits
Exhibit No. Description
11 Computation of Earnings Per Common Share.
12 Computation of Ratio of Earnings to Fixed Charges.
13 Specified portions of the Registrant's Annual Report to
Stockholders for the year ended December 31, 1996.
23 Consent of Independent Accountants.
27 Financial Data Schedule.
99(a) Valuation and Qualifying Accounts (Schedule II).
99(b) Capitalization Schedule.
99(c) Accountant's Report on Financial Statement Schedules.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MCI COMMUNICATIONS CORPORATION
/s/ David M. Case
- ------------------------------------------------------
David M. Case
Vice President and Controller
Date: February 10, 1997
Exhibit 11
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(Page 1 of 3)
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
(In millions, except per share amounts)
For the Year ended
December 31, 1996
Assuming
Primary Full Dilution
------- -------------
Net income ................................. $1,202 $1,202
Adjustment of shares outstanding:
Weighted average shares of common stock
outstanding............................... 687 687
Shares of common stock issuable upon the
assumed exercise of common stock
equivalents............................... 55 55
Shares of common stock assumed repurchased
for treasury(a)........................... (47) (41)
---- ----
Adjusted shares of common stock and common
stock equivalents for computation......... 695 701
==== ====
Earnings per common and common
equivalent shares......................... $ 1.73 $ 1.72
==== ====
(a) At an average market price of $27.90 for primary. The December 31, 1996
market price of $32.69 for fully diluted was used as it was higher than the
average 1996 market price of $27.90.
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Exhibit 11
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(Page 2 of 3)
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
(In millions, except per share amounts)
For the Year ended
December 31, 1995
Assuming
Primary Full Dilution
------- -------------
Net income ................................. $548 $548
Adjustment of shares outstanding:
Weighted average shares of common stock
outstanding............................... 680 680
Shares of common stock issuable upon the
assumed exercise of common stock
equivalents............................... 52 52
Shares of common stock assumed repurchased
for treasury(b)........................... (45) (38)
---- ----
Adjusted shares of common stock and common
stock equivalents for computation......... 687 694
==== ====
Earnings per common and common
equivalent shares......................... $.80 $.79
==== ====
(b) At an average market price of $22.45 for primary. The December 31, 1995
market price of $26.13 for fully diluted was used as it was higher than the
average 1995 market price of $22.45.
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Exhibit 11
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MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
(In millions, except per share amounts)
For the Year ended
December 31, 1994
Assuming
Primary Full Dilution
------- -------------
Net income.................................. $ 795 $ 795
Dividends on preferred stock................ (1) (1)
---- ----
Earnings applicable to common
stockholders.............................. $794 $794
==== ====
Adjustment of shares outstanding:
Weighted average shares of common stock
outstanding............................... 597 597
Shares of common stock issuable upon the
assumed exercise of common stock
equivalents............................... 41 41
Shares of common stock assumed repurchased
for treasury(c)........................... (34) (34)
---- ----
Adjusted shares of common stock and common
stock equivalents for computation......... 604 604
==== ====
Earnings per common and common
equivalent shares......................... $1.32 $1.32
==== ====
(c) At an average market price of $23.58 for primary and fully diluted as the
December 31, 1994 market price of $18.38 was less than the average market price
of $23.58.
Exhibit 12
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MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In millions, except ratio amounts)
(unaudited)
Year Ended December 31,
---------------------------------------------
1996 1995 1994 1993 1992
----- ----- ----- ----- -----
Earnings:
Income before
income taxes and
extraordinary item (a) $ 1,955 $ 897 $1,280 $1,045 $ 963
Add:
Fixed charges 460 344 315 315 346
Less:
Capitalized interest 118 93 78 61 52
------ ------ ------ ------ ------
Total earnings $ 2,297 $1,148 $1,517 $1,299 $1,257
====== ====== ====== ====== ======
Fixed Charges:
Fixed charges on
indebtedness,
including amortization
of debt discount and
premium(a) $ 349 $ 242 $ 231 $ 239 $ 270
Interest portion of
operating lease
rentals(b) 111 102 84 76 76
------ ------ ------ ------ ------
Total fixed charges $ 460 $ 344 $ 315 $ 315 $ 346
====== ====== ====== ====== ======
Ratio of earnings to
fixed charges 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.
Exhibit 13
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SELECTED FINANCIAL INFORMATION
MCI Communications Corporation and Subsidiaries
Year ended December 31, 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------
(In millions, except per
share amounts and employees)
INCOME STATEMENT DATA
Revenue $18,494 $15,265 $13,338 $11,921 $10,562
Total operating expenses 16,181 14,147 11,882 10,653 9,351
Income from operations 2,313 1,118 1,456 1,268 1,211
Equity in income (losses)
of affiliated companies (156) (187) (4) (2) (2)
Income before extraordinary item 1,202 548 795 627 609
Net income 1,202 548 795 582 609
Earnings applicable to
common stockholders 1,202 548 794 581 589
Earnings per common and common
equivalent share 1.73 .80 1.32 1.04 1.11
Cash dividends per share .05 .05 .05 .05 .05
BALANCE SHEET DATA
Gross investment in property
and equipment $18,709 $15,547 $13,408 $11,618 $10,316
Total assets 22,978 19,301 16,366 11,276 9,678
Long-term debt 4,798 3,444 2,997 2,366 3,432
Subsidiary Trust mandatorily
redeemable preferred securities 750 - - - -
Stockholders' equity 10,661 9,602 9,004 4,713 3,150
CASH FLOW DATA
Cash from operating activities $3,144 $2,979 $2,355 $1,978 $1,726
Capital expenditures for
property and equipment 3,347 2,866 2,897 1,733 1,272
Acquisition (disposition) of
businesses and investment in
affiliates, DBS and News Corp. 1,549 2,737 284 8 (22)
Cash from (used for) financing
activities 1,354 355 3,826 (286) (274)
OPERATIONS DATA
Capacity circuit miles 9,157 6,786 4,767 3,556 2,107
Number of full-time employees 55,285 50,367 40,667 36,235 30,964
In May 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 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.
In September and November 1995, the company acquired all of the outstanding
shares of common stock of Nationwide Cellular Service, Inc. and SHL Systemhouse
Inc., respectively. These acquisitions were accounted for as purchases;
accordingly, the net assets and results of operations of the acquired companies
are included in the information above since their respective acquisition dates.
In 1994, British Telecommunications plc (BT) completed the purchase of 136
million shares of the company's Class A common stock for $4.3 billion, which
resulted in a 20% voting interest in the company. This purchase was achieved by
the company's issuance of 108.5 million shares of Class A common stock to BT for
$3.5 billion on September 30, 1994 and BT's conversion on that date of 13,736
shares of Series D convertible preferred stock, purchased for $830 million in
June 1993, into 27.5 million shares of Class A common stock. This investment is
included in stockholders' equity.
1
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW
The following discussion and analysis provides information that management
believes is relevant to an assessment and understanding of MCI Communications
Corporation and subsidiaries' (collectively, the company) consolidated results
of operations and financial condition for the three years ended December 31,
1996. The discussion should be read in conjunction with the company's
consolidated financial statements and accompanying notes.
The company operates predominantly in the telecommunications industry providing
a broad range of communication services. The company is one of the world's
leading providers of communication services, the second largest carrier of long
distance telecommunication services in the United States (U.S.) and the third
largest carrier of international long distance telecommunication services in the
world. Through continued investments and 1995 business acquisitions, the company
has expanded its business into certain ventures and developing markets,
including the local, wireless, information technology and multimedia markets.
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 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, renamed Concert plc (Concert). Under
the terms of the Merger, each outstanding share of the company's common stock
(other than treasury shares and shares owned by BT including the shares of Class
A common stock) 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.
Completion of the Merger is subject to certain conditions, including the
approval of the stockholders of the company and BT and receipt of required
regulatory approvals. The company expects to complete the Merger in the fall of
1997. The Merger will be accounted for under the purchase method of accounting
under both U.S. and United Kingdom generally accepted accounting principles. 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.
- --------------------------------------------------------------------------------
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 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 of information 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, in
addition to those contained elsewhere in Management's Discussion and Analysis
could 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 those
expressed in the forward-looking statements, such as: 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 obtain local facilities at competitive rates; and competition from
others in the U.S. and international long distance markets, including the entry
of the seven regional Bell operating companies (RBOCs) and other companies into
the long distance markets in the U.S.
2
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Telecommunications Legislation
On February 8, 1996, the Telecommunications Act of 1996 (the Act) was signed
into law. It represents the most comprehensive revision of U.S. communications
policies in more than 60 years. The Act eliminates legal barriers to competition
in the local telephone market and, at the same time, contains provisions
intended to protect consumers and businesses from unfair competition by all
incumbent local exchange carriers (ILECs) including the seven RBOCs. The 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. Further, the entry of
an RBOC into the in-region long distance market requires the approval of the
Federal Communications Commission (FCC) which, in consultation with the relevant
state and the Department of Justice (DOJ), must find, among other things, such
entry to be in the public interest. The Act allows the company to enter into
local telephone markets by building new facilities, leasing unbundled network
elements from ILECs, reselling local network capacity and partnering with other
new market entrants, including other long distance companies.
On August 8, 1996, pursuant to the Act, the FCC adopted rules (the FCC
Interconnection Order) relating to the manner in which new entrants seeking
entry into local services markets will be able to interconnect with the ILECs.
The FCC Interconnection Order also contained a suggested range for discounts at
which the ILECs must offer new entrants facilities for resale until completion
of the various state proceedings to establish permanent rates. On October 15,
1996, the United States Court of Appeals for the Eighth Circuit stayed (the
Stay) certain key provisions including the pricing provisions of the FCC
Interconnection Order, until it is able to consider the parties' arguments and
render a decision on the appeal of the entire FCC Interconnection Order. Oral
argument on the appeal was heard on January 17, 1997. The company anticipates
that the court will render its decision sometime in the first or second quarter
of 1997. The Stay allows individual state regulatory agencies to interpret the
pricing provisions in the Act without regard to the FCC's interpretation of
those provisions. The company has completed arbitration of the interconnection
terms and conditions in most states and is in the process of filing
interconnection agreements with state public utility commissions for approval.
The company believes that the Stay hinders its ability to obtain ILEC services
and facilities on an economic basis and delays national competition in the local
services markets. The company will continue to pursue revenue growth and expand
local service capabilities in cities where the company has existing and planned
local switches. The company currently has 24 local switches installed in 25
major U.S. cities, 17 of which are operational. The remaining seven switches
will be placed in service by the end of the first quarter of 1997.
The company believes that the consummation of the proposed SBC Communications
Inc. / Pacific Telesis Group and Bell Atlantic Corp./Nynex Corp. mergers could
further slow the development of competition in the local services markets
because it removes significant potential competing parties. The SBC
Communications Inc./Pacific Telesis Group merger has been approved by the DOJ
and FCC but still requires state regulatory approval. The Bell Atlantic Corp./
Nynex Corp. merger still requires approval of the DOJ, FCC and regulatory
commissions in a number of states.
Earnings Highlights
Income from operations was $2,313 million in 1996 as compared to $1,118 million
in 1995 and $1,456 million in 1994. In 1995 and 1994, operating income was
affected by special pretax operating charges of $736 million and $133 million,
respectively. Excluding these charges, which are discussed below, income from
operations increased 25% in 1996 and 17% in 1995 and operating margins were
12.5% in 1996, 12.1% in 1995 and 11.9% in 1994.
