UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 1997
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
Commission File Number 0-6547
MCI COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 52-0886267
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1801 Pennsylvania Avenue, N.W., Washington, D.C. 20006
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (202) 872-1600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
As of September 30, 1997, the registrant had outstanding 135,998,932 shares of
Class A common stock and 560,491,503 shares of common stock.
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PAGE 2
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
FORM 10-Q
For The Quarter Ended September 30, 1997
INDEX
Page No.
--------
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Statements of Operations for the three and nine months ended
September 30, 1997 and 1996 3
Balance Sheets as of September 30, 1997 and December 31, 1996 4-5
Statements of Cash Flows for the nine months ended
September 30, 1997 and 1996 6
Statement of Stockholders' Equity for the nine months
ended September 30, 1997 7
Notes to Interim Condensed Consolidated Financial
Statements 8-11
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12-26
PART II: OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 27
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 28
SIGNATURE 29
EXHIBIT INDEX 30
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PAGE 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1997 1996 1997 1996
------ ------ ------ ------
REVENUE $4,819 $4,685 $14,545 $13,741
------ ------ ------ ------
OPERATING EXPENSES
Cost of services 3,018 2,370 8,090 7,056
Sales, operations and general 1,444 1,304 4,028 3,718
Depreciation 543 430 1,475 1,223
-------- -------- -------- --------
TOTAL OPERATING EXPENSES 5,005 4,104 13,593 11,997
-------- -------- -------- --------
INCOME (LOSS) FROM OPERATIONS (186) 581 952 1,744
Interest expense (58) (51) (174) (153)
Interest income 4 7 14 27
Equity in income (losses) of
affiliated companies (46) (28) (107) (128)
Other income (expense), net 6 (1) (1) (1)
------ -------- -------- -------
INCOME (LOSS) BEFORE INCOME TAXES AND
TRUST DISTRIBUTIONS (280) 508 684 1,489
Income tax (provision) benefit 113 (189) (246) (570)
Distributions on subsidiary Trust
mandatorily redeemable preferred
securities 15 15 45 20
-------- -------- -------- -------
NET INCOME (LOSS) $ (182) $ 304 $ 393 $ 899
======== ======== ======== =======
EARNINGS (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE $ (.26) $ .44 $ .56 $ 1.29
Weighted average number of shares
of common stock and common stock
equivalents outstanding 695 691 705 695
Dividends declared per common share $ - $ - $ .025 $ .025
See accompanying Notes to Interim Condensed Consolidated Financial Statements.
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PAGE 4
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
BALANCE SHEETS
(unaudited)
September 30, December 31,
1997 1996
----------- -----------
(In millions)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 139 $ 187
Marketable securities 10 161
Receivables, net of allowance for
uncollectibles of $344 and $273 million 3,561 3,480
Other assets 893 888
------- -------
TOTAL CURRENT ASSETS 4,603 4,716
------- -------
PROPERTY AND EQUIPMENT, net 13,783 12,174
OTHER ASSETS
Noncurrent marketable securities 10 58
Other assets and deferred charges, net 971 678
Investment in affiliates 605 690
Investment in News Corp. 1,350 1,350
Investment in DBS 1,029 893
Goodwill, net 2,366 2,419
------- -------
TOTAL OTHER ASSETS 6,331 6,088
------- -------
TOTAL ASSETS $24,717 $22,978
======= =======
See accompanying Notes to Interim Condensed Consolidated Financial Statements.
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PAGE 5
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
BALANCE SHEETS
(unaudited)
September 30, December 31,
1997 1996
----------- -----------
(In millions)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $1,038 $ 992
Accrued telecommunications expense 2,312 2,045
Other accrued liabilities 1,925 1,806
Long-term debt due within one year 2,052 203
------ ------
TOTAL CURRENT LIABILITIES 7,327 5,046
------ ------
NONCURRENT LIABILITIES
Long-term debt 3,282 4,798
Deferred taxes and other 2,037 1,723
------ ------
TOTAL NONCURRENT LIABILITIES 5,319 6,521
------ ------
COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED
SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY
JUNIOR SUBORDINATED DEFERRABLE INTEREST
DEBENTURES OF THE COMPANY 750 750
STOCKHOLDERS' EQUITY
Class A common stock, $.10 par value,
authorized 500 million shares, issued
136 million shares 14 14
Common stock, $.10 par value, authorized
2 billion shares, issued
560 million shares 60 60
Additional paid in capital 6,394 6,410
Retained earnings 5,607 5,231
Treasury stock, at cost,
32 and 44 million shares (754) (1,054)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 11,321 10,661
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 24,717 $ 22,978
======== ========
See accompanying Notes to Interim Condensed Consolidated Financial Statements.
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PAGE 6
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
September 30,
-------------------
1997 1996
------ ------
(In millions)
OPERATING ACTIVITIES
Receipts from customers $14,108 $13,267
Payments to suppliers and employees (11,316) (10,580)
Taxes paid (303) (497)
Interest paid (218) (163)
Interest and dividends received 8 28
-------- --------
CASH FROM OPERATING ACTIVITIES 2,279 2,055
-------- --------
INVESTING ACTIVITIES
Capital expenditures for property and equipment (2,642) (2,423)
Purchases, maturities and sales of
marketable securities, net 199 176
Investment in News Corp. - (350)
Investment in DBS (146) (268)
Investment in affiliates (45) (32)
Acquisition of businesses - (24)
Other, net (2) (8)
-------- --------
CASH USED FOR INVESTING ACTIVITIES (2,636) (2,929)
-------- --------
NET CASH FLOW BEFORE FINANCING ACTIVITIES (357) (874)
-------- --------
FINANCING ACTIVITIES
Issuance (payment) of Debentures and other debt, net (259) 492
Commercial paper and bank credit facility
activity, net 319 (368)
Issuance of Trust preferred securities, net - 726
Issuance of common stock for employee plans 359 342
Purchase of treasury stock (93) (522)
Payment of dividends on common stock and
Class A common stock (17) (17)
-------- --------
CASH FROM FINANCING ACTIVITIES 309 653
-------- --------
Net decrease in cash and cash equivalents (48) (221)
Cash and cash equivalents - beginning balance 187 471
-------- --------
Cash and cash equivalents - ending balance $ 139 $ 250
======== ========
Reconciliation of net income to cash from
operating activities:
Net income $ 393 $ 899
Adjustments to net income:
Depreciation and amortization 1,501 1,267
Equity in (income) losses of affiliated companies 107 127
Deferred income tax provision (37) 192
Net change in operating activity accounts
other than cash and cash equivalents:
Receivables (81) (419)
Operating accounts payable (195) 122
Other operating activity accounts 591 (133)
-------- --------
Cash from operating activities $ 2,279 $ 2,055
======== ========
See accompanying Notes to Interim Condensed Consolidated Financial Statements.
