UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 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: 0-6457
MCI COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 52-0886267
(State of incorporation) (I.R.S. Employer 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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 par value per share
(Title of class)
8.00% Cumulative Quarterly Income Preferred Securities, Series A*
(Title of class)
- --------------------------
* Issued by MCI Capital I, a Delaware statutory business trust. The payment of
trust distributions and payments on liquidation or redemption are guaranteed
under certain circumstances by MCI Communications Corporation. MCI
Communications Corporation is the owner of 100% of the common securities issued
by MCI Capital I.
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, and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ ]
The aggregate market value of the voting stock of registrant, which includes the
Common Stock and Class A Common Stock, held by non-affiliates was
$32,812,112,363 at February 2, 1998, based upon the closing price of the Common
Stock on that date.
As of January 20, 1998, registrant had outstanding 571,230,935 shares of Common
Stock and 135,998,932 shares of Class A Common Stock.
Documents Incorporated by Reference:
Portions of the Annual Report to Stockholders for the year ended December 31,
1997 - Part II.
Portions of the Proxy Statement for the Special Meeting of Stockholders dated
January 22, 1998 - Part III.
<PAGE>
PAGE 2
Forward-looking Statements May Prove Inaccurate
MCI has made certain forward-looking statements in this Annual Report
on Form 10-K 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 those of MCI
WorldCom, Inc. ("MCI WorldCom") after the proposed merger with WorldCom, Inc.
("WorldCom") 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 important factors such as the
following, in addition to those contained elsewhere in this Annual Report on
Form 10-K, could affect the future results of the company, its long-distance
telecommunication services and VDM businesses and those of MCI WorldCom after
the proposed merger with WorldCom and could cause those results to differ
materially from those expressed in the forward-looking statements: material
adverse changes in the economic conditions in the markets served by the company
and MCI WorldCom; a significant delay in the expected closing of the proposed
merger with WorldCom; future regulatory actions and conditions in the company's
and MCI WorldCom's operating areas, including the ability of the company to
implement its local strategy and obtain local facilities at competitive rates;
the ability to pass on additional charges imposed by the Federal Communications
Commission ("FCC"); competition from others in the United States ("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.; the cost of the company's year 2000 compliance efforts; and the
effect of future technological changes on its business.
<PAGE>
PAGE 3
PART I
Item 1. Business
GENERAL
- -------
MCI* is one of the world's leading providers of communication services. It
is the second largest carrier of long-distance telecommunication services in the
U.S. and the second largest carrier of international long-distance
telecommunication services in the world. On November 9, 1997, MCI entered into
an agreement to merge with WorldCom which will be consummated upon receipt of
the necessary regulatory approvals (see "The Merger" below for a more detailed
discussion).
MCI provides a broad range of communication services, including
long-distance telecommunication services, local and wireless services,
data/Internet/intranet services and information technology and outsourcing
services. The provision of long- distance telecommunication services is MCI's
core business. Long- distance telecommunication services comprise a wide
spectrum of domestic and international voice and data services, including
long-distance telephone services, data communication services and
teleconferencing services. During each of the last three years, more than 90% of
MCI's operating revenues and operating income were derived from its core
business.
The communication services industry continues to change both domestically
and internationally, providing significant opportunities and risks to the
participants in these markets. In the U.S., the Telecommunications Act of 1996
(the "Telecom Act") is expected to have a significant impact on MCI's business
by opening the U.S. local service markets to competition and allowing the RBOCs
to compete in the long-distance market. However, challenges to the orders issued
by the FCC pursuant to the Telecom Act have delayed the anticipated opening of
the local markets to effective competition. Internationally, in February 1997,
72 member countries, including the U.S., of the World Trade Organization ("WTO")
entered into an agreement (the "WTO Agreement")
- --------
* MCI conducts its business primarily through subsidiaries. Unless the context
otherwise requires, "MCI" or "company" means MCI Communications Corporation, a
Delaware corporation organized in August 1968, and its subsidiaries on a
consolidated basis. MCI is a registered service mark of MCI Communications
Corporation. MCI has its principal executive offices at 1801 Pennsylvania
Avenue, N.W., Washington, D.C. 20006 (telephone number (202) 872-1600).
<PAGE>
PAGE 4
to open their respective markets, some of which are monopoly controlled, to
foreign competition.
The changes in the communication services industry are driven by providers
of telecommunication services, such as MCI, that are entering, or trying to
enter, new markets, both domestically and internationally. MCI, as well as other
telecommunication service providers previously offering services primarily in
one segment of the communication services market, are now offering, either
directly or through alliances with others, new services to complement their
primary service offerings. The offering of these new complementary services,
facilitated by evolving technology and by the regulatory developments described
above, is meant to meet the needs of customers who desire to have most or all of
their communication requirements fulfilled by one supplier. The ability of
companies, such as MCI, to be that single supplier may result in the convergence
of the international, domestic long-distance and local telecommunication service
markets into one global market.
MCI expects that competition from the RBOCs and any others that enter the
long-distance telecommunication services market, some of which have significant
financial and other resources, will be intense. Due to the rapidly changing
nature of these markets, the advances being made in communications technology,
the timing of the consummation of the proposed merger with WorldCom and the
other factors summarized above, MCI cannot predict the level of its future
success, but the company believes that it can and will compete effectively in
providing its services.
MCI anticipates that continued substantial capital expenditures will be
required to compete effectively in the long-distance and local telecommunication
service markets. MCI continues to expand its digital transmission and switching
facilities and capabilities to meet the requirements of its customers for
additional and enhanced domestic and international services, to add redundancy
to its network and to enhance network intelligence, which enables MCI to utilize
its transmission resources more effectively and provide enhanced services. Total
capital expenditures for these expansions were approximately $3.8 billion in
1997, $3.3 billion in 1996 and $2.9 billion in 1995. MCI anticipates that its
core business and its ventures and developing markets business units will
require total capital expenditures of approximately $3.3 billion in 1998.
In 1997, the company developed and began to implement its plan to become
Year 2000 compliant by the year 2000. The plan includes (i) an inventory of the
company's internal systems and applications for year 2000 compliance, (ii)
solicitation of its outside vendors, suppliers and major customers, including,
but not limited to, each of the RBOCs, major communications equipment vendors
and foreign PTTs, to determine the level of and plans for their year 2000
<PAGE>
PAGE 5
compliance, (iii) development of necessary conversion programs, (iv) replacing
or upgrading non-compliant equipment, (v) conversion of systems, and (vi)
testing.
The company expects to incur approximately $400 million of expenses over
the next two years to implement its Year 2000 plan. The company expects to be
Year 2000 compliant on or before December 31, 1999.
As of December 31, 1997, MCI had approximately 60,000 full-time employees.
The Merger
----------
On November 9, 1997, MCI entered into an agreement (the "Merger Agreement")
to merge with WorldCom to create a fully integrated global communications
company. The combined company will be named MCI WorldCom and will provide a
complete range of local, long- distance, data/Internet/intranet and
international communications services.
On March 11, 1998, the stockholders of MCI and WorldCom approved the
Merger. Consummation of the Merger is also subject to certain conditions,
including the receipt of required regulatory approvals. See MCI's Proxy
Statement for its 1998 Special Meeting for a full description of the Merger and
the risks and benefits of the Merger, which description is incorporated herein
by reference.
Concurrent with the Merger Agreement, the Company, WorldCom and British
Telecommunications plc ("BT") entered into an agreement (the "Termination
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 connection with the plan of
reorganization 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 agreed to
exercise its call option to acquire MCI's shares in Concert Communications
Company immediately following the effective time of the Merger.
MCI believes MCI WorldCom, with the combined resources of MCI and WorldCom,
will be able to expand into new markets, offer new services and compete more
effectively in the local services market faster than MCI would have on a
standalone basis. See "CORE BUSINESS - COMPETITION" and "CORE BUSINESS
REGULATION" below for a further discussion of the Telecom Act and its
anticipated impact on competition and MCI.
<PAGE>
PAGE 6
CORE BUSINESS
- -------------
Services
--------
MCI provides a wide range of long-distance telecommunication services,
including: basic long-distance telephone service; dial around; collect calling,
operator assistance and calling card services (including prepaid calling cards);
toll free or 800 services; and 900 services. MCI also provides a wide range of
basic and enhanced voice and data services, including private line services;
voice and data services provided over software-defined virtual private networks;
switched and dedicated Internet access services and Internet backbone services.
The company offers these services individually and in combinations. Through
combined offerings, MCI provides customers with benefits such as single billing,
unified services for multi-location companies and customized calling plans.
MCI markets domestic and international long-distance telecommunication,
domestic data telecommunication and electronic messaging services to business,
government and residential customers primarily through the sales organization of
its long- distance telecommunication subsidiary, MCI Telecommunications
Corporation ("MCIT"). International data telecommunication and electronic
messaging services are marketed through MCI International, Inc., a wholly-owned
subsidiary of MCI. To a lesser extent, MCI also markets its voice and data
communication services domestically and internationally through arrangements
with third parties.
System
------
Domestic long-distance services are provided primarily over MCI's own
optical fiber and terrestrial digital microwave communication systems and, to a
lesser extent, over transmission facilities leased from other common carriers,
utilizing MCI's digital switches. International communication services are
provided by submarine cable systems in which MCI holds investment positions,
satellites and facilities of other domestic and foreign carriers.
<PAGE>
PAGE 7
Local Access
------------
MCI provides customers that utilize large volumes of long- distance
telecommunication services with direct access to its long- distance network.
Most customers access MCI's services through local interconnection facilities
provided by the incumbent local exchange carriers ("ILECs"), the largest of
which are subsidiaries of the RBOCs, and competitive local exchange carriers
("CLECs"). To a much lesser extent, local access is provided by MCI. The costs
of these local interconnection facilities are a significant component of MCI's
operating expenses. See "REGULATION" below for a discussion of the impact on
local access costs MCI anticipates from the Telecom Act and the FCC rules
relating thereto.
Competition
-----------
MCI's primary and most vigorous competitor in the domestic and
international long-distance telecommunication services market continues to be
AT&T Corp. ("AT&T"), which has substantial capital and other financial
resources. Other competitors include Sprint Corporation ("Sprint"), other
facilities-based domestic telecommunication common carriers and numerous
resellers of long- distance telecommunication services. MCI also competes with
RBOCs, which provide toll telecommunication services within local access
transport areas ("LATA"), and with ILECs that provide toll telecommunication
services.
MCI believes that the RBOCs will eventually become substantial competitors
of MCI for interLATA long-distance telecommunication services, especially in
their local service regions when allowed to offer such services pursuant to the
Telecom Act. (See "REGULATION - Telecom Act" below.) This is due to the RBOCs
ownership of extensive facilities in their local service regions, their
long-standing customer relationships and very substantial capital and other
financial resources. MCI expects to compete effectively against the RBOCs as a
result of MCI's innovation in, and quality of, services, the diversity of its
services, its ability to offer a combination of services, its marketing strategy
and customer service. However, MCI expects that the RBOCs' ability to provide
interLATA long-distance telecommunications services in their local regions will
result in certain additional pricing and margin pressures.
The telecommunications industry is also in a period of rapid technological
evolution, marked by the introduction of new product and service offerings and
increasing satellite and fiber optic transmission capacity for services similar
to those provided by
<PAGE>
PAGE 8
MCI. MCI may be subject to additional competition as a result of the development
of new technologies and increased availability of domestic and international
transmission capacity. Even though fiber optic networks, such as that of MCI,
are now widely used for long-distance transmission, it is possible that the
competitiveness of such networks could be adversely affected by changing
technology.
MCI cannot predict which of many possible future product and service
offerings will be important to maintain its competitive position or what
expenditures will be required to develop and provide such products and services
or the impact these expenditures and the pricing pressures expected from
competing with the RBOCs will have on its consolidated financial position or
results of operations.
REGULATION
- ----------
General
-------
MCI is subject to varying degrees of federal, state, local and
international regulation. In the United States, the FCC has extensive authority
to regulate interstate services and local access facilities and services
provided by common carriers, including the power to review the interstate rates
charged by carriers and to establish policies that promote competition for
interstate telecommunication services. However, MCI is not currently required to
obtain FCC authorization for installation or operation of its network facilities
used for domestic services, other than licenses for specific terrestrial
microwave and satellite earth station facilities which utilize radio frequency
spectrum. FCC approval is required, however, for the installation and operation
of international facilities and services.
At the state level, MCI must be separately certified in each state to offer
local exchange and intrastate long-distance services. No state, however,
subjects MCI to price cap or rate of return regulation. MCI is also subject to
varying degrees of regulation in the foreign jurisdictions in which it conducts
business, including authorization for the installation and operation of network
facilities.
<PAGE>
PAGE 9
Telecom Act
-----------
The Telecom Act, among other things, permits the RBOCs to provide domestic
and international long-distance services to customers located outside of the
RBOCs' home regions. It also permits an RBOC to provide domestic and
international long-distance service originating within states in its region upon
a finding by the FCC that the RBOC has satisfied certain criteria for opening up
its local exchange network to competition and that its provision of
long-distance services would further the public interest; and removes existing
barriers to entry into local service markets. Additionally, the Telecom Act
changes the manner in which certain interconnection agreements between ILECs and
carriers are negotiated, arbitrated and approved; provides procedures to revise
universal service standards; and imposes penalties for unauthorized switching of
customers.
In implementing the Telecom Act, the FCC issued an order establishing
nationwide rules designed to encourage new entrants to participate in the local
services markets through interconnection with ILECs, resale of ILECs' retail
services, and use of individual and combinations of unbundled network elements.
These rules set the groundwork for the statutory criteria governing RBOC entry
into the long-distance telecommunications market. The FCC order was appealed to
the Eighth Circuit, which, among other things, vacated all of the FCC's
nationwide pricing rules and the FCC's requirement that unbundled network
elements be provided on a combined basis. The United States Supreme Court has
granted certiorari to review the decision.
Pursuant to the Telecom Act, the FCC has denied four applications filed by
three of the RBOCs seeking authority to provide in-region interLATA
long-distance telecommunication service. Three of the denials have been
appealed. Certain RBOCs have also raised a constitutional challenge to the
provision of the Telecom Act that grants the FCC the authority to deny these
applications and restricts RBOC provision of interLATA long- distance
telecommunication services in their local regions. On December 31, 1997, the
United States District Court for the Northern District of Texas ruled that this
restriction violates the Bill of Attainder Clause of the U.S. Constitution. The
District Court subsequently stayed its decision pending appeal.
The Telecom Act also provided for the FCC to review and implement reforms
to the Universal Service subsidies which, among other things, allow consumers in
rural or other high cost areas access to telecommunication and information
services at rates comparable to those charged in urban areas. The access charges
that MCI pays to ILECs have been set at levels intended to provide
<PAGE>
PAGE 10
Universal Service subsidies; such access charges are a principal component of
MCI's telecommunication expense. On May 7, 1997, the FCC announced that it will
issue a series of orders that will reform Universal Service subsidy allocations
and adopted various reforms to the existing rate structure for interstate access
services provided by the ILECs that are designed to reduce access charges, over
time, to more economically efficient levels and rate structures. These actions
have been appealed by the ILECs to federal courts of appeals. In addition,
several state agencies have started proceedings to address the reallocation of
implicit subsidies contained in the access rates and retail service rates to
state Universal Service funds.
International
-------------
MCI offers its international public switched voice services through
arrangements with foreign public utility authorities and is compensated based on
traditional settlement rates and proportionate return regimes. In December 1996,
the FCC adopted a new policy that makes it easier for U.S. international
carriers to obtain authority to route international public switched voice
traffic to and from the United States outside of the traditional settlement rate
and proportionate return regimes. In February 1997, the United States entered
into the WTO Agreement that contemplates liberalizing the provision of switched
voice telephone and other telecommunication services in scores of foreign
countries over the next several years. In November 1997, in order to comply with
U.S. commitments to the WTO Agreement, the FCC adopted new rules, effective as
of February 9, 1998, that liberalize existing policies regarding (i) the
services that may be provided in the U.S. by certain carriers affiliated with
foreign carriers and the rates to be charged for international switched voice
services; and (ii) the provision of international switched voice services
outside of the traditional settlement rate and proportionate return regimes.
In August 1997, the FCC adopted lower mandatory settlement rate benchmarks
to attempt to reduce the rates that U.S. carriers pay foreign carriers to
terminate traffic in their home countries. The FCC also adopted rules to
encourage foreign carriers and WTO member countries to reduce the settlement
rates below the benchmarks.
MCI cannot predict the ultimate outcome of the challenges to the orders
issued by the FCC pursuant to the Telecom Act. Nor can it predict whether the
resolution of these challenges, the implementation of the Telecom Act or any
further legislation, regulation or regulatory changes, whether domestic or
international, will have a material impact on its consolidated financial
position or results of operations or will facilitate MCI's entry into new
markets.
<PAGE>
PAGE 11
VENTURES AND DEVELOPING MARKETS BUSINESS
- ----------------------------------------
MCI has diversified the communication services it offers through
investments in ventures and developing markets businesses. This diversification
enables MCI to meet more of the communications needs of its customers and to
take advantage of developing opportunities in the communication services market.
See Item 6. Management's Discussion and Analysis and "VENTURES AND DEVELOPING
MARKETS BUSINESS" below for information of the financial operations of the VDM
business.
Local Services
--------------
Through either its own local city networks or through arrangements with the
ILECs and CLECs for special access and switched access services, MCI provides
businesses and governments with high quality dedicated access to the MCI
network. As of December 31, 1997, MCI had been granted authority to offer a full
range of local switched services in 42 states and had applications pending for
such services in 7 other states. MCI has 80 operational local city networks and
provides facilities-based switched local services in 31 markets. MCI intends to
offer such local services in over 100 U.S. markets after completion of the
Merger. To a limited extent, MCI resells local services to customers in several
states in the U.S.
Although the Telecom Act requires ILECs to provide interconnection and
access to its local networks and to provide for resale of its local services on
reasonable and nondiscriminatory terms, MCI does not know if this requirement
will be met. This uncertainty is increased due to the rulings of the Eighth
Circuit on actions taken by the FCC to implement the Telecom Act. See
"REGULATION - Telecom Act" above. The pace at which local services will be made
available for resale and at which network elements will be made available on
reasonable and nondiscriminatory terms, the prices at which MCI can purchase
such services from the ILEC and the amount of capital available to MCI to expand
its local facilities will affect the types of local services MCI can offer and
its ability to compete with the ILECs in providing local telecommunications
services. MCI announced in 1998 that the resale of ILEC services is not
profitable and that it will focus on providing facilities based local services
to its customers.
The ILECs have very substantial capital and other resources, long standing
customer relationships and extensive existing facilities and network
rights-of-way and are MCI's primary
<PAGE>
PAGE 12
competitors in the local services market. In addition, it is anticipated that a
number of long-distance telecommunication, wireless and cable service providers
and others will enter the local services market in competition with MCI. Some of
these potential competitors have substantial financial and other resources. MCI
will also compete in the local services market with a number of other CLECs, a
few of which have existing local networks and significant financial resources.
To the extent MCI and others provide intrastate local services, they are
also subject to regulation by state regulatory commissions, which have extensive
authority to regulate the provision of local services. MCI is required to file
tariffs as a competitive local exchange carrier. Those filing requirements may
be less restrictive than those imposed on the ILECs.
Wireless Services
-----------------
Through the acquisition in September 1995 of Nationwide Cellular Service,
Inc. ("Nationwide"), a reseller of cellular phone services and a retailer of
cellular phone equipment, and, as a result of the execution of resale agreements
with facilities-based cellular telephone service providers, MCI has the
capability to offer cellular telephone services obtained from facilities based
providers to a substantial portion of the U.S. population.
MCI markets these services to both business and residential customers
through the former Nationwide's sales organization and stores and MCIT's sales
organization. In 1997, the company focused on providing wireless services as
part of a total communications services package rather than as standalone
offerings.
MCI's primary competitors in the wireless market are AT&T Wireless
Services, Airtouch Communications, Inc., Ameritech, Bell Atlantic NYNEX Mobile,
GTE, SBC and Sprint, all of which provide wireless services over their own
facilities. As MCI is not a facilities based wireless operator, its ability to
be competitive depends on the terms and conditions under which it obtains
services and its ability to renew on satisfactory terms its resale agreements.
Competition is expected to intensify as the winning bidders in the Personal
Communication System spectrum auctions offer competing services.
As a wireless reseller, MCI is not subject to any tariffing or licensing
requirements by the FCC or state regulatory agencies.
<PAGE>
PAGE 13
Information Technology Services
-------------------------------
MCI's information technology ("IT") services primarily consist of
outsourcing, IT consulting, systems integration, private network management,
technology deployment and applications and systems development. IT services
generally involve the use of technology, know-how and methodologies to gather,
collate, analyze, record, characterize, categorize, process, generate,
distribute and/or store information for end-users. In addition to IT services,
MCI offers call center services, which include technical help desk services,
customer services, telesales, call center consulting and implementation, call
center network integration services, and software/database application
development.
MCI offers IT services to commercial and government enterprises through SHL
Systemhouse Co., acquired by MCI in November 1995. MCI's IT services include the
design, development and implementation of IT systems with an emphasis on
client/server technologies; the management, operation and maintenance of client
IT functions as part of outsourcing arrangements; and the delivery and
installation of IT hardware and software.
MCI serves its IT clients by (i) working with a client to analyze its IT
needs and, based on this analysis, designing, developing and implementing an
integrated client/server IT system; (ii) providing systems operations and
management services for a broad range of computing platforms, including
mainframe, mid-range computers, personal computer and network environments, such
as local-area networks and wide-area networks; and (iii) assessing a client's
computing platform and network requirements and then configuring, delivering,
installing and testing the needed hardware and software products to meet such
requirements. MCI also offers service for IT products and training and education
of client IT users.
Competitors in the IT business include Andersen Consulting, Computer
Sciences Corporation, Electronic Data Systems Corporation and International
Business Machines Corporation, all of which have substantial financial and other
resources. MCI derives a material amount of its IT revenues from a small number
of customers. In addition, MCI faces competition in the IT industry not only for
contracts, but also for personnel. There is a shortage of skilled employees and
a high turnover rate among skilled employees in the client/server portion of the
IT business.