Earnings were $1,202 million or $1.73 per share in 1996; $548 million or $.80
per share in 1995; and $794 million or $1.32 per share in 1994. Excluding
special charges, earnings were $1,066 million or $1.55 per share in 1995 and
$886 million or $1.47 per share in 1994. In 1996 and 1995, earnings were
negatively affected by the results of the company's ventures and developing
markets businesses and investments. The 1994 earnings per share reflect the
partial year dilutive impact of the issuance to BT on September 30, 1994 of 136
million shares of the company's Class A common stock, which included conversion
of preferred shares issued in 1993 to complete its 20% investment in the company
for $4.3 billion.
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 company consolidated its core business and centralized major
administrative functions. In connection with the reorganization and other third
quarter 1995 events, the company recorded special pretax charges of $831
million. These charges were comprised of a $520 million asset write-down, a $216
million charge related primarily to reorganization costs and a $95 million
charge to equity in income (losses) of affiliated companies which related to
restructuring plans and write-down of carrying value for several investees.
After the applicable tax benefit, the charge resulted in a reduction to earnings
of $518 million or $.75 per share.
3
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In 1994, the company recorded special pretax items totaling $148 million, which
related primarily to reduced utility of older asynchronous fiber-optic
transmission equipment and product launch costs. After the applicable tax
benefit, the charge resulted in a reduction to earnings of $92 million or $.15
per share.
CONSOLIDATED RESULTS OF OPERATIONS
The following provides a discussion of the company's consolidated results,
comprised of its long distance telecommunication services business (core
business) and ventures and developing markets (VDM) businesses, for the three
years ended December 31, 1996. Prior to 1996 and the company's acquisitions of
Nationwide Cellular Service, Inc. (Nationwide) and SHL Systemhouse, Inc.
(Systemhouse) (collectively, the acquired companies) in September and November
1995, respectively, substantially all of the company's revenues were derived
from its core business. Refer to the Enterprise Reporting section for further
discussion of the company's core and VDM businesses.
Revenue
In 1996, consolidated revenue increased by $3.2 billion or 21% over the prior
year versus a $1.9 billion or 14% increase in 1995 over 1994. In 1996, the
company's core business revenue increased by approximately $1.8 billion or 12%
while VDM business revenue, excluding sales to the company's core business,
increased by approximately $1.4 billion. Core business revenue continued to
increase primarily due to increased volumes and revenues from enhanced and value
added communication services provided to business customers. VDM growth reflects
the company's entry into certain developing markets primarily as a result of the
acquisition of the acquired companies. While VDM revenue in 1996 accounted for
44% of the consolidated year-over-year revenue increase, in 1995, revenue of the
acquired companies contributed to 10% of the consolidated year-over-year revenue
growth.
Cost of Services
Cost of services consists of telecommunications expense and costs of other
products and services primarily associated with VDM businesses.
Telecommunications expense is primarily comprised of access facilities fees paid
to local exchange carriers 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
VDM, costs of other products and services include equipment, software and
information technology service costs. In 1996, cost of services increased by
$1,596 million or 20% to $9,489 million as compared to $7,893 million and $6,916
million in 1995 and 1994, respectively. Such increases were consistent, as a
percentage, with the increase in consolidated revenues and full year
consolidation of the acquired companies. As a percentage of total revenues, cost
of services was 51.3% in 1996 as compared to 51.7% in 1995 and 51.9% in 1994.
With respect to core business, telecommunications expense as a percentage of
revenue decreased to 49.9% in 1996 from 51.9% in 1995 and 52.1% in 1994,
primarily due to decreases in access and international settlement rates, changes
in product mix and the use of alternative carriers.
Sales, Operations and General
Sales, operations and general expenses increased in 1996 by $602 million or 14%
to $5,028 million as compared to $4,426 million and $3,790 million in 1995 and
1994, respectively. Of this increase, approximately 60% was attributable to the
inclusion of a full year of expenses of the acquired companies. Of the remaining
increase, the majority was related to increases in sales and service employees,
marketing promotions and new product costs. Such increases were consistent, as a
percentage, with the growth in revenues. Excluding 1995 and 1994 special
charges, sales, operations and general expenses as a percentage of revenues were
27.2% in 1996, 27.6% in 1995 and 27.9% in 1994. The percentage reduction in 1996
is primarily the result of cost savings associated with the 1995 restructuring
efforts that resulted in the centralization of certain common functions
throughout the company and in reduced facilities costs as well as an ongoing
focus on cost efficiencies and the more efficient utilization of human
resources.
Depreciation
In 1996, depreciation expense increased by $356 million or 27% to $1,664 million
as compared to $1,308 million and $1,176 million in 1995 and 1994, respectively.
Of this increase, approximately 75% was primarily the result of additions to the
communications system network in order to increase network capacity, redundancy
and reliability, add product features and functionality and support the
company's entry into the local services market. The remaining increase is
primarily due to additional depreciation on property and equipment and
amortization associated with the acquired companies. As a percentage of revenue,
depreciation expense was 9% in 1996, 8.6% in 1995 and 8.8% in 1994. Depreciation
expense in 1995 reflects depreciation savings associated with the 1995 asset
write-down. Depreciation expense in 1994 reflects the additional $63 million
special charge to recognize the reduced utility of older asynchronous
fiber-optic transmission equipment and the results of an asset utilization
review.
4
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Interest
Interest expense increased $47 million from 1995 due to an increase in the
average amount of outstanding debt as a result of commercial paper and debt
securities issuances during the year. Increases in average debt balances and
interest rates during 1995 resulted in higher interest costs than 1994; however
these increases were offset by increases in capitalized interest incurred as a
result of increased investment in the communications system.
Interest income decreased $113 million from 1995 due to lower short-term
marketable securities that resulted from the continued use of cash to fund
capital network expenditures, investments in the VDM businesses and the Direct
Broadcast Satellite (DBS) license and construction costs. Interest income
increased in 1995 from 1994 due to the investment of BT proceeds received in
September 1994.
Equity in Income (Losses) of Affiliated Companies
Equity in income (losses) of affiliated companies decreased by $31 million to
$(156) million at December 31, 1996. Excluding the 1995 special charge, equity
in losses of affiliated companies increased by $64 million due to increased
losses in certain of the company's investments and start-up ventures, including
ICS Communications, Inc., Avantel, S.A. de C.V. (Avantel) and operating costs
associated with the company's on-line project with The News Corporation Limited
(News Corp.). The 1995 increase in equity losses of affiliated companies as
compared to 1994 was primarily due to the aforementioned special charge and the
losses attributable to the company's investments in Concert Communications
Company (Concert Communications) and In-Flight Phone Corporation. As further
discussed in the Enterprise Reporting section, due to the start-up nature of
several of these investments and ventures, the company expects equity in losses
of affiliated companies to continue, but trend downward in 1997.
Other
Other expense, net, decreased by $27 million in 1996 and $37 million in 1995.
The 1996 decrease is primarily due to $54 million full year dividend income from
the company's preferred stock investment in News Corp. The 1995 decrease is due
to a $25 million charge recorded in 1994 for the settlement of two class action
suits and the dividend income of $18 million from the News Corp. preferred stock
investment made in August 1995.
Distributions on Subsidiary Trust Mandatorily Redeemable Preferred Securities
Distributions on subsidiary Trust mandatorily redeemable preferred securities,
issued in May 1996, totaled $35 million for the fiscal year.
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 method investments such as News Corp.
The following unaudited information was prepared using all amounts included in
the company's consolidated financial statements and reflects estimates and
allocations that management believes provide a reasonable basis on which to
present such information. The revenue and income amounts include sales of
services between the VDM businesses and core business based primarily upon
prevailing market rates. Administrative expenses are allocated to the respective
enterprises on a fully distributed basis reflective of actual utilization. Net
interest expense is fully distributed based upon proportionate debt levels
reflecting the cash flow of the respective enterprise commencing on October 1,
1995. Prior to October 1, 1995, all debt was allocated to the core business
except for amounts allocated to support the acquisition of Nationwide and the
investments in News Corp. and MCImetro (SM). The consolidated income tax
provision and related tax payments are allocated to each enterprise based on its
tax attributes.
5
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The following table summarizes the financial highlights of these enterprises.
SUPPLEMENTAL ENTERPRISE REPORTING DATA
Core Business VDM Businesses
Year ended December 31, 1996 1995 1996 1995
- --------------------------------------------------------------------------------
(In millions)
Revenue $16,784 $14,990 $1,953 $ 365
Income (loss) from operations* 2,453 1,923 (126) (69)
Equity in income (losses) of
affiliated companies* - - (156) (92)
Net income (loss)* 1,514 1,191 (298) (125)
Capital expenditures 2,710 2,558 637 308
Depreciation 1,536 1,285 128 23
Net interest, income taxes
and other expense* (939) (732) (16) 36
EBITDA** 3,989 3,208 2 (46)
* Amounts for 1995 have been adjusted to exclude the impact of the
aforementioned special charges.
** EBITDA, as defined by management, includes earnings, excluding equity in
income (losses) of affiliates, other income (expense), net, and 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 generally
accepted accounting principles (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. EBITDA has been adjusted to exclude the
impact of the 1995 special charges.
The following discussion focuses on significant financial and operational
results of the company's core business and VDM businesses.
CORE BUSINESS
Core business revenues in 1996 increased by 12% to $16,784 million from $14,990
million in 1995. The company's revenue growth from its core business in 1996 was
approximately 30% of the total long distance industry revenue growth, estimated
to be approximately $6 billion.
1996 vs. 1995 1995 vs. 1994
- --------------------------------------------------------------------------------
Increase in revenue 12% 13%
Increase in traffic 13% 16%
- --------------------------------------------------------------------------------
Revenue to traffic variance (1)% (3)%
- --------------------------------------------------------------------------------
In 1996, the company's revenue to traffic variance in the core business narrowed
to (1)% as compared to (3)% in the prior year. The improvement in the revenue to
traffic variance over the prior year is primarily due to the improved mix of
higher margin product sales in the business and consumer markets such as
network, data and Intralata products, the impact of residential rate increases
and a reduction in consumer promotional activities. These improvements were
partially offset by increased provisions for uncollectibles during the year as a
result of tightened credit policies and increased bad debt write-offs. The
variance in revenue to traffic for the year was primarily the result of consumer
promotional activities, volume discounts and lower revenue rates associated with
sales to resellers.
Revenues in the business market continued to increase in 1996 across all sales
channels with particular strength in the mid-sized customer and carrier
channels. As in 1995, growth continues to be strongest in the network, data and
inbound products. In addition, emerging products have also contributed to the
business market revenue growth with Internet, conferencing and prepaid card
services each achieving 100% or more growth in 1996. Growth in mass markets,
which includes the former consumer and small business market groups, was slowed
as competitive pressures continued to affect the revenue and traffic growth.
Customer churn has increased year-over-year, but the company has experienced
continual improvement on a sequential quarters basis during 1996 due to further
focus on multiple product sales of higher margin products and profitability per
customer. The company expects additional churn improvement and improved revenue
and traffic growth in 1997 due to this continued focus and other related
actions.
6
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Revenue increases in the business market in 1995 were primarily attributable to
growth in data products, which grew 34% in 1995, as well as the continued
success of the company's virtual private network product (Vnet (R)), MCI Vision
(R) and 800 services. In the consumer market, revenue and traffic growth in 1995
was driven by the company's Friends & Family (R), collect-calling (1-800-COLLECT
(R)), calling card and Personal 800 (R) products.
VENTURES AND DEVELOPING MARKETS BUSINESSES
During 1996, the company continued to make investments in its VDM businesses and
strategic initiatives and expand its business opportunities in these markets.
The company incurred costs of $893 million for its DBS investment, which
included a $682 million payment for its DBS license won in the January 1996
auction and $211 million in related DBS development costs, an additional $350
million investment in News Corp., approximately $390 million of continued
capital investments in MCImetro (SM), the company's local services subsidiary,
and $306 million of investments in affiliated companies including Avantel and
Concert Communications. The company's results of operations in these markets are
provided below.