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PAGE 7
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
STATEMENT OF STOCKHOLDERS' EQUITY
(unaudited)
Treas. Total
Class A Addit'l Stock, Stock-
Common Common Paid in Retained at holders'
Stock Stock Capital Earnings Cost Equity
------ ------ ------- -------- ------- -------
(In millions)
Balance at
December 31, 1996 $14 $60 $6,410 $5,231 $(1,054) $10,661
Common stock issued
for employee stock
and benefit plans and
other activity
(14 million shares) - - (16) - 387 371
Net income - - - 393 - 393
Common stock dividends - - - (17) - (17)
Treasury stock
purchased
(2 million shares) - - - - (87) (87)
----- ----- ------ ------ ----- -------
Balance at
September 30, 1997 $14 $60 $6,394 $5,607 $ (754) $11,321
===== ===== ====== ====== ====== =======
See accompanying Notes to Interim Condensed Consolidated Financial Statements.
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PAGE 8
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. GENERAL
The accompanying unaudited interim condensed consolidated financial statements
have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission (SEC). The interim condensed consolidated
financial statements include the consolidated accounts of MCI Communications
Corporation and its majority-owned subsidiaries (collectively, the company) with
all significant intercompany transactions eliminated. In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
necessary for a fair statement of the financial position, results of operations
and cash flows for the interim periods presented have been made. The preparation
of the financial statements includes estimates that are used when accounting for
revenue, allowances for uncollectible receivables, telecommunications expense,
depreciation and amortization, employee benefit plans and taxes. Actual results
could differ from those estimates. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles (GAAP) have been condensed or omitted pursuant to
such SEC rules and regulations. These financial statements should be read in
conjunction with the company's Annual Report on Form 10-K for the year ended
December 31, 1996.
NOTE 2. MERGER AGREEMENT WITH WORLDCOM, INC.
On November 9, 1997, the company entered into an Agreement and Plan of Merger
(the Agreement) with WorldCom, Inc., a Georgia corporation (WorldCom), and TC
Investments Corp., a Delaware corporation and a wholly-owned subsidiary of
WorldCom (Merger Sub), pursuant to which the company will merge with and into
Merger Sub (the Merger). As a result of the Merger, (a) each outstanding share
of the company's common stock, par value $.10 per share (other than shares owned
by WorldCom or Merger Sub or held by the company) will be converted into the
right to receive that number of shares of WorldCom common stock, par value $.01
per share, equal to the quotient determined by dividing $51.00 by the average of
the high and low sale prices of WorldCom common stock as reported on The Nasdaq
National Market on each of the twenty consecutive trading days ending with the
third trading day immediately preceding the effective time of the Merger (the
Exchange Ratio), provided that the Exchange Ratio shall not be less than 1.2439
or greater than 1.7586; and (b) each outstanding share of the company's Class A
common stock (other than shares of Class A common stock owned by WorldCom or
Merger Sub or held by the company) shall be converted into the right to receive
$51.00 in cash, without interest thereon. The combined companies plan to operate
under the MCI WorldCom name.
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PAGE 9
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Concurrent with the Agreement, the company, WorldCom and British
Telecommunications plc (BT) entered into an agreement whereby (i) the Agreement
and Plan of Merger, dated as of November 3, 1996, as amended (the BT Merger
Agreement), among the company, BT and Tadworth Corporation was terminated; (ii)
WorldCom agreed to pay BT $450,000,000 and expenses not in excess of $15,000,000
in order to induce BT to waive its rights under, and agree to terminate, the BT
Merger Agreement; (iii) BT agreed to support and vote its shares of Class A
Common Stock in favor of the Merger; and (iv) BT may exercise its call option to
acquire the company's shares in Concert Communications Services (CCS)
immediately following the effective date of the Merger. The company will be a
distributor of CCS services on a nonexclusive basis for five years following
BT's exercise of its call option.
Consummation of the Merger is subject to certain conditions, including receipt
of the approval of the Merger and the transactions contemplated thereby, by the
stockholders of the company and WorldCom and receipt of required regulatory
approvals.
NOTE 3. DEBT
On July 23, 1997, the company entered into a $500 million forward-starting swap
agreement at a fixed interest rate of 6.71%.
NOTE 4. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 130, Reporting Comprehensive Income, which is effective
for fiscal years beginning after December 15, 1997. The Statement establishes
standards for reporting and displaying comprehensive income, as defined, and its
components. The company plans to adopt the Statement's disclosure standards in
1998.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information, which is effective for fiscal years
beginning after December 15, 1997. The Statement establishes standards for the
way companies report information about operating segments in annual and interim
financial statements. The company plans to adopt the Statement's disclosure
standards in 1998.
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PAGE 10
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 5. CONTINGENCIES
The company, in the normal course of business, is a party to a number of
lawsuits and regulatory and other proceedings certain of which are described
below.
On November 4, 1996 and thereafter, and on August 25, 1997 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 a total of fifteen complaints filed in the Court of
Chancery in the State of Delaware. BT was named as a defendant in thirteen of
the complaints. In addition, amended or revised complaints were filed in four of
those cases commenced in November 1996 and in one of the cases filed in August
1997. The complaints were brought by alleged stockholders of the company,
individually and purportedly as class actions on behalf of all other
stockholders of the company. The complaints allege breaches of fiduciary duty by
the company's directors in connection with the BT Merger Agreement. Seven of the
complaints in which BT was named as a defendant allege that BT aided and abetted
those breaches of duty. Five of the complaints in which BT was named as a
defendant allege that BT owes fiduciary duties to the other stockholders of the
company and that it breached those duties in connection with the BT Merger
Agreement. The complaints seek damages and other relief.