<PAGE>
PAGE 14
International Services
----------------------
MCI continues to develop global alliances to expand the use and reach of
its services and to meet the global needs of its customers.
On March 9, 1998, MCI entered into a strategic alliance with Telefonica de
Espana ("Telefonica") and WorldCom to create strategic business ventures which
will enter the telecommunication markets in Europe and the Americas. As part of
the alliance, MCI and Telefonica's international unit, T.I. Telefonica
Internacional de Espana S.A., amended their Pan-American Joint Venture Agreement
entered into last year. The joint venture was formed to target the fast growing
Latin American communications market, and to establish a state-of-the-art Pan
American network to provide customers a portfolio of integrated communications
services.
AVANTEL S.A. de C.V. ("AVANTEL") is a business venture between Grupo
Financiero Banamex-Accival, Mexico's largest financial group, and MCI, in which
MCI owns a 44.5% equity interest. AVANTEL built Mexico's first all-digital
fiber-optic network. In 1996, AVANTEL became the first company to provide
alternative long-distance telecommunication service in Mexico in competition
with Telefonos de Mexico ("TelMex"). TelMex, the former monopoly
telecommunications provider, is AVANTEL's primary competitor. TelMex's financial
and other resources are substantially greater than AVANTEL's, and it has an
extensive existing customer base.
Concert Communications Company ("Concert"), is a business venture between
MCI and BT in which MCI owns a 24.9% equity interest. Concert*** provides global
enhanced and value-added telecommunication services, such as packet data,
virtual network, frame relay and managed bandwidth services. MCI is the
exclusive distributor of Concert services in North, Central and South America,
and BT is the exclusive distributor of Concert services in the rest of the
world.
Pursuant to the Termination Agreement, BT has agreed to exercise its call
option to acquire MCI's shares in Concert immediately following the effective
time of the Merger at a value to be mutually agreed to by MCI and BT or, absent
such agreement, by an independent investment bank. Upon purchase of MCI's
interest in Concert by BT, MCI will no longer be an exclusive distributor of
Concert services and will no longer be bound by the territorial restrictions
affecting international enhanced services. However,
- --------
*** Concert is a mark of Concert Communications Company, a business venture
between MCI and BT, and is used under license.
<PAGE>
PAGE 15
MCI will be able to continue to provide Concert services on a non- exclusive
basis to customers in the U.S. for a period of at least two years and as many as
five years.
AT&T and Sprint have each formed global alliances that compete with Concert
and will compete with the international enhanced service offerings of MCI
WorldCom. AT&T's WorldPartners is an association of member companies formed in
1993 to provide a family of telecommunication services (private line, frame
relay and virtual network services) to multinational customers. Members of the
association include AT&T, KDD of Japan, Singapore Telecom, Telstra of Australia,
Telecom New Zealand, Hong Kong Telecom, Unitel of Canada, Korea Telecom and the
members of Unisource (which include Royal PTT Netherlands NV, Telia AB and
Schweizerische PTT - Betriebe). Sprint, France Telecom ("FT") and Deutsche
Telekom ("DT") have formed Global One, a global partnership which offers an
array of international telecommunication services to multinational business
customers. As part of the transaction, FT and DT each acquired 10% of Sprint's
common stock.
In 1992, MCI entered into a strategic alliance with Stentor, an alliance of
major Canadian telephone companies, to develop a fully integrated intelligent
network linking the U.S. and Canada. In 1995, Stentor entered into an agreement
with MCI to become the exclusive distributor of Concert services in Canada. The
Stentor alliance and the AVANTEL joint venture will facilitate the development
of a fully integrated, seamless North American network capable of providing
services with identical features to customers throughout the U.S., Canada and
Mexico.
In addition, MCI owns minority equity interests in telecommunication
service providers in Portugal, New Zealand and Belize and is exploring
opportunities in Central and South America and other areas of the world.
Multimedia Services
-------------------
In 1995 and 1996, MCI invested a total of $1.35 billion in The News
Corporation Limited ("News Corp"). In May 1997, MCI and News Corp entered into
an agreement to form a Direct Broadcast Satellite ("DBS") joint venture in which
MCI would hold a 19.9% interest with the stated intention of seeking a third
party to acquire their combined interest.
DBS service is a point-to-multipoint service that uses high- powered KU
band satellites which are placed in a geosynchronous orbit. DBS service is
capable of delivering a wide range of services, such as subscription television,
pay-per-view services,
<PAGE>
PAGE 16
such as movies, concerts and sporting events, and digitized content, such as
magazines.
The DBS license, awarded by the FCC to MCI in December 1996 for $682.5
million, granted MCI the right to use 28 of 32 channels in the satellite slot
located at 110 degrees west longitude, which provides coverage to all fifty
states in the U.S. and Puerto Rico.
In June 1997, MCI and News Corp entered into an agreement with Primestar
Partners, L.P. ("Primestar") for the sale of substantially all of their assets
related 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, MCI will acquire preferred shares
in a subsidiary of News Corp for a face amount equal to MCI's cost of obtaining
the FCC license plus interest thereon. MCI will also receive from Primestar
consideration in the form of cash and interest bearing non-voting New Primestar
securities for its 19.9% interest in the DBS joint venture. The transaction is
subject to regulatory approvals, including approval by the FCC of MCI's transfer
of the DBS license to New Primestar and approval by the Department of Justice.
Competition in the DBS service market will arise from three sources:
existing and future DBS service providers, including, two RBOCs which have
formed an alliance with a DBS service provider; medium-power satellite video
service providers; and cable companies that operate land based facilities. These
competitors have substantial financial resources, existing customer bases and
experienced marketing organizations. In addition, it is anticipated that
long-distance telecommunication service providers and other RBOCs may seek to
form alliances with DBS service or other multimedia service providers and
compete in this market using terrestrial or satellite-based technologies, such
as KA band satellite, digital broadcast spectrum and Local Multipoint Delivery
Service.
<PAGE>
PAGE 17
Item 2. Properties.
- -------------------
MCI leases, under long-term leases, portions of railroad, utility and other
rights-of-way for the fiber-optic transmission system used in its long-distance
network. MCI also has numerous tower sites, generally in rural areas, to serve
as repeater stations in its domestic microwave transmission system. Most of
these sites are leased, although MCI does own many of those which are at an
intersection of two or more routes of MCI's transmission system. Generally, MCI
owns the buildings that serve as switch facilities for the transmission system.
In metropolitan areas, MCI leases facilities to serve as operations facilities
for its transmission systems.
MCI's local services network consists of a fiber optic transmission network
consisting of lighted (currently used) and dark (not currently used) fibers
which are either owned or leased under long-term leases. These fibers are
located in conduits, which are either owned or leased under long-term leases.
MCI supplements its local services network with transmission capacity leased
from other carriers under long-term leases. MCI also leases, under long-term
leases, the buildings that house its Class 5 switches and other network and
administrative office space.
In addition, MCI leases, under long-term leases, office space to serve as
sales office and/or administrative facilities. Some of these facilities are
located jointly with operations facilities. In addition, MCI owns its
headquarters building in Washington, D.C. and two buildings in a suburb of
Washington, D.C., as well as administrative facilities in Cary, North Carolina;
Cedar Rapids, Iowa; Colorado Springs, Colorado; Piscataway, New Jersey; and
Richardson, Texas.
Item 3. Legal Proceedings.
- ---------------------------
Information regarding contingencies and legal proceedings is included in
Note 14 of the Notes to Consolidated Financial Statements in the company's
Annual Report to Stockholders for the year ended December 31, 1997, which is
incorporated herein by reference to Exhibit 13 to this Annual Report on Form
10-K.
Item 4. Submission of Matters to a Vote of Security Holders.
- -------------------------------------------------------------
None.
<PAGE>
PAGE 18
PART II
Item 5. Market for Registrant's Common Equity and Related
- ----------------------------------------------------------
Stockholder Matters.
- -------------------
MCI Common Stock is traded on the NASDAQ National Market. The tables below
set forth the high and low bid prices of the Common Stock as reported for the
periods indicated.
1997
HIGH LOW
-------- ---------
4th Quarter $45.00 $33.13
3rd Quarter 43.38 27.31
2nd Quarter 41.88 35.63
1st Quarter 38.75 32.38
1996
HIGH LOW
-------- ---------
4th Quarter $33.88 $23.88
3rd Quarter 28.13 22.38
2nd Quarter 30.38 24.88
1st Quarter 31.13 25.63
MCI paid cash dividends of $.025 per share of Common Stock in July and
December of 1997 and 1996 and an equivalent cash dividend on the shares of Class
A Common Stock.
At January 20, 1998, there were 44,754 holders of record of MCI's Common
Stock and 1 holder of record of MCI's Class A Common Stock.
<PAGE>
PAGE 19
Recent Sales of Unregistered Securities
- ---------------------------------------
On June 30, 1995, as part of the merger consideration under the Agreement and
Plan of Merger among Darome Teleconferencing, Inc., MCI and MCIT, MCI issued
793,297 shares of MCI Common Stock, par value $.10 per share, with an aggregate
value of approximately $16,000,000 or approximately $20.17 per share, to the
shareholders of Darome Teleconferencing, Inc. MCI claims exemption from
registration of the shares under Section 4(2) of the Securities Act of 1933, as
amended.
Items 6 through 8.
- -----------------
The information required by these items is included in the company's Annual
Report to Stockholders for the year ended December 31, 1997, which information
is filed as Exhibit 13 to this Annual Report on Form 10-K and is incorporated
herein by reference.
Item 9. Change in and Disagreements with Accountants on
- --------------------------------------------------------
Accounting and Financial Disclosure.
- ------------------------------------
None.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.]
<PAGE>
PAGE 20
PART III
Item 10. Directors and Executive Officers.
- ------------------------------------------
Executive Officers of the Registrant.*
------------------------------------
The executive officers of MCI, including its subsidiaries, are elected
annually and serve at the pleasure of the respective board of directors. They
are:
Name Age* Position**
Bert C. Roberts, Jr. 55 Chairman of the Board,
Director
Gerald H. Taylor 56 Chief Executive Officer, Director
Timothy F. Price 44 President and
Chief Operating Officer
Seth D. Blumenfeld 57 President,
MCI International, Inc.
John W. Gerdelman 45 Executive Vice President,
MCI Telecommunications Corporation
Douglas L. Maine 49 Executive Vice President and
Chief Financial Officer
Scott B. Ross 46 Director, SHL Systemhouse Co.,
Director, President and Chief
Operating Officer, MCI Systemhouse
Corp.
Michael J. Rowny 47 Executive Vice President
Michael H. Salsbury 48 Executive Vice President and
General Counsel
David M. Case 42 Vice President and Controller
- --------------------
* As of March 1, 1998.
** Unless otherwise indicated, the position is with MCI
Communications Corporation.
<PAGE>
PAGE 21
Mr. Roberts has been Chairman of the Board of MCI since June 1992. He was
Chief Executive Officer of MCI from December 1991 to November 1996. He was
President and Chief Operating Officer of MCI from October 1985 to June 1992 and
President of MCI Telecommunications Corporation ("MCIT") from May 1983 to June
1992. Mr. Roberts has been a director of MCI since 1985; a non-executive
director of Telefonica de Espana, a telecommunications company located in Spain,
since March 1998; a non-executive director of The News Corporation Limited, a
global multi-media company located in Australia, since November 1995; and was a
non- executive director of British Telecommunications plc ("BT"), a global
telecommunications provider which has an approximate 20% equity interest in MCI,
from October 1994 to March 1998.
Mr. Taylor has been Chief Executive Officer of MCI since November 1996. He
has been Vice Chairman of MCIT since July 1995. He was President and Chief
Operating Officer of MCI from July 1994 to November 1996 and President and Chief
Operating Officer of MCIT from April 1994 to July 1995. He was an Executive Vice
President and Group Executive of MCIT from September 1993 to April 1994. He was
an Executive Vice President of MCIT, serving as President, Consumer Markets,
from November 1990 to September 1993. Mr. Taylor has been a director of MCI
since September 1994 and was a non- executive director of BT from November 1996
to November 1997.
Mr. Price has been President and Chief Operating Officer of MCI since
November 1996. He has been President and Chief Operating Officer of MCIT since
July 1995. He was an Executive Vice President and Group President of MCIT,
serving as Group President, Communication Services, from December 1994 to July
1995. He was an Executive Vice President of MCIT, serving as President, Business
Markets, from June 1993 to December 1994. He was a Senior Vice President of MCIT
from November 1990 to June 1993, serving as President, Business Services, from
July 1992 to June 1993 and as Senior Vice President, Consumer Markets, from
November 1990 to July 1992.
Mr. Blumenfeld was President of MCI International, Inc., from August 1983
to July 1993. He was Executive Vice President and Group Executive of MCIT from
July 1993 to September 1994 and has been President of MCI International, Inc.
since September 1994.
<PAGE>
PAGE 22
Mr. Gerdelman has been an Executive Vice President of MCIT, serving as
President, networkMCI Services, since October 1994. He was a Senior Vice
President of MCIT from August 1992 to October 1994. From July 1991 to August
1992, he was President and Chief Executive Officer of MCI Services Marketing,
Inc., a company that provided telemarketing services to, and in which a 51%
equity interest was held by, MCIT. Since July 1994, Mr. Gerdelman has been a
director of General Communication, Inc. ("GCI"), a telecommunications provider
in Alaska, of which MCIT owns approximately 22% of the outstanding shares of
Class A Common Stock and approximately 31% of the outstanding shares of Class B
Common Stock.
Mr. Maine has been an Executive Vice President of MCI since April 1994. Mr.
Maine has been Chief Financial Officer of MCI since February 1992. He was a
Senior Vice President of MCI from September 1988 to April 1994. From November
1990 to February 1992, he was a Senior Vice President of MCIT, serving as
President of the Southern Division.
Mr. Ross has been President and Chief Operating Officer of MCI Systemhouse
Corp. since September 1995. He was an Executive Vice President of MCIT, serving
as President, Finance and Business Operations, from August 1995 to March 1996
and as President, Business Markets, from December 1994 to August 1995. He was a
Senior Vice President of MCIT from September 1993 to December 1994 and a Vice
President of MCIT for more that 5 years prior thereto.
Mr. Rowny has been an Executive Vice President of MCI since April 1995 and
an Executive Vice President of MCIT since June 1994, serving as Executive Vice
President, Ventures and Alliances. He was President of MJR Enterprises, a
consulting company, from April 1994 to June 1994; Executive Vice President and
Chief Financial Officer and a director of ICF Kaiser International, Inc., an
environmental and engineering services company, from April 1992 to April 1994;
and Chairman and Chief Executive Officer of Ransohoff Company, a manufacturer of
environmental and industrial equipment, from November 1989 to April 1992.
Mr. Salsbury has been Executive Vice President and General Counsel of MCI
since November 1995. He was a partner in the law firm of Jenner & Block for more
than five years prior thereto.
Mr. Case has been Vice President and Controller of MCI since September 1995
and a Vice President of MCIT since October 1993. For more than five years prior
thereto, he served MCIT in various management capacities.
<PAGE>
PAGE 23
Directors of the Registrant
- ---------------------------
(as of December 31, 1997)
Stock ownership of the directors, and related footnotes, is incorporated into
this Annual Report on Form 10-K by reference to pages 131 and 132 of the
registrant's Proxy Statement for the Special Meeting of Stockholders dated
January 22, 1998.
Clifford L. Alexander, Jr. (64)(A)(N) 1982
President of Alexander & Associates, Inc., management consultants, since 1981;
director of Dreyfus 3rd Century Fund, Dreyfus General Family of Funds, Mutual of
America Life Insurance Company, Dun & Bradstreet Corporation and American Home
Products Corporation, Cognizant Corporation and TLC Holdings, Inc.
Judith Areen (53)(A)(N) 1992
Executive Vice President for Law Center Affairs and Dean of the Law
Center, Georgetown University, since 1989; Professor of Law,
Georgetown University, since 1976.
Michael H. Bader (68)(A) 1968
Member of the law firm Haley Bader & Potts PLC; Chairman of radio stations WGLL
and WCBG from 1983 to 1993; Chairman of radio station WTHU from 1988 to 1993;
Vice President of Bach n' Roll Radio of Brandon, Inc. since 1989.
Sir Peter L. Bonfield (53) 1996
Chief Executive of BT, a worldwide telecommunications company, since January
1996; Chairman and Chief Executive of ICL plc from 1985 to 1995; non-executive
Chairman of ICL plc since 1996; non- executive Director of BICC PLC from 1992 to
1996; non-executive Director of ZENECA Group PLC; Vice President of the British
Quality Foundation; Chairman of DESC Ltd to 1996.
Robert P. Brace (47) 1997
A director and Group Finance Director of BT since October 1993; joined BT in
1989 as Finance Director of its UK Division.
<PAGE>
PAGE 24
Richard M. Jones (71)(C)(F) 1988
A director of Guaranty Federal Savings Bank, formerly a director of Applied
Power and Illinois Tool Works Inc.
Gordon S. Macklin (69)(C)(F) 1988
Chairman, White River Corporation; director, Fund American Enterprises Holdings,
Inc.; CCC Information Services Group, Inc.; MedImmune, Inc.; Shoppers Express;
Spacehab, Inc.; and director, trustee or managing general partner, as the case
may be of 52 of the investment companies in the Franklin Templeton Group of
Funds; formerly Chairman, Hambrecht and Quist Group; director, H&Q Healthcare
Investors; and President, National Association of Securities Dealers, Inc.
Bert C. Roberts, Jr. (55)(F)(N) 1985
Richard B. Sayford (67)(C) 1980
President and Chief Executive Officer of Strategic Enterprises,
Inc., a management consulting firm, since 1986; a director of Laser
Technologies, Inc. and Visx, Inc.
Gerald H. Taylor (56) 1994
Judith Whittaker (59)(C) 1985
Vice President, General Counsel and Secretary of Hallmark Cards, Incorporated, a
greeting card and gift manufacturing company, since January 1997; prior to that
Corporate Vice President - Legal of Hallmark Cards, Incorporated, since 1992;
Associate General Counsel of Hallmark Cards, Incorporated, for more that five
years prior thereto; Vice President and General Counsel of Univision Holdings,
Inc., a subsidiary of Hallmark Cards, Incorporated, from 1988 to 1992.
John R. Worthington (67)(A) 1968
A consultant since March 1996. General Counsel of MCI from 1971 to November 1995
and a Senior Vice President of MCI from November 1995 to March 1996.
<PAGE>
PAGE 25
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely upon review of Forms 3, 4 and 5 (and amendments thereto)
furnished to MCI during or in respect of the fiscal year ended December 31,
1997, MCI is not aware of any director or executive officer who has not timely
filed reports required by Section 16(a) of the Exchange Act during or in respect
of such fiscal year, except John Gerdelman, Bert C. Roberts, Jr. and John R.
Worthington who each filed one Form 4 late with respect to one transaction.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
PAGE 26
Item 11. Executive Compensation.
- --------------------------------
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation Awards
Securities
Name and Principal Other Annual Restricted Stock Underlying All Other
Position Salary Bonus Compensation Award(s) Options Compensation
Year ($) ($)(1) ($)(2) ($)(3),(4) (#)(4) ($)(5)
============================= ======= =========== ============ =============== =================== ============= =================
<S> <C> <C> <C> <C> <C> <C> <C>
Bert C. Roberts, Jr. 1997 1,000,000 4,800,000 0 0 90,000 4,449
Chairman 1996 960,000 0 0 7,205,000 180,000 6,030
1995 890,000 1,300,000 231,703 0 150,000 6,030
Gerald H. Taylor 1997 700,000 3,966,667 0 0 65,000 6,365
Chief Executive Officer 1996 565,000 0 0 5,185,000 130,000 6,030
1995 525,000 800,000 76,914 0 100,000 6,030
Timothy F. Price 1997 550,000 3,600,000 0 0 57,500 6,365
President and Chief 1996 460,000 150,000 0 3,352,500 115,000 6,030
Operating Officer 1995 400,000 600,000 28,607 597,500 115,000 136,849
Michael J. Rowny 1997 350,000 1,850,000 908,375 0 40,000 13,074
Executive Vice President 1996 310,000 0 0 1,072,500 80,000 11,679
1995 270,000 300,000 0 597,500 70,000 8,788
Douglas L. Maine 1997 330,000 1,775,000 0 0 40,000 6,123
Executive Vice President 1996 290,000 0 0 895,500 70,000 4,123
and Chief Financial Officer 1995 260,000 265,000 26,077 478,000 70,000 6,030
===================================================================================================================================
</TABLE>
(1) The amounts listed as paid in this column do not include the amount of
bonus (otherwise payable currently in cash) invested at the election of the
executive in incentive stock units ("ISUs"). Such amount are reported under
the Restricted Stock Awards column. The 1997 bonus consists of the
following (a) 1997 Incentive Award and (b) an award made from a cash
retention award pool established in connection with the MCI/WorldCom Merger
to provide retention incentive for MCI senior executives. One third of the
retention incentive was paid December 1, 1997. The applicable incentive
amounts for each executive are: Mr. Roberts (a) $1,300,000 and (b)
$3,500,000; Mr. Taylor (a) $800,000 and (b) $3,166,667; Mr. Price (a)
$600,000 and (b) $3,000,000; Mr. Rowny (a) $350,000 and (b) $1,500,000; and
Mr. Maine (a) $275,000 and (b) $1,500,000.
(2) Represents the annuity premium and taxes paid on behalf of the executive as
the result of the purchase of an annuity to discharge the Supplemental
Pension Plan's obligation to the executive. These amounts reduce dollar for
dollar the actual amount of pension to be paid to the executive upon
retirement. The 1997 amount for Mr. Rowny includes relocation costs and
related taxes of $893,698 for Mr. Rowny's relocation to and return from the
United Kingdom.
(3) No restricted shares or ISUs were awarded in 1997 to the named executives.