Local
MCImetro (SM) provides switched services to business customers and local
fiber-optic capacity and competitive access services to the company's core
business and other long distance carriers, large businesses and government users
of telecommunication services. MCImetro (SM) intends to become a single-source
provider of comprehensive local wireline telecommunication services and to
compete in the local services market, while also reducing the company's access
and interconnection rates. Despite the stay of key provisions of the FCC
Interconnection Order, MCImetro (SM) will continue to pursue revenue and profit
growth while expanding local service capabilities. At December 31, 1996,
MCImetro (SM) had been granted authority to offer local exchange service in 24
states and had applications for such services pending in 9 other states.
In 1996 and 1995, MCImetro (SM) revenues were $178 million and $108 million,
respectively, on sales of fiber-optic capacity and competitive access services,
substantially all of which was derived from sales to the company's core
business. Also in 1996, MCImetro (SM) began to provide local switched service.
The loss from operations was $(97) million and $(26) million for the years ended
December 31, 1996 and 1995, respectively, while net loss was $(70) million and
$(17) million, respectively, for the same periods. EBITDA for the years ended
December 31, 1996 and 1995 was $(62) million and $(15) million, respectively. As
of December 31, 1996, the number of operational local city networks increased to
62 in 35 cities from 38 networks in 25 cities at year end 1995. At December 31,
1996, MCImetro (SM) had 2,948 route miles, 4,132 right-of-way miles and 24 Class
5 local switches installed as compared to 2,338 route miles, 3,700 right-of-way
miles and 10 Class 5 local switches installed at year end 1995. For the same
periods, MCImetro (SM) made capital expenditures of approximately $390 million
and $265 million, respectively, primarily for the construction of its local city
networks and Class 5 switch deployment. MCImetro (SM) currently has 17 switches
operational providing service in 18 major U.S. cities and intends to make local
service commercially available in 7 additional cities in the first quarter of
1997.
Information Technology Services
Information Technology Services primarily includes the results of Systemhouse's
operations, which was acquired in November 1995 for U.S. $1.13 billion, and in
addition includes Call Center Services. Information Technology Services revenues
increased by $1,266 million to $1,401 million in 1996. Revenues were comprised
of $686 million of equipment deployment and educational services, $399 million
for consulting and systems integration, $223 million for outsourcing services
and $93 million for Call Center Services. Of the total revenue increase,
approximately 90% is attributable to an entire fiscal year of consolidated
Systemhouse operating results. Call Center Services, which provides call center
outsourcing, consulting and automation services to mid-sized and large companies
in the U.S., Canada and Europe, increased revenue in 1996 by more than 150% from
the prior year. Income (loss) from operations was $42 million and $(9) million
and net loss was $(59) million and $(20) million for the years ended December
31, 1996 and 1995, respectively. EBITDA was $114 million and $(3) million for
the same periods.
Backlog, which includes amounts committed under executed contracts or letters of
intent, at December 31, 1996 and 1995, was approximately $2 billion and
approximately $1.4 billion, respectively, the majority of which is from
Systemhouse's largest customers. The company expects that approximately 25% of
the backlog will be delivered in the next twelve months. Since revenue depends
on actual usage under service contracts and may be subject to termination under
certain circumstances, actual revenue for a particular contract may be higher or
lower than the reported backlog for such contract.
7
<PAGE>
Wireless
Wireless primarily includes the results of operations of Nationwide, which was
acquired in September 1995 for $210 million, and in addition includes paging
services. Wireless revenues, which are derived from cellular and paging services
and equipment sales, increased by $254 million to $347 million in 1996. Of the
total revenue increase, approximately 80% is attributable to an entire fiscal
year of consolidated operating results of Nationwide. At December 31, 1996, the
number of cellular service subscribers increased to 429 thousand from 347
thousand at December 31, 1995. This increase is the result of the company's
expansion into new markets during the year bringing the company's coverage to
more than 35 markets. Paging subscribers declined during 1996 as the company
de-emphasized stand-alone paging offerings to consumers in the second quarter to
revise the cost and service infrastructure. The company anticipates re-launching
the service in the first half of 1997. Loss from operations was $(45) million
and $(17) million and net loss was $(43) million and $(18) million for the
twelve months ended December 31, 1996 and 1995, respectively. EBITDA was $(28)
million and $(16) million for the same periods.
International Services
During 1996, the company invested $25 million in Concert Communications, a 24.9%
owned international services venture with BT which provides a complete portfolio
of advanced global communication services including virtual network, frame
relay, managed bandwidth and packet services, available to multinational
business customers worldwide. For the year ended December 31, 1996 and 1995,
Concert Communications' distributor revenues amounted to approximately $570
million and $300 million, respectively. Concert Communications' virtual network
service continued to grow with over 90 sites active or becoming operational
around the world. The company's share of Concert Communications' losses reported
in accordance with U.S. GAAP was $(31) million for the year ended December 31,
1996 and $(57) million, exclusive of Concert Communications' special charges,
for the year ended December 31, 1995. Through December 31, 1996, the company has
invested approximately $170 million in Concert Communications since its launch
in July 1994.
In November 1996, the company invested an additional $248 million in Avantel, a
44.5% owned business venture with Grupo Financiero Banamex-Accival, bringing its
total invested cash position to $495 million since the Avantel joint venture was
formed in November 1995. Avantel has built Mexico's first all digital
fiber-optic network and on August 12, 1996 became the first company to provide
alternative long distance service in the Mexican telecommunications market
competing against Telefonos de Mexico. Avantel launched the first branded
Mexico-to-United States collect calling product and two new dialing products
targeted to consumers and businesses. Avantel began offering a full range of
competitive switched long distance services to residential and business
customers in January 1997. During 1996, Avantel invested approximately $520
million in capital expenditures for the continued development of its
communication system. Additionally, Avantel increased its fiber-optic network in
Mexico during the year to 3,431 route miles. For the year ended December 31,
1996, the company's share of Avantel's losses was $(30) million. The company
expects to incur increasing losses on its investment during 1997 as Avantel
moves forward with its entry into the Mexican telecommunications market
expanding its service and customer bases.
Multimedia Services
The company invested an additional $350 million in News Corp. in May 1996,
bringing its total cost investment to $1,350 million at December 31, 1996.
Dividend income on the investment for the years ended December 31, 1996 and 1995
was $54 million and $18 million, respectively.
In December 1996, the FCC issued the DBS license awarded to the company in the
January 1996 public auction. The DBS spectrum slot, located at 110-degrees West
Longitude, provides coverage of all fifty states and Puerto Rico. DBS is a
point-to-multipoint broadcast service that uses high-powered Ku band satellites
which are placed in geosynchronous orbit. During 1996, the company paid an
aggregate of $682 million for the license and invested $211 million in primarily
satellite construction costs. The company and News Corp. have agreed to form a
joint venture, in which the company anticipates owning less than a 20% interest,
to provide digital satellite services to homes and businesses beginning in late
1997.
The company is currently in the process of renegotiating its investment
agreement with News Corp. which may include the purchase by the company of
mandatorily redeemable preferred securities of News Corp., the payment by the
DBS joint venture to the company of a limited right-to-use fee for the DBS
spectrum slot, and the termination of the company's remaining investment
obligation and News Corp.'s rights relating thereto. Refer to footnote 6 of the
company's consolidated financial statements for further detail on its investment
obligation in News Corp.
8
<PAGE>
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Cash from operations increased to $3,144 million in 1996 from $2,979 million in
1995 which was consistent with the growth in income from operations offset by an
increase in the amount of taxes and interest paid and a decline in the amount of
interest received in 1996. Cash used for investing activities increased to
$4,782 million in 1996 from $4,292 million in 1995. In 1996, the company used
cash of $3,347 million, an increase of $481 million, to fund capital
expenditures primarily for network deployment and local services. The company
also invested $682 million to acquire the FCC license for the DBS slot and
funded an additional $171 million primarily in related satellite construction
costs. The company invested an additional $350 million in News Corp. in 1996
bringing its total investment to $1,350 million and made additional
contributions of $248 million to Avantel and $58 million to other equity
investments. Cash from operations and financing activities was used primarily to
support the company's investing activities during 1996.
Cash from financing activities increased to $1,354 million in 1996 from $355
million in 1995 primarily the result of net issuances of commercial paper,
issuances under the debt shelf registration and the subsidiary Trust mandatorily
redeemable preferred securities, and common stock issuances under employee
benefit plans. During 1996, the commercial paper balance increased by $717
million. In addition, the company issued two series of debt under its $1 billion
shelf registration including $500 million aggregate principal amount of 7 1/8%
Senior Debentures due June 15, 2027 and $300 million aggregate principal amount
of 6.95% Senior Notes due August 15, 2006. In May 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 June 30, 2026. The Trust exists
for the sole purpose of issuing preferred securities and investing the proceeds
in the company's 8% Junior Subordinated Deferrable Interest Debentures, Series A
due June 30, 2026, the only assets of the Trust. Cash proceeds from issuances of
common stock under employee benefit plans were $426 million. The gross proceeds
of these issuances were offset by amounts used to repurchase $647 million of
treasury stock.
Working Capital
Working capital (defined as current assets less current liabilities) was $(330)
million and $(365) million at December 31, 1996 and 1995, respectively. In 1996,
current assets increased by $211 million, primarily as a result of increases in
accounts receivable and other current assets which reflect strong year end
business volume and are consistent with the growth in revenue offset by reduced
cash and marketable securities balances which were used to fund the company's
working capital requirements. Current liabilities increased by $176 million from
December 31, 1995 primarily due to increases of $395 million in accounts payable
and accrued telecommunications expense offset by a $297 million reduction in the
current maturities of long-term debt. The increases in accounts payable and
accrued telecommunications expense were attributable to the growth in the
company's overall business. Long-term debt due within one year decreased in 1996
as a result of the repayment of $300 million of maturing Senior Notes.
EBITDA
Consolidated EBITDA increased to $4 billion or 25% from $3.2 billion in 1995 and
$2.7 billion in 1994. The increase in EBITDA in 1996 is the result of the
increase in consolidated revenues and the improvement in cost of services and
sales, operations and general expenses as a percentage of consolidated revenues.
EBITDA, as defined by management, includes 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.
EBITDA has been adjusted to exclude the impact of the 1995 special charges.
Funding of Capital Expenditures and Investments in Ventures and Developing
Markets
In 1996, the company funded its capital expenditures, investments in News Corp.,
Avantel, DBS and other ventures through cash from operations and debt and
commercial paper issuances. In 1997, the company plans approximately $3.9
billion in capital expenditures, which includes MCImetro (SM) capital
expenditures, a majority of which will be funded with cash from operations. In
addition, the company expects to invest approximately $200 million in existing
VDM investments. The company believes that it will be able to meet its current
and long-term liquidity and capital requirements from cash from operations and
existing debt facilities. The company has a $2 billion bank credit facility
which expires in September 2001. The bank credit facility supports the company's
commercial paper program and may be used to fund short-term fluctuations in
working capital and other corporate requirements. In addition, the company has a
$1.2 billion shelf registration in effect, which covers the issuance of debt
securities with a range of maturities at either
9
<PAGE>
fixed or variable rates. At December 31, 1996, there was $1,422 million
outstanding under the commercial paper program and bank credit facility, and no
securities were issued under the shelf registration. In light of the Merger
Agreement, the company is currently evaluating debt financing options which may
include increases to the credit facility and longer term debt issuances.