On or about October 8, 1997, all of the company's 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 a purported derivative complaint
filed in the Court of Chancery in the State of Delaware. BT and Tadworth
Corporation were also named as defendants, and the company was named as a
nominal defendant. The plaintiff, derivatively and on behalf of the company,
alleges breach of fiduciary duty by the company's directors and aiding and
abetting those breaches of duty by BT in connection with the BT Merger Agreement
and WorldCom's exchange offer. The complaint seeks injunctive relief, damages,
and other relief. On November 14, 1997, plaintiffs' counsel and defendants'
counsel held a conference with the Court of Chancery in Delaware in which
plaintiffs' counsel requested interim injunctive relief with respect to the
termination fee paid under the BT Merger Agreement, and requested that the Court
enter a mandatory injunction requiring defendants to allow representatives of
the plaintiffs to participate in any further negotiations. Plaintiffs' counsel
also requested expedited treatment and the setting of an early trial date with
respect to plaintiffs' challenge to the termination fee paid under the BT Merger
Agreement and the different form of consideration payable to BT contemplated by
the Agreement. Citing the absence of irreparable injury, the Court of Chancery
denied plaintiffs' request for injunctive relief and expedited treatment, and
declined to set an early trial date. At the conclusion of the conference,
plaintiffs' counsel indicated that they would be seeking to file new amended
complaints challenging aspects of the Merger and attempting to join additional
defendants as parties to the litigations.
On or about August 28, 1997, a complaint was filed in the federal district court
in Washington, D.C., by an alleged stockholder of the company, individually and
putatively as a class action on behalf of purchasers of the company's shares
during the period from August 14, 1997 through August 20, 1997. On or about
October 27, 1997, another complaint was filed in the federal district court in
Washington, D.C., by two alleged stockholders of the company, individually and
putatively as a class action on behalf of purchasers of the company's shares
during the period from August 14, 1997 through August 22, 1997. On or about
October 31, 1997, another complaint was filed in the federal district court in
Washington, D.C., by an alleged stockholder of the company, individually and
putatively as a class action on behalf of purchasers of the company's shares
during the period from July 10, 1997 through August 22, 1997. All three
complaints allege that the company and certain of its officers and
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PAGE 11
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
directors improperly failed to disclose material information about the company,
including that the company was renegotiating the terms of the Merger Agreement
with BT dated November 3, 1996 . The complaints seek damages and other relief.
The defendants believe that all of the complaints are without merit and the
company presently does not expect that the above actions will have a material
adverse effect on the consolidated financial position or results of operations
of the company.
<PAGE>
PAGE 12
PART I.
ITEM 2.
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
GENERAL
- - -------
The following discussion and analysis provides information that management
believes is relevant to an assessment and understanding of the consolidated
results of operations and financial condition of MCI Communications Corporation
and its subsidiaries (collectively, the company). The discussion should be read
in conjunction with the interim condensed consolidated financial statements and
notes thereto and the company's Annual Report on Form 10-K for the year ended
December 31, 1996.
MERGER AGREEMENT WITH WORLDCOM, INC.
- - ------------------------------------
On November 3, 1996, the company entered into an Agreement and Plan of Merger
with British Telecommunications plc (BT), which was last amended on August 21,
1997 (the BT Merger Agreement).
On October 1, 1997, WorldCom, Inc. (WorldCom) announced its intent to make an
exchange offer of shares of WorldCom common stock for all the outstanding common
stock and Series A common stock of the company. On October 15, 1997, GTE
Corporation (GTE) announced its intent to effect a negotiated two-step
acquisition of all the outstanding common stock and Class A common stock of the
company.
- - -------------------------------------------------------------------------------
Forward-looking Statements May Prove Inaccurate
The company has made certain forward-looking statements in Management's
Discussion and Analysis that are subject to risks and uncertainties.
Forward-looking statements include information concerning the possible future
results of operations of the company, its long distance telecommunication
services (core) business, its investments in ventures and developing markets
(VDM) businesses, the possible future results of operations of the company and
MCI WorldCom after the Merger and statements preceded by, followed by or that
include the words "believes", "expects", "anticipates", or similar expressions.
For those statements, the company claims the protection of the safe-harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995. The reader is cautioned that the following important factors among
others, in addition to those contained elsewhere in Management's Discussion and
Analysis, could adversely affect the future results of the company, its long
distance telecommunication services and VDM businesses and the company and MCI
WorldCom after the Merger and could cause those results to differ materially
from the statements and information expressed in the forward-looking statements:
material adverse changes in the economic conditions in the markets served by the
company; a significant delay in the expected closing of the Merger; future
regulatory actions and conditions in the company's operating areas, including
the ability of the company to implement its local strategy and obtain local
facilities at competitive rates and resulting changes in the implementation of
its local strategy; and competition from others in the U.S. and international
long distance markets, including the entry of the regional Bell operating
companies (RBOCs) and other companies into the long distance markets in the U.S.
For additional information about other important factors that should be
considered, the reader should read the company's Annual Report on Form 10-K for
the year ended December 31, 1996 and all of the company's filings with the
Securities and Exchange Commission subsequent thereto.
<PAGE>
PAGE 13
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
On November 9, 1997, the company entered into an Agreement and Plan of Merger
(the Agreement) with WorldCom, a Georgia corporation, and TC Investments Corp.,
a Delaware corporation and a wholly-owned subsidiary of WorldCom (Merger Sub),
pursuant to which the company will merge with and into Merger Sub (the Merger).
As a result of the Merger, (a) each outstanding share of the company's common
stock, par value $.10 per share (other than shares owned by WorldCom or Merger
Sub or held by the company) will be converted into the right to receive that
number of shares of WorldCom common stock, par value $.01 per share, equal to
the quotient determined by dividing $51.00 by the average of the high and low
sale prices of WorldCom common stock as reported on the Nasdaq National Market
on each of the twenty consecutive trading days ending with the third trading day
immediately preceding the effective time of the Merger (the Exchange Ratio),
provided that the Exchange Ratio shall not be less than 1.2439 or greater than
1.7586; and (b) each outstanding share of the company's Class A common stock
(other than shares of Class A common stock owned by WorldCom or Merger Sub or
held by the company) shall be converted into the right to receive $51.00 in
cash, without interest thereon. The combined companies plan to operate under the
MCI WorldCom name.
Concurrent with the BT Agreement, the company, WorldCom and BT entered into an
agreement whereby (i) the BT Merger Agreement was terminated; (ii) WorldCom
agreed to pay BT $450,000,000 and expenses not in excess of $15,000,000 order to
induce BT to waive its rights under, and agree to terminate, the BT Merger
Agreement; (iii) BT agreed to support and vote its shares of Class A Common
Stock in favor of the Merger; and (iv) BT may exercise its call option to
acquire the company's shares in Concert Communications Services (CCS)
immediately following the effective date of the Merger. The company will be a
distributor of CCS services on a nonexclusive basis for five years following
BT's exercise of its call option.
Consummation of the Merger is subject to certain conditions, including receipt
of the approval of the Merger and the transactions contemplated thereby by the
stockholders of the company and WorldCom and receipt of required regulatory
approvals.