No bonus was deferred into ISUs. As of December 31, 1997, executives held
the following restricted shares and non vested ISUs, valued based on the
market price on December 31, 1997 as follows: Mr. Roberts, 255,736
restricted shares, 44,167 ISUs, valued at $12,814,024; Mr. Taylor, 229,641
ISUs, valued at $9,831,505; Mr. Price, 154,138 ISUs, valued at $6,599,033;
Mr. Rowny, 76,940 ISUs, valued at $3,293,993; and Mr. Maine, 52,573 ISUs,
valued at $2,250,782.
(4) Stock options, restricted stock awards and ISUs granted on or before
November 9, 1997, which are outstanding on the merger date, will fully vest
upon the close of the MCI/WorldCom merger.
(5) Consists of the following: (a) contributions by the Company to the
executives' accounts under the MCI ESOP and 401(k); and for Mr. Rowny (b)
premiums paid by the Company for executive life insurance during the year.
The values of the applicable components for each executive officer are: Mr.
Roberts (a) $4,449; Mr. Taylor (a) $6,365; Mr. Price (a) $6,365; Mr. Rowny
(a) $6,285 and (b) $6,789; and Mr. Maine (a) $6,123.
<PAGE>
PAGE 27
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR(1)
Number of % of Total Potential Realizable Value at Assumed Annual Rates
Securities Options of Stock Price Appreciation for Option Term(2)
Underlying Granted Exercise
Options to or Base
Granted Employees in Price Expiration
Name (#)(3) Fiscal Year ($/Sh)(4) Date(5) 0% ($)(6) 5% ($) 10% ($)
- ---------------------- ---------- ------------ ------------- ------------ --------- ---------------- -----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Bert C. Roberts, Jr. 90,000 0.688% 36.25 2/05/07 0 2,052,000 5,199,300
Gerald H. Taylor 65,000 0.497% 36.25 2/05/07 0 1,482,000 3,755,050
Timothy F. Price 57,500 0.440% 36.25 2/05/07 0 1,311,000 3,321,775
Michael J. Rowny 40,000 0.306% 36.25 2/05/07 0 912,000 2,310,800
Douglas L. Maine 40,000 0.306% 36.25 2/05/07 0 912,000 2,310,800
- -----------------------------------------------------------------------------------------------------------------------------------
All Optionees(7) 13,079,895 100.00% $36.2663 various 0 298,008,931 755,412,859
All Stockholders N/A N/A N/A N/A 0 19,039,520,388(8) 48,248,417,881(8)
===================================================================================================================================
</TABLE>
(1) The Company did not grant any stock appreciation rights during the last or
any prior fiscal year.
(2) The potential realizable value uses the hypothetical rates specified by the
SEC and is not intended to forecast future appreciation, if any, of the
Company's stock price. The Company did not use an alternative formula for
this valuation as the Company is not aware of any formula which will
determine with reasonable accuracy a present value based on future unknown
or volatile factors. In fact, the Company disavows the ability of this or
any other valuation model to predict or estimate the Company's future stock
price or to place a reasonably accurate present value on the options
because all models depend on assumptions about the stock's future price
movement, which is simply unknown. The value indicated is a net amount, as
the aggregate exercise price has been deducted from the final appreciated
value. An annual appreciation of 5% and 10% from the exercise price of
$36.25 would result in per share prices of approximately $59.05 and
$94.02, respectively, as of February 5, 2007.
(3) Grants become exercisable to the extent of one-third of the shares covered
thereby on each of the first, second and third anniversary of the grant.
Vesting may be accelerated upon a reorganization event or upon a tender
offer for 30% or more of the Company's voting stock by a third party in
accordance with plan provisions. Pursuant to the Merger Agreement, options
granted prior to November 9, 1997 become fully vested and exercisable upon
the closing of the Merger.
(4) The exercise price of the options is equal to the fair market value of the
underlying stock on the date of grant.
(5) All options granted in 1997 expire ten years from the date of grant.
(6) Unless the stock price increases, which will benefit all stockholders
commensurately, an optionee will realize no gain.
(7) Options were granted to 8,202 employees in 1997. The potential realizable
value uses a 10-year option term and base price of $36.2663.
(8) Values were calculated using the total shares outstanding (including Class
A Common Stock) as of December 31, 1997 (707,066,025 shares) and using a
base price of $42.8125. Appreciation of 5% and 10% would result in per
share prices of approximately $69.74 and $111.05, respectively, at December
31, 2007. The values set forth in the table do not reflect the effects of
the merger.
<PAGE>
PAGE 28
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
Number of Securities Value of Unexercised In-the-Money
Underlying Unexercised Options at FY-End ($)(1)
Options at FY-End (#)
Name Shares Acquired on Value Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable
Exercise (#)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Bert C. Roberts, Jr. 560,000 16,401,496 658,400/261,600 13,286,175/3,472,575
Gerald H. Taylor 0 0 563,070/186,100 13,251,186/2,438,731
Timothy F. Price 237,470 4,272,415 6,800/173,650 162,775/2,377,841
Michael J. Rowny 0 0 152,600/117,400 3,082,063/1,571,063
Douglas L. Maine 0 0 363,300/110,700 8,841,244/1,480,194
===================================================================================================================================
</TABLE>
(1) Options are "in-the-money" if, on December 31, 1997, the market price of
the Common Stock ($42.8125) exceeded the exercise price of such options.
All options, on December 31, 1997, were "in-the-money". The value of such
options is calculated by determining the difference between the aggregate
market price of the Common Stock covered by the options on December 31,
1997 and the aggregate exercise price of such options.
<PAGE>
PAGE 29
<TABLE>
<CAPTION>
Long-Term Incentive Plans -- Awards in Last Fiscal Year
(a) (b) (c)
Number of Performances or
Shares, Units Other Period Until
or Other Maturation or
Name Rights($)(1) Payout(2)
- -------------------------------------------------------------------------------
<S> <C> <C>
Bert C. Roberts, Jr. 7,000,000 12/1/98;12/1/99
Gerald H. Taylor 6,333,333 12/1/98;12/1/99
Timothy F. Price 6,000,000 12/1/98;12/1/99
Michael J. Rowny 3,000,000 12/1/98;12/1/99
Douglas L. Maine 3,000,000 12/1/98;12/1/99
===============================================================================
</TABLE>
(1) Represents the dollar amount of the retention incentive award granted but
not yet paid to each named executive by the board of directors on December
1, 1997.
(2) The retention incentive awards will be paid over three years. One-third was
received by the executive on December 1, 1997; and one-third will be paid
on each of December 1, 1998 and December 1, 1999. Any amounts remaining
unpaid at the merger date will be paid to the executive upon the closing of
the Merger.
<PAGE>
PAGE 30
Pension Plans
MCI sponsors a tax-qualified defined benefit plan ("Qualified Plan") and a
supplemental nonqualified defined benefit plan ("Supplemental Plan" and,
together with the Qualified Plan, the "Pension Plans"). The Qualified Plan
covers all employees of MCI, including executive officers, who work at least
1,000 hours in a year. The Supplemental Plan covers only MCI's key executives,
including the executive officers, who work at least 1,000 hours in a year. No
employee contributions are required for participation in the Pension Plans.
Retirement benefits are based upon the employee's compensation during the
employee's employment with MCI or a participating subsidiary.
Compensation used to calculate benefits includes bonuses (including
bonuses invested in ISUs) but does not include compensation related to fringe
benefits, stock options or restricted stock. During 1997, compensation for the
purposes of calculating pension benefits for the Qualified Plan was limited by
section 401(a)(17) of the Internal Revenue Code of 1986, as amended (the
"Code"), to $160,000. The Supplemental Plan pays the incremental benefit
attributable to that part of the employee's compensation which exceeds the Code
limitation in any plan year.
Employees are fully vested upon the earlier of five years of service or
upon reaching age 65 while employed by MCI or a participating subsidiary. There
is no partial vesting. Normal retirement age is 65, but an employee may elect to
receive an actuarially-reduced pension at or after age 55 with five years of
service with MCI or a participating subsidiary. In addition, the Supplemental
Plan permits MCI to grant additional service and additional pension amounts to
selected employees.
For employees employed after January 1, 1989, the Pension Plans provide
a normal retirement benefit for each year of credited service equal to 1% of the
compensation earned by the employee during that year up to the Social Security
"covered compensation" level plus an additional 1.5% of compensation earned over
that level. However, employees employed on or before January 1, 1993 were
credited with an updated past service benefit which provides a benefit of 1% of
the employee's average annual compensation (for the years 1990, 1991 and 1992)
up to $21,000 and 1.5% of such compensation over $21,000 for such years
multiplied by the employee's service through December 31, 1992. For employees
employed on or after January 1, 1994, the Pension Plans provide a future service
benefit for each subsequent year of credited service equal to a flat 1.8% of the
employee's eligible compensation. Effective January 1, 1996, MCI adopted a Part
II to the Qualified Plan ("Part II") which changed the manner in which pension
benefits will be determined. Part II is a defined benefit pension plan. Under
Part II an initial account balance has been established for each participant
equal to the actuarial equivalent of the participant's prior accruals under the
Qualified Plan. Participants employed on or after
<PAGE>
PAGE 31
January 1, 1996 receive compensation credits and interest credits to their
accounts. Compensation credits are a designated percent of pay, based on the
participant's age, according to the following schedule: employees younger than
age 25, 2.0%; age 25-29, 2.5%; age 30-34, 3.0%; age 35-39, 4.0%; age 40-44,
5.0%; age 45-54, 6.0%; and age 55 or older, 6.5%. Part II guarantees a minimum
interest credit of 4% per year on the prior year's account balance. For 1997,
the guaranteed interest credit is 6.09%. Part II Participants who were age 50 or
older with 5 years of service as of December 31, 1995 will accrue a pension
benefit equal to the greater of benefits calculated under Part I or Part II
until the Plan year ended December 31, 2000 for each year they are employed by
MCI.
Benefits payable from tax qualified plans are further limited by section
415 of the Code; in 1997, the annual maximum benefit from the Qualified Plan was
limited to $125,000. When the pension formula would result in an executive
receiving a benefit above the applicable limit, the Supplemental Plan assumes an
obligation to pay the incremental portion above such limit.
As of December 31, 1997, Messrs. Roberts, Taylor, Price, Rowny and
Maine, upon normal retirement, would be entitled to annual retirement benefits
from the Pension Plans of approximately $648,394; $310,662; $272,964; $128,668
and $149,451, respectively. Mr. Rowny will not vest under the plans until June
1998. Should Mr. Rowny leave MCI before he vests, he will receive no pension
benefit from MCI.
Compensation of Directors
During 1997, directors of MCI who were not officers were entitled to
receive a retainer of $2,250 per month and an additional $1,500 for each meeting
of the board of directors which they attended and for each meeting of the Audit
or Compensation Committee they attended that was not held on the day or the day
preceding the day on which a meeting of the board of directors was held. In
addition, the Chairman of each of the Audit and Compensation Committees received
an additional retainer of $300 per month, and each member of the Audit and
Compensation Committees who attended an Audit or Compensation Committee meeting
on the day or the day preceding the day on which a board of directors meeting
was held was paid an additional $700 for each such meeting attended. Directors
also were reimbursed for actual out-of-pocket travel expenses incurred in
connection with attendance at board and/or committee meetings.
Employment Contracts
In November 1996, MCI entered into employment contracts with Messrs.
Roberts, Taylor, Price, Rowny and Maine. The summary description of the
employment contracts on pages 63 through 65 of MCI's Proxy Statement for the
Special Meeting of Stockholders dated January 22, 1998 is incorporated into
this Annual Report on Form 10-K by reference.
<PAGE>
PAGE 32
Compensation Committee Interlocks and Insider Participation
During 1997, no member of the Compensation Committee of MCI's board of
directors was a current or former officer or employee of MCI or any of its
subsidiaries. No executive officer of MCI serves as a member of a compensation
committee of another entity, one of whose executive officers is a director of
MCI.
MCI COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
- -----------------------------------------------------------
MCI Executive Compensation Policies and Objectives
- --------------------------------------------------
The Compensation Committee of MCI's board of directors (the
"Compensation Committee") evaluates and sets the base salary and incentive
compensation for the Chairman, Chief Executive Officer ("CEO") and the Chief
Operating Officer ("COO") of MCI and administers MCI's Stock Option Plans and
the Executive Incentive Compensation Plan (the "EICP"). The Compensation
Committee also establishes the target awards and performance goals for the CEO
and COO under the Senior Executive Incentive Compensation Plan (the "SEICP").
The Compensation Committee reviews, but does not evaluate, determine or approve,
the compensation of MCI's other executives, which is determined by the CEO
and/or COO with the assistance of MCI's human resources staff.
The Compensation Committee consists solely of non-employee directors who
are not eligible to participate in the compensation plans which they administer.
The Compensation Committee's executive compensation objectives are (1)
to ensure competitive levels of compensation that enable MCI to attract, retain
and motivate executives of outstanding ability and character to lead MCI
successfully in its highly competitive industry characterized by rapid
technological change, innovation and significant capital investment
requirements; (2) to tie a meaningful portion of compensation to the achievement
of improved long term stockholder value and other business objectives through
the EICP and the SEICP; and (3) to provide stock-based long term incentives that
directly link the compensation of executives to appreciation in the Common
Stock. The Compensation Committee accomplishes these objectives by periodically
reviewing surveys of executive compensation, by establishing an annual EICP and
by setting performance levels and target awards under the SEICP. Through annual
grants of options, incentive stock units and, at times, awards of restricted
stock, the Compensation Committee strives to align the financial interests of
the executives with those of MCI's stockholders.
<PAGE>
PAGE 33
MCI Executive Officer Compensation and MCI Performance
- ------------------------------------------------------
MCI has standard salary ranges for all executive positions below the
level of Chairman, CEO and COO. These salary ranges are developed by MCI's human
resources staff from surveys conducted by compensation consultants using
competitive market data from similarly sized companies in the telecommunications
industry, as well as other industries. This group of companies includes all
companies that comprise MCI's peer group used in constructing MCI's performance
graph. (See the section of this Form 10-K entitled, "Five-Year Performance
Comparison," below.) Salary range midpoints are targeted to be at approximately
the median of the survey data for companies of similar size and complexity. An
executive's salary within these salary ranges depends upon the executive's
experience and capabilities, the executive's unique talents and strengths and
the executive's contribution to MCI. The CEO, the COO or another senior
executive responsible for the business unit annually reviews the salary and
performance of executives in the business unit. In this review, individual
contribution, attainment of individual and business unit performance objectives
and level within the salary range are considered; however, there is no specific
weight given to each criterion.
The purpose of the EICP is to encourage consistent growth in stockholder
value by creating a motivational environment in which compensation is contingent
upon the performance of MCI; the business unit, where applicable; and the
individual. All executive officers participate in the EICP.
At the beginning of MCI's 1997 fiscal year, the Compensation Committee
approved a 1997 EICP. Target awards were designed to provide a level of total
cash compensation, including salary, between the 50th and 75th percentiles for
similar companies, including those in MCI's peer group, if performance goals
were achieved. The Compensation Committee set overall financial performance
goals for the executives covered by the plan. In addition, in order to tie the
executive's incentive award more closely to such executive's performance
objectives for the year, the EICP provided the business units with discretion in
determining individual performance measurements and resulting awards for each
executive. Prior to the end of the first quarter of 1997, the senior management
of the business units established the individual performance criteria for the
executives in their respective business units. The performance criteria were
based on each executive's individual performance objectives, and, as
appropriate, business unit's objectives. The performance criteria for the senior
management of the business units were established by the COO and CEO and were
based on MCI's business plan with consideration for business unit performance
and individual contribution.
In 1996, the Compensation Committee recommended, MCI's board of
directors adopted and MCI stockholders approved the SEICP. The SEICP was
<PAGE>
PAGE 34
designed to allow compensation awarded under it to qualify as performance based
compensation meeting the requirements of section 162(m) of the Internal Revenue
Code of 1986, as amended. The SEICP entitles MCI to deduct for tax purposes
amounts awarded under the SEICP that would not otherwise be deductible for tax
purposes.
Under the SEICP, the Compensation Committee sets financial performance
goals based on factors specified in the plan, and sets ranges of awards to be
granted if performance goals are met, subject to the SEICP's maximum award
limits. In 1997, the Compensation Committee set goals for the Chairman, CEO and
the COO using the SEICP factors.
MCI has a long history of encouraging employee ownership of MCI's Common
Stock. In the belief that employees who have a proprietary interest in MCI will
focus on its long term success and on building stockholder wealth, the
Compensation Committee uses MCI's Stock Option Plan as a basis to create a
foundation for the long-term growth of MCI and increased stockholder value by
providing executives and key employees with an opportunity to obtain and build a
meaningful stake in MCI's future. At the beginning of each fiscal year, the
Compensation Committee grants stock options to executives and key employees who
are recommended by management as being in a position to contribute to MCI's
profitability. Option awards are intended to encourage contribution to
profitability over a longer term than the EICP. Therefore, options become
exercisable based on continued employment with MCI and generally remain
exercisable for a period of ten years. To provide the desired level of potential
stock ownership, the number of stock options granted to Company executives is
targeted to be above average in comparison to executives in similar companies,
including those in MCI's peer group. The number of options granted to a
particular executive is based on the grade level of the executive and
management's assessment of the executive's performance and contribution. Stock
options have been granted to key employees at all levels of MCI's management.
The ultimate value of the options, if any, depends on the extent to which MCI's
Common Stock appreciates in market value.
The Stock Option Plan allows the Compensation Committee to award
incentive stock units. Incentive stock units are an unfunded promise to deliver
shares of stock in the future. Incentive stock units are awarded to executives
under the terms of a program called the Executive Stock Award Program (the
"ESA"). Under the ESA, cash target awards are set for each executive salary
range and awards determined based on the same performance criteria as the EICP.
Cash awards are converted to incentive stock units by dividing the cash award
amount by the MCI Common Stock price on the date awards are determined.
Incentive stock units granted under the ESA vest ratably over a three year
period.
MCI's Executive Deferred Compensation Plan permits executives to defer
all or a portion of their cash bonus into incentive stock units. MCI matches the
executive's deferral with an additional grant of one incentive
<PAGE>
PAGE 35
stock unit for each four incentive stock units voluntarily purchased with the
executive's bonus. The incentive stock units used to match the voluntary
purchase vest ratably over a three year period. The Compensation Committee
believes that the use of incentive stock units fosters the same goals as the
grant of stock options with the added benefit of providing more flexibility on
timing of recognition of income related to such instruments as well as promoting
continued investment in MCI Common Stock.
Other Executive Compensation Plans
- ----------------------------------
MCI sponsors other employee benefit plans for both executives and
non-management employees. In addition to the Supplemental Retirement Plan
relating to executive retirement benefits, MCI has an executive life insurance
program for executives. The Compensation Committee neither administers nor makes
any determinations with respect to any such plan or program, with the exception
of MCI's 1990 Employee Stock Purchase Plan.
Compensation of MCI's Chairman, Chief Executive Officer and Chief Operating
- ---------------------------------------------------------------------------
Officer and Company Performance
- -------------------------------
The Chairman, Bert C. Roberts, Jr.; the CEO, Gerald H. Taylor; and the
President and COO, Timothy F. Price participate in the SEICP. In the first
ninety days of 1997, the Compensation Committee set performance goals and target
awards for these top three officers using the SEICP guidelines. The Compensation
Committee also established their 1997 salaries.
The Compensation Committee conducts an annual evaluation of the
competitiveness of Messrs. Roberts', Taylor's and Price's total compensation
relative to the compensation of the Chairmen, CEOs and COOs of other similar-
sized companies in the telecommunications industry as well as in other
industries. The Compensation Committee considers compensation data available for
the companies in MCI's peer group, as well as data available from other
similar-sized companies not in the peer group because it considers the market
for Messrs. Roberts', Taylor's and Price's skills and strengths much broader
than the telecommunications industry. As part of this evaluation, the
Compensation Committee annually requests a market analysis of compensation
levels by a nationally-known compensation consulting firm. The compensation
consulting firm also furnishes other information to the Compensation Committee
as requested or needed. Salaries are targeted to be approximately at the median
of salaries of top executives of companies of similar size, complexity and
performance. Based on a review of corporate performance relative to MCI's
business plan, Messrs. Roberts', Taylor's and Price's individual performance,
information supplied by the consultant, the expected challenges for Messrs.
Roberts, Taylor and Price in the coming year and other factors that the
Compensation
<PAGE>
PAGE 36
Committee in its discretion may deem relevant at that time, the Compensation
Committee establishes the salaries for the new fiscal year.
Under the SEICP, the Compensation Committee develops the performance
goals for determining Messrs. Roberts', Taylor's and Price's annual incentive
award using one or more of the measurable financial criteria required by the
Plan, i.e., revenue; operating income; earnings before interest expense, taxes,
depreciation, amortization and other non-cash items ("EBITDA"); return on
equity; return on assets; and economic value added. In 1997, the Compensation
Committee set financial targets for net revenue and earnings before taxes and
noted that because of the proposed merger with British Telecommunications plc,
there might be a need to adjust the results for extraordinary items. The
financial targets were weighted equally in determining whether the financial
goals were met and applied to each of the Chairman, CEO and COO, but were
weighted differently for their total award when compared to their qualitative
objectives. The qualitative performance goals adopted for the Chairman, CEO and
COO were: 1) achievement of certain strategic goals in the local
telecommunications market; 2) completion of the merger with British
Telecommunications plc with emphasis on achieving a stock price above that
estimated on the announcement of the transaction; 3) shifting certain revenue
from minutes based revenue to services based revenue; and 4) maintenance of
strong organizational capabilities, despite increasing competitive pressures for
management talent. In addition to these qualitative performance goals, Mr. Price
had two additional goals: 1) to maintain product and market leadership in
integrated services, virtual data services and Internet services and to develop
momentum in "new to MCI" or emerging markets and 2) to develop MCI's management
team to improve diversity of skill sets, to provide greater flexibility as MCI
enters new markets and to creatively sustain MCI's management team despite
aggressive recruitment by other companies.