The company's ratio of debt to total capitalization, defined as total debt to
total debt plus subsidiary Trust mandatorily redeemable preferred securities and
equity, increased to 30% at December 31, 1996 from 29% at December 31, 1995. The
increase in 1996 was the result of commercial paper and debt issuances to fund
investments in the VDM businesses and capital expenditures. Issuances of
commercial paper to fund the acquisitions of the acquired companies and
investments in the VDM businesses in 1995 caused the company's debt to total
capitalization ratio to increase to 29% at December 31, 1995 from 26% at
December 31, 1994.
10
<PAGE>
INCOME STATEMENTS
MCI Communications Corporation and Subsidiaries
Year ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------
(In millions, except per
share amounts)
REVENUE $18,494 $15,265 $13,338
OPERATING EXPENSES
Cost of services 9,489 7,893 6,916
Sales, operations and general 5,028 4,426 3,790
Depreciation 1,664 1,308 1,176
Asset write-down - 520 -
------ ------ ------
TOTAL OPERATING EXPENSES 16,181 14,147 11,882
------ ------ ------
INCOME FROM OPERATIONS 2,313 1,118 1,456
Interest expense (196) (149) (153)
Interest income 34 147 50
Equity in income (losses) of
affiliated companies (156) (187) (4)
Other expense, net (5) (32) (69)
------ ------ ------
INCOME BEFORE INCOME TAXES 1,990 897 1,280
Income tax provision 753 349 485
Distributions on subsidiary Trust
mandatorily redeemable preferred
securities 35 - -
------ ------ ------
NET INCOME 1,202 548 795
Dividends on preferred stock - - 1
------ ------ ------
EARNINGS APPLICABLE TO
COMMON STOCKHOLDERS $ 1,202 $ 548 $ 794
====== ====== ======
EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE $ 1.73 $ .80 $ 1.32
====== ====== ======
Weighted average number of
common shares 695 687 604
See accompanying Notes to Consolidated Financial Statements.
11
<PAGE>
BALANCE SHEETS
MCI Communications Corporation and Subsidiaries
December 31, 1996 1995
- --------------------------------------------------------------------------------
(In millions)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 187 $ 471
Marketable securities 161 373
Receivables, net of allowance for
uncollectibles of $273 and $260 million 3,480 2,912
Other current assets 888 749
------ ------
TOTAL CURRENT ASSETS 4,716 4,505
------ ------
PROPERTY AND EQUIPMENT
Communications system in service 14,005 11,318
Furniture, fixtures and equipment 2,848 2,432
Other property 519 493
------ ------
TOTAL PROPERTY AND EQUIPMENT 17,372 14,243
Accumulated depreciation (6,535) (5,238)
Construction in progress 1,337 1,304
------ ------
TOTAL PROPERTY AND EQUIPMENT, NET 12,174 10,309
OTHER ASSETS
Noncurrent marketable securities 58 -
Other assets and deferred charges, net 678 511
Investment in affiliates 690 495
Investment in Direct Broadcast Satellite 893 -
Investment in News Corp. 1,350 1,000
Goodwill, net 2,419 2,481
------ ------
TOTAL OTHER ASSETS 6,088 4,487
------ ------
TOTAL ASSETS $22,978 $19,301
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 992 $ 706
Accrued telecommunications expense 2,045 1,936
Other accrued liabilities 1,806 1,728
Long-term debt due within one year 203 500
------ ------
TOTAL CURRENT LIABILITIES 5,046 4,870
------ ------
NONCURRENT LIABILITIES
Long-term debt 4,798 3,444
Deferred taxes and other 1,723 1,385
------ ------
TOTAL NONCURRENT LIABILITIES 6,521 4,829
COMPANY OBLIGATED MANDATORILY REDEEMABLE
PREFERRED SECURITIES OF SUBSIDIARY TRUST
HOLDING SOLELY JUNIOR SUBORDINATED
DEFERRABLE INTEREST DEBENTURES OF THE
COMPANY 750 -
STOCKHOLDERS' EQUITY
Class A common stock, $.10 par value,
authorized 500 million shares, issued
136 million shares 14 14
Common stock, $.10 par value, authorized
2 billion shares, issued 593 million shares 60 60
Additional paid in capital 6,410 6,405
Retained earnings 5,231 4,063
Treasury stock, at cost, 44 and 43 million
shares (1,054) (940)
------ ------
TOTAL STOCKHOLDERS' EQUITY 10,661 9,602
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $22,978 $19,301
====== ======
See accompanying Notes to Consolidated Financial Statements.
12
<PAGE>
STATEMENTS OF CASH FLOWS
MCI Communications Corporation and Subsidiaries
Year ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------
(In millions)
OPERATING ACTIVITIES
Receipts from customers $17,897 $14,786 $13,298
Payments to suppliers and
employees (13,830) (11,453) (10,472)
Taxes paid (810) (410) (393)
Interest paid (147) (113) (100)
Interest received 34 169 22
------ ------ ------
CASH FROM OPERATING ACTIVITIES 3,144 2,979 2,355
------ ------ ------
INVESTING ACTIVITIES
Capital expenditures for
property and equipment (3,347) (2,866) (2,897)
Purchases of marketable securities (487) (4,630) (4,096)
Proceeds from sales and maturities
of marketable securities 641 5,930 2,424
Acquisition of businesses, net of
cash acquired (40) (1,243) (110)
Investment in News Corp. (350) (1,000) -
Investment in Direct Broadcast
Satellite (853) - -
Investment in affiliates (306) (494) (174)
Other, net (40) 11 (64)
------ ------ ------
CASH USED FOR INVESTING ACTIVITIES (4,782) (4,292) (4,917)
------ ------ ------
NET CASH FLOW BEFORE FINANCING
ACTIVITIES (1,638) (1,313) (2,562)
------ ------ ------
FINANCING ACTIVITIES
Issuance of Senior Notes and other
debt 796 - 939
Payment of Senior Notes and other
debt (595) (305) (246)
Commercial paper and bank credit
facility activity, net 717 702 (239)
Issuance of subsidiary Trust
mandatorily redeemable preferred
securities, net 726 - -
Issuance of Class A common stock - - 3,510
Issuance of common stock for
employee plans 426 275 248
Payment of dividends on common
and preferred stock (34) (33) (32)
Distributions paid on subsidiary
Trust mandatorily redeemable
preferred securities (35) - -
Purchase of treasury stock (647) (284) (354)
------ ------ ------
CASH FROM FINANCING ACTIVITIES 1,354 355 3,826
------ ------ ------
Net (decrease) increase in cash
and cash equivalents (284) (958) 1,264
Cash and cash equivalents
at beginning of year 471 1,429 165
------ ------ ------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 187 $ 471 $ 1,429
====== ====== ======
Reconciliation of net income to
cash from operating activities:
Net income $ 1,202 $ 548 $ 795
Adjustments to net income:
Depreciation and amortization 1,722 1,367 1,230
Asset write-down - 520 -
Equity in (income) losses of
affiliated companies 156 187 4
Deferred income tax provision 298 144 269
Net change in operating activity
accounts other than cash and
cash equivalents, net of effects
of acquisition of businesses:
Receivables (568) (442) (135)
Operating accounts payable 228 57 36
Other operating activity accounts 106 598 156
------ ------ ------
CASH FROM OPERATING ACTIVITIES $ 3,144 $ 2,979 $ 2,355
====== ====== ======
See accompanying Notes to Consolidated Financial Statements.
13
<PAGE>
STATEMENTS OF STOCKHOLDERS' EQUITY
MCI Communications Corporation and Subsidiaries
Class A Add'l Treasury Stock-
Preferred Common Common Paid in Retained Stock, holders'
Stock Stock Stock Capital Earnings at Cost Equity
- --------------------------------------------------------------------------------
(In millions)
BALANCE AT DECEMBER 31,
1993 $1 - $60 $2,493 $2,785 $(626) $4,713
Class A common stock
issued (136 million
shares) and preferred
stock converted (1) $14 - 3,496 - - 3,509
Common stock issued for
employee stock and
benefit plans (18 million
shares) - - - 180 - 124 304
Tax benefit of common stock
transactions related to
employee benefit plans - - - 63 - - 63
Change in unrealized loss
on marketable securities - - - (5) - - (5)
Net income - - - - 795 - 795
Common and preferred stock
dividends - - - - (32) - (32)
Treasury stock purchased
(15 million shares) - - - - - (343) (343)
-------------------------------------------------------
BALANCE AT DECEMBER 31,
1994 - 14 60 6,227 3,548 (845) 9,004
Common stock issued for
employee stock and
benefit plans (18 million
shares) - - - 132 - 189 321
Tax benefit of common stock
transactions related to
employee benefit plans - - - 25 - - 25
Acquisition of business
(.8 million shares) - - - 16 - - 16
Change in unrealized loss
on marketable securities - - - 5 - - 5
Net income - - - - 548 - 548
Common stock dividends - - - - (33) - (33)
Treasury stock purchased
(13 million shares) - - - - - (284) (284)
-------------------------------------------------------
BALANCE AT DECEMBER 31,
1995 - 14 60 6,405 4,063 (940) 9,602
Common stock issued for
employee stock and
benefit plans (23 million
shares) - - - (56) - 533 477
Tax benefit of common stock
transactions related to
employee benefit plans - - - 61 - - 61
Net income - - - - 1,202 - 1,202
Common stock dividends - - - - (34) - (34)
Treasury stock purchased
(23 million shares) - - - - - (647) (647)
-------------------------------------------------------
BALANCE AT DECEMBER 31,
1996 $ - $14 $60 $6,410 $5,231 $(1,054)$10,661
See accompanying Notes to Consolidated Financial Statements.
14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MCI Communications Corporation and Subsidiaries
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
The company operates predominantly in a single industry, the telecommunications
industry. The company provides a broad range of communication services,
including long distance, local and wireless telecommunication services and
information technology services. Long distance telecommunication 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.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Estimates are used when
accounting for revenue, allowances for uncollectible receivables,
telecommunications expense, depreciation and amortization, reorganization
accruals and asset write-downs, employee benefit plans and taxes.
Principles of Consolidation
The financial statements include the consolidated accounts of MCI Communications
Corporation and its majority-owned subsidiaries (collectively, the company) with
all significant intercompany transactions eliminated.
Revenue
The company records as revenue the amount of communication services furnished,
as measured primarily by the minutes of traffic processed, after deducting an
estimate of traffic which will be neither billed nor collected. Service
discounts and incentives are accounted for as a reduction of revenue when
granted or, where a service continuation contract exists, ratably over the
contract period. Revenue from information technology services is recognized,
depending on the service provided, on a percentage of completion basis or as
services and products are furnished or delivered.
Cash and Cash Equivalents
Cash equivalents consist primarily of certificates of deposit, securities of the
U.S. Government and its agencies and corporate debt securities all having
maturities of ninety days or less when purchased. The carrying amount reported
in the accompanying balance sheets for cash equivalents approximates fair value
due to the short-term maturity of these instruments. At December 31, 1996 and
1995, checks not yet presented for payment of $338 million and $248 million in
excess of cash balances, respectively, were included in current liabilities. The
company had sufficient funds available to cover these outstanding checks when
they were presented for payment.
Marketable Securities
Investments in marketable securities at December 31, 1996 and 1995 are
classified as available for sale and are reported at fair value in accordance
with Statement of Financial Accounting Standards No. 115 (SFAS No. 115),
"Accounting for Certain Investments in Debt and Equity Securities." The fair
values are based on quoted market prices, and any holding gains and losses are
excluded from earnings and reported as a net amount in additional paid in
capital until realized. Realized gains and losses are recorded in the income
statement and the cost assigned to securities sold is based on the specific
identification method.