<PAGE>
PAGE 14
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
TELECOMMUNICATIONS REGULATORY ENVIRONMENT
- - -----------------------------------------
The Telecommunications Act of 1996 (the Act) was enacted by Congress to help
minimize legal barriers to local telephone market entry while affording
residential and business consumers protection from unfair competition by
incumbent local exchange carriers (ILECs). A company is permitted to enter the
local market by constructing new facilities, leasing unbundled network elements,
reselling local network capacity or by partnering with other new market
entrants. The regional Bell operating companies'(RBOCs) are permitted to offer
long distance services outside their regions but are barred from offering
in-region long distance services until they open their own markets and encounter
facilities-based local competition. The Act establishes criteria pursuant to
which each RBOC application to provide in-region long distance service may be
approved by the FCC, in consultation with the relevant state regulatory agencies
as well as the DOJ.
In order to implement the Act, the FCC outlined a trilogy of issues to be
resolved to ensure competition in the local market-interconnection, universal
service and access charge reform. On May 7, 1997, the FCC completed action on
the trilogy when it rendered its access charge and universal service reform
decisions. The FCC adopted a plan in a price cap order that it stated would
reduce interstate access charges approximately $1.7 billion on an industry-wide
basis. However, only $1.6 billion of such access charge reductions went into
effect on July 1, 1997. As part of its effort to establish cost based services,
the FCC, in its access charge order reclassified certain access charges from
usage based to line based. The company anticipates that it will pass through to
consumers the realized savings from switched access charge reductions, net of
pre-subscribed interconnect carrier costs and new universal service obligations,
which are discussed below. The company has appealed the price cap and the access
charge reform orders.
The FCC's universal service order, which includes current subsidies paid by long
distance carriers and new obligations to fund discounted services for schools,
libraries, rural health care providers and low income consumers, will become
effective on January 1, 1998 and be funded by all telecommunications carriers.
This order is currently being appealed by several parties. These challenges seek
changes that could materially affect the size of the universal service fund and
the company's required contributions.
<PAGE>
PAGE 15
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
In an August 1997 decision, the FCC ordered ILECs to unbundle and provide access
to their transport facilities for the routing of new entrants' local traffic.
This is an important mode of entry for competitive local exchange carriers
(CLECs). Without access to these facilities, CLECs would be forced to duplicate
the ILEC's network by constructing their own local transport or by leasing
costly flat-rated dedicated transport. The order is currently being appealed by
several ILECs in the U.S. Court of Appeals for the Eighth circuit (Eighth
Circuit).
In July 1997, the U.S. Court of Appeals for the Eighth Circuit determined that
the FCC had exceeded its authority when it established a national pricing
structure for interconnection with the ILECs pursuant to the Act. The Eighth
Circuit also held that certain portions of the FCC rules, such as the scope of
its enforcement activities, are invalid. Most recently, in October 1997, the
Eighth Circuit rendered an additional decision, invalidating an FCC rule
prohibiting ILECs from disassembling already combined elements in their
networks. This decision means that new entrants may be forced to purchase and
then recombine the previously combined elements themselves. As a result of the
most recent decision , the company beleives that new entrants will now be
subject to increased costs for disconnecting and reconnecting elements and new
customers may be subject to delays in changing local telephone service
providers. Although the Act was designed by Congress to deregulate the telephone
industry and encourage competition in the local and long distance markets, the
company believes the Eighth Circuit's rulings will delay local phone competition
because potential competitors to the ILECs, including the company, will have to
continue to negotiate interconnection agreements in individual states without
the benefit of uniform pricing rules guided by a national policy and will face
increased costs and operational delays as they enter the local market. For
further discussion of these matters refer to "Enterprise Reporting-Local"
section.
<PAGE>
PAGE 16
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
EARNINGS HIGHLIGHTS
- - -------------------
Income (loss) from operations was $(186) million and $952 million for the three
and nine months ended September 30, 1997, respectively. Operating margin for the
three and nine months ended September 30, 1997 decreased to (3.9)% and 6.5%,
respectively, from 12.4% and 12.7%, in the comparable periods in 1996. Net
income (loss) for the three and nine months ended September 30, 1997 decreased
to $(182) million and $393 million, or $(0.26) and $.56 per share, respectively,
from $304 million and $899 million, or $0.44 and $1.29 per share, for the
comparable periods in 1996. The 1997 third quarter net loss reflects expenses of
$432 million associated with a series of steps taken by the company to improve
its short and long-term financial performance. These steps include charges
associated with exiting and restructuring several business customer contracts,
eliminating selected retail channels and discontinuing certain unprofitable
information technology services.
The company is continuing to evaluate additional steps to improve returns in the
core and VDM businesses through new customer and marketing initiatives,
re-engineering certain processes and operations, improved asset utilization and
resource re-deployment. In addition, the company will also be taking steps in
the fourth quarter of 1997 to enhance customer and employee retention in light
of the company's recent merger activities. While these steps have not all been
finalized, if taken, they could result in material expenses impacting the
company's 1997 results of operations. In the local business, given that the
company anticipates merging with WorldCom, which has substantial local
facilities, the company is re-addressing its local investments and costs and
expects to reduce local losses below previously disclosed estimates. For further
discussion of these matters refer to the "Consolidated Results of Operations"
and "Enterprise Reporting-Local" section.
CONSOLIDATED RESULTS OF OPERATIONS
- - ----------------------------------
Consolidated revenue for the three and nine months ended September 30, 1997,
including the impact of $67 million in increased uncollectible provisions and
other actions, increased 2.9% and 5.9% to $4.8 billion and $14.5 billion,
respectively, from the comparable periods in 1996. As explained under
"Enterprise Reporting", for the three and nine months ended September 30, 1997,
core business revenue increased by $69 million and $598 million or 1.6% and
4.8%, respectively, from the prior year periods and Ventures and Developing
Markets (VDM) revenue increased by $134 million and $373 million for the three
and nine months ended September 30, 1997, respectively, over the comparable
periods in 1996. The company expects fourth quarter 1997 revenue growth to be
similar to the third quarter of 1997.
<PAGE>
PAGE 17
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Cost of services consists of telecommunications expense and costs of other
products and services. Telecommunications expense is primarily comprised of
access fees paid to ILECs and other domestic service providers, and payments
made to foreign telephone companies (international settlements) to complete
calls made to foreign countries from the U.S. by the company's customers. In the
VDM businesses, costs of other products and services primarily include
equipment, software and technology service costs. Consolidated cost of services
for the three and nine months ended September 30, 1997 increased to $3 billion
and $8.1 billion, respectively, from the comparable periods in 1996 reflecting
$340 million in costs and provisions incurred in the third quarter of 1997 to
exit and restructure certain business customer contracts.