Additionally, the Compensation Committee established minimum levels of
Company performance below which no performance award would be made and maximum
levels above which the executives would not earn additional amounts.
In February 1998, the Committee met to evaluate the performance of the
top three executives. It recognized 1997 had been an unusual year and that the
executives performance should be viewed against the background of the
difficulties the Company experienced in being able to enter the local market
profitably, the uncertainty arising from the renegotiation of the merger
agreement with BT, the unsolicited acquisition offers from WorldCom and GTE and
the execution of the WorldCom merger agreement and termination of the BT merger
agreement and the impact of these events on the employees and customers. It
reviewed the Company's performance against the previously established financial
goals, appropriately adjusted to reflect special items, and noted the role the
executives had played in retaining and motivating the Company's key employees
and in maintaining the
<PAGE>
PAGE 37
Company's momentum during this period of uncertainty. It further recognized the
benefit to the Company and its stockholders of the merger agreement with
WorldCom. As a result, the Compensation Committee awarded an incentive award of
$1.3 million to Mr. Roberts, $800,000 to Mr. Taylor, and $600,000 to Mr. Price.
In preparation for making any decision regarding the grant of stock
options and/or restricted stock, the Compensation Committee evaluated Messrs.
Roberts', Taylor's and Price's performance relative to the guidelines described
above, MCI's achievements during the year (discussed above), the awards made to
them in prior years, their differing yet critical leadership roles in MCI's
future success and noted the degree to which other companies have linked their
Chairman's, CEO's and COO's long term compensation to stockholder return. The
Compensation Committee also used subjective criteria it deemed relevant in its
reasonable business discretion, such as its opinions about the business
environment and the particular challenges for MCI as well as the potential
market for Messrs. Roberts', Taylor's and Price's services. In addition, the
Compensation Committee considers awards under the Stock Option Plan as a means
to align the financial interest of the Chairman, the CEO and the COO with that
of MCI's stockholders.
Richard M. Jones
Gordon S. Macklin
Richard B. Sayford
Judith Whittaker
Members of the Compensation Committee
Five-Year Performance Comparison
Set forth below is a graphical presentation comparing MCI's cumulative,
five-year stockholder returns on an indexed basis with the Standard & Poor's 500
Stock Index and an index of peer companies selected by MCI. MCI has selected a
peer group generally consisting of the major providers of telecommunications
services. The members of the peer group are the following: AT&T Corp., Sprint
Corporation, NYNEX Corporation (merged with Bell Atlantic Corporation 9/15/97),
Bell Atlantic Corporation, BellSouth Corporation, Ameritech Corporation, SBC
Communications, Inc., US West, Inc., Pacific Telesis Group (acquired by SBC
Communications, Inc. 5/19/97) and GTE Corporation. For the purpose of
calculating the peer group average, the returns of each company have been
weighted according to its stock market capitalization. The measurements are
indexed to a value of $100 at December 31, 1992, and assume that all dividends
are reinvested.
<PAGE>
PAGE 38
Performance Graph
MCI Communications Corporation
Five-Year Cumulative Total Return
for MCI, Peer Group and S&P 500
| 92Q4 | 93Q1 | 93Q2 | 93Q3 | 93Q4 | 94Q1 | 94Q2
|--------|--------|--------|--------|--------|--------|--------
MCI | $100 |$112.306|$145.24 |$139.557|$142.861|$118.208|$112.013
- --------------|--------|--------|--------|--------|--------|--------|--------
S&P 500 Index | $100 |$104.367|$104.875|$107.585|$110.079|$105.905|$106.351
- --------------|--------|--------|--------|--------|--------|--------|--------
Peer Group | $100 |$110.96 |$116.674|$121.667|$113.567|$108.434|$114.673
| 94Q3 | 94Q4 | 95Q1 | 95Q2 | 95Q3 | 95Q4 | 96Q1
|--------|--------|--------|--------|--------|--------|--------
MCI |$129.732| $93.146|$104.552|$111.66 |$132.277|$132.72 |$153.676
- --------------|--------|--------|--------|--------|--------|--------|--------
S&P 500 Index |$111.551|$111.534|$122.393|$134.078|$144.732|$153.446|$161.682
- --------------|--------|--------|--------|--------|--------|--------|--------
Peer Group |$113.782|$108.282|$115.967|$142.381|$168.256|$183.867|$173.105
| 96Q2 | 96Q3 | 96Q4 | 97Q1 | 97Q2 | 97Q3 | 97Q4
|--------|--------|--------|--------|--------|--------|--------
MCI |$130.292|$130.292|$166.335|$181.286|$194.929|$149.579|$218.125
- --------------|--------|--------|--------|--------|--------|--------|--------
S&P 500 Index |$168.937|$174.159|$188.677|$193.735|$227.557|$244.603|$251.625
- --------------|--------|--------|--------|--------|--------|--------|--------
Peer Group |$180.802|$162.90 |$185.565|$183.594|$203.65 |$216.206|$265.453
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.]
<PAGE>
PAGE 39
Item 12. Security Ownership of Certain Beneficial Owners and
- -------------------------------------------------------------
Management.
- ----------
Security Ownership of Beneficial Holders
Class Beneficial Owner Beneficial Ownership % of Class
Common FMR Corp. 53,466,490(1) 9.5%
Stock 82 Devonshire Street
Boston, Massachusetts
Class A British 135,998,932 shares(2) 100%
Common Telecommunications plc
Stock 81 Newgate Street
London U.K.
(1) FMR Corp. has (i) sole voting power with respect to 5,017,736 of these
shares and (ii) sole dispositive power with respect to 53,466,490 of these
shares.
(2) BT has sole voting and investment power with respect to all these shares.
Item 13. Certain Relationships and Related Transactions.
- --------------------------------------------------------
None.
<PAGE>
PAGE 40
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
- ---------------------------------------------------------------------------
Form 8-K.
- --------
(a) Documents filed as a part of this report.
(1) Financial Statements.
Report of Independent Accountants
Income Statements for the years
ended December 31, 1997, 1996
and 1995
Balance Sheets at December 31, 1997
and 1996
Statements of Cash Flows for the
years ended December 31, 1997,
1996 and 1995
Statements of Stockholders' Equity
for the years ended December 31,
1997, 1996 and 1995
Notes to Consolidated Financial Statements
The Financial Statements and Notes thereto are incorporated herein by
reference to Exhibit 13 of this Annual Report on Form 10-K. See Part II.
(2) Financial Statement Schedule.
The following additional financial data should be read in conjunction
with the Financial Statements and Notes thereto which are incorporated herein by
reference to Exhibit 13. Schedules not included with this additional financial
data have been omitted because they are not required or applicable or the
required information is shown in the Financial Statements or Notes thereto.
Report of Independent Accountants on
Financial Statement Schedule
Valuation and Qualifying Accounts (Schedule II)
<PAGE>
PAGE 41
The Report of Independent Accountants on the Financial Statement
Schedule is submitted as Exhibit 99(c) to this Annual Report on Form 10-K, which
is incorporated herein by reference.
The Financial Statement Schedule is submitted as Exhibit 99(a) to this
Annual Report on Form 10-K, which is incorporated herein by reference.
(3) Exhibits.
Executive compensation plans and arrangements required to be filed, and
which have been filed, with the Commission pursuant to Item 14(c) of this Annual
Report on Form 10-K are listed in this Annual Report on Form 10-K as Exhibits
10(a)-(u).
Exhibit
No. Description
- ------ -----------
2 Agreement and Plan of Merger dated November 9, 1997, among WorldCom, Inc.,
MCI Communications Corporation and TC Investments Corp. (Incorporated by
reference to Exhibit 2 to Registrant's Current Report on Form 8-K/A, filed
November 14, 1997.)
3(a) Restated Certificate of Incorporation of MCI Communications Corporation
filed on March 28, 1995. (Incorporated by reference to Exhibit 3(a) to
registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 1994.)
(b) By-laws of registrant, as amended. (Incorporated by reference to Exhibit
3(ii) to registrant's Registration Statement on Form S-3, Reg. No.
33-57155.)
4(a) Indenture, dated as of October 15, 1989, between registrant and Bankers
Trust Company. (Incorporated by reference to Exhibit 4(c) to registrant's
Registration Statement on Form S-3, Reg. No. 33-31600.)
(b) Indenture dated as of October 15, 1989 between registrant and Bankers Trust
Company. (Incorporated by reference to Exhibit 4(d) to registrant's
Registration Statement on Form S-3, Reg. No. 33-31600.)
(c) Indenture dated as of October 15, 1989 between registrant and Citibank,
N.A. (Incorporated by reference to Exhibit 4(e) to registrant's
Registration Statement on Form S-3, Reg. No. 33-31600.)
<PAGE>
PAGE 42
(d) Indenture dated as of February 17, 1995 between registrant and Citibank,
N.A. (Incorporated by reference to Exhibit 4 (d) to registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994.)
(e) Supplement No. 1, dated as of October 4, 1996, to the Indenture, dated as
of February 17, 1995, between MCI and Citibank, N.A. (Incorporated by
reference to Exhibit 4(e) to registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996.)
(f) Supplement No. 2, dated as of March 12, 1998, to the Indenture, dated as of
February 17, 1995, between MCI and Citibank, N.A.
(g) Form of Senior Fixed Rate Medium-Term Note. (Incorporated by reference to
Exhibit 4(a) to Registrant's Current Report on Form 8-K, filed October 7,
1996.)
(h) Form of Senior Floating Rate Medium-Term Note. (Incorporated by reference
to Exhibit 4(b) to Registrant's Current Report on Form 8-K, filed October
7, 1996.)
(i) Form of Subordinated Fixed Rate Medium-Term Note. (Incorporated by
reference to Exhibit 4(g) to registrant's Registration Statement on Form
S-3, Reg. No. 33-31600.)
(j) Form of Subordinated Floating Rate Medium-Term Note. (Incorporated by
reference to Exhibit 4(i) to registrant's Registration Statement on Form
S-3, Reg. No. 33-31600.)
(k) Form of 7-1/2% Senior Note due August 20, 2004. (Incorporated by reference
to Exhibit 4 of registrant's Quarterly Report on Form 10-Q for the Quarter
Ended June 30, 1992.)
(l) Form of 7-1/8% Senior Note due January 20, 2000. (Incorporated by reference
to Exhibit 1(b) of registrant's Current Report on Form 8-K filed January
19, 1993.)
(m) Form of 8-1/4% Senior Debenture due January 20, 2023. (Incorporated by
reference to Exhibit 1(c) of registrant's Current Report on Form 8-K filed
January 19, 1993.)
(n) Form of 7-3/4% Senior Debenture due March 15, 2024. (Incorporated by
reference to Exhibit 4(a) of registrant's Current Report on Form 8-K filed
March 12, 1993.)
<PAGE>
PAGE 43
(o) Form of 6-1/4% Senior Note due March 23, 1999. (Incorporated by reference
to Exhibit 4(a) of registrant's Current Report on Form 8-K filed March 15,
1994.)
(p) Form of 7-3/4% Senior Debenture due March 23, 2025. (Incorporated by
reference to Exhibit 4(b) of registrant's Current Report on Form 8-K filed
March 15, 1994.)
(q) Form of 7-1/8% Debenture due June 15, 2027. (Incorporated by reference to
Exhibit 4(a) of registrant's Current Report on Form 8-K filed June 21,
1996.)
(r) Form of 6.95% Senior Note due August 15, 2006. (Incorporated by reference
to Exhibit 4(a) of registrant's Current Report on Form 8-K filed August 8,
1996.)
(s) Form of Senior Floating Rate Note due March 16, 1999. (Incorporated by
reference to Exhibit 4(c) of registrant's Current Report on Form 8-K filed
March 15, 1994.)
(t) Rights Agreement, dated as of September 30, 1994, between the registrant
and Mellon Bank, N.A. (Incorporated by reference to Exhibit 4(a) to
registrant's Current Report on Form 8-K filed October 4, 1994.)
(u) Amendment No. 1, dated as of November 3, 1996, to Rights Agreement, dated
as of September 30, 1994, between the registrant and Mellon Bank, N.A.
(Incorporated by reference to Exhibit 2 to registrant's Form 8-A/A filed
November 20, 1996.)
(v) Amendment No. 2, dated as of August 20, 1997, to Rights Agreement, dated as
of September 30, 1994 and amended, between the Company and Morgan Guaranty
Trust Company of New York, as Rights Agent. (Incorporated by reference to
Exhibit 4 to registrant's Form 8-A/A filed November 20, 1997.)
(w) Amendment No. 3, dated as of November 9, 1997, to Rights Agreement, dated
as of September 30, 1994 and amended, between the Company and Morgan
Guaranty Trust Company of New York, as Rights Agent. (Incorporated by
reference to Exhibit 5 to registrant's Form 8-A/A filed November 20, 1997.)
<PAGE>
PAGE 44
(x) Junior Subordinated Indenture between registrant and Wilmington Trust
Company, as Debenture Trustee. (Incorporated by reference to Exhibit 4.01
of registrant's Registration Statement on Form S-3, Registration No. 333-
02593.)
(y) Form of Amended and Restated Trust Agreement among registrant, as
Depositor, Wilmington Trust Company, as Property Trustee and Delaware
Trustee, and the Administrative Trustees named therein. (Incorporated by
reference to Exhibit 4.10 of registrant's Registration Statement on Form
S-3, Registration No. 333-02593.)
(z) Form of Guarantee Agreement between registrant, as Guarantor, and
Wilmington Trust Company, as Trustee. (Incorporated by reference to Exhibit
4.12 of registrant's Registration Statement on Form S-3, Registration No.
333- 02593.)
(aa) Form of Supplemental Indenture between registrant and Wilmington Trust
Company, as Debenture Trustee. (Incorporated by reference to Exhibit 4.13
of registrant's Registration Statement on Form S-3, Registration No. 333-
02593.)
10(a)1979 Stock Option Plan of registrant, as amended and restated.
(Incorporated by reference to Exhibit 10(a) to registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1988.)
(b) Supplemental Retirement Plan for Employees of MCI Communications
Corporation and Subsidiaries, as amended. (Incorporated by reference to
Exhibit 10(b) to registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1993.)
(c) Description of Executive Life Insurance Plan for MCI Communications
Corporation and Subsidiaries. (Incorporated by reference to "Remuneration
of Officers" in registrant's Proxy Statement for its 1992 Annual Meeting of
Stockholders.)
(d) MCI Communications Corporation Executive Incentive Compensation Plan.
(Incorporated by reference to Exhibit 10(e) to registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1995.)
<PAGE>
PAGE 45
(e) Amendment No. 1 to MCI Communications Corporation Executive Incentive
Compensation Plan. (Incorporated by reference to Exhibit 10(e) to
registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 1996.)
(f) Form of Director Indemnification Agreement.(Incorporated by reference to
Appendix B to registrant's Proxy Statement for its 1987 Annual Meeting of
Stockholders.)
(g) 1988 Directors' Stock Option Plan of registrant. (Incorporated by reference
to Exhibit D to registrant's Proxy Statement for its 1989 Annual Meeting of
Stockholders.)
(h) Amendment No. 1 to the 1988 Directors' Stock Option Plan of registrant.
(Incorporated by reference to Appendix D to registrant's Proxy Statement
for its 1996 Annual Meeting of Stockholders.)
(i) Amendment No. 2 to 1988 Directors' Stock Option Plan of registrant.
(Incorporated by reference to Exhibit 10(i) to registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1996.)
(j) Amendment No. 3 to 1988 Directors' Stock Option Plan of registrant.
(Incorporated by reference to Exhibit 10(j) to registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1996.)
(k) Stock Option Plan of registrant. (Incorporated by reference to Exhibit C to
registrant's Proxy Statement for its 1989 Annual Meeting of Stockholders.)
(l) Amendment No. 1 to the Stock Option Plan of registrant. (Incorporated by
reference to Exhibit 10(l) to registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996.)
(m) Amendment No. 2 to the Stock Option Plan of registrant. (Incorporated by
reference to Appendix B to registrant's Proxy Statement for its 1996 Annual
Meeting of Stockholders.)
(n) Amendment No. 3 to the Stock Option Plan of registrant. (Incorporated by
reference to Exhibit 10(n) to registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996.)
<PAGE>
PAGE 46
(o) Amendment No. 4 to the Stock Option Plan of registrant. (Incorporated by
reference to Exhibit 10(o) to registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996.)
(p) Amendment No. 5 to the Stock Option Plan of registrant. (Incorporated by
reference to Exhibit 10(p) to registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996.)
(q) Board of Directors Deferred Compensation Plan of Registrant. (Incorporated
by reference to Exhibit 10(i) to registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994.)
(r) The Senior Executive Incentive Compensation Plan of registrant.
(Incorporated by reference to Appendix A to registrant's Proxy Statement
for its 1996 Annual Meeting of Stockholders.)
(s) Amendment No. 1 to the Senior Executive Incentive Compensation Plan of
registrant. (Incorporated by reference to Exhibit 10(s) to registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1996.)
(t) Executive Severance Policy. (Incorporated by reference to Exhibit 10(a) to
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
30, 1996.)
(u) Form of employment agreement, effective as of November 2, 1996, between MCI
and certain executive officers of MCI. (Incorporated by reference to
Exhibit 10(u) to registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996.)
(v) Amended and Restated Investment Agreement dated as of January 31, 1994
between MCI Communications Corporation and British Telecommunications plc.
(Incorporated by reference to Appendix I of registrant's Notice of Special
Meeting of Stockholders and Proxy Statement dated February 4, 1994.)
(w) Modified Joint Venture Agreement dated as of July 1, 1994 between MCI
Communications Corporation and British Telecommunications plc and MCI
Ventures Corporation and Moorgate (Twelve) Limited and Concert
Communications Company. (Incorporated by reference to Exhibit 10(l) to
registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 1994.)
<PAGE>
PAGE 47
(x) Warrant Purchase Agreement by and between The News Corporation Limited and
MCI Communications Corporation dated as of August 2, 1995. (Incorporated by
reference to Exhibit 10(p) to registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995.)
(y) Preferred Stock Purchase Agreement by and among MCI, News Triangle Finance,
Inc. and News T Investments, Inc. dated as of August 2, 1995. (Incorporated
by reference to Exhibit 10(q) to registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995.)
(z) $4,000,000,000 Revolving Credit Agreement, dated as of April 30, 1997,
among the registrant, Bank of America National Trust and Savings
Association, as agent, and the several financial institutions parties
thereto. (Incorporated by reference to Exhibit 10(a) of registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997.)
(aa) Agreement, dated as of November 9, 1997, among British Telecommunications
plc, MCI Communications Corporation and WorldCom, Inc. (Incorporated by
reference to Exhibit 10 of registrant's Current Report on Form 8-K filed on
November 12, 1997.)
12 Computation of Ratio of Earnings to Fixed Charges.
13 Certain portions of the registrant's Annual Report to Stockholders for the
year ended December 31, 1997 which are incorporated by reference into this
Annual Report on Form 10-K.
21 Significant Subsidiaries of MCI Communications Corporation.
23 Consent of Independent Accountants.
27(a) Financial Data Schedule - December 31, 1997.
(b) Financial Data Schedule - December 31, 1996.
(c) Financial Data Schedule - December 31, 1995.
99(a) Valuation and Qualifying Accounts (Schedule II).
(b) Capitalization Schedule.
(c) Accountant's Report on Financial Statement Schedule.
<PAGE>
PAGE 48
(b) Reports on Form 8-K.
(i) Current Report on Form 8-K filed on November 12, 1997
reporting on Items 5 and 7.
(ii) Amendment to Current Report on Form 8-K filed on November
14, 1997 reporting on Item 7.
(c) Exhibits.
See Item 14(a)(3) of this Annual Report on Form 10-K.
(d) Financial Statement Schedule.
See Items 14(a)(2) and 14(a)(3) of this Annual Report on Form 10-K.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.]
<PAGE>
PAGE 49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
/s/ Bert C. Roberts, Jr.
Dated: March 31, 1998 By: --------------------------
Bert C. Roberts, Jr.
Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on March 31, 1998 on
behalf of the registrant and in the capacities indicated.
Signature Title
/s/ Gerald H. Taylor
- ---------------------------- Chief Executive Officer,
Gerald H. Taylor Director
/s/ Douglas L. Maine
- ----------------------------- Principal Financial Officer
Douglas L. Maine
/s/ David M. Case
- ----------------------------- Principal Accounting Officer
David M. Case
/s/ Bert C. Roberts, Jr.
- ----------------------------- Director
Bert C. Roberts, Jr.
/s/ Clifford L. Alexander, Jr.
- ----------------------------- Director
Clifford L. Alexander, Jr.
/s/ Judith Areen
- ------------------------------ Director
Judith Areen
<PAGE>
PAGE 50
/s/ Michael H. Bader
- ----------------------------- Director
Michael H. Bader
- ----------------------------- Director
Sir Peter L. Bonfield
- ----------------------------- Director
Robert P. Brace
/s/ Richard M. Jones
- ----------------------------- Director
Richard M. Jones
/s/ Gordon S. Macklin
- ----------------------------- Director
Gordon S. Macklin
/s/ Richard B. Sayford
- ----------------------------- Director
Richard B. Sayford
/s/ Judith Whittaker
- ----------------------------- Director
Judith Whittaker
/s/ John R. Worthington
- ----------------------------- Director
John R. Worthington
<PAGE>
PAGE 1
Exhibit Index
---------------
Exhibit
No. Description
- ------ -----------
2 Agreement and Plan of Merger dated November 9, 1997, among WorldCom, Inc.,
MCI Communications Corporation and TC Investments Corp. (Incorporated by
reference to Exhibit 2 to Registrant's Current Report on Form 8-K/A, filed
November 14, 1997.)
3(a) Restated Certificate of Incorporation of MCI Communications Corporation
filed on March 28, 1995. (Incorporated by reference to Exhibit 3(a) to
registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 1994.)