Investments
The company uses the equity method to account for investments in entities in
which it has less than a majority interest but can exercise significant
influence. These investments are classified on the accompanying balance sheets
as investments in affiliates. Under the equity method, the investment,
originally recorded at cost, is adjusted to recognize the company's share of the
net earnings or losses of the affiliates as they occur, rather than as dividends
or other distributions are received, limited to the extent of the company's
investment in, advances to and guarantees for the investee. The company's share
of net earnings or losses of affiliates includes amortization of purchase
adjustments. Other investments in which the ownership is less than 20% and the
company does not exercise significant influence are recorded at cost. The
company's investment in News Corp. is recorded under the cost method. The
company's investment in the Direct Broadcast Satellite (DBS) consists primarily
of the FCC license fee and satellite construction costs, all of which are
recorded at cost. The license expires 10 years from the date of grant; however,
FCC rules provide for renewal expectancy provisions. The company expects that
the license would be routinely renewed for successive
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<PAGE>
10 year terms subject to compliance with such FCC rules. Accordingly, the
license will be amortized using the straight-line method over a period of 40
years at the time service provided under the license commences, which is
expected to begin in late 1997. Satellite construction costs are capitalized in
accordance with the company's accounting policy for property and equipment.
Property and Equipment
The communications system in service is recorded at cost and includes material,
interest, labor and overhead. The costs of construction and equipment are
transferred to communications system in service as construction projects are
completed and/or equipment is placed in service. Depreciation is recorded
commencing with the first full month that the assets are in service and is
provided using the straight-line method over their estimated useful lives. A
majority of the company's communications system assets are grouped in like pools
for depreciation purposes. For these asset groups, the cost of equipment retired
in the ordinary course of business, less proceeds, is charged to accumulated
depreciation. The company periodically reviews and adjusts the useful lives
assigned to fixed assets to ensure that depreciation charges provide appropriate
recovery of capital costs over the estimated physical and technological lives of
the assets. The weighted average depreciable life of the assets comprising the
communications system in service approximates 10 years. Furniture, fixtures and
equipment are depreciated over a weighted average life of 6 years and includes
computer and data center equipment along with other administrative assets. Other
property includes land, buildings and leasehold improvements. Leasehold
improvements are depreciated over the shorter of the life of the equipment or
the life of the lease. Buildings are depreciated using lives of up to 35 years.
Maintenance and repairs are charged to expense as incurred.
Capital Leases
Certain of the company's lease obligations meet the criteria of a capital lease.
These obligations are recorded at the present value of the future lease
payments, including estimated bargain purchase options, discounted at the
approximate interest rate implicit in each lease. Amounts are depreciated over
the estimated useful lives of the equipment, which are generally longer than the
terms of the leases. Leases not capitalized are primarily for land on which
communications equipment is located and for administrative facilities, including
office buildings, vehicles, certain data processing equipment and office
equipment.
Other Assets and Deferred Charges
Included in other assets and deferred charges are unamortized customer discounts
and service incentives, right-of-way agreements with third parties, purchased
subscriber base, deferred advertising costs and debt issuance costs. Deferred
customer discounts and service incentives are amortized over the life of the
specific contract to which they relate; also included are amounts recoverable
under long-term customer service contracts, which are amortized over the
contract period. Right-of-way costs are amortized as the assets are placed in
service, over the lesser of the remaining term of the agreements or 25 years.
Purchased subscriber base is amortized over the period benefited. Debt issuance
costs are amortized over the life of the applicable debt.
Goodwill
Goodwill represents the excess of the cost to acquire subsidiaries over the
estimated fair market value of the net assets acquired. These amounts are
amortized using the straight-line method over lives ranging from 10 to 40 years.
Accumulated amortization at December 31, 1996 and 1995 was $247 million and $172
million, respectively. The company periodically evaluates the realizability of
goodwill based upon projected undiscounted cash flows and operating income for
each subsidiary having a material goodwill balance. The company believes that no
impairment of goodwill existed at December 31, 1996.
Foreign Exchange Contracts and Interest Rate Swaps
The company enters into foreign exchange contracts and interest rate swap
agreements to hedge its foreign currency risks and reduce its interest rate
exposure (see Note 8). While the company does not engage in speculation, it is
exposed to market rate risk in the event of nonperformance by the other parties
to the agreements. The company manages credit risk by regularly monitoring and
evaluating the counterparties. At December 31, 1996, the fair values of and
potential risk of loss on these agreements were not material.
Income Taxes
The company files a consolidated federal income tax return on a March 31 fiscal
year end. Deferred income taxes are provided on transactions which are reported
in the financial statements in different periods than for income tax purposes.
Income tax benefits of tax deductions related to common stock transactions with
the company's employee benefit plans are recorded directly to additional paid in
capital. General business credits are accounted for by the flow-through method.
16
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Earnings Per Common and Common Equivalent Share
Earnings per common and common equivalent share amounts are based on the
weighted average number of shares of common stock outstanding during each year,
adjusted for the effect of common stock equivalents arising from the assumed
exercise of stock options, if dilutive. Fully diluted earnings per share are not
materially different from primary earnings per share.
Reclassification
Certain prior year information has been reclassified to conform to the current
year presentation.
NOTE 2. MERGER AGREEMENT WITH BRITISH TELECOMMUNICATIONS PLC AND EXISTING
ALLIANCE
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 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, renamed Concert plc (Concert). Under
the terms of the Merger, each outstanding share of the company's common stock
(other than treasury shares and shares owned by BT including the shares of Class
A common stock) 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.
Completion of the Merger is subject to certain conditions, including the
approval of the stockholders of the company and BT and receipt of required
regulatory approvals. The company expects to complete the Merger in the fall of
1997. The Merger will be accounted for under the purchase method of accounting
under both U.S. and United Kingdom (U.K.) generally accepted accounting
principles.
Existing Alliance
On September 30, 1994, BT completed the purchase of 136 million shares of the
company's Class A common stock for $4.3 billion. As discussed further in Note
10, the purchase resulted in a 20% voting interest in the company. In
conjunction with this investment, the company purchased a 24.9% equity interest
in Concert Communications Company (Concert Communications), a business venture
launched by BT in July 1994, which provides global enhanced telecommunication
services for business customers. In addition, the company purchased from BT
substantially all of the operations of BT North America Inc. in January 1994 for
$108 million and divested its interest in AAP Telecommunications Pty. Ltd. in
October 1994.
The company and BT lease each others' access lines at prevailing market rates in
the ordinary course of business to process traffic in the U.S. and the U.K. The
company also conducts business with Concert Communications through the provision
and receipt of communication services at prevailing market rates. During 1996,
1995 and 1994, the amounts associated with these transactions were not material
to the company.
NOTE 3. BUSINESS ACQUISITIONS
In September 1995, the company acquired all of the outstanding shares of
Nationwide Cellular Service, Inc. for approximately $210 million. In November
1995, the company acquired all of the outstanding shares of SHL Systemhouse,
Inc. for approximately U.S. $1.13 billion. These acquisitions have been
accounted for as purchase business combinations and, accordingly, the net assets
and results of their operations have been included in the company's financial
statements since the acquisition dates. Acquisition costs have been allocated to
the fair value of assets acquired, including intangibles, and liabilities
assumed. The excess of the purchase price over the fair value of net assets for
these and other less significant 1995 acquisitions, of approximately $1.4
billion, is being amortized over periods of 20 to 40 years.
NOTE 4. MARKETABLE SECURITIES
At December 31, 1996 and 1995, all of the company's marketable securities were
classified as available-for-sale and stated at fair value. These securities were
included in the accompanying balance sheets as either cash and cash equivalents,
current marketable securities or noncurrent marketable securities. At December
31, 1996, the portfolio consisted of $40 million of certificates of deposit,
$143 million of U.S. Government agency securities and $67 million of corporate
debt securities. At December 31, 1995, the portfolio consisted of $70 million of
certificates of deposit, $385 million of U.S. Government agency securities and
$129 million of corporate debt securities.
17
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At December 31, 1996 and 1995, amortized cost equaled fair market value. Sales
of available-for-sale marketable securities during 1996 and 1995 resulted in a
net realized gain of $0 and $13 million, respectively, which were included in
interest income.
The distribution of maturities of marketable securities is as follows:
December 31, -------1996------- -------1995-------
Cost Fair Value Cost Fair Value
- --------------------------------------------------------------------------------
(In millions) Marketable securities:
Maturing within three months $ 31 $ 31 $211 $211
Maturing within one year 161 161 373 373
Maturing between one and five years 58 58 - -
- --------------------------------------------------------------------------------
Total marketable securities $250 $250 $584 $584
- --------------------------------------------------------------------------------
NOTE 5. INVESTMENT IN AFFILIATES
The company has various investments accounted for under the equity method, which
are reported in the accompanying balance sheets as investments in affiliates. At
December 31, 1996 and 1995, the net investment balance in affiliated companies
was $690 million and $495 million, respectively. Included in investment in
affiliates is Avantel, S.A. de C.V. (Avantel), a 44.5% owned business venture
with Grupo Financiero Banamex-Accival formed to provide competitive domestic and
international long distance telecommunications services in Mexico. At December
31, 1996 and 1995, the net investment balance for Avantel was $465 million and
$237 million, respectively. Also included is the company's 24.9% interest in
Concert Communications, which had a net investment balance of $53 million and
$58 million at December 31, 1996 and 1995, respectively. Until the merger with
BT is consummated, the company expects to continue making capital contributions
in Concert Communications to maintain its proportionate equity interest.
The summarized financial information for all affiliated companies accounted for
by the company under the equity method, as reported on their financial
statements as of and for the year ended December 31, 1995, is as follows:
current assets of $581 million, noncurrent assets of $759 million, current
liabilities of $396 million, noncurrent liabilities of $388 million, redeemable
preferred stock of $37 million, net sales of $590 million, gross profit of $100
million, net loss from continuing operations of $(437) million and net loss of
$(442) million. The company's share of net losses of affiliated companies in
1995 was $(187) million, which included a special charge discussed further in
Note 14, and represented, in the aggregate, more than 10% of the company's 1995
income before income taxes and such losses. Similar information about affiliated
companies for 1996 is not presented herein since the company's share of their
operating results was less than 10% of the company's 1996 income before income
taxes and such losses.
NOTE 6. INVESTMENTS IN NEWS CORP. AND DIRECT BROADCAST SATELLITE
In August 1995, the company made an initial investment of $1 billion in The News
Corporation Limited (News Corp.). The investment was comprised of (i) an
aggregate of 51 preferred shares of two U.S. subsidiaries of News Corp. with a
stated value and liquidation preference of $850 million and bearing a dividend
rate of 5.147%, and (ii) a four year warrant (purchase price of $150 million) to
acquire up to approximately 155 million News Corp. ordinary shares for $850
million. The exercise price of the warrant is payable, at the company's option,
in cash, through the surrender of the preferred shares or a combination of both.
The company has an option for five years to invest an additional $1 billion
under the same terms and for the same consideration as its initial investment.
During the five year period, News Corp. can require the company to invest the
additional $1 billion or a part thereof for News Corp.'s use to acquire assets
relating to its core business. In January 1996, News Corp. exercised a portion
of this right by requiring the company to invest $350 million, which investment
was made in May 1996. Should the company exercise its warrants and acquire
ordinary shares of News Corp., subject to certain exceptions, the company shall
vote in the same proportion as all other votes. For the years ended December 31,
1996 and 1995, the company recorded dividend income on its preferred stock
investment in News Corp. of $54 million and $18 million, respectively.