Telecommunications expense, as a percent of core business revenue, increased 2.8
percentage points for the three months ended September 30, 1997 compared to the
same period in 1996, due to the introduction of payphone compensation costs and
fluctuations in the revenue mix, which were partially offset by a decline in
domestic telecommunication and international settlement rates. For the nine
months ended September 30, 1997, telecommunications expense as a percent of core
business revenue remained consistent with the year ago period.
Sales, operations and general expense increased 10.7% and 8.3% to $1.4 billion
and $4 billion for the three and nine months ended September 30, 1997,
respectively, from the comparable periods in 1996. In the core business, sales,
operations and general expense for the three and nine months ended September 30,
1997 as a percentage of revenue decreased to 24.8% and 24.5%, respectively, from
26.9% and 26.1% in the same periods in 1996, respectively, primarily as a result
of continued redeployment of certain resources and operations to local services
and other cost containment efforts. The core business sales, operations and
general expenses includes $57 million in costs for severance and contract
commitment and termination costs associated with the discontinuance of certain
mass markets retail sales channels and certain legal costs. The VDM sales,
operations and general expense as a percentage of revenue for the three and nine
months ended 1997 increased to 61.2% and 46.4%, respectively, from 32.3% and
32.2% in the same periods in 1996. This increase was attributable to the
continued development in local services markets and information technology
services and the related increases in marketing efforts and personnel
expenditures. In addition, the VDM sales, operations and general expenses
include $34 million in expenses for redundant facility and severance costs and
contract termination costs associated with the discontinuance of certain
information and technology service operations. The company is continuing to work
towards addressing the actions necessary to make its computer systems Year 2000
compliant. Estimated costs associated with this undertaking are preliminary, but
could exceed $200 million in aggregate during the period between fourth quarter
of 1997 and December 31, 1998.
<PAGE>
PAGE 18
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Depreciation expense increased 26.3% and 20.6% for the three and nine months
ended September 30, 1997 to $543 million and $1,475 million, respectively, from
the comparable periods in 1996. The increases are primarily the result of 1996
and 1997 additions to the communications system network to increase network
capacity, redundancy and reliability, add product features and functionality and
support the company's local services business. Depreciation costs in the third
quarter of 1997 also include $17 million of costs related to the disposal and
abandonment of assets associated with the discontinuance of the aforementioned
retail and information technology service operations.
Interest expense increased $7 million and $21 million, respectively, from the
comparable periods in 1996 due to increased 1997 debt balances.
Equity losses of affiliates increased $18 million for the three month period
ended September 30, 1997 from the comparable period in 1996, primarily due to
continued operating losses incurred by Avantel. For the nine months ended
September 30, 1997, equity in losses improved as the company recognized a
reduction of $21 million from the comparable period in 1996, primarily due to
reductions in losses on the former on-line project with News Corporation Limited
(News Corp.), which ceased operations in 1996, partially offset by an increase
in Avantel operating losses. As further discussed in "Enterprise Reporting"
below, due to the start-up nature and current operations of several of these
affiliates, the company expects equity in losses of affiliated companies to
continue for the remainder of 1997.
Distributions on subsidiary Trust mandatorily redeemable securities, issued
in May 1996, totaled $15 million and $45 million for the three and nine months
ended September 30, 1997, respectively.
<PAGE>
PAGE 19
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
ENTERPRISE REPORTING
- - --------------------
This section segregates the performance of the company's core business from its
VDM businesses and investments. Core business services comprise a wide spectrum
of domestic and international voice and data services, including long distance
telephone, data communication, teleconferencing, Internet and electronic
messaging services. The company has invested in VDM businesses outside of its
core business through acquisitions, alliances and other strategic initiatives in
the local, information technology, wireless, international and multimedia
markets. Investments in these VDM businesses are included in the company's
financial statements as consolidated subsidiaries, unconsolidated equity
investments, or cost investments such the company's investment in News Corp.
The following information was prepared using all amounts included in the
company's interim condensed consolidated financial statements and reflects
estimates and allocations that management believes provide a reasonable basis on
which to present such information.
CORE BUSINESS RESULTS
- - ---------------------
(In millions) Three Months Ended Nine Months Ended
September 30, September 30,
--------------- ---------------
1997 1996 1997 1996
------ ------ ------ ------
Revenue $4,343 $4,274 $13,080 $12,482
Income from operations 75 617 1,389 1,831
Equity in income (losses)
of affiliated companies - - - -
Net income 48 381 855 1,131
Depreciation 479 395 1,324 1,127
Net interest, income taxes
and other expense (27) (236) (534) (700)
EBITDA* 554 1,012 2,713 2,958
* EBITDA, as defined by management, consists of earnings (loss), 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. Analysts often use EBITDA when evaluating the performance
of a company. Readers are cautioned that the company's definition of EBITDA may
not be comparable to similarly titled measures used by other companies or
analysts.
<PAGE>
PAGE 20
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
The following discussion focuses on significant financial and operational
results of the company's core business.
Core business revenue for the three months ended September 30, 1997 increased
1.6% from the year ago period to $4.3 billion, reflecting the impact of $67
million in additional uncollectible provisions required by recent bankruptcies
and delinquencies of business customer accounts and other actions. Traffic grew
6.2% from the year ago quarter. As further explained below, the revenue to
traffic variance reflects the strategic de-emphasis of the wholesale channel,
continued competitive pricing and industry wide moderation in revenue growth.
Core business revenue for the nine months ended September 30, 1997 increased
4.8% from the comparable year ago period while traffic grew 5.2%, resulting in
revenue to traffic variance of (.4%). This variance reflects the transition away
from the high level of customer acquisition programs in the first half of 1996
and the company's focus on value, service and integration during 1997.
In the business market, revenue continued to grow in the three and nine months
ended September 30, 1997 from the comparable periods in 1996. Revenue growth was
driven by strong demand for data and Internet services, as well as a result of
the company's direction towards providing integrated services. Offsetting these
gains were a decline in wholesale revenue due to management's de-emphasis of the
wholesale market and the restructuring of this sales channel. Revenue in the
mass market for the three and nine months ended September 30, 1997 decreased
from the comparable periods in 1996. This is due to the company's continued
focus on high value customers, service and integration, which improve customer
retention. The company continued to selectively target high value customers
through its integrated package offering of inbound, outbound, wireless and
Internet services and programs aimed at customer retention while curtailing the
use of high-cost customer acquisition programs during the nine months ended
September 30, 1997. As a result, customer churn declined and customer spending
improved in 1997 as compared to the same period a year ago.