(b) By-laws of registrant, as amended. (Incorporated by reference to Exhibit
3(ii) to registrant's Registration Statement on Form S-3, Reg. No.
33-57155.)
4(a) Indenture, dated as of October 15, 1989, between registrant and Bankers
Trust Company. (Incorporated by reference to Exhibit 4(c) to registrant's
Registration Statement on Form S-3, Reg. No. 33-31600.)
(b) Indenture dated as of October 15, 1989 between registrant and Bankers Trust
Company. (Incorporated by reference to Exhibit 4(d) to registrant's
Registration Statement on Form S-3, Reg. No. 33-31600.)
(c) Indenture dated as of October 15, 1989 between registrant and Citibank,
N.A. (Incorporated by reference to Exhibit 4(e) to registrant's
Registration Statement on Form S-3, Reg. No. 33-31600.)
(d) Indenture dated as of February 17, 1995 between registrant and Citibank,
N.A. (Incorporated by reference to Exhibit 4 (d) to registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994.)
(e) Supplement No. 1, dated as of October 4, 1996, to the Indenture, dated as
of February 17, 1995, between MCI and Citibank, N.A. (Incorporated by
reference to Exhibit 4(e) to registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996.)
<PAGE>
PAGE 2
(f) Supplement No. 2, dated as of March 12, 1998, to the Indenture, dated as of
February 17, 1995, between MCI and Citibank, N.A.
(g) Form of Senior Fixed Rate Medium-Term Note. (Incorporated by reference to
Exhibit 4(a) to Registrant's Current Report on Form 8-K, filed October 7,
1996.)
(h) Form of Senior Floating Rate Medium-Term Note. (Incorporated by reference
to Exhibit 4(b) to Registrant's Current Report on Form 8-K, filed October
7, 1996.)
(i) Form of Subordinated Fixed Rate Medium-Term Note. (Incorporated by
reference to Exhibit 4(g) to registrant's Registration Statement on Form
S-3, Reg. No. 33-31600.)
(j) Form of Subordinated Floating Rate Medium-Term Note. (Incorporated by
reference to Exhibit 4(i) to registrant's Registration Statement on Form
S-3, Reg. No. 33-31600.)
(k) Form of 7-1/2% Senior Note due August 20, 2004. (Incorporated by reference
to Exhibit 4 of registrant's Quarterly Report on Form 10-Q for the Quarter
Ended June 30, 1992.)
(l) Form of 7-1/8% Senior Note due January 20, 2000. (Incorporated by reference
to Exhibit 1(b) of registrant's Current Report on Form 8-K filed January
19, 1993.)
(m) Form of 8-1/4% Senior Debenture due January 20, 2023. (Incorporated by
reference to Exhibit 1(c) of registrant's Current Report on Form 8-K filed
January 19, 1993.)
(n) Form of 7-3/4% Senior Debenture due March 15, 2024. (Incorporated by
reference to Exhibit 4(a) of registrant's Current Report on Form 8-K filed
March 12, 1993.)
(o) Form of 6-1/4% Senior Note due March 23, 1999. (Incorporated by reference
to Exhibit 4(a) of registrant's Current Report on Form 8-K filed March 15,
1994.)
(p) Form of 7-3/4% Senior Debenture due March 23, 2025. (Incorporated by
reference to Exhibit 4(b) of registrant's Current Report on Form 8-K filed
March 15, 1994.)
(q) Form of 7-1/8% Debenture due June 15, 2027. (Incorporated by reference to
Exhibit 4(a) of registrant's Current Report on Form 8-K filed June 21,
1996.)
<PAGE>
PAGE 3
(r) Form of 6.95% Senior Note due August 15, 2006. (Incorporated by reference
to Exhibit 4(a) of registrant's Current Report on Form 8-K filed August 8,
1996.)
(s) Form of Senior Floating Rate Note due March 16, 1999. (Incorporated by
reference to Exhibit 4(c) of registrant's Current Report on Form 8-K filed
March 15, 1994.)
(t) Rights Agreement, dated as of September 30, 1994, between the registrant
and Mellon Bank, N.A. (Incorporated by reference to Exhibit 4(a) to
registrant's Current Report on Form 8-K filed October 4, 1994.)
(u) Amendment No. 1, dated as of November 3, 1996, to Rights Agreement, dated
as of September 30, 1994, between the registrant and Mellon Bank, N.A.
(Incorporated by reference to Exhibit 2 to registrant's Form 8-A/A filed
November 20, 1996.)
(v) Amendment No. 2, dated as of August 20, 1997, to Rights Agreement, dated as
of September 30, 1994 and amended, between the Company and Morgan Guaranty
Trust Company of New York, as Rights Agent. (Incorporated by reference to
Exhibit 4 to registrant's Form 8-A/A filed November 20, 1997.)
(w) Amendment No. 3, dated as of November 9, 1997, to Rights Agreement, dated
as of September 30, 1994 and amended, between the Company and Morgan
Guaranty Trust Company of New York, as Rights Agent. (Incorporated by
reference to Exhibit 5 to registrant's Form 8-A/A filed November 20, 1997.)
(x) Junior Subordinated Indenture between registrant and Wilmington Trust
Company, as Debenture Trustee. (Incorporated by reference to Exhibit 4.01
of registrant's Registration Statement on Form S-3, Registration No. 333-
02593.)
(y) Form of Amended and Restated Trust Agreement among registrant, as
Depositor, Wilmington Trust Company, as Property Trustee and Delaware
Trustee, and the Administrative Trustees named therein. (Incorporated by
reference to Exhibit 4.10 of registrant's Registration Statement on Form
S-3, Registration No. 333-02593.)
<PAGE>
PAGE 4
(z) Form of Guarantee Agreement between registrant, as Guarantor, and
Wilmington Trust Company, as Trustee. (Incorporated by reference to Exhibit
4.12 of registrant's Registration Statement on Form S-3, Registration No.
333- 02593.)
(aa) Form of Supplemental Indenture between registrant and Wilmington Trust
Company, as Debenture Trustee. (Incorporated by reference to Exhibit 4.13
of registrant's Registration Statement on Form S-3, Registration No. 333-
02593.)
10(a)1979 Stock Option Plan of registrant, as amended and restated.
(Incorporated by reference to Exhibit 10(a) to registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1988.)
(b) Supplemental Retirement Plan for Employees of MCI Communications
Corporation and Subsidiaries, as amended. (Incorporated by reference to
Exhibit 10(b) to registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1993.)
(c) Description of Executive Life Insurance Plan for MCI Communications
Corporation and Subsidiaries. (Incorporated by reference to "Remuneration
of Officers" in registrant's Proxy Statement for its 1992 Annual Meeting of
Stockholders.)
(d) MCI Communications Corporation Executive Incentive Compensation Plan.
(Incorporated by reference to Exhibit 10(e) to registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1995.)
(e) Amendment No. 1 to MCI Communications Corporation Executive Incentive
Compensation Plan. (Incorporated by reference to Exhibit 10(e) to
registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 1996.)
(f) Form of Director Indemnification Agreement.(Incorporated by reference to
Appendix B to registrant's Proxy Statement for its 1987 Annual Meeting of
Stockholders.)
(g) 1988 Directors' Stock Option Plan of registrant. (Incorporated by reference
to Exhibit D to registrant's Proxy Statement for its 1989 Annual Meeting of
Stockholders.)
<PAGE>
PAGE 5
(h) Amendment No. 1 to the 1988 Directors' Stock Option Plan of registrant.
(Incorporated by reference to Appendix D to registrant's Proxy Statement
for its 1996 Annual Meeting of Stockholders.)
(i) Amendment No. 2 to 1988 Directors' Stock Option Plan of registrant.
(Incorporated by reference to Exhibit 10(i) to registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1996.)
(j) Amendment No. 3 to 1988 Directors' Stock Option Plan of registrant.
(Incorporated by reference to Exhibit 10(j) to registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1996.)
(k) Stock Option Plan of registrant. (Incorporated by reference to Exhibit C to
registrant's Proxy Statement for its 1989 Annual Meeting of Stockholders.)
(l) Amendment No. 1 to the Stock Option Plan of registrant. (Incorporated by
reference to Exhibit 10(l) to registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996.)
(m) Amendment No. 2 to the Stock Option Plan of registrant. (Incorporated by
reference to Appendix B to registrant's Proxy Statement for its 1996 Annual
Meeting of Stockholders.)
(n) Amendment No. 3 to the Stock Option Plan of registrant. (Incorporated by
reference to Exhibit 10(n) to registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996.)
(o) Amendment No. 4 to the Stock Option Plan of registrant. (Incorporated by
reference to Exhibit 10(o) to registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996.)
(p) Amendment No. 5 to the Stock Option Plan of registrant. (Incorporated by
reference to Exhibit 10(p) to registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996.)
(q) Board of Directors Deferred Compensation Plan of Registrant. (Incorporated
by reference to Exhibit 10(i) to registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994.)
<PAGE>
PAGE 6
(r) The Senior Executive Incentive Compensation Plan of registrant.
(Incorporated by reference to Appendix A to registrant's Proxy Statement
for its 1996 Annual Meeting of Stockholders.)
(s) Amendment No. 1 to the Senior Executive Incentive Compensation Plan of
registrant. (Incorporated by reference to Exhibit 10(s) to registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1996.)
(t) Executive Severance Policy. (Incorporated by reference to Exhibit 10(a) to
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
30, 1996.)
(u) Form of employment agreement, effective as of November 2, 1996, between MCI
and certain executive officers of MCI. (Incorporated by reference to
Exhibit 10(u) to registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996.)
(v) Amended and Restated Investment Agreement dated as of January 31, 1994
between MCI Communications Corporation and British Telecommunications plc.
(Incorporated by reference to Appendix I of registrant's Notice of Special
Meeting of Stockholders and Proxy Statement dated February 4, 1994.)
(w) Modified Joint Venture Agreement dated as of July 1, 1994 between MCI
Communications Corporation and British Telecommunications plc and MCI
Ventures Corporation and Moorgate (Twelve) Limited and Concert
Communications Company. (Incorporated by reference to Exhibit 10(l) to
registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 1994.)
(x) Warrant Purchase Agreement by and between The News Corporation Limited and
MCI Communications Corporation dated as of August 2, 1995. (Incorporated by
reference to Exhibit 10(p) to registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995.)
(y) Preferred Stock Purchase Agreement by and among MCI, News Triangle Finance,
Inc. and News T Investments, Inc. dated as of August 2, 1995. (Incorporated
by reference to Exhibit 10(q) to registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995.)
<PAGE>
PAGE 7
(z) $4,000,000,000 Revolving Credit Agreement, dated as of April 30, 1997,
among the registrant, Bank of America National Trust and Savings
Association, as agent, and the several financial institutions parties
thereto. (Incorporated by reference to Exhibit 10(a) of registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997.)
(aa) Agreement, dated as of November 9, 1997, among British Telecommunications
plc, MCI Communications Corporation and WorldCom, Inc. (Incorporated by
reference to Exhibit 10 of registrant's Current Report on Form 8-K filed on
November 12, 1997.)
12 Computation of Ratio of Earnings to Fixed Charges.
13 Certain portions of the registrant's Annual Report to Stockholders for the
year ended December 31, 1997 which are incorporated by reference into this
Annual Report on Form 10-K.
21 Significant Subsidiaries of MCI Communications Corporation.
23 Consent of Independent Accountants.
27(a) Financial Data Schedule - December 31, 1997.
(b) Financial Data Schedule - December 31, 1996.
(c) Financial Data Schedule - December 31, 1995.
99(a) Valuation and Qualifying Accounts (Schedule II).
(b) Capitalization Schedule.
(c) Accountant's Report on Financial Statement Schedule.
SUPPLEMENT NO. 2
TO THE
INDENTURE,
DATED AS OF FEBRUARY 17, 1995,
BETWEEN
MCI COMMUNICATIONS CORPORATION
AND
CITIBANK, N.A., TRUSTEE
FOR
SENIOR DEBT SECURITIES
THIS SUPPLEMENT NO. 2, dated as of March 12, 1998 ("Supplement No. 2"), to
the Indenture, dated as of February 17, 1995, as supplemented by Supplement No.
1 (the "Indenture") between MCI Communications Corporation, a Delaware
corporation (hereinafter called the "Company"), with an office at 1801
Pennsylvania Avenue, N.W., Washington, D.C. 20006, and CITIBANK, N.A., a
national banking association duly incorporated and existing under the laws of
the United States, as Trustee under the Indenture.
WHEREAS, pursuant to Section 1101(6) of the Indenture, the Company desires
to amend certain provisions contained in the Indenture, but only with respect to
Debt Securities initially issued under the Indenture on and after the date
hereof;
NOW, THEREFORE, in consideration of the mutual covenants and promises set
forth herein and other good and valuable consideration, the adequacy and receipt
of which is hereby acknowledged, the parties agree to amend the Indenture as
follows, but only with respect to Debt Securities initially issued under the
Indenture on and after the date hereof:
1. In Article 5, delete Section 501(7) in its entirety.
2. In Article 12, delete Section 1209 in its entirety.
3. This Supplement No. 2 shall be effective as of the date hereof, but only
with respect to Debt Securities initially issued under the Indenture on and
after the date hereof and shall have no effect with respect to any Debt
Securities initially issued under the Indenture prior to the date hereof.
1
<PAGE>
4. Capitalized terms not otherwise defined in this Supplement No. 2 shall have
the meanings provided for in the Indenture. This Supplement No. 2 may be
executed in counterparts, each of which together will constitute one and
the same instrument.
5. This Supplement No. 2 shall be deemed to be a contract made and to be
performed entirely in the State of New York, and for all purposes shall be
governed by and construed in accordance with the laws of said State without
regard to the conflicts of law rules of said State.
6. Except as modified herein with respect to Debt Securities initially issued
under the Indenture on and after the date hereof, all other terms and
conditions of the Indenture remain unchanged.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.]
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Supplement No. 2 to
the Indenture to be executed as of the date first written above.
MCI COMMUNICATIONS CORPORATION
BY: /s/Jonelle St. John
--------------------------
NAME: Jonelle St. John
[CORPORATE SEAL] TITLE: Vice President and Treasurer
Attest:
BY: /s/ C. Bolton-Smith, Jr.
--------------------------
NAME: C. Bolton-Smith, Jr.
TITLE: Secretary
CITIBANK, N.A., as Trustee
BY: /s/ Carol Ng
-------------------------
NAME: Carol Ng
[CORPORATE SEAL] TITLE: Vice President
Attest:
BY: /s/ Wafaa Oafy
-----------------
NAME: Wafaa Oafy
TITLE: Senior Trust Officer
3
Exhibit 12
<TABLE>
<CAPTION>
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In millions, except ratio amounts)
(unaudited)
Year Ended December 31,
--------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Earnings:
Income before
income taxes and
extraordinary item (a) $ 239 $1,955 $ 897 $1,280 $1,045
Add:
Fixed charges 568 460 344 315 315
Less:
Capitalized interest 153 118 93 78 61
------ ------ ------ ------ ------
Total earnings $ 654 $2,297 $1,148 $1,517 $1,299
====== ====== ====== ====== ======
Fixed Charges:
Fixed charges on
indebtedness,
including amortization
of debt discount and
premium(a) $ 448 $ 349 $ 242 $ 231 $ 239
Interest portion of
operating lease
rentals(b) 120 111 102 84 76
------ ------ ------ ------ ------
Total fixed charges $ 568 $ 460 $ 344 $ 315 $ 315
====== ====== ====== ====== ======
Ratio of earnings to
fixed charges 1.15 4.99 3.34 4.82 4.12
====== ====== ====== ====== ======
</TABLE>
(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>
<CAPTION>
SELECTED FINANCIAL INFORMATION Exhibit 13
MCI Communications Corporation and Subsidiaries
Year ended December 31, 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
(In millions, except per share amounts and employees)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED INCOME STATEMENT DATA
Revenue $19,653 $18,494 $15,265 $13,338 $ 11,921
Total operating expenses 18,978 16,181 14,147 11,882 10,653
Income from operations 675 2,313 1,118 1,456 1,268
Equity in income (losses) of affiliated companies (144) (156) (187) (4) (2)
Income before extraordinary item 149 1,202 548 795 627
Net income 149 1,202 548 795 582
Earnings applicable to common stockholders 149 1,202 548 794 581
Basic earnings per common share, before
extraordinary item .22 1.75 .81 1.33 1.20
Basic earnings per common share .22 1.75 .81 1.33 1.11
Diluted earnings per common share, before
extraordinary item .21 1.73 .80 1.32 1.12
Diluted earnings per common share .21 1.73 .80 1.32 1.04
Cash dividends per share .05 .05 .05 .05 .05
CONSOLIDATED BALANCE SHEET DATA
Gross investment in property and equipment $21,724 $18,709 $15,547 $13,408 $ 11,618
Total assets 25,510 22,978 19,301 16,366 11,276
Long-term debt 3,276 4,798 3,444 2,997 2,366
Subsidiary Trust mandatorily redeemable
preferred securities 750 750 - - -
Stockholders' equity 11,311 10,661 9,602 9,004 4,713
CONSOLIDATED CASH FLOW DATA
Cash from operating activities $3,488 $ 3,144 $ 2,979 $ 2,355 $ 1,978
Capital expenditures for property and equipment 3,828 3,347 2,866 2,897 1,733
Acquisition of businesses and investment
in affiliates, DBS and News Corp. 291 1,549 2,737 284 8
Cash from (used for) financing activities 480 1,354 355 3,826 (286)
OPERATIONS DATA
Capacity circuit miles 11,401 9,157 6,786 4,767 3,556
Number of full-time employees 60,409 55,285 50,367 40,667 36,235
</TABLE>
In 1997, the company adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share" (SFAS No. 128). This statement modifies the
computation of earnings per share (EPS) by replacing the computation of primary
EPS with basic EPS, which excludes the dilutive effect of common stock
equivalents. Additionally, the statement replaces fully diluted EPS with diluted
EPS. The calculation of common stock equivalents using the treasury stock method
is modified under diluted EPS to utilize an average price during the period as
compared to the Accounting Principles Board Opinion No. 15 method, which
utilized the higher of the average or ending price. EPS information for years
prior to 1997 has been restated to reflect the provisions of SFAS No. 128.
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. (Nationwide), and
SHL Systemhouse Co. (MCI Systemhouse), respectively, (collectively, the acquired
companies). 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 the company's 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.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW
The following discussion and analysis provides information 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, 1997. The
discussion should be read in conjunction with the company's consolidated
financial statements and accompanying notes.
The company is a leading provider of local-to-global communications services to
business, government and residential users. The company operates one of the
world's largest and most advanced digital networks, connecting local markets in
the U.S. to more than 280 countries and locations worldwide. The company
provides a broad range of communications services, including long-distance,
local and wireless telecommunications services and information technology (IT)
services. The company's "core" business, long-distance telecommunications
services, comprises a portfolio of domestic and international services,
including voice, intelligent 800, data, conferencing, Internet, managed network,
and electronic messaging services. Through continued investments and business
acquisitions in recent years, the company has expanded its portfolio of services
into certain ventures and developing markets, including the U.S. local, IT,
wireless, international and multimedia markets (the VDM businesses).
Merger Agreement
On November 9, 1997, the company entered into an Agreement and Plan of Merger
(the MCI WorldCom Merger Agreement) with WorldCom, Inc. (WorldCom), a Georgia
corporation, and TC Investments Corp. (Merger Sub), a Delaware corporation and a
wholly-owned subsidiary of WorldCom, pursuant to which the company will merge
with and into Merger Sub (the MCI WorldCom Merger or 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
20 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 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.
- -------------------------------------------------------------------------------
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 core business, its investments in 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, intends, 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 telecommunications 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 and MCI WorldCom; 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 the ability
to pass on additional charges imposed by the Federal Communications Commission
(FCC); 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 in the long-distance markets in the U.S.; and the cost of
the company's year 2000 compliance efforts.
<PAGE>
Concurrent with the MCI WorldCom Merger Agreement, the company, WorldCom and BT
entered into an agreement (the BT Termination Agreement) whereby (i) the
Agreement and Plan of Merger, dated as of November 3, 1996, as last amended on
August 21, 1997 (the MCI BT Merger Agreement), among the company, BT and
Tadworth Corporation was terminated; (ii) WorldCom agreed to pay BT a fee of
$450 million and expenses not in excess of $15 million in order to induce BT to
waive its rights under and agree to terminate, the MCI 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 agreed to exercise its call option to acquire the
company's shares in Concert Communications Company (Concert CS) immediately
following the effective time of the Merger. The company will be a distributor of
Concert CS services on a nonexclusive basis to customers in the U.S. for a
period of at least two years and as many as five years following BT's exercise
of its call option.
On March 11, 1998, the stockholders of the company and shareholders of WorldCom
approved the Merger. The Merger is also subject to the receipt of required
regulatory approvals which the company expects to receive in the summer of 1998.
The Merger will be accounted for as a purchase for financial accounting purposes
in accordance with generally accepted accounting principles. The company
believes that the MCI WorldCom Merger will create a fully integrated global
communications company that will be well positioned to take advantage of growth
opportunities in the global telecommunications market by providing a complete
range of local, long-distance, Internet and international communications
services.
Telecommunications Legislation
In 1997, the implementation of the Telecommunications Act of 1996 (1996 Act)
continued to influence market opportunities for entry into local markets and to
govern the climate for long-distance services, with federal courts and lawsuits
playing an increasingly important role. The 1996 Act encouraged competition in
local markets by requiring incumbent local exchange companies (ILECs), including
the RBOCS, to interconnect with new competitive local exchange carriers (CLECs)
and, among other things, permit the CLECs to use unbundled parts of the ILECs'
networks. The 1996 Act directed the Federal Communications Commission (FCC) to
issue rules governing the availability of these unbundled network elements
(UNEs) and guidelines governing ILEC-CLEC interconnection arrangements. The
FCC's rules prescribed the minimum degree of unbundling required of ILECs and
that UNEs should be priced at forward-looking costs. However, on petitions for
review by the ILECs and certain state public utility commissions, the U.S. Court
of Appeals for the Eighth Circuit (Eighth Circuit) concluded that the FCC had
exceeded its authority in issuing these rules. As a result, each state
independently must determine its own applicable interconnection guidelines and
pricing. Many states have explicitly adopted forward-looking cost principles on
their own, mitigating the effects of the Eighth Circuit decision. The Supreme
Court has agreed to review the Eighth Circuit decision during 1998, and the
company is hopeful that the FCC's rules will be reinstated.