In December 1996, the Federal Communications Commission (FCC) issued the DBS
license awarded to the company in the January 1996 public auction. The DBS
spectrum slot, located at 110-degrees West Longitude, provides coverage of all
fifty states and Puerto Rico. DBS is a point-to-multipoint broadcast service
that uses high-powered Ku band satellites which are placed in geosynchronous
orbit. As of December 31, 1996, the company had capitalized $893 million related
to its investment in DBS, $682 million of which was for the payment of the
license and the remainder for the construction of satellites. As a result of
this alliance, the company and News Corp. have agreed to form a joint venture,
in which the company anticipates owning less than a 20% interest, to provide
digital satellite services to homes and businesses beginning in late 1997.
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NOTE 7. SUPPLEMENTARY BALANCE SHEET INFORMATION
December 31, 1996 1995
- --------------------------------------------------------------------------------
(In millions) Other current assets:
Deferred income taxes $ 376 $ 317
Other receivables, net 191 173
Other 321 259
- --------------------------------------------------------------------------------
Total other current assets $ 888 $ 749
- --------------------------------------------------------------------------------
Other accrued liabilities:
Taxes, other than income $ 335 $ 399
Payroll and employee benefits 328 270
Reorganization costs 92 161
Other 1,051 898
- --------------------------------------------------------------------------------
Total other accrued liabilities $1,806 $1,728
- --------------------------------------------------------------------------------
Deferred taxes and other:
Deferred income taxes $1,697 $1,357
Other 26 28
- --------------------------------------------------------------------------------
Total deferred taxes and other $1,723 $1,385
- --------------------------------------------------------------------------------
NOTE 8. DEBT AND LEASE OBLIGATIONS
Company debt consists of:
December 31, 1996 1995
- --------------------------------------------------------------------------------
(In millions)
Senior Notes, net of unamortized discounts of
$1.5 million and $1 million at weighted average
interest rates of 6.9%, and with maturities
ranging from September 1997 to August 2006 $1,485 $1,486
Senior Debentures, net of unamortized discount
of $6.5 million and $6 million at a weighted
average interest rate of 7.6% and 7.9%, and with
maturities ranging from January 2023 to June 2027 1,384 884
Capital lease obligations at a weighted
average interest rate of 9.1% and 9.0% 504 589
Commercial paper and bank credit facility
borrowings at a weighted average interest
rate of 5.4% and 5.7% 1,422 705
Other debt at a weighted average interest
rate of 5% and 7.6% 206 280
- --------------------------------------------------------------------------------
Total debt 5,001 3,944
Debt due within one year (203) (500)
================================================================================
Total long-term debt $4,798 $3,444
================================================================================
Annual maturities of long-term debt for the five years after December 31, 1996
are as follows: $203 million in 1997; $140 million in 1998; $582 million in
1999; $270 million in 2000 and $1,459 million in 2001.
Total interest costs were $314 million in 1996, $242 million in 1995 and $231
million in 1994, of which $118 million, $93 million and $78 million,
respectively, were capitalized.
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At December 31, 1996 and 1995, the estimated fair value of the company's
long-term debt, excluding capital lease obligations, is listed below. This
valuation represents either quoted market values, where available, or the
company's estimate based upon market prices of comparable debt instruments.
December 31, 1996 1995
- --------------------------------------------------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
- --------------------------------------------------------------------------------
(In millions)
Senior Notes $1,485 $1,516 $1,486 $1,540
Senior Debentures 1,384 1,456 884 955
Commercial paper and bank
credit facility borrowings 1,422 1,422 705 705
Other debt 206 206 280 280
- --------------------------------------------------------------------------------
Total debt, excluding capital leases $4,497 $4,600 $3,355 $3,480
================================================================================
The excess in the estimated fair value versus the carrying amount of debt for
1996 and 1995 reflects the trend during the periods of market rates below the
company's fixed rate debt.
Senior Notes and Debentures
During 1996, the company issued two series of debt under its $1 billion shelf
registration. On June 24, 1996, the company issued $500 million aggregate
principal amount of 7 1/8% Senior Debentures due June 15, 2027 and on August 9,
1996, the company issued $300 million aggregate principal amount of 6.95% Senior
Notes due August 15, 2006. The proceeds of the issuances were used for general
corporate purposes, including the repayment of short-term borrowings under the
company's commercial paper program. In October 1996, the company effected a new
shelf registration, which combined the remaining $200 million available under
the former shelf registration, to enable the company to issue up to an
additional $1.2 billion aggregate principal amount of debt securities with a
range of maturities at either fixed or variable rates. The company has not
issued any securities under this new shelf registration at December 31, 1996.
During 1996 and 1995, the company repaid $300 million and $15 million of
maturing Senior Notes, leaving $2,869 million and $2,370 million of debt
securities outstanding at a weighted average annual interest rate of 7.21% and
7.25% at December 31, 1996 and 1995, respectively.
Commercial Paper and Bank Credit Facility Borrowings
On September 26, 1996, the company entered into a revolving credit loan
agreement with several parties under which the company may borrow up to $2
billion. This agreement expires in September 2001 and replaces the $2 billion
revolving credit loan agreement of July 1994. This credit facility supports the
company's commercial paper program and, in conjunction with this program, may be
used to fund fluctuations in working capital and other general corporate
requirements. There are no amounts outstanding under this credit facility at
December 31, 1996. During 1996, the company issued $9,089 million and repaid
$8,372 million of commercial paper borrowings leaving $1,422 million outstanding
under the commercial paper program at December 31, 1996. During 1995, the
company issued commercial paper and borrowed under the credit facility an
aggregate of $771 million and repaid an aggregate of $66 million leaving $705
million outstanding under the commercial paper program and credit facility.
Borrowings under the commercial paper program and credit facility are classified
as noncurrent as the remaining term of the credit facility agreement exceeds one
year.
Lease Obligations
Future minimum rental commitments for capital leases are as follows: $131
million in 1997; $64 million in 1998; $54 million in 1999; $51 million in 2000;
$57 million in 2001; and $542 million thereafter. At December 31, 1996,
aggregate future minimum capital lease payments were $899 million including
interest of $395 million. The present value of future capital lease payments at
December 31, 1996 was $504 million. The gross and net book values of property
and equipment financed by capital leases were $497 million and $215 million,
respectively, at December 31, 1996 and $584 million and $274 million,
respectively, at December 31, 1995. Future minimum rental commitments for
noncancelable operating leases are as follows: $247 million in 1997; $211
million in 1998; $169 million in 1999; $129 million in 2000; $91 million in
2001; and $295 million thereafter. At December 31, 1996, aggregate future
minimum payments for noncancelable operating leases were $1,142 million. Total
rental expense for all operating leases was $332 million, $321 million and $262
million for the years ended December 31, 1996, 1995 and 1994, respectively.
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NOTE 9. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEFERRABLE INTEREST
DEBENTURES OF THE COMPANY
On May 29, 1996, MCI Capital I, a wholly-owned Delaware statutory business trust
(Trust), issued $750 million aggregate principal amount of 8% Cumulative
Quarterly Income Preferred Securities, Series A (preferred securities) due June
30, 2026. The Trust exists for the sole purpose of issuing the preferred
securities and investing the proceeds in the company's 8% Junior Subordinated
Deferrable Interest Debentures, Series A (Subordinated Debt Securities) due June
30, 2026, the only assets of the Trust. The net proceeds from the issuance of
the Subordinated Debt Securities were used for general corporate purposes.
Holders of the preferred securities are entitled to receive preferential
cumulative cash distributions from the Trust, on a quarterly basis, provided the
company has not elected to defer the payment of interest due on the Subordinated
Debt Securities to the Trust. The company may elect this deferral from time to
time, provided that the period of each such deferral does not exceed five years.
The company made $35 million in Trust distributions during 1996. The preferred
securities are subject to mandatory redemption, in whole or in part, upon
repayment of the Subordinated Debt Securities at maturity or earlier in an
amount equal to the amount of Subordinated Debt Securities maturing or being
repaid. In addition, in the event the company terminates the Trust, the
Subordinated Debt Securities will be distributed to the then holders of the
preferred securities of the Trust.
In connection with the issuance of the preferred securities, the company
executed a Trust Agreement, an Indenture, a Guarantee Agreement and an Expense
Agreement. These agreements, taken together with the issuance of the
Subordinated Debt Securities, constitute a full, irrevocable and unconditional
guarantee by the company of all of the Trust's obligations under the preferred
securities (the Guarantee). The Guarantee Agreement covers payment of the
preferred securities' quarterly distributions and payments on maturity or
redemption of the preferred securities, but only in each case to the extent of
funds held by the Trust. If the company does not make interest payments on the
Subordinated Debt Securities held by the Trust, the Trust will have insufficient
funds to pay such distributions. The obligations of the company under the
Guarantee and the Subordinated Debt Securities are subordinate and junior in
right of payment to all senior debt of the company.
NOTE 10. STOCKHOLDERS' EQUITY
Preferred Stock Rights Plan
In September 1994, the company's board of directors adopted a stockholders'
rights plan (Rights Plan) and declared a dividend of one preferred share
purchase right (Right) for each outstanding share of common stock and Class A
common stock (collectively, Common Shares). The Rights dividend was distributed
on October 11, 1994 to the holders of record on that date. The Rights have
attached and will continue to attach to certain future issuances of Common
Shares. Each Right entitles the registered holder to purchase from the company
one one-hundredth of a share of the company's Series E Junior Participating
Preferred Stock, par value $.10 per share (Series E Preferred Stock) for an
initial purchase price of $100, subject to adjustment. The Rights Plan was
amended on November 3, 1996 in connection with the Merger to avoid BT becoming
an "acquiring person" under the Rights Plan as a result of the approval,
execution or delivery of the Merger Agreement or the consummation of the Merger.
The Rights will become exercisable upon the occurrence of certain specified
events, including a public announcement that a person or group of affiliated or
associated persons (Acquiring Person) have acquired beneficial ownership of 10%
or more of the outstanding Common Shares (more than 20.1% in the case of share
acquisitions by BT unless such threshold is exceeded due solely to (i) the
approval, execution or delivery of the Merger Agreement or (ii) the consummation
of the Merger). In the event that any person or group of affiliated or
associated persons becomes an Acquiring Person, each holder of a Right (other
than Rights beneficially owned by the Acquiring Person, which will become void),
will thereafter have the right, subject to certain restrictions, to receive upon
exercise in lieu of Series E Preferred Stock that number of shares of the
company's common stock (or, at the option of the company, that number of one
one-hundredth of a share of Series E Preferred Stock) determined as set forth in
the Rights Plan.
For purposes of the Rights Plan, the company's board of directors has designated
10 million shares of Series E Preferred Stock which amount may be increased or
decreased by the board of directors. All Rights expire on September 30, 2004,
unless this date is extended or the Rights are earlier redeemed or exchanged by
the company in accordance with the Rights Plan.
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Class A Common Stock
On September 30, 1994, BT completed the purchase of 136 million shares of the
company's Class A common stock for $4.3 billion, which resulted in a 20% voting
interest in the company. This purchase was achieved by the company's issuance of
108.5 million shares of Class A common stock to BT for a cash payment of $3.5
billion on September 30, 1994, and by BT's conversion of all the outstanding
13,736 shares of Series D convertible preferred stock (Series D), purchased for
$830 million in June 1993, into 27.5 million shares of Class A common stock. In
1996, 1995 and 1994, the company paid dividends of $.05, $.05 and $.025 per
share, respectively, on the Class A common stock. The company paid dividends of
$50 per share on the Series D in 1994.
At December 31, 1996, all of the Class A common stock was held by BT. The Class
A common stock is equivalent on a per share basis to the company's common stock,
except with respect to certain voting rights. BT is entitled to proportionate
representation on the company's board of directors, which currently equates to
three seats. In addition to board representation, BT is entitled to preemptive
rights with respect to the issuance of additional shares of common stock and to
investor protections with respect to certain corporate actions of the company.
Shares of Class A common stock automatically convert into common stock upon
transfer and in certain other events.