<PAGE>
PAGE 21
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
VENTURES AND DEVELOPING MARKETS RESULTS
- - ---------------------------------------
(In millions) Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
1997 1996 1997 1996
----- ----- ----- -----
Revenue $608 $474 $1,800 $1,427
Loss from operations (247) (32) (406) (80)
Equity in income (losses)
of affiliated companies (46) (28) (107) (128)
Net loss (222) (73) (441) (225)
Depreciation 64 35 151 96
Net interest, income taxes
and other expense 71 (13) 72 (17)
EBITDA* (183) 3 (255) 16
During the third quarter of 1997, the company continued to make investments in
its VDM businesses and strategic initiatives in an effort to expand its business
opportunities in these markets. The company invested approximately $146 million
in local services, $49 million in direct broadcast satellite (DBS) development
costs and $7 million in affiliated companies during the third quarter of 1997.
Certain information about the company's results of operations in these
businesses and strategic initiatives are provided below.
LOCAL
- - -----
The company provides switched local service to both business and residential
customers and it additionally provides dedicated access and dark fiber services
to its core business customers using the company-owned network facilities and
facilities or wholesale services provided by other companies. In addition to
these services, the company provides infrastructure support to the company's
core long distance network. As of September 30, 1997, the company had been
granted authority to offer local exchange services in 38 states and had
applications for such services pending in 10 other states.
<PAGE>
PAGE 22
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Local service revenue increased by $47 million and $108 million year-over-year
to $92 million and $237 million for the three and nine months ended September
30, 1997, respectively. A majority of this growth resulted from service provided
to end user business customers, with a smaller portion resulting from
residential customer revenue and services provided to the core long distance
network. The revenue derived from sales to the company's core business customers
and its long distance network remains the largest portion of local revenue. Net
loss for the three and nine months ended September 30, 1997 increased by $99
million and $185 million year-over-year to $118 million and $229 million,
respectively. EBITDA for the three and nine months ended September 30, 1997
decreased by $142 million and $253 million year-over-year to $(157) million and
$(288) million, respectively. The increase in net losses and the decrease in
EBITDA for the three and nine months ended September 30, 1997 reflect the
increased operating costs associated with the continued investment in the local
market. During the third quarter of 1997, the company added 7 local city
networks, bringing the total number of operational local city networks to 76 in
39 markets, compared to 61 operational networks in 34 markets at the end of the
third quarter of 1996. In addition, route miles increased 19% year-over-year to
3,305 miles as of September 30, 1997. At present, the company provides
facilities-based switched local services in 25 markets and intends to have
service operational in over 30 markets by the end of 1997.
The company's expansion and traffic growth in the local market continued to be
hampered by changes in Federal and state regulations governing the opening of
local markets, exacerbated by anti-competitive behavior and delaying tactics of
the ILECS, as described under "Telecommunications Regulatory Environment". This
environment has continued the delay of the company's entrance into the local
market, and as a result the company will continue to incur additional costs to
support regulatory efforts and other local problems. Given that the company
anticipates merging with WorldCom, which has substantial local facilities, the
company is re-addressing its local investments and costs and expects to reduce
local losses below previously disclosed estimates.
<PAGE>
PAGE 23
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
INFORMATION TECHNOLOGY SERVICES
- - -------------------------------
Information technology services primarily consist of MCI Systemhouse, the
company's global systems integration subsidiary. Revenue for the three and nine
months ended September 30, 1997 increased by $91 million and $297 million to
$430 million and $1,307 million, respectively, from the comparable periods in
1996. This revenue growth reflects the industry-wide demand for information
technology services for which Systemhouse is becoming a leading provider,
particularly in the global telecommunications outsourcing market. Net loss for
the three and nine months ended September 30, 1997 increased by $38 million and
$53 million, respectively, over the comparable periods in 1996 to $57 million
and $99 million, respectively. EBITDA for the three and nine months ended
September 30, 1997 was $(21) million and $38 million, respectively, compared to
$21 million and $87 million for the same periods in 1996. The increase in net
loss for the periods reflect $53 million in costs associated with the
aforementioned discontinuance of certain information and technology services as
well as the result of increases in sales, operations and general expenses for
advanced staffing necessary to meet the increasingly strong demand for
information technology services.
WIRELESS
- - --------
Wireless services primarily include the operations of MCI Wireless, Inc., the
company's cellular provider, and paging services. Revenue for the three months
ended September 30, 1997 decreased by $3 million from the year ago period to $80
million. This decrease was primarily attributable to the decrease in average
revenue per cellular subscriber partially offset by an increase in the number of
cellular customers of approximately 8% to 438,000. Revenue for the nine months
ended September 30, 1997 decreased $29 million from the year ago period due to a
decrease in paging customers to 188,000, as the company continued to concentrate
on profitability per customer in the mass market and to de-emphasize stand alone
paging services. For the three and nine months ended September 30, 1997, net
loss was $13 million and $32 million, respectively, and EBITDA was $(7) million
and $(13) million, respectively.
<PAGE>
PAGE 24
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
INTERNATIONAL SERVICES
- - ----------------------
CCS is the company's 24.9% owned international services venture with BT that
provides a broad portfolio of advanced global communication services, including
virtual network, frame relay, managed bandwidth and packet services, to
multinational business customers worldwide. CCS' distributor revenues increased
25% and 35% year-over-year to $200 million and $547 million for the three and
nine months ended September 30, 1997, respectively. The company's share of CCS'
losses reported in accordance with U.S. GAAP for the three and nine months ended
September 30, 1997, decreased by $1 million and $5 million, respectively, from
the year ago periods to $6 million and $18 million, respectively.
Avantel is the company's 44.5% owned Mexican business venture which began
offering a full range of competitive switched long distance services to
residential and business customers on January 1, 1997. During the third quarter
of 1997, Avantel's network became fully operational and Avantel is now offering
services throughout most of Mexico. In addition, Avantel has obtained more than
a 10% share in the total Mexican long distance market. The company's share of
Avantel's losses reported in accordance with U.S. GAAP for the three and nine
months ended September 30, 1997 increased by $20 million and $44 million to $29
million and $64 million, respectively, from the comparable periods in 1996. The
company expects to incur additional losses on its investment as Avantel
continues to expand its service and customer bases in the Mexican
telecommunications market.