The 1996 Act also barred the RBOCs from providing in-region long-distance
services until their local markets had been sufficiently opened to competition.
The FCC has denied RBOC petitions to provide long-distance services in Oklahoma,
Michigan, South Carolina and Louisiana. On March 20, 1998 the D.C. Circuit
affirmed the FCC's rejection of SBC Communications Inc.'s long-distance bid in
Oklahoma. On December 31, 1997, a federal district court in Wichita Falls, Texas
declared unconstitutional the 1996 Act's provisions barring RBOC provision of
in-region long-distance services. The company and others have appealed the
decision and the judge has stayed the decision pending its appeal to the U.S.
Court of Appeals for the Fifth Circuit.
During 1997, the company made progress in opening local markets to competition
by obtaining regulatory approval as a CLEC in 18 additional states, bringing the
total to 42 states. Applications are pending in 7 other states as of December
31, 1997. The company also made progress in convincing regulators of the
inadequate steps being taken by the ILECs to open local markets. The FCC and
several state regulators have determined that the operational support systems
necessary to sell local services provisioned from the ILEC networks currently
are insufficient to enable the company to compete effectively with the ILEC for
customers when using such ILEC facilities.
In May 1997, the FCC also adopted several orders that implemented access charge
reform and adjusted the price cap rules that regulate the largest ILECs'
interstate access charges. The FCC's Access Reform Order restructured interstate
access charges to shift more costs directly to end users. The Access Reform
Order also reduced per-minute charges long-distance carriers will pay and
created new flat-rate charges to long-distance carriers based on the number of
pre-subscribed customers the carrier has and subscriber lines held by these
customers. As a result of FCC actions in 1997, the long-distance industry saw
annualized interstate access reductions of $1.7 billion. State intrastate access
charges were reduced by more than $100 million in 1997.
While per-minute access rates were dropping, per-line charges were increasing
and new universal service support obligations for telecommunications services
for schools and libraries and rural health care facilities were created. Costs
of providing telecommunications service in 1998 are expected to increase despite
rate reductions that went into effect on January 1, 1998. The company has
announced that it will continue to review costs and rates, and will recalibrate
rates as necessary to ensure it is collecting the amounts necessary to pay ILEC
per-minute and per-line access charges and the universal service obligations
imposed directly on the company.
Certain provisions of the access reform, price cap, and universal service orders
are now under review by various U.S. Courts of Appeals. In addition, the company
has renewed its requests that the FCC itself revisit access reform and mandate
that access charges decrease to cost.
Internationally, the company will also benefit from the signing of the World
Trade Organization Telecom Agreement by the United States and 71 other member
countries that opens to competition markets controlled by monopolies. This
agreement should provide additional opportunities for the company to provide
services in the rapidly expanding global market.
Recently Issued Accounting Pronouncements
In 1997, the Financial Accounting Standards Board issued three statements that
will be effective for the company's year ending December 31, 1998. The company
is currently evaluating the effects of Statements of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income", SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information", and SFAS
No.132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits", however management believes the adoption of these statements will not
have a material impact on the financial statements taken as a whole. In March
1998, the American Institute of Certified Public Accountants issued Statement of
Position No. 98-1 "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use", that will be effective for the company's year ending
December 31, 1999. Management is currently analyzing the impact of the adoption
of the statement, which may be material to the financial statements.
CONSOLIDATED RESULTS OF OPERATIONS
The following discusses the company's consolidated results of operations for the
three years ended December 31, 1997. Prior to 1996 and the acquisition of
Nationwide and MCI Systemhouse in September and November 1995, respectively,
substantially all of the company's revenue was derived from its core business.
Refer to the Enterprise Reporting section for further discussion of the
company's core and VDM businesses.
Revenue
In 1997, revenue increased by $1.2 billion, or 6%, from 1996 compared to a $3.2
billion, or 21% increase in 1996 revenue over 1995. In 1997, core business
revenue increased $835 million, or 5%, while VDM revenue, excluding intercompany
sales, increased $324 million, or 19%. In 1996, core business revenue increased
$1.8 billion or 12% and VDM revenue, excluding intercompany sales, increased
$1.4 billion. Core business growth slowed in 1997 as a result of the access
price reduction flow through, competitive pricing dynamics in certain areas and
strategic decisions by management. In 1997, management took several steps to
improve long-term profitability and growth including eliminating acquisition
promotions in the residential market, focusing on high-value residential
customers and de-emphasizing growth in the wholesale carrier sales channel. In
1997, the VDM revenue increase was driven by increases in IT and local services,
while the 1996 year-over-year revenue increase reflects the full year impact
from acquired companies which accounted for 44% of the consolidated revenue
growth during that period.
Cost of Services
Cost of services consist 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 the
VDM businesses, costs of other products and services primarily include
equipment, software, and IT services costs. In 1997, cost of services increased
by $1,467 million, or 15.5%, to $10,956 million compared to $9,489 million and
$7,893 million in 1996 and 1995, respectively. Cost of services as a percentage
of revenue was 55.7% in 1997, 51.3% in 1996 and 51.7% in 1995. The increased
expense and related percentage of revenue in 1997 reflects $361 million,
representing 1.8% of revenue, of costs to exit, restructure or settle several
business contracts as the company de-emphasized its wholesale carrier business
and ceased certain product and service offerings. The remaining increase in cost
of services and the related percentage of revenue increase was primarily the
result of consolidated revenue growth and increases in direct operating expenses
in the company's local and IT businesses. Telecommunications expense as a
percentage of core business revenue was 50.2% in 1997 as compared to 49.9% in
1996 and 51.9% in 1995. The increase from 1996 to 1997 was due to the revenue
mix and the impact of newly required compensation to payphone owners for 800
calls, partially offset by the reduction in international settlement expense and
more efficient network usage. In 1996, cost of services increased by $1,596
million, or 20%, from 1995, which was consistent, as a percentage, with the
increase in consolidated revenue and full year consolidation of the acquired
companies.
Sales, Operations and General
Sales, operations and general expenses increased in 1997 by $912 million, or
18.1%, to $5,940 million as compared to $5,028 million and $4,426 million in
1996 and 1995, respectively. Sales, operations and general expenses as a
percentage of revenue were 30.2% in 1997, 27.2% in 1996,and 29.0% in 1995. The
higher expenses and related percentage of revenue in 1997 and 1995 were
primarily the result of business growth and certain actions taken in the second
half of 1997 as discussed below. During the second half of 1997, the company
initiated and completed a comprehensive review of certain product and service
offerings, and selected operations. In conjunction with this review, the company
decided to consolidate certain operating centers and streamline or discontinue
certain non-core or under-performing IT operations, and reorganize certain
operations and to eliminate certain product and service offerings within its
core business. The company recorded $282 million, representing 1.4% of revenue,
of costs for these actions which included approximately $103 million of
severance in connection with workforce alignments associated with reorganization
efforts and $93 million of obligations and penalties associated with lease,
vendor and customer contracts. The remainder represents other costs associated
with the company's business reorganization and certain legal costs. Cash
expenditures related to these obligations were and will continue to be funded
through cash from operations. Once these initiatives are completed, the company
expects annual operating expense savings of approximately $150 million in sales,
operations and general expense, partially offset by increased costs associated
with planned business growth.
During the fourth quarter of 1997, the company also incurred approximately $220
million, representing 1.1% of revenue, of costs for employee pre-merger
retention bonuses and increased customer retention activities. In connection
with the execution of the BT Merger Agreement and as modified under the MCI
WorldCom Merger Agreement, pre-merger retention bonus pools (retention pools)
totaling $270 million were established to retain key executives and employees of
the company. The company recorded compensation costs in 1997 of $93 million
related to these retention pools of which $82 million was paid by December 31,
1997. The remaining accrued compensation costs of $11 million and other amounts
payable from these retention pools are scheduled to be paid in 1998 and 1999.
However, all unpaid amounts under these retention pools will be paid on the
closing date of the MCI WorldCom Merger or any other transaction involving the
sale or other disposition of a majority of the company's capital stock or assets
if occurring earlier than the scheduled payment dates. Customer retention
activities included additional advertising and marketing expenses for
residential product offerings meant, in part, to reinforce the company brand and
service offerings to consumers. These initiatives included advertising and
marketing related to a national product rollout as well as increased brand
advertising for consumer offerings. The company does not expect to incur a
similar level of expense in 1998 related to these activities.
The remaining increase in sales, operations and general expenses in 1997 was due
to business growth in local and IT services and the related increases in
marketing, selling, and personnel costs. The percentage reduction in sales,
operations and general expenses in 1996 was primarily the result of cost savings
associated with the 1995 restructuring efforts, and more efficient utilization
of personnel costs. In 1995, sales, operations and general expenses included
$216 million of costs related to the consolidation of the company's core
business operations and the centralization of major administrative functions.
Depreciation including Asset Write-downs
Depreciation expense increased by $418 million, or 25%, to $2,082 million
compared to $1,664 million and $1,308 million in 1996 and 1995, respectively.
The increase primarily relates to capital expenditures for property and
equipment principally for the core and local services communications networks to
increase network capacity, redundancy and reliability and add product features
and functionality which were $3.8 billion and $3.3 billion for the years ended
December 31, 1997, and 1996 respectively. In 1998, the company expects to incur
$3.3 billion in capital expenditures, an anticipated year-over-year decline due
to lower long-distance network requirements. The 1997 expense increase also
reflects $60 million related to the write-down of certain assets included in the
company's fourth quarter 1997 asset disposition plan described below and the
depreciation impact of asset additions. In 1996, depreciation expense increased
by $356 million, or 27%, primarily as a result of the network additions in 1996
and 1995. During the third quarter of 1995, the company recorded a $520 million
charge for an asset write-down primarily related to the consolidation of the
company's core business, the centralization of major administrative functions or
assets no longer aligned with strategic product offerings.
In connection with an asset disposition plan adopted in the fourth quarter of
1997, the company will dispose of certain equipment primarily in the first half
of 1998. The net book value of the assets to be disposed of aggregated $265
million with no significant proceeds expected. The productive assets included in
the disposition plan were identified in response to changes in specific
customer, product and technology strategies. The major part of this plan
included the early replacement of central processing units and data storage
devices. The company reassessed and consequently revised its strategies related
to data processing and storage in order to maximize facility space in its data
centers which is critical to support growth in products that require customer
collocation in such centers. The company will replace this equipment with
devices that offer greater processing and storage capabilities with reduced
operating and maintenance costs and less floor space. Depreciation expense in
1997 includes $60 million representing the net book value of the assets included
in the disposition plan which had been removed from service by December 31,
1997. The company will continue to use the remaining assets until they are
removed from service and accelerate the recognition of depreciation expense on
these assets over their shortened remaining service period. The company expects
that substantially all of the remaining assets will be decommissioned and
disposed of by June 30, 1998. This change will result in estimated additional
depreciation expense of up to approximately $190 million in the first half of
1998. The company had been depreciating this equipment over estimated lives
averaging six years. This would compare with an average life of four years, had
the assets been depreciated over the revised service period as contemplated in
the fourth quarter 1997 disposition plan. Moreover, had the company originally
depreciated these assets ratably over such revised service period, depreciation
expense, exclusive of the $60 million referred to above, would have been
approximately $59 million, $55 million and $43 million higher in 1997, 1996 and
1995, respectively.
Interest
Interest expense in 1997 rose $39 million from 1996 due to an increase in the
average amount of debt outstanding as a result of commercial paper issuances in
1997 and capital lease commitments made in 1997. In 1996, interest expense
increased $47 million from 1995 also due to an increase in the average amount of
outstanding debt as a result of commercial paper and debt securities issuance
during 1995.
Interest income decreased $16 million from 1996 due to lower cash and marketable
securities balances held throughout 1997. In 1996, interest income decreased
$113 million from 1995 due to lower marketable securities balances 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.
Equity in Income (Losses) of Affiliated Companies
Equity in income (losses) of affiliated companies decreased by $12 million to
$(144) million in 1997. The company's share of operating losses of ICS
Communications, Inc. (ICS), Concert CS, and its former on-line project with the
News Corporation Limited (News Corp.) declined in 1997. These declines were
offset by the company's share of increased operating losses of Avantel which
included $16 million related to the company's share of operating losses
recognized in connection with an Avantel restructuring and equal access
implementation. In 1996, equity in losses of affiliated companies decreased by
$31 million as compared to 1995. This decrease is the result of the absence in
1996 of any charges similar to the $95 million charge incurred in 1995 related
to investee restructuring plans and the 1995 write-down of the carrying value of
several equity investees, offset by increased losses in certain of the company's
investments and start-up ventures including Avantel, ICS, and the company's
on-line project with News Corp.
Other
Other expense, net, increased by $10 million in 1997 and decreased by $27
million in 1996. The 1996 decrease is primarily due to $54 million full year
dividend income from the company's preferred stock investment in News Corp.
compared to a partial year in 1995.
Distributions on Subsidiary Trust Mandatorily Redeemable Preferred Securities
Distributions on subsidiary Trust mandatorily redeemable preferred securities,
issued in May 1996, totaled $60 million and $35 million for the years ended
December 31, 1997, and 1996, respectively.
ENTERPRISE REPORTING
This section discusses the results of operations of the company's core and VDM
businesses. The Enterprise Reporting financial data table and ensuing discussion
on pages 8 to 10 are intended to supplement management's discussion and analysis
of the consolidated results of operations. The unaudited data appearing in this
table was prepared using all amounts included in the consolidated financial
statements and reflects estimates and allocations that management believes
provide a reasonable basis on which to present such information. The revenue and
net income (loss) amounts include sales of services between the core businesses
and VDM businesses 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. The consolidated income tax provision and related tax
payments are allocated to each enterprise based on their respective tax
attributes.
<PAGE>
<TABLE>
<CAPTION>
SUPPLEMENTAL ENTERPRISE REPORTING DATA
CORE RESULTS VDM RESULTS
Year ended December 31, 1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C> <C>
Revenue $17,619 $16,784 $2,508 $1,953
Income (loss) from operations 1,535 2,453 (814) (126)
Equity in income (losses) of affiliated companies - - (144) (156)
Net income (loss) 945 1,514 (766) (298)
Depreciation including asset write-downs 1,860 1,536 222 128
Net interest, income taxes and other expense (590) (939) 192 (16)
EBITDA* 3,395 3,989 (592) 2
</TABLE>
* 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 including asset write-downs 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.
CORE BUSINESS
In 1997, revenue increased 5%, to $17.6 billion, on traffic growth of 6%, from
1996. In 1996, revenue and traffic increased 12% and 13%, respectively. The 1997
revenue growth reflects a reduction of $67 million primarily related to the
impact of an increase in uncollectible provisions required by bankruptcies and
delinquencies of business customer accounts. In addition and as previously
mentioned, revenue and traffic growth slowed in 1997 due to several strategic
decisions addressing long-term financial performance of the business and the
continued industry-wide competitive pricing pressures. The revenue and traffic
trends and related variance in 1997 and 1996 reflects changes in product and
business sales channel mix, the impact of eliminating acquisition promotions in
the residential market, focus on high-value residential customers, and enhanced
and value added services.
Revenue in the business market continued to increase in 1997 driven by sales to
commercial customers, while revenue and traffic growth on sales to wholesale
carrier customers slowed as the company took actions to restructure and
de-emphasize this sales channel to improve profitability. In 1997, revenue
growth in the business market continued in strategic services such as data,
Internet, and conferencing as well as traditional voice services. In the mass
market, the company continued to focus on transitioning its customer base to
high-value customers by offering integrated communications services with
products such as MCI One(R). While revenue decreased in the mass market in 1997,
customer churn continued to decline and revenue and traffic trends improved with
the launch of 5-Cent SundaysSM and growth in transactional brands such as
10-321(R) and 1-800-COLLECT(R). In 1996, revenue in the business market
increased across all sales channels driven by growth in strategic and
traditional products, while growth in the mass market was slowed due to
competitive pressures.
VENTURES AND DEVELOPING MARKETS BUSINESSES
Investments in the VDM businesses are included in the accompanying financial
statements as consolidated subsidiaries, unconsolidated equity investments or
cost method investments such as News Corp. The company's result of operations in
these businesses is provided below.
Local Services
The company provides switched local service to both business and residential
customers and provides dedicated access and dark fiber services to business
customers using its 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.
Company-owned facilities-based local service continues to be a strategic
priority of the company because it is a critical factor in its ability to
deliver end-to-end communications service from local markets in the U.S. to
domestic and worldwide locations. At December 31, 1997, the company had been
granted authority to offer local exchange service in 42 states, had applications
for authority pending in 7 other states, and has an investment in a provider of
local service in Alaska. Since December 31, 1996, the number of operational
local city networks increased to 80 in 39 cities from 62 networks in 35 cities,
and route miles increased by 24%, to 3,654 miles at December 31, 1997. At
December 31, 1997, the company provided facilities-based, switched local service
in 31 markets and intends to have service operational in at least 100 markets
after the completion of the MCI WorldCom Merger. Local service expansion and
traffic growth continued to be hampered by changes in Federal and state
regulations governing the opening of local markets. In January 1998, the company
ceased efforts to resell local services to new residential consumers due to high
costs associated with the service offering.
In 1997, local service revenue increased $165 million, to $343 million, from
$178 million in 1996 on sales of switched, competitive access services and
fiber-optic capacity. A majority of this growth resulted from services provided
to the company's business customers, with a smaller portion resulting from
services provided to residential customers and the core long-distance network.
The loss from operations was $(559) million and $(97) million for the years
ended December 31, 1997, and 1996, respectively, while net loss was $(375)
million and $(70) million, respectively, for the same periods. EBITDA for the
years ended December 31, 1997, and 1996 was $(485) million and $(62) million,
respectively. In 1997, local services' start-up nature and facilities-based
expansion into 13 new markets contributed to the increases in operating costs
and net loss and the decrease in EBITDA.
Information Technology Services
IT services include the results of MCI Systemhouse and call center services. MCI
Systemhouse services include equipment deployment, consulting and systems
integration, and outsourcing. IT services revenue increased by $426 million to
$1,827 million, or 30%, in 1997 from $1,401 in 1996. Revenue grew in each
service line in 1997 compared to 1996. Revenue from equipment deployment and
educational services increased 15%, to $788 million; consulting and systems
integration revenue increased 51%, to $603 million; outsourcing services revenue
grew by 45%, to $324 million, and call center services revenue increased 20%, to
$112 million. This growth reflects the emerging industry-wide demand for
information technology and call center outsourcing and automation services. Cost
of services and sales, operations and general expenses increased by 48% in 1997
as a result of the business growth and the related increase in equipment and
personnel requirements to address new contract and customer requirements as well
as strategic decisions made by management. As previously described, in the
second half of 1997 MCI Systemhouse initiated efforts to consolidate certain
operating centers and streamline certain non-core and under performing
operations to enhance efficiencies within its expanding organization. Including
the impact of costs associated with these 1997 actions, IT services income
(loss) from operations was $(195) million and $42 million, and net loss was
$(212) million and $(59) million for the years ended December 31, 1997, and
1996, respectively. EBITDA was $(83) million and $114 million for the same
periods.
Backlog, which includes amounts committed under executed contracts or letters of
intent at December 31, 1997 and 1996, was approximately $2 billion, the majority
of which is from MCI Systemhouse's largest customers. The company expects that
approximately 24% of the backlog will be delivered in the next 12 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.
Wireless
Wireless includes the results of operations of the company's cellular and paging
services. In 1997, the company focused on providing wireless services as part of
a total communications services package rather than as stand-alone offerings.
Wireless revenue decreased by $33 million, to $314 million, in 1997. This
decrease is the result of a reduction in paging subscribers of 43% to 176
thousand. This decline was offset by a 3% increase in cellular subscribers at
December 31, 1997.
International Services
During 1997, the company invested $61 million in Concert CS, a 24.9% owned
international services venture with BT that provides a complete portfolio of
advanced global communications services, including virtual network, frame relay,
managed bandwidth and packet services, available to multinational business
customers worldwide. For the years ended December 31, 1997 and 1996, Concert CS
distributor revenue amounted to approximately $750 million and $570 million,
respectively. The company's share of Concert CS losses reported in accordance
with U.S. GAAP was $(21) million and $(31) million for the years ended December
31, 1997, and 1996, respectively. Through December 31, 1997, the company had
invested approximately $231 million in Concert CS since its launch in July 1994.
Pursuant to the BT Termination Agreement, BT has agreed to exercise its call
option to acquire the companys shares in Concert CS immediately following the
effective time of the MCI WorldCom Merger. Upon purchase of the companys
interest in Concert CS by BT, the company will no longer be an exclusive
distributor of Concert CS. However, Concert CS will continue to provide services
to MCI WorldCom on a nonexclusive basis for customers in the U.S. for a period
of at least two years and as many as five years. MCI WorldCom expects to
continue providing global service solutions either through Concert CS or its own
operations.
In April 1997, the company formed a strategic alliance with Telefonica de
Espana, S.A. (Telefonica) to explore opportunities in Latin America's
telecommunications market. In March 1998, the company and Telefonica expanded
the scope of their alliance to include WorldCom and to pursue certain activities
in the Americas and Europe.
During 1997, the company invested an additional $54 million in Avantel, a 44.5%
owned business venture with Grupo Financiero Banamex-Accival, bringing its total
invested cash position to $549 million. Avantel built Mexico's first all digital
fiber-optic network and was the first company to provide alternative
long-distance service in Mexico's telecommunications market, competing against
Telefonos de Mexico. On January 1, 1997, Avantel began offering a full range of
competitive, switched long-distance services to residential and business
customers. Offering services throughout most of Mexico, Avantel has obtained
more than a 10% share in the addressable Mexico long-distance market. The
company's share of Avantel's losses reported in accordance with U.S. GAAP
increased by $73 million, to $(103) million, in 1997 from $(30) million in 1996.