Common Stock Dividends
In 1996, 1995 and 1994, the company paid annual dividends of $.05 per share on
its common stock.
NOTE 11. STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS
Employee Stock Option Plan
The current Employee Stock Option Plan (Stock Option Plan) provides for the
issuance of up to 128 million shares of common stock. On an annual basis,
pursuant to the Stock Option Plan, the board of directors may increase the
maximum number of shares available for issuance under the Stock Option Plan as
of each January 1, by up to 5% of the number of shares of common stock
outstanding at each such date. Options granted under the Stock Option Plan are
exercisable at such times and in such installments as determined by the
compensation committee of the board of directors. Options granted under the
Stock Option Plan may not have an option price less than the fair market value
of the common stock on the date of the grant.
Stock appreciation rights may be granted in combination with a stock option
either at the time of the grant or anytime thereafter. As of December 31, 1996,
no stock appreciation rights have been granted.
The compensation committee may also grant restricted stock awards and
performance share awards, subject to such conditions, restrictions and
requirements as the committee in its sole discretion may determine. During the
year ended December 31, 1996, approximately 1 million restricted shares were
granted. At December 31, 1996, there were approximately 1.8 million restricted
shares outstanding. No performance share awards had been issued at December 31,
1996.
The compensation committee may grant both incentive stock options and
non-qualified options under the Plan. All options granted in the last three
years have been non-qualified options. These non-qualified options expire after
ten years. Incentive stock options expire between five and ten years after
issuance. Both non-qualified and incentive stock options are exercisable ratably
over a three year period.
Under the Stock Option Plan, executives may be granted incentive stock units
(ISUs) which vest over a three year period and entitle the holder to receive
shares of the company's common stock. In addition, prior to the execution of the
Merger Agreement, the company awarded 3,035,000 senior retention ISUs entitling
the holders to receive up to 3,035,000 company shares in the aggregate. Such
senior retention ISUs are to vest one third upon the completion of the Merger
and one third on each of the first two anniversaries of the completion.
Directors' Stock Option Plan
The company also has a stock option plan for non-employee directors (Directors'
Plan) which provides for the issuance of up to 2 million shares of common stock.
Under the Directors' Plan, each non-employee director has been granted upon
commencement of service as a director a five-year option to purchase up to
40,000 shares of common stock at the closing price of the common stock on the
date of grant. Two directors declined such option. The options are exercisable
after the first anniversary of the date of grant, in cumulative installments of
25% per year. Similar options will be granted automatically to all new board
members who are not employees, including the nominee directors from BT. Upon the
fifth anniversary of the date of grant of options, the unexercised portion of
the grant shall be canceled and a new option for 40,000 shares shall be granted
automatically.
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Both of the above option plans permit the holder of an option to pay the
purchase price for stock option exercises by surrendering shares of the
company's common stock having a fair market value equal to, or greater than, the
purchase price.
Employee Stock Purchase Plan
Under the current Employee Stock Purchase Plan (ESPP Plan), up to 56 million
shares of common stock may be purchased by eligible employees of the company
through payroll deductions of up to 15% of their eligible compensation. The
purchase price is equal to the lesser of (a) 85% of the fair market value of the
stock on the date it is purchased or (b) 85% of the fair market value of the
stock on certain specified valuation dates. During 1996 and 1995, employees
purchased approximately 6.3 million and 6.5 million shares, respectively, under
the ESPP Plan.
Common Stock Reserved for Future Issuance
At December 31, 1996, 101 million shares of the company's authorized common
stock, including 75 million shares under option, were reserved for future
issuance under the Employee and Directors' Stock Option Plans and the ESPP Plan.
The company has opted to use treasury shares to fulfill the purchases made under
these plans during the three-year period ended December 31, 1996.
Accounting for Stock Issued to Employees
The company accounts for its stock option plans under APB Opinion No. 25
"Accounting for Stock Issued to Employees" under which no compensation expense
is recognized. In 1996, the company adopted Statement of Financial Accounting
Standards No. 123 "Accounting for Stock-Based Compensation" (SFAS No. 123) for
disclosure purposes; accordingly, no compensation expense has been recognized in
the results of operations for its stock option or ESPP plans as required by APB
Opinion No. 25.
For disclosure purposes the fair value of each stock option grant is estimated
on the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for stock options granted in 1996
and 1995, respectively: annual dividends of $0.05 for both years, expected
volatility of 24.7% and 33.2%, risk-free interest rate of 5.4% and 7.4% and
expected life of five years for all grants. The weighted-average fair value of
the stock options granted in 1996 and 1995 was $9.42 and $7.83, respectively.
The fair value of each stock purchase right under the ESPP Plan is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for stock purchase rights granted in
1996 and 1995, respectively: expected volatility of 30.7% and 30.2%, risk-free
interest rate of 5.1% and 5.7%, and expected life of one month for all grants.
The weighted-average fair value of the stock purchase rights granted in 1996 and
1995 was $4.87 and $3.99, respectively.
Under the above models, the total value of stock options granted in 1996 and
1995 was $195 million and $167 million, respectively, which would be amortized
ratably on a pro forma basis over the three-year option vesting period and the
total value of the stock purchase rights granted in 1996 and 1995 was $31
million and $26 million, respectively. Had the company determined compensation
cost for these plans in accordance with SFAS No. 123, the company's pro forma
net income and earnings per share would have been $1,105 million and $1.59 in
1996 and $498 million and $0.73 in 1995. The SFAS No. 123 method of accounting
does not apply to options granted prior to January 1, 1995, and accordingly, the
resulting pro forma compensation cost may not be representative of that to be
expected in future years.
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Stock option transactions are summarized as follows:
Weighted-
Average
Number Exercise Price Exercise
of Shares Range Price
- --------------------------------------------------------------------------------
(In millions, except exercise price amounts)
- --------------------------------------------------------------------------------
Options outstanding, December 31, 1993 51.3 $ 3.44-28.75 $16.42
Options granted 22.3 18.88-26.88 26.33
Options exercised (8.1) 3.44-22.44 13.60
Options terminated (3.2) 3.81-28.75 23.41
- --------------------------------------------------------------------------------
Options outstanding, December 31, 1994 62.3 3.44-28.75 19.97
Options granted 25.2 18.38-26.50 19.13
Options exercised (9.8) 3.44-26.88 15.20
Options terminated (6.0) 5.38-28.25 22.37
- --------------------------------------------------------------------------------
Options outstanding, December 31, 1995 71.7 3.44-28.75 20.13
Options granted 22.4 25.13-30.25 29.18
Options exercised (13.6) 3.44-28.75 18.83
Options terminated (5.5) 9.94-30.06 25.04
- --------------------------------------------------------------------------------
Options outstanding, December 31, 1996 75.0 $ 9.94-30.25 $22.70
- --------------------------------------------------------------------------------
Options exercisable, December 31, 1995 31.1 3.44-28.75 18.17
Options exercisable, December 31, 1994 26.6 3.44-28.75 15.29
- --------------------------------------------------------------------------------
The following table summarizes information about the options outstanding at
December 31, 1996:
--------Options Outstanding-------- ----Options Exercisable----
Weighted-
Average Weighted-
Number Remaining Average Number Weighted-
Range of Outstanding Contractual Exercise Outstanding Average
Exercise Prices (In millions) Life (Years) Price (In millions) Exercise Price
- --------------- ----------- ----------- ------ ----------- --------------
$ 9.94 - $14.88 5.1 3.6 $10.38 5.1 $10.38
$15.00 - $19.57 24.8 6.9 $18.05 12.7 $17.72
$20.06 - $24.13 9.5 6.2 $21.08 9.0 $21.01
$25.00 - $29.88 35.4 8.3 $28.15 9.6 $26.87
$30.06 - $30.25 0.2 7.3 $30.14 - -
------ ------ ------ ------ ------
75.0 36.4
At December 31, 1996, the company had 9 million shares available for future
grant.
NOTE 12. EMPLOYEE BENEFIT PLANS
Pension Plans
The company maintains a noncontributory defined benefit pension plan (MCI Plan)
and a supplemental pension plan (Supplemental Plan). Western Union
International, Inc. (WUI), a subsidiary of the company, also has a defined
benefit pension plan (WUI Plan). Collectively, these plans cover substantially
all employees who work 1,000 hours in a year.
The MCI Plan and the Supplemental Plan provide pension benefits that are based
on the employee's compensation for each year of service prior to retirement. The
WUI Plan provides pension benefits based on the employee's compensation for each
year of service after 1990 and prior to retirement.
The company's policy is to fund the MCI Plan and the WUI Plan in accordance with
the funding requirements of the Employee Retirement Income Security Act of 1974
and within the limits of allowable tax deductions. The assets of the plans are
primarily invested in corporate equities, government securities and corporate
debt securities.
24
<PAGE>
Net periodic pension cost includes:
Year ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------
(In millions)
Service cost during the period $45 $40 $37
Interest cost on projected benefit obligation 29 25 21
Actual return on plan assets (54) (70) 3
Net amortization and deferral 22 48 (20)
================================================================================
Net pension cost $42 $43 $41
================================================================================
The company's pension asset consists of:
December 31, 1996 1995
- --------------------------------------------------------------------------------
(In millions)
Plan assets at fair value $453 $399
Accumulated benefit obligation including vested
benefits of $307 in 1996 and $305 in 1995 (347) (334)
================================================================================
Plan assets in excess of accumulated
benefit obligation $ 106 $ 65
================================================================================
Plan assets at fair value $453 $399
Projected benefit obligation for service
rendered to date (432) (401)
- --------------------------------------------------------------------------------
Plan assets in excess of (less than) projected
benefit obligation 21 (2)
Unrecognized net (gain) loss from past experience
different from that assumed (1) 42
Prior service cost not yet recognized in net
periodic pension cost 30 33
Unrecognized net asset at January 1, 1986
being recognized over 16 years (3) (4)
================================================================================
Total prepaid pension asset $ 47 $ 69
================================================================================
The discount rate and rate of increase in future compensation levels used in
determining the actuarial present value of the projected benefit obligation at
December 31, 1996 was 7.75% for both plans and 5.75% and 5.00% for the MCI and
WUI Plans, respectively. At December 31, 1995, the discount rate used was 7.25%
and the rate of increase in future compensation levels was 5% for both plans.
The expected long-term rate of return on assets in 1996 and 1995 was 9% for the
MCI Plan and 8.5% for the WUI Plan.
Annual service cost is determined using the Projected Unit Credit actuarial
method and prior service cost is amortized on a straight-line basis over the
average remaining service period of employees.
Effective January 1, 1996, the company amended the MCI Plan. Retirement benefits
are calculated by first establishing an initial balance for each participant
based on the present value of benefits earned through 1995. For service after
1995, participants accrue benefits based on a specific percentage of annual
salary and earn interest credits based on the prior year's balance at a specific
interest rate. Employees who are age 50 or older and have at least five years of
service as of December 31, 1995, will have their benefits continue to accrue
under the previous formula through the year 2000.
25
<PAGE>
Employee Stock Ownership Plan and 401(k) Plans
The company has combined employee stock ownership (ESOP) and 401(k) plans
covering substantially all of its employees. The 401(k) plans allow employees to
defer pretax income in accordance with the requirements of Internal Revenue Code
Section 401(k). The company matches employee contributions up to a certain
limit. Participants vest in the company's matching contributions at a rate of
20% per year of service and are immediately 100% vested in their elective
deferrals. The company contributed approximately 1.6 million shares, 1.7 million
shares, and 1.5 million shares of its common stock as the company's matching
contribution to the 401(k) plans for the plan years ended December 31, 1996,
1995 and 1994, respectively. The company suspended contributions to the ESOP in
1994.