MULTIMEDIA SERVICES
- - -------------------
The company's investments in News Corp. and DBS comprise Multimedia Services.
Dividend income on the company's investment in News Corp. for the three and nine
months ended September 30, 1997 was approximately $15 million and $44 million,
respectively, compared to $15 million and $39 million for the comparable periods
in 1996. The company has invested $146 million in DBS in the nine months ended
September 30, 1997, bringing its total investment in the project to
approximately $1 billion as of September 30, 1997.
<PAGE>
PAGE 25
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
In June 1997, the company and News Corp. entered into an agreement with
Primestar Partners, L.P. (Primestar) for the sale and transfer of substantially
all of their assets relating to the DBS business, including the DBS license but
excluding two of the four satellites under construction. This transaction is
part of a larger transaction that involves the consolidation of Primestar and
TCI Satellite Entertainment, Inc. into a newly formed entity (New Primestar).
Concurrent with the closing of the Primestar transaction, the company will
acquire preferred shares in a subsidiary of News Corp. for a face amount equal
to the company's cost of obtaining the FCC license plus interest thereon. The
company will also receive from Primestar consideration for its 19.9% joint
venture interest, an interest in New Primestar in the form of cash and interest
bearing non-voting New Primestar securities. The process in which the company
and News Corp. will allocate the proceeds and recover their respective
investments in the DBS business has yet to be completed. The transaction is
subject to regulatory approvals, including approval by the FCC of the company's
transfer of the DBS license to New Primestar.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
- - ----------------------------------------------------
CASH FLOWS
- - ----------
Cash from operating activities increased by $224 million for the nine months
ended September 30, 1997 to $2,279 million from the comparable period in 1996.
This increase is primarily the result of an increase in customer receipts
resulting from the growth in revenue and a decrease in taxes paid, offset by an
increase in payments to suppliers and employees resulting from the increase in
costs of services and sales, operations and general expense.
Cash used for investing activities decreased by $293 million for the nine months
ended September 30, 1997 to $2,636 million from the comparable period in 1996
primarily because of a $472 million reduction in cash used for the DBS and News
Corp. investments offset by higher capital expenditures. In the first nine
months of 1997, the company used cash of $2,642 million, an increase of $219
million, for capital expenditures primarily for network deployment and local
services. The company also invested an additional $146 million for additional
satellite construction and other costs for its DBS investment and $45 million in
investments in its affiliates. No additional amounts were invested in News Corp.
during 1997.
Cash from financing activities decreased by $344 million for the nine months
ended September 30, 1997 to $309 million from the comparable period in 1996. The
reduction is primarily the result of financing activities that had occurred
during 1996 when the company issued approximately $750 million aggregate
principal amount of 8% Cumulative Quarterly Income Preferred Securities, Series
A and $800 million in aggregate principal amount of Senior Debentures and Notes
<PAGE>
PAGE 26
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
which did not recur in 1997. In addition, for the nine months ended September
30, 1997, the company repaid $259 million in debentures and other debt and
reduced treasury stock repurchases to $93 million from $522 million repurchased
in the year ago period . Offsetting these net proceeds was a net increase in
commercial paper issuance of $687 million.
CAPITAL RESOURCES AND LIQUIDITY
- - -------------------------------
For the nine months ended September 30, 1997, the company funded its capital
expenditures and its investment in the VDM businesses primarily through cash
from operations and commercial paper issuance. The company believes that it will
be able to meet its current and foreseeable liquidity and capital requirements
through its cash flows from operating activities and its existing debt
facilities. At September 30, 1997, the company had approximately $2.2 billion
available under its commercial bank program and bank credit facility. 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
fixed or variable rates. In addition, the company expects that its revolving
credit loan agreement expiring on April 28, 1998 will be renewed or similiar
financing will be obtained. On July 23, 1997, the company entered into a $500
million notional amount forward-starting swap agreement to hedge future debt
issuances a fixed interest rate of 6.71%.
EBITDA
- - ------
Reflecting the impact of the aforementioned actions and cost provisions,
Consolidated EBITDA decreased 18.2% to $2,427 million for the nine months ended
September 30, 1997 from $2,967 million for the year ago period primarily as a
result of the reduction in operating income for the nine months ended September
30, 1997. EBITDA, as defined by management, consists of earnings, excluding
equity in income (losses) of affiliates, other income (expense), net, and
distributions on subsidiary Trust mandatorily redeemable preferred securities,
before interest, income taxes, depreciation and amortization. EBITDA represents
a measure of the company's ability to generate cash flows and does not represent
net income or cash flows from operating, investing and financing activities as
defined by GAAP. EBITDA should be considered in addition to, but not as a
substitute for, or superior to, measures of financial performance reported in
accordance with GAAP. Analysts often use EBITDA when evaluating the performance
of the company. Readers are cautioned that the company's definition of EBITDA
may not be comparable to similarly titled measures used by other companies or
analysts.
<PAGE>
PAGE 27
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
FORM 10-Q
PART II. OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
<PAGE>
PAGE 28
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
FORM 10-Q
PART II. OTHER INFORMATION (continued)
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
a)Exhibits
Exhibit No. Description
- - ----------- -----------
11 Computation of Earnings per Common Share.
12 Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule as of September 30, 1997.
99(a) Capitalization Schedule as of September 30, 1997.
b)Reports on Form 8-K
The company filed two Current Reports on Form 8-K during the quarter. These
reports were file on July 14, 1997 and August 26, 1997.
<PAGE>
PAGE 29
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
FORM 10-Q
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MCI COMMUNICATIONS CORPORATION
Date: November 14, 1997 Signed: /s/ David M. Case
-----------------------
David M. Case
Vice President and Controller
<PAGE>
PAGE 30
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
FORM 10-Q
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
11 Computation of Earnings per Common Share.
12 Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule as of September 30, 1997.
99(a) Capitalization Schedule as of September 30, 1997.