The increased losses relate to the start-up nature of their operations and
additional costs incurred with the implementation of equal access in Mexico and
certain restructuring efforts. The company expects to incur additional losses on
its investment during 1998 as Avantel continues to expand its service and
customer bases in Mexico's telecommunications market. In connection with the
strategic alliance agreement, Telefonica agreed to invest $250 million in
Avantel and to purchase additional equity if certain qualified transactions
occur. In certain circumstances, Telefonica has the right to require the company
to acquire its interest in Avantel at its cost.
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 years ended
December 31, 1997 and 1996 was $59 million and $54 million, respectively.
DBS is a point-to-multipoint broadcast service that uses high-powered Ku band
satellites placed in geosynchronous orbit. In December 1996, the FCC issued the
DBS license awarded to the company in the January 1996 public auction. In May
1997, the company and News Corp. entered into an agreement to form a joint
venture (DBS Venture) in which both parties would contribute their respective
DBS assets and cash. In exchange, the company would receive a 19.9% interest in
the new venture. The agreement also provided that the parties would seek a third
party to acquire their combined interests in this DBS business. In June 1997,
the company and News Corp. entered into an agreement with Primestar Partners,
L.P. (Primestar) for the sale and transfer of the company's and News Corp.'s
DBS assets other than two of the four DBS Venture satellites (Primestar
Transaction). In March 1998, the parties sold their interest in one of the
remaining satellites. The parties are pursuing the disposition of the other
satellite, which is still under construction. The Primestar 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) that
was completed in April 1998. Concurrent with the consummation 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 New Primestar
consideration in the form of cash and interest bearing non-voting New Primestar
securities for its share of the DBS Venture assets transferred to New Primestar.
The Primestar Transaction is subject to regulatory approvals, including approval
by the FCC and the Department of Justice. As of December 31, 1997, the company
had capitalized $1,043 million related to its investment in DBS, $682 million of
which was for the payment of the license and the remainder related primarily to
the construction of two satellites.
YEAR 2000 EFFORTS
The company is continuing its evaluation and upgrading of its computer systems
and applications for the year 2000. The company is also seeking confirmation
from its primary processing and supplier vendors that they are developing and
implementing plans to become year 2000 compliant. The company is utilizing both
internal and external resources to identify, correct or reprogram, and test its
systems for year 2000 compliance. The company expects to incur internal labor as
well as consulting and other expenses related to infrastructure and facilities
enhancements necessary to prepare its systems for the year 2000. The costs
incurred to date have not been significant, however, the company expects to
incur approximately $400 million in expense over the next two years to implement
its year 2000 plan. The company expects to be year 2000 compliant before
December 31, 1999.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Cash from operating activities increased by $344 million to $3,488 million.
Receipts from customers increased by $1,589 million in 1997 due primarily to the
increase in revenue. Payments to suppliers and employees increased by $1,397
million as a result of the increases in costs of services and sales, operations
and general expenses in 1997. Taxes paid decreased in 1997 by $203 million
primarily due to the reduction in net income for the year. Interest paid in 1997
rose as the result of higher average debt balances during the year. Cash used
for investing activities decreased by $888 million in 1997 due primarily to
lower funding requirements for investments in VDM businesses. Capital
expenditures, primarily for the company's core and local services networks, were
the most significant investing activity and increased by $481 million to $3,828
million. The company also made additional capital contributions to Avantel,
Concert CS, and other affiliated entities of $130 million, an approximate 60%
decline from 1996. Current year investments related to DBS and related satellite
construction costs declined by $692 million from 1996 due primarily to the $682
million payment for the FCC license made in 1996. In 1996, the company also
invested an additional $350 million in News Corp. No additional investments were
made in News Corp. in 1997. Cash from operating activities and financing
activities was used to support the company's investing activities during 1997.
Cash required from financing activities declined by $874 million in 1997 due to
the increase in cash from operating activities and the reduction in amounts
required for investing activities. In 1997, the company's financing requirements
were met by issuances of commercial paper and proceeds raised from issuances of
stock to employees under benefit plans. During 1997, the commercial paper
balance increased to $384 million. Proceeds from issuances of common stock under
employee benefit plans were $580 million, an increase of $154 million from 1996.
Other investing activities in 1997 included the payment of dividends on common
stock of $35 million, distributions paid on the subsidiary Trust mandatorily
redeemable preferred securities of $60 million and purchases of treasury stock
of $93 million.
Working Capital
Working capital (defined as current assets less current liabilities) was
$(2,836) million and $(330) million at December 31, 1997 and 1996, respectively.
The significant decrease in working capital is the result of the change in
classification of commercial paper balances of $1,806 million to current
liabilities as described below. At December 31, 1997, current assets increased
by $544 million from December 31, 1996, primarily as a result of the increase in
accounts receivable related to the growth in revenue; and a receivable from a
sale-lease back transaction offset by a reduction in marketable securities
balances that were used to fund working capital requirements. Current
liabilities, excluding the reclassification referred to above, increased by
$1,244 million from December 31, 1996 as a result of the increase in accounts
payable, accrued telecommunications expenses and other accrued liabilities from
higher operating expenses and the impact of the actions taken by the company in
the last half of 1997.
Liquidity and Capital Resources
In 1997, the company funded its capital expenditures and other investment
activities through cash from operations, commercial paper issuances and other
financing activities. In 1998, the company plans approximately $3.3 billion in
capital expenditures, with the year-to-year reduction coming from lower core
business requirements, a majority of which will be funded by cash from
operations. The company has a $4 billion bank credit facility that supports the
companys commercial paper program and may be used to fund short-term
fluctuations in working capital and other corporate requirements. This credit
facility expires in April 1998 and, accordingly, borrowings associated with this
bank credit facility have been classified as short-term liabilities at December
31, 1997. The company expects to extend this credit facility prior to its
expiration. The company also 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. At December 31, 1997, there was $1,806 million
outstanding under the commercial paper program and bank credit facility, and no
securities had been issued under the shelf registration. The company plans to
issue up to $1 billion aggregate principal amount of senior debt securities
under this shelf registration during the second quarter of 1998, which proceeds
will be used for general corporate purposes, including repayment of short term
borrowings under the companys commercial paper program. The company believes it
will be able to meet its current and long-term liquidity and capital
requirements from cash from operating activities, existing debt facilities
including the extended facility discussed above and use of the shelf
registration. In July 1997, the company entered into a forward starting interest
rate swap agreement (the swap) in the notional principal amount of $500 million
for a term of 15 years. The swap involves the receipt of floating-rate interest
and the payment of fixed-rate interest at 6.71% without the exchange of the
underlying principal amount. The swap has been designated as a hedge against
adverse changes in market interest rates on fixed-rate debt expected to be
issued in the second quarter of 1998. The companys credit risk related to
interest rate swaps is dependent upon both the movement of interest rates and
the possibility of non-payment by swap counterparties. The company mitigates its
credit risk by only entering into swap agreements with high-quality
counterparties. The company believes its market risk exposure with regard to its
financial instruments is limited to changes in interest rates primarily in the
U.S. Based upon the composition of the companys variable rate debt outstanding
at December 31, 1997 which is primarily borrowings under the commercial paper
program, the company does not believe that a hypothetical 100 basis point
increase in short-term rates would be material to net income.
The companys debt to total capitalization, defined as total debt to total debt
plus subsidiary Trust mandatorily redeemable preferred securities and equity,
increased to 31% at December 31, 1997, from 30% at December 31, 1996. The
increase in 1997 was the result of commercial paper issuances in 1997 to fund
investments in the VDM businesses, capital expenditures and other corporate
requirements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED INCOME STATEMENTS
MCI Communications Corporation and Subsidiaries
Year ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
(In millions, except per share amounts)
<S> <C> <C> <C>
REVENUE $19,653 $18,494 $15,265
OPERATING EXPENSES
Cost of services 10,956 9,489 7,893
Sales, operations and general 5,940 5,028 4,426
Depreciation including asset write-downs 2,082 1,664 1,828
-----------------------------------------
TOTAL OPERATING EXPENSES 18,978 16,181 14,147
-----------------------------------------
INCOME FROM OPERATIONS 675 2,313 1,118
Interest expense (235) (196) (149)
Interest income 18 34 147
Equity in income (losses) of affiliated companies (144) (156) (187)
Other expense, net (15) (5) (32)
INCOME BEFORE INCOME TAXES 299 1,990 897
Income tax provision 90 753 349
Distributions on subsidiary Trust mandatorily redeemable preferred securities 60 35 -
-----------------------------------------
NET INCOME $ 149 $ 1,202 $ 548
=======================================
BASIC EARNINGS PER COMMON SHARE $ 0.22 $ 1.75 $ 0.81
DILUTED EARNINGS PER COMMON SHARE $ 0.21 $ 1.73 $ 0.80
Weighted average number of common shares 693 687 680
Weighted average number of common shares - assuming dilution 707 695 687
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
MCI Communications Corporation and Subsidiaries
December 31, 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
(In millions)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 261 $ 187
Marketable securities - 161
Receivables, net of allowance for
uncollectibles of $372 and $273 million 3,576 3,480
Other current assets 1,423 888
TOTAL CURRENT ASSETS 5,260 4,716
PROPERTY AND EQUIPMENT
Communications system in service 16,291 14,005
Furniture, fixtures and equipment 3,263 2,848
Other property 616 519
TOTAL PROPERTY AND EQUIPMENT 20,170 17,372
Accumulated depreciation (7,856) (6,535)
Construction in progress 1,554 1,337
TOTAL PROPERTY AND EQUIPMENT, NET 13,868 12,174
Investment in affiliates 653 690
Investment in Direct Broadcast Satellite 1,043 893
Investment in News Corp. 1,350 1,350
Other assets and deferred charges, net 991 736
Goodwill, net 2,345 2,419
TOTAL OTHER ASSETS 6,382 6,088
TOTAL ASSETS $ 25,510 $ 22,978
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,321 $ 992
Accrued telecommunications expense 2,416 2,045
Other accrued liabilities 2,248 1,806
Long-term debt due within one year 2,111 203
TOTAL CURRENT LIABILITIES 8,096 5,046
NONCURRENT LIABILITIES
Long-term debt 3,276 4,798
Deferred taxes and other 2,077 1,723
TOTAL NONCURRENT LIABILITIES 5,353 6,521
COMMITMENTS AND CONTINGENT LIABILITIES
COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEFERRABLE INTEREST
DEBENTURES OF THE COMPANY 750 750
STOCKHOLDERS' EQUITY
Class A common stock, $.10 par value, authorized 500 million shares, issued 136
million shares 14 14
Common stock, $.10 par value, authorized 2 billion shares, issued 593 million shares 60 60
Additional paid-in capital 6,362 6,410
Retained earnings 5,345 5,231
Treasury stock, at cost, 22 and 44 million shares (470) (1,054)
TOTAL STOCKHOLDERS' EQUITY 11,311 10,661
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 25,510 $ 22,978
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
MCI Communications Corporation and Subsidiaries
Year ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
(In millions)
OPERATING ACTIVITIES
<S> <C> <C> <C>
Receipts from customers $ 19,405 $ 17,816 $ 14,888
Payments to suppliers and employees (15,341) (13,944) (11,549)
Taxes paid (412) (615) (416)
Interest paid (176) (147) (113)
Interest received 12 34 169
CASH FROM OPERATING ACTIVITIES 3,488 3,144 2,979
INVESTING ACTIVITIES
Capital expenditures for property and equipment (3,828) (3,347) (2,866)
Purchases of marketable securities (3) (487) (4,630)
Proceeds from sales and maturities of marketable securities 222 641 5,930
Acquisition of businesses, net of cash acquired - (40) (1,243)
Investment in News Corp. - (350) (1,000)
Investment in Direct Broadcast Satellite (161) (853) -
Investment in affiliates (130) (306) (494)
Other, net 6 (40) 11
CASH USED FOR INVESTING ACTIVITIES (3,894) (4,782) (4,292)
NET CASH FLOW BEFORE FINANCING ACTIVITIES (406) (1,638) (1,313)
FINANCING ACTIVITIES
Issuance of Senior Notes and other debt - 796 -
Payment of Senior Notes and other debt (296) (595) (305)
Commercial paper and bank credit facility activity, net 384 717 702
Issuance of subsidiary Trust mandatorily redeemable
preferred securities, net - 726 -
Issuance of common stock for employee plans 580 426 275
Payment of dividends on common stock (35) (34) (33)
Distributions paid on subsidiary Trust mandatorily redeemable
preferred securities (60) (35) -
Purchase of treasury stock (93) (647) (284)
CASH FROM FINANCING ACTIVITIES 480 1,354 355
Net increase(decrease)in cash and cash equivalents 74 (284) (958)
Cash and cash equivalents at beginning of year 187 471 1,429
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 261 $ 187 $ 471
Reconciliation of net income to cash from operating activities:
Net income $ 149 $ 1,202 $ 548
Adjustments to net income:
Depreciation including asset write-downs and amortization 2,118 1,722 1,887
Equity in (income) losses of affiliated companies 144 156 187
Deferred income tax provision 92 298 144
Net change in operating activity accounts other than cash and cash equivalents,
net of effects of acquisition of businesses:
Receivables (96) (568) (442)
Operating accounts payable and accrued liabilities 621 350 634
Other operating activity accounts 460 (16) 21
CASH FROM OPERATING ACTIVITIES $3,488 $ 3,144 $ 2,979
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
MCI Communications Corporation and Subsidiaries
Class A Additional Treasury Stock-
Common Common Paid-in Retained Stock, holders'
Stock Stock Capital Earnings at Cost Equity
(In millions)
<S> <C> <C> <C> <C> <C> <C>
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
Unrealized loss on investments and other - - 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 - - 60 - - 60
Unrealized gains on investments and other - - 1 - - 1
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
Common stock issued for employee
stock and benefit plans
(25 million shares) - - (111) - 671 560
Tax benefit of common stock
transactions related to employee
benefit plans - - 44 - - 44
Unrealized gains on investments and other - - 19 - - 19
Net income - - - 149 - 149
Common stock dividends - - - (35) - (35)
Treasury stock purchased
(3 million shares) - - - - (87) (87)
BALANCE AT DECEMBER 31, 1997 $14 $60 $6,362 $5,345 $(470) $11,311
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MCI Communications Corporation and Subsidiaries
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
MCI Communications Corporation and its majority-owned subsidiaries
(collectively, the company) operate predominately in a single industry, the
telecommunications industry which includes the broad range of long-distance,
local, and wireless telecommunications services; the company also provides
information technology services. Long-distance telecommunications services
comprise a wide spectrum of domestic and international voice and data services,
including long-distance telephone, data communications, 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 revenue and expenses during the reporting period. Actual
results could differ from those estimates. Estimates are used when accounting
for revenue, including long-term customer contracts and allowances for
uncollectible receivables, investments, telecommunications expense, depreciation
including asset write-downs and amortization, reorganization accruals, employee
benefit plans and taxes.
Principles of Consolidation
The financial statements include the consolidated accounts of the company with
all significant intercompany transactions eliminated.
Revenue
The company records as revenue the amount of communications 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 having maturities
of 90 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.
Investments
Investments in marketable securities are classified as available-for-sale and
are reported at fair value in accordance with Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." The fair values are based on quoted market prices, and any
unrealized gains or losses, net of applicable income taxes, 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.
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, investments, originally
recorded at cost, are 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 investees. The company's
share of net earnings or losses of affiliates includes amortization of purchase
adjustments. Unlisted securities or securities in privately held companies in
which the ownership is less than 20% and the company does not exercise
significant influence are recorded at cost.
<PAGE>
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 the assets' 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. Gains or losses on assets that are not grouped in like
pools for depreciation purposes are included in depreciation expenses. 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 nine years. Furniture, fixtures
and equipment are depreciated over a weighted average life of six years and
include computer and data center equipment along with other administrative
assets. Other property includes land, buildings and leasehold improvements.
Buildings are depreciated using lives of up to 35 years. Leasehold improvements
are depreciated over the shorter of the life of the equipment or the life of the
lease. Maintenance, repairs, and reengineering costs 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,net
Other assets and deferred charges, net includes unamortized customer discounts
and service incentives, right-of-way agreements with third parties, noncurrent
marketable securities and investments accounted for at cost 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.
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.
The company periodically evaluates the realizability of goodwill based upon
projected undiscounted cash flows and operating income or other valuation
techniques for each subsidiary having a material goodwill balance. The company
believes that no impairment of goodwill existed at December 31, 1997.
Long-Lived Assets
In the event that facts and circumstances indicate that the carrying amount of a
long-lived asset may be impaired, an evaluation of recoverability is performed.
If an evaluation is required, the estimated future undiscounted cash flows
associated with the asset are compared to the asset's carrying amount to
determine if a write-down to market value or discounted cash flow is required.
Transactions with British Telecommunications plc
British Telecommunications plc (BT) controls an approximate 20% voting interest
in the company through its ownership of Class A common stock and common stock.
In 1994, the company and BT formed a joint venture, Concert Communications
Company (Concert CS), to provide global enhanced telecommunications services to
business customers. The company and BT lease each other's access lines at
accepted market rates in the ordinary course of business to process traffic in
the U.S. and U.K. During 1997, 1996 and 1995, the amounts associated with these
transactions were not material to the company.
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. While the company does not engage in speculation, it is exposed to
credit 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 and believes the credit risk exposure is limited.
At December 31, 1997, the fair value 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 that 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.
Basic and Diluted Earnings per Common Share
The company implemented Statement of Financial Accounting Standards No. 128
(SFAS No. 128) Earnings per Share, in 1997, which requires certain disclosures
relating to the calculation of earnings per share (EPS). Basic EPS is based on
the weighted average number of shares of common stock outstanding during each
year. Diluted EPS is 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.
Reclassifications
Certain prior year information has been reclassified to conform to the current
year presentation.
NOTE 2. MERGER AGREEMENT
On November 9, 1997, the company entered into an Agreement and Plan of Merger
(the MCI WorldCom Merger Agreement) with WorldCom, Inc. (WorldCom), a Georgia
corporation, and TC Investments Corp. (Merger Sub), a Delaware corporation and a
wholly-owned subsidiary of WorldCom, pursuant to which the company will merge
with and into Merger Sub (the MCI WorldCom Merger or 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
20 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 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 MCI WorldCom Merger Agreement, the company, WorldCom and BT
entered into an agreement (the BT Termination Agreement) whereby (i) the
Agreement and Plan of Merger, dated as of November 3, 1996, as last amended on
August 21, 1997 (the MCI BT Merger Agreement), among the company, BT and
Tadworth Corporation was terminated; (ii) WorldCom agreed to pay BT a fee of
$450 million and expenses not in excess of $15 million in order to induce BT to
waive its rights under and agree to terminate, the MCI 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 agreed to exercise its call option to acquire the
company's shares in Concert CS immediately following the effective time of the
Merger . The company will be a distributor of Concert CS services on a
nonexclusive basis to customers in the U.S. for at least two years and as many
as five years following BT's exercise of its call option.
On March 11, 1998, the stockholders of the company and shareholders of WorldCom
approved the Merger. The Merger is also subject to the receipt of required
regulatory approvals.
In connection with the execution of the BT Merger Agreement and as modified
under the MCI WorldCom Merger Agreement, pre-merger retention bonus pools
(retention pools) totaling $270 million were established to retain key
executives and employees of the company. The company recorded compensation costs
in 1997 of $93 million, related to these retention pools of which $82 million
was paid by December 31, 1997. The remaining accrued compensation costs of $11
million and other amounts payable from these retention pools are scheduled to be
paid in 1998 and 1999. However, all unpaid amounts under these retention pools
will be paid on the closing date of the MCI WorldCom Merger or any other
transaction involving the sale or other disposition of a majority of the
company's capital stock or assets if occurring earlier than the scheduled
payment dates. The company and WorldCom have certain interconnection or other
service agreements at prevailing market rates in the ordinary course of their
businesses. Since the execution of the MCI WorldCom Merger Agreement, the
amounts associated with these transactions were not material to the company.
<PAGE>
NOTE 3. INVESTMENTS IN MARKETABLE SECURITIES
At December 31, 1997 and 1996, the company had various investments in marketable
securities, all of which were classified as available-for-sale and stated at
fair value. At December 31, 1997, the portfolio consisted of equity securities
with an aggregate cost of $60 million and fair value of $120 million and were
included in other assets and deferred charges, net. At December 31, 1996, the
portfolio consisted of $40 million of certificates of deposit, $143 million of
U.S. Government agency securities, $67 million of corporate debt securities and
equity securities with an aggregate cost and fair value of $11 million. These
investments were included in the accompanying balance sheet as either cash and
cash equivalents, marketable securities or other assets and deferred charges,
net, as appropriate.
Gross unrealized holding gains associated with these investments at December 31,
1997 were $60 million and there were no gross unrealized holding gains or losses
at December 31, 1996. There were no realized gains on sales of available for
sale marketable securities for the years ended December 31, 1997 and 1996.
NOTE 4. INVESTMENTS IN AFFILIATES
The company has various investments in affiliates accounted for under the equity
method. At December 31, 1997 and 1996, the net investment balance in affiliated
companies was $653 million and $690 million, respectively. The more significant
of these are Avantel, S.A. de C.V. (Avantel) and Concert CS. Avantel is 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, 1997 and 1996, the net investment balance for Avantel
was $415 million and $465 million, respectively. The company's 24.9% interest in
Concert CS, had a net investment balance of $92 million and $53 million,
respectively at December 31, 1997 and 1996. In 1997, the company pledged its
investment in Avantel as security for a loan to Avantel. In connection with a
strategic alliance agreement with Telefonica de Espana, S.A. (Telefonica)
entered in April 1997 and expanded in March 1998, Telefonica agreed to invest
$250 million in Avantel and to purchase additional equity if certain qualified
transactions occur. In certain circumstances, Telefonica has the right to
require the company to acquire its interest in Avantel at cost.