WUI sponsors a 401(k) savings plan for its collectively bargained employees (WUI
401(k)). The savings plan is intended to meet requirements of Internal Revenue
Code Section 401(k). WUI 401(k) participants vest in the company's matching
contributions at a rate of 20% per year of service and are immediately 100%
vested in their elective deferrals. The company contributed approximately 18,000
shares, 24,000 shares, and 22,000 shares of its common stock to the WUI 401(k)
for the plan years ended December 31, 1996, 1995 and 1994, respectively.
NOTE 13. INCOME TAXES
The components of the total income tax provision are:
Year ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------
(In millions)
Current
Federal $387 $182 $190
State and local 68 23 26
- --------------------------------------------------------------------------------
Current income tax provision 455 205 216
Deferred
Federal 276 129 243
State and local 22 15 26
- --------------------------------------------------------------------------------
Deferred income tax provision 298 144 269
- --------------------------------------------------------------------------------
Total income tax provision $753 $349 $485
================================================================================
A reconciliation of the statutory federal income tax rate to the company's
effective income tax rate is:
Year ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------
Statutory federal income tax rate 35% 35% 35%
State and local income taxes, net
of federal income tax effect 3 3 3
Nondeductible amortization 1 2 1
Other (1) (1) (1)
================================================================================
Effective income tax rate 38% 39% 38%
================================================================================
In 1996, 1995 and 1994, the company recorded a tax benefit of $61 million, $25
million and $63 million, respectively, to additional paid in capital for tax
deductions related to common stock transactions with its employee benefit plans.
At December 31, 1996, for federal income tax purposes, the company has $123
million of Alternative Minimum Tax (AMT) credit carryforwards available which
have no expiration date. In addition, the company has available $109 million of
acquired U.S. net operating loss carryforwards expiring through 2011, all of
which are subject to limitation due to change in ownership control, and $145
million of acquired Canadian net operating loss carryforwards expiring through
2004.
26
<PAGE>
At December 31, 1996, 1995 and 1994, the company's net deferred income tax
liability is comprised of the following:
1996 1995 1994
- --------------------------------------------------------------------------------
(In millions)
Deferred income tax asset $ 550 $ 587 $ 321
Deferred income tax liability (1,871) (1,627) (1,398)
================================================================================
Net deferred income tax liability $(1,321) $(1,040) $(1,077)
================================================================================
The components of these amounts are:
Communications system $(1,885) $(1,577) $(1,312)
Customer discounts (77) (87) (61)
Allowance for uncollectibles 114 56 46
Reorganization and realignment expenses 34 61 4
Domestic equity investments 62 38 (6)
Alternative minimum and general
business tax credits - 104 102
Other, net 431 365 150
================================================================================
Net deferred income tax liability $(1,321) $(1,040) $(1,077)
================================================================================
The company believes that it is more likely than not to realize the deferred
income tax asset and accordingly, no valuation allowance has been recorded in
the three years ended December 31, 1996.
NOTE 14. 1995 SPECIAL CHARGES
During the third quarter of 1995, the company implemented a reorganization
designed to increase efficiency, enhance marketplace effectiveness and improve
business focus. The company consolidated its core business and centralized major
administrative functions. In connection with the reorganization and other third
quarter 1995 events, the company recorded special pretax charges of $831
million. These charges were comprised of three components.
First, the company recorded a $520 million charge for an asset write-down which
reflected a decline in value of certain assets caused by changes in business and
technology strategy. The amount of the write-down was measured in conformity
with Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
Disposal or abandonment of substantially all of these assets occurred by
December 31, 1995.
Second, the company recorded a $216 million charge to sales, operations and
general expenses, which related primarily to reorganization costs. The company
expected to reduce its workforce by approximately 2,800 employees, of whom
approximately 2,400 had left the company by December 31, 1995 and the remainder
during 1996. The company also abandoned excess and duplicate facilities at
various business and operations locations due to automation, workforce
reductions and centralization. As of December 31, 1996, the company had incurred
approximately $124 million of the accrued reorganization costs and approximately
$92 million of the accrual remained. The remaining accrual is primarily
comprised of costs associated with lease obligations for excess facilities,
contract termination costs and certain accrued legal and other business costs.
Cash expenditures for these expenses were and will continue to be funded from
cash from operations.
In addition, the company recorded a $95 million charge in equity in income
(losses) of affiliated companies related to several investees where
restructuring plans were implemented in the third quarter of 1995 or where
product offerings were not able to generate future cash flows sufficient to
recover the current carrying value.
27
<PAGE>
NOTE 15. 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.
In December 1992, the company petitioned the United States District Court for
the District of Columbia for a declaratory ruling that certain patents being
asserted against the company by AT&T Corp. (AT&T) were invalid and that AT&T
should therefore, and for other reasons, be barred from enforcing them against
the company. AT&T counterclaimed that the company was violating certain patents.
In May 1993, AT&T and Unitel Communications Inc., a Canadian corporation in
which AT&T has an equity interest, filed a companion suit in Canada, alleging
that the company and the Stentor Group of Canadian telephone companies (with
which the company has an alliance) are infringing in Canada four of the patents
at issue in the U.S. litigation. The company does not expect that the above
action 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
shareholders 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
action will have a material adverse effect on the consolidated financial
position or results of operations of the company.
28
<PAGE>
NOTE 16. SELECTED QUARTERLY INFORMATION (Unaudited)
Three months ended Dec.31, Sept.30, June 30, Mar.31,
1996 1996 1996 1996
- --------------------------------------------------------------------------------
(In millions, except per share amounts)
Revenue $4,753 $4,685 $4,565 $4,491
Operating expenses:
Cost of services 2,433 2,370 2,342 2,344
Sales, operations and general 1,310 1,304 1,229 1,185
Depreciation 441 430 412 381
Income from operations 569 581 582 581
Equity in income (losses) of
affiliated companies (28) (28) (45) (55)
Net income 303 304 300 295
Earnings per common and common
equivalent shares .44 .44 .43 .42
Weighted average number of shares of
common stock and common stock
equivalents outstanding 694 691 698 701
Three months ended Dec.31, Sept.30, June 30, Mar.31,
1995 1995 1995 1995
- --------------------------------------------------------------------------------
(In millions, except per share amounts)
Revenue $4,136 $3,862 $3,706 $3,561
Operating expenses:
Cost of services 2,152 2,001 1,921 1,819
Sales, operations and general 1,127 1,283 1,023 993
Depreciation 336 328 325 319
Asset write-down - 520 - -
Income (loss) from operations 521 (270) 437 430
Equity in income (losses) of
affiliated companies (24) (116) (18) (29)
Net income (loss) 284 (240) 260 244
Earnings (loss) per common and
common equivalent shares .41 (.35) .38 .36
Weighted average number of shares of
common stock and common stock
equivalents outstanding 694 688 684 685
In September and November 1995, the company acquired all of the outstanding
shares of common stock of Nationwide and Systemhouse, respectively. These
acquisitions were accounted for as purchases; accordingly, the net assets and
results of operations of the acquired companies are included in the information
above since their respective acquisition dates.
The three months ended September 30, 1995 include $831 million of special pretax
charges. Charges include a $520 million asset write-down, $216 million primarily
of reorganization costs and $95 million recorded as equity in income (losses) of
affiliated companies where restructuring plans have been implemented or where an
adjustment for recoverability was made.
Since there are changes in the weighted average number of shares outstanding
each quarter, the sum of earnings per common and common equivalent share by
quarter may not equal the total share for the applicable year.
29
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of MCI Communications Corporation
In our opinion, the consolidated balance sheets and the related consolidated
income statements, statements of cash flows and stockholders' equity appearing
on pages 11 through 29 present fairly, in all material respects, the financial
position of MCI Communications Corporation and its subsidiaries at December 31,
1996 and 1995, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
January 27, 1997
Washington, D.C.
30
Exhibit 23
----------
(Page 1 of 1)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-21740, 33-23275, 33-29547, 33-29549, 33-29550,
33-35339, 33-49304, 33-49403, 33-52133, 33-58071, 333-01137, 33-52133,
333-02887, 333-08569, 333-12849, 333-12847, 333-12845) and the Prospectuses
constituting part of the Registration Statements on Form S-3 (Nos. 33-57155,
333-11193 and 333-02593) of MCI Communications Corporation ("MCI") of our report
dated January 27, 1997, which appears on page 30 of MCI's 1996 Annual Report to
Shareholders, on MCI's financial statements for the year ended December 31,
1996, which are included in Exhibit 13 to MCI's Current Report on Form 8-K dated
February 10, 1997 ("Current Report"). We also consent to the incorporation by
reference of our report on the Financial Statement Schedule, which is included
as Exhibit 99 (c) to the Current Report.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
February 10, 1997
Washington, D.C.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet of MCI Communications Corporation and Subsidiaries at December 31, 1996
the income statement for the year ended December 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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 187
<SECURITIES> 161
<RECEIVABLES> 3,480
<ALLOWANCES> 273
<INVENTORY> 0
<CURRENT-ASSETS> 4,716
<PP&E> 18,709
<DEPRECIATION> 6,535
<TOTAL-ASSETS> 22,978
<CURRENT-LIABILITIES> 5,046
<BONDS> 4,798
750
0
<COMMON> 74
<OTHER-SE> 10,587
<TOTAL-LIABILITY-AND-EQUITY> 22,978
<SALES> 0
<TOTAL-REVENUES> 18,494
<CGS> 0
<TOTAL-COSTS> 16,181
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 196
<INCOME-PRETAX> 1,990
<INCOME-TAX> 753
<INCOME-CONTINUING> 1,202
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,202
<EPS-PRIMARY> 1.73
<EPS-DILUTED> 1.72
</TABLE>
Exhibit 99(a)
------------
Schedule II
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR UNCOLLECTIBLES
(In millions)
Balance at Balance at
Beginning Deductions End of
of Period Additions (Write-offs) Period
----------- ----------- ----------- -----------
December 31, 1996 $260 $572 $559 $273
December 31, 1995 226 437 403 260
December 31, 1994 211 394 379 226
Exhibit 99(b)
------------
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CAPITALIZATION SCHEDULE
(In millions)
(unaudited)
Set forth below is the capitalization of the company as of December 31, 1996:
Debt(a):
Secured debt:
Capital lease obligations............................ $ 504
Other secured obligations............................ 31
-------
Total secured debt...................................... 535
-------
Unsecured debt:
Senior Notes, net.................................... 1,485
Senior Debentures, net............................... 1,384
Commercial paper borrowings.......................... 1,422
Other unsecured debt................................. 175
-------
Total unsecured debt.................................... 4,466
-------
Total debt................................................ 5,001
-------
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........................... 6,410
Retained earnings.................................... 5,231
Treasury stock, at cost, 44 million shares........... (1,054)
-------
Total stockholders' equity................................ 10,661
-------
Total capitalization...................................... $16,412
=======
(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 through 20 of the company's Annual Report to
Stockholders, which is included in Item 7 to the company's Annual Report on Form
8-K for the year ended December 31, 1996. Interest rates on capital lease
obligations, on a weighted average basis, approximated 9.1% per annum at
December 31, 1996.
(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 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.
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of MCI Communications Corporation
Our audits of the consolidated financial statements referred to in our report
dated January 27, 1997 appearing on page 30 of MCI Communications Corporation's
("MCI") Annual Report to Shareholders for the year ended December 31, 1996,
which report and consolidated financial statements are included in Exhibit 13 to
MCI's Current Report on Form 8-K dated February 10, 1997 ("Current Report"),
also included an audit of the Financial Statement Schedule which appears as
Exhibit 99 (a) to the Current Report. In our opinion, the Financial Statement
Schedule presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
January 27, 1997
Washington, D.C.