Exhibit 11
-------------
(Page 1 of 2)
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
(In millions, except per share amounts)
(unaudited)
Three months Nine months
ended ended
September 30, September 30,
------------- -------------
1997 1996 1997 1996
Primary ---- ---- ---- ----
-------
Net income (loss) $(182) $304 $393 $899
==== ==== ==== ====
Adjustment of shares outstanding:
Weighted average shares of common stock
outstanding 695 685 690 688
Shares of common stock issuable upon the
assumed exercise of common stock
equivalents - 42 69 57
Shares of common stock assumed repurchased
for treasury(a) - (36) (54) (50)
---- ---- ---- ----
Adjusted shares of common stock and common
stock equivalents for computation 695 691 705 695
==== ==== ==== ====
Earnings (loss) per common and common
equivalent shares $(.26) $.44 $.56 $1.29
==== ==== ==== ====
(a) Loss per common shares for the three months ended September 30, 1997 is
computed without regard to shares of common stock issuable upon the assumed
exercise of common stock equivalents and shares of common stock assumed
repurchased for treasury due to their anti-dilutive effect. Shares of common
stock assumed repurchased for treasury for the nine months ended September 30,
1997 are at an average market price of $35.60. Shares of common stock assumed
repurchased for treasury are at an average market price of $25.74 and $27.63 for
the three and nine months ended September 30, 1996, respectively.
<PAGE>
Exhibit 11
-------------
(Page 2 of 2)
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
(In millions, except per share amounts)
(unaudited)
Three months Nine months
ended ended
September 30, September 30,
------------- -------------
1997 1996 1997 1996
Assuming Full Dilution ---- ---- ---- ----
- - ----------------------
Net income (loss) $(182) $304 $393 $899
==== ==== ==== ====
Adjustment of shares outstanding:
Weighted average shares of common stock
outstanding 695 685 690 688
Shares of common stock issuable upon the
assumed exercise of common stock
equivalents - 42 70 57
Shares of common stock assumed repurchased
for treasury(b) - (36) (54) (50)
----- ----- ----- -----
Adjusted shares of common stock and common
stock equivalents for computation 695 691 706 695
==== ==== ==== ====
Earnings (loss) per common and common
equivalent shares $(.26) $.44 $.56 $1.29
==== ==== ==== ====
(b) Loss per common shares for the three months ended September 30, 1997 is
computed without regard to shares of common stock issuable upon the assumed
exercise of common stock equivalents and shares of common stock assumed
repurchased for treasury due to their anti-dilutive effect. The nine months
ended September 30, 1997 average market price of $35.60 was used as it is higher
than the ending market price of $29.38. The three and nine months ended
September 30, 1996 average market prices of $25.74 and $27.63, respectively, was
used as they were higher than the ending market price of $25.63.
Exhibit 12
----------
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In millions, except ratio amounts)
(unaudited)
Nine Months Ended
September 30, Year Ended December 31,
---------------- -------------------------------------
1997 1996 1996 1995 1994 1993 1992
----- ----- ---- ---- ---- ---- ----
Earnings:
Income before
income taxes and
extraordinary item(a) $639 $1,469 $1,955 $ 897 $1,280 $1,045 $ 963
Add:
Fixed charges 423 333 460 344 315 315 346
Less:
Capitalized interest 115 79 118 93 78 61 52
------ ------ ------ ------ ------ ------ ------
Total earnings $947 $1,723 $2,297 $1,148 $1,517 $1,299 $1,257
====== ====== ====== ====== ====== ====== ======
Fixed Charges:
Fixed charges on
indebtedness,
including amortization
of debt discount and
premium(a) $ 334 $ 252 $ 349 $ 242 $ 231 $ 239 $ 270
Interest portion of
operating lease
rentals(b) 89 81 111 102 84 76 76
------ ------ ------ ------ ------ ------ -----
Total fixed charges $ 423 $ 333 $ 460 $ 344 $ 315 $ 315 $ 346
====== ====== ====== ====== ====== ====== =====
Ratio of earnings to
fixed charges 2.24 5.17 4.99 3.34 4.82 4.12 3.63
====== ====== ====== ====== ====== ====== ======
(a) Includes distributions on subsidiary Trust mandatorily redeemable
preferred securities.
(b) The interest portion of operating lease rentals is calculated as one third
of rent expense, which represents a reasonable approximation of the interest
factor.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet of MCI Communications Corporation and Subsidiaries at September 30, 1997
and the income statement for the nine months ended September 30, 1997 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000064079
<NAME> MCI Communications Corporation
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 139
<SECURITIES> 10
<RECEIVABLES> 3,561
<ALLOWANCES> 344
<INVENTORY> 0
<CURRENT-ASSETS> 893
<PP&E> 21,258
<DEPRECIATION> 7,475
<TOTAL-ASSETS> 24,717
<CURRENT-LIABILITIES> 7,327
<BONDS> 3,282
750
0
<COMMON> 74
<OTHER-SE> 11,247
<TOTAL-LIABILITY-AND-EQUITY> 24,717
<SALES> 0
<TOTAL-REVENUES> 14,545
<CGS> 0
<TOTAL-COSTS> 13,593
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 174
<INCOME-PRETAX> 684
<INCOME-TAX> (246)
<INCOME-CONTINUING> 393
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 393
<EPS-PRIMARY> 0.56
<EPS-DILUTED> 0.56
</TABLE>
Exhibit 99(a)
-------------
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CAPITALIZATION SCHEDULE
(In millions)
(unaudited)
Set forth below is the capitalization of the company as of September 30, 1997:
Debt(a):
Secured debt:
Capital lease obligations $ 420
Other secured obligations 55
--------
Total secured debt 475
--------
Unsecured debt:
Senior Notes, net 1,541
Senior Debentures, net 1,383
Commercial paper borrowings 1,741
Other unsecured debt 194
--------
Total unsecured debt 4,859
--------
Total debt $ 5,334
--------
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 560 million shares 60
Additional paid in capital 6,394
Retained earnings 5,607
Treasury stock, at cost, 37 million shares (754)
--------
Total stockholders' equity $ 11,321
--------
Total capitalization $ 17,405
========
(a) For additional information concerning the company's capital lease
obligations, which are obligations of subsidiaries of the company that are
guaranteed by the company, and for additional information concerning the
company's long-term debt, see Note 8 of Notes to Consolidated Financial
Statements on pages 19 and 20 of the company's Annual Report to Stockholders,
which is included in Exhibit 13 to the company's Annual Report on Form 10-K for
the year ended December 31, 1996. Interest rates on capital lease obligations,
on a weighted average basis, approximated 9.4% per annum at September 30, 1997.
(b) On May 29, 1996, MCI Capital I, a wholly-owned Delaware statutory business
trust (Trust), issued $750 million aggregate principal amount of 8% Cumulative
Quarterly Income Preferred Securities, Series A (preferred securities) due on
June 30, 2026. The Trust exists for the sole purpose of issuing the preferred
securities and investing the proceeds in the company's 8% Junior Subordinated
Deferrable Interest Debentures, Series A (Subordinated Debt Securities) due June
30, 2026.