The summarized financial information for all affiliated companies accounted for
by the company under the equity method, as reported in their financial
statements as of December 31, 1997 and 1996 and for the three years ended
December 31, 1997 is as follows:
<TABLE>
<CAPTION>
December 31, 1997 1996
---
- --------------------------------------- ---------------------- ----------------------
- --------------------------------------- ----------------------
(In millions)
<S> <C> <C>
Current assets
$ 647 $ 425
Other assets
1,864 1,674
Current liabilities
863 868
Noncurrent liabilities
785 739
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995
- --------------------------------------- ---------------------- ---------------------- ----------------------
- ---------------------------------------
(In millions)
<S> <C> <C> <C>
Net Sales $ 1,309 $ 868 $ 590
Gross profit 366 146 100
Net loss from continuing operations (341) (395) (437)
Net loss (190) (395) (442)
</TABLE>
The company's share of net losses of affiliated companies including amortization
of purchase adjustments was $(144) million, $(156) million and $(187) million,
in 1997, 1996 and 1995, respectively. The company conducts business with Concert
CS through the provision and receipt of communications services at accepted
rates in the ordinary course of business. The company and Avantel conduct
business through the exchange of domestic and international interconnection
services at prevailing market rates in the ordinary course of business. During
1997, 1996 and 1995, the amounts associated with these transactions were not
material to the company.
NOTE 5. INVESTMENTS IN NEWS CORP. AND DIRECT BROADCAST SATELLITE
At December 31, 1997, the company had invested $1,350 million in the News
Corporation Limited (News Corp.) comprised of (i) cumulative convertible
preferred shares of two U.S. subsidiaries of News Corp. with a stated value and
liquidation preference of $1,148 million and bearing a dividend rate of 5.147%,
and (ii) four-year warrants (purchase price $202 million) to acquire up to 210
million News Corp. ordinary shares for an exercise price of $1,148 million. The
exercise price of the warrants is payable, at the company's option, in either
cash or through the surrender of the cumulative convertible preferred shares, or
a combination of both. In May 1997, the company and News Corp. amended their
investment agreement to, among other things, terminate the company's previous
obligation to invest an additional $650 million in News Corp. The company
recorded dividend income of $59 million, $54 million and $18 million, in 1997,
1996 and 1995, respectively, on its investment.
Direct Broadcast Satellite (DBS) is a point-to-multipoint broadcast service that
uses high-powered Ku band satellites placed in geosynchronous orbit. In December
1996, the FCC issued the DBS license awarded to the company in the January 1996
public auction. In May 1997, the company and News Corp. entered into an
agreement to form a joint venture (DBS Venture) in which both parties would
contribute their respective DBS assets and cash. In exchange, the company would
receive a 19.9% interest in the new venture. The agreement also provided that
the parties would seek a third party to acquire their combined interests in this
DBS business. In June 1997, the company and News Corp. entered into an agreement
with Primestar Partners, L.P. (Primestar) for the sale and transfer of the
company's and News Corp.'s DBS assets other than two of the four DBS Venture
satellites (Primestar Transaction). In March 1998, the parties sold their
interest in one of the remaining satellites. The parties are pursuing the
disposition of the other satellite, which is still under construction. The
Primestar 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) that was completed in April 1998. Concurrent with
the consummation 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 New Primestar consideration in the form of cash and
interest bearing non-voting New Primestar securities for its share of the DBS
Venture assets transferred to New Primestar. The Primestar Transaction is
subject to regulatory approvals, including approval by the FCC and the
Department of Justice. As of December 31, 1997, the company had capitalized
$1,043 million related to its investment in DBS, $682 million of which was for
the payment of the license and the remainder related primarily to the
construction of two satellites.
NOTE 6. SUPPLEMENTARY BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
December 31, 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
(In millions)
Other current assets:
<S> <C> <C>
Deferred income taxes $ 452 $ 376
Other receivables, net 578 191
Other 393 321
- ---------------------------------------------------------------------------------------------------------------------------
Total other current assets $ 1,423 $ 888
- ---------------------------------------------------------------------------------------------------------------------------
Other accrued liabilities:
Taxes, other than income $ 207 $ 335
Payroll and employee benefits 431 328
Reorganization costs 295 92
Other 1,315 1,051
- ---------------------------------------------------------------------------------------------------------------------------
Total other accrued liabilities $ 2,248 $1,806
- ---------------------------------------------------------------------------------------------------------------------------
Deferred taxes and other:
Deferred income taxes $ 1,866 $1,697
Other 211 26
- ---------------------------------------------------------------------------------------------------------------------------
Total deferred taxes and other $ 2,077 $1,723
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Accumulated amortization associated with goodwill at December 31, 1997 and 1996
was $321 million and $247 million, respectively.
At December 31, 1997 and 1996, checks not yet presented for payment of $319
million and $338 million in excess of cash balances, respectively, were included
in accounts payable on the accompanying balance sheet. The company had
sufficient funds available to cover these outstanding checks when they were
presented for payment.
In 1997, the company completed a comprehensive review of product and service
offerings. In conjunction with this review, the company decided to exit,
restructure or settle several business contracts; consolidate certain operating
centers and streamline or discontinue certain non-core or under-performing IT
operations; and reorganize certain operations or eliminate certain product and
service offerings within its core business. The company recorded $361 million in
its costs of services to reflect costs and provisions to exit, restructure or
settle several business contracts and cease certain product and service
offerings. The company also recorded $282 million in its sales, operations and
general expense primarily for other reorganization actions, which included
approximately $103 million of severance associated with workforce alignment and
$93 million of obligations and penalties associated with lease, vendor and
customer contracts. The remainder represents other costs associated with the
company's business reorganization and certain legal costs.
At December 31, 1997, the company had expended $153 million of the accrued costs
related to the above items, with the majority of the remaining $490 million
expected to be expended during 1998. The remaining accrual, which was included
in reorganization costs and other in other accrued liabilities, was primarily
comprised of lease obligations, severance and customer and vendor contract
termination and commitment costs and certain legal costs. Cash expenditures from
these obligations were and will continue to be funded through cash from
operations. Reorganization liabilities at December 31, 1997 also included lease
and other commitments related to the company's consolidation of its core
business and centralization of major administrative functions that occurred in
the year ended December 31, 1995.
NOTE 7. DEBT AND LEASE OBLIGATIONS
Company debt consists of:
<TABLE>
<CAPTION>
December 31, 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
(In millions)
<S> <C> <C>
Senior Notes, net of unamortized discounts of
$1.1 million and $1.5 million at weighted average
interest rates of 6.9%, and with maturities ranging
from February 1998 to August 2006 $1,468 $1,485
Senior Debentures, net of unamortized discounts
of $6.5 million and $6.5 million at a weighted
average interest rates of 7.6%, and with
maturities ranging from January 2023 to June 2027 1,384 1,384
Capital lease obligations at a weighted
average interest rate of 8.6% and 9.1% 528 504
Commercial paper and bank credit facility
borrowings at a weighted average interest
rate of 5.8% and 5.4% 1,806 1,422
Other debt at a weighted average interest
rate of 7.4% and 5% 201 206
- ---------------------------------------------------------------------------------------------------------------------------
Total debt 5,387 5,001
Debt due within one year (2,111) (203)
===========================================================================================================================
Total long-term debt $3,276 $4,798
===========================================================================================================================
</TABLE>
Annual maturities of long-term debt for the five years after December 31, 1997
are as follows: $2,111 million in 1998; $596 million in 1999; $281 million in
2000; $47 million in 2001; and $41 million in 2002.
Total interest costs were $388 million in 1997, $314 million in 1996 and $242
million in 1995, of which $153 million, $118 million and $93 million,
respectively, were capitalized.
At December 31, 1997 and 1996, the estimated fair value of the company's
long-term debt, excluding capital lease obligations, is listed below. These
valuations represent either quoted market values, where available, or the
company's estimate based upon market prices of comparable debt instruments.
<TABLE>
<CAPTION>
December 31, 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
- ---------------------------------------------------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C> <C>
Senior Notes $1,468 $1,503 $1,485 $1,516
Senior Debentures 1,384 1,438 1,384 1,456
Commercial paper and bank
credit facility borrowings 1,806 1,806 1,422 1,422
Other debt 201 201 206 206
- ---------------------------------------------------------------------------------------------------------------------------
Total debt, excluding capital leases $4,859 $4,948 $4,497 $4,600
===========================================================================================================================
</TABLE>
The excess in the estimated fair value versus the carrying amount of debt for
1997 and 1996 reflects the trend during the periods where market rates were
below the company's fixed-rate debt.
Senior Notes and Debentures
In June 1996, the company issued $500 million in aggregate principal amount of 7
1/8% Senior Debentures due June 15, 2027. In August 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. The company has in effect a $1.2 billion shelf registration,
which will enable it to issue debt securities with a range of maturities at
either fixed or variable rates. The company had not issued any securities under
this shelf registration at December 31, 1997. During 1997 and 1996, the company
repaid $17 million and $300 million, respectively, of maturing Senior Notes,
leaving $2,852 million and $2,869 million of debt securities outstanding at a
weighted average annual interest rate of 7.22% and 7.21% at December 31, 1997
and 1996, respectively.
Commercial Paper and Bank Credit Facility Borrowings
On April 30, 1997, the company entered into a revolving credit loan agreement
with several parties under which the company may borrow up to $4 billion through
April 28, 1998. 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, 1997. During
1997, the company issued $7,340 million and repaid $6,956 million of commercial
paper borrowings. During 1996, the company issued commercial paper and borrowed
under the credit facility an aggregate of $9,089 million and repaid an aggregate
of $8,372 million. Borrowings under the commercial paper program and credit
facility are classified as current, as the remaining term of the credit facility
agreement is less than one year. The company expects to extend this facility
prior to its expiration.
Interest Rate Swap
In July 1997, the company entered into a forward starting interest rate swap
agreement (the "swap") in the notional principal amount of $500 million for a
term of 15 years. The swap involves the receipt of floating-rate interest and
the payment of fixed-rate interest at 6.71% without the exchange of the
underlying principal amount. The swap, which requires biannual net cash
settlements commencing in July 1998, has been designated as a hedge against
adverse changes in market interest rates on fixed-rate debt expected to be
issued under the shelf registration in the second quarter of 1998. The gain or
loss recognized upon the expiration or settlement of the swap will be amortized
over the life of the associated debt as an offset or addition to interest
expense. The fair value of the swap and amount of gain or loss deferred is
estimated as the amount the company would receive (pay) to terminate the swap
taking into account the then-current interest rates. The unrealized loss
resulting from the fair value of the swap at December 31, 1997, was $20 million.
Lease Obligations
Future minimum rental commitments for capital leases are as follows: $181
million in 1998; $56 million in 1999; $54 million in 2000; $57 million in 2001;
$45 million in 2002; and $461 million thereafter. At December 31, 1997,
aggregate future minimum capital lease payments were $854 million including
interest of $326 million. The present value of future capital lease payments at
December 31, 1997 was $528 million. The gross and net book values of property
and equipment financed by capital leases were $353 million and $202 million,
respectively, at December 31, 1997 and $497 million and $215 million,
respectively, at December 31, 1996. Future minimum rental commitments for
noncancelable operating leases are as follows: $401 million in 1998; $355
million in 1999; $302 million in 2000; $232 million in 2001; $181 million in
2002; and $770 million thereafter. At December 31, 1997, aggregate future
minimum payments for noncancelable operating leases were $2,241 million. Total
rental expense for all operating leases was $361 million, $332 million and $321
million for the years ended December 31, 1997, 1996 and 1995, respectively.
In December 1997, the company sold equipment at net book value to an independent
entity and leased it back under a six year noncancelable operating lease
agreement with options to renew the lease for an additional three-year term and
to purchase the equipment at various amounts during the lease term based upon
amounts as specified under the lease terms. At December 31, 1997, other current
assets on the accompanying balance sheet included a receivable of $360 million
for the transaction proceeds, which were received in January 1998.
NOTE 8. 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 representing 30 million shares
outstanding (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 $60 million and $35 million in Trust distributions for the
years ended December 31, 1997, and 1996, respectively. 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. The Trust assets had an estimated fair market value of $788 million and
$750 million at December 31, 1997 and 1996, respectively.
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 9. 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 9, 1997, in connection with the Merger to avoid WorldCom
becoming an "acquiring person" under the Rights Plan as a result of the
approval, execution or delivery of the MCI WorldCom 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) (other than WorldCom or any of its
affiliates as a result of the approval, execution or delivery of the MCI
WorldCom Merger Agreement or the consummation of the Merger) has acquired
beneficial ownership of 10% or more of the outstanding Common Shares (more than
20.1% in the case of share acquisitions by BT). 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. In addition, the Rights Plan
provides that the Rights will expire immediately prior to the effective time of
the Merger.
Class A Common Stock
In September 1994, the company issued 136 million shares of its Class A common
stock to BT for $4.3 billion, which resulted in a 20% voting interest in the
company. At December 31, 1997, 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.
Class A and Common Stock Dividends
For each of the three years ended December 31, 1997, 1996 and 1995, the company
paid annual dividends of $.05 per share on its common stock.
NOTE 10. 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 142 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 lower 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 any time thereafter. As of December 31, 1997,
no stock appreciation rights had 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, 1997, no restricted shares were granted. At December 31,
1997, there were approximately 276,000 restricted shares outstanding. No
performance share awards had been issued at December 31, 1997.
The compensation committee may grant both incentive stock options and
nonqualified options under the Plan. All options granted in the last three years
have been nonqualified options. These nonqualified options expire after ten
years, and are exercisable ratably over a three year period.
Under the Stock Option Plan, executives may be granted incentive stock units
(ISUs) that vest over a three year period and entitle the holder to receive
shares of the company's common stock. At December 31, 1997, there were
approximately 2.3 million ISUs outstanding. For the year ended December 31,
1997, the company recognized approximately $34 million of compensation expense
for ISU's issued during the year. In conjunction with the MCI WorldCom Merger
Agreement, the senior retention ISUs granted under the MCI BT Merger Agreement
were cancelled.
Directors' Stock Option Plan
The company also has a stock option plan for non-employee directors (Directors'
Plan) that 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. Upon the fifth anniversary of the date of grant
of options, the unexercised portion of the grant expires, and a new option for
40,000 shares is granted automatically.
Both of the above 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 1997 and 1996, employees
purchased approximately 6.8 million and 6.3 million shares, respectively, under
the ESPP Plan.
Common Stock Reserved for Future Issuance
At December 31, 1997, 96 million shares of the company's authorized common
stock, including 69.5 million shares under option, were reserved for future
issuance under the Employee and Directors' Stock Option Plans and the ESPP Plan.
The company had opted to use treasury shares to fulfill the purchases made under
these plans during the three-year period ended December 31, 1997.
Accounting for Stock Issued to Employees
The company accounts for its stock option plans under Accounting Principles
Board (APB), Opinion No. 25 "Accounting for Stock Issued to Employees" and, in
accordance with the recognition requirements set forth under this pronouncement,
no compensation expense was recognized for the three years ended December 31,
1997. In 1996, the company elected to adopt SFAS No. 123 "Accounting for Stock
Based Compensation" for disclosure purposes only.
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 1997,
1996, and 1995, respectively: annual dividends of $0.05 and actual option
forfeitures for all three years, expected volatility of 24.7%, 24.7% and 33.2%,
risk-free interest rate of 6.3%, 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
1997, 1996, and 1995 was $12.52, $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
1997, 1996 and 1995, respectively: expected volatility of 36.5%, 30.7% and
30.2%, risk-free interest rate of 5.2%, 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 1997, 1996 and 1995 was $5.78, $4.87 and $3.99, respectively.
Under the above models, the total value of stock options granted in 1997, 1996,
and 1995 was $155 million, $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
1997, 1996 and 1995 was $40 million, $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:
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995
- ------------------------------------------ -------------- --------------- --------------
- ------------------------------------------ -------------- --------------- --------------
(In millions, except per share amounts)
<S> <C> <C> <C>
Pro forma net income $ 20 $1,105 $ 498
Pro forma basic earnings per share $ 0.03 $ 1.61 $0.73
Pro forma diluted earnings per share $ 0.03 $ 1.59 $0.72
</TABLE>
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.
Stock option transactions are summarized as follows:
<TABLE>
<CAPTION>
Number Exercise Price Weighted-Average
of Shares Range Exercise Price
- ---------------------------------------------------------------------------------------------------------------------------
(In millions, except exercise price amounts)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
Shares under option, 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
- ---------------------------------------------------------------------------------------------------------------------------
Shares under option, 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
- ---------------------------------------------------------------------------------------------------------------------------
Shares under option, December 31, 1996 75.0 $ 9.94-30.25 $22.70
Options granted 13.1 29.75-42.56 36.26
Options exercised (16.5) 9.94-36.25 21.03
Options terminated (2.1) 9.94-42.56 29.07
- ---------------------------------------------------------------------------------------------------------------------------
Shares under option, December 31, 1997 69.5 $ 9.94-42.56 $25.46
- ---------------------------------------------------------------------------------------------------------------------------
Options exercisable, December 31, 1997 38.7 9.94-36.25 21.83
Options exercisable, December 31, 1996 36.4 9.94-28.75 19.91
Options exercisable, December 31, 1995 31.1 3.44-28.75 18.17
</TABLE>
The following table summarizes information about the shares outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
-------------------Options Outstanding------------------- --------Options Exercisable-----------
Number Weighted-Average Number
Range of Outstanding Remaining Contractual Weighted-Average Outstanding Weighted-Average
Exercise Prices (In millions) Life (Years) Exercise Price (In millions) Exercise Price
- --------------- ------------- ------------ -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
$ 9.94-14.88 3.4 4.1 $10.38 3.4 $10.38
15.81-19.56 18.2 6.6 18.07 12.7 17.94
20.06-24.13 6.7 6.0 21.09 6.6 21.07
25.00-30.25 28.9 8.4 28.28 15.9 27.62
35.25-42.56 12.3 9.9 36.29 0.1 36.25
69.5 38.7
</TABLE>
At December 31, 1997, the company had an aggregate of 11 million shares
available for future grant under both its Employee and Directors' Stock Option
Plans combined.
NOTE 11. 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.
Net periodic pension cost includes:
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C>
Service cost during the period $57 $45 $40
Interest cost on projected benefit obligation 34 29 25
Actual return on plan assets (70) (54) (70)
Net amortization and deferral 32 22 48
===========================================================================================================================
Net pension cost $53 $42 $43
===========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
The company's pension asset consists of:
December 31, 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
(In millions)
<S> <C> <C>
Plan assets at fair value $ 494 $453
Accumulated benefit obligation including vested
benefits of $390 in 1997 and $307 in 1996 (447) (347)
===========================================================================================================================
Plan assets in excess of accumulated
benefit obligation $47 $ 106
===========================================================================================================================
Plan assets at fair value $494 $453
Projected benefit obligation for service
rendered to date (563) (432)
- ---------------------------------------------------------------------------------------------------------------------------
Plan assets (less than) in excess of projected benefit obligation (69) 21
Unrecognized net loss (gain) from past experience
different from that assumed 35 (1)
Prior service cost not yet recognized in net
periodic pension cost 31 30
Unrecognized net asset at January 1, 1986
being recognized over 16 years (3) (3)
===========================================================================================================================
Total (liability) prepaid pension asset $(6) $47
===========================================================================================================================
</TABLE>
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, 1997, was 7.0% for both plans and 5.75% and 5.00% for the MCI and
WUI Plans, respectively. At December 31, 1996, the discount rate used was 7.75%
for both plans, and the rate of increase in future compensation levels was 5.75%
and 5.00% for the MCI and WUI plans, respectively. The expected long-term rate
of return on assets in 1997 and 1996 was 9.0% 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. Effective January 1, 1997,
employees of MCI Systemhouse Corp. became eligible to participate in the MCI
Plan.
<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 1.5 million shares, 1.6 million
shares, and 1.7 million shares of its common stock as the company's matching
contribution to the 401(k) plans for the plan years ended December 31, 1997,
1996, and 1995, 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 15,000
shares, 18,000 shares, and 24,000 shares of its common stock to the WUI 401(k)
for the plan years ended December 31, 1997, 1996, and 1995, respectively.
Employee Severance Plan
The company has a severance plan covering substantially all of its employees,
which entitles employees to receive severance pay benefits in the event their
employment is permanently terminated as a result of a reduction-in-force or
other internal reorganizations as specified in the severance plan. Each covered
employee is eligible to receive a severance benefit based on years of service.
For the year ended December 31, 1997, approximately $103 million of severance
under the plan was included in sales, operations and general expenses and other
accrued liabilities in connection with work force alignments associated with
reorganization efforts. As a result of its decision to sell and discontinue
certain non-core operations and streamline other operations, the company will
eliminate approximately 4,500 positions in specific areas of the company. These
employees include management and non management, mostly in staff, support and
administrative positions. Approximately 3,200 of these employees had left the
company by March 31, 1998. The remaining employees are expected to leave by the
end of 1998.
NOTE 12. INCOME TAXES
<TABLE>
<CAPTION>
The components of the total income tax provision are:
Year ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C>
Current
Federal $ 21 $387 $182
State and local - 68 23
- ---------------------------------------------------------------------------------------------------------------------------
Current income tax provision 21 455 205
Deferred
Federal 57 276 129
State and local 12 22 15
- ---------------------------------------------------------------------------------------------------------------------------
Deferred income tax provision 69 298 144
- ---------------------------------------------------------------------------------------------------------------------------
Total income tax provision $ 90 $753 $349
===========================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
A reconciliation of the statutory federal income tax rate to the company's
effective income tax rate is:
Year ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax rate 35% 35% 35%
State and local income taxes, net
of federal income tax effect 3 3 3
Nondeductible amortization 10 1 2
Nontaxable dividends (7) (1) (1)
R&D tax credits (8) (1) (1)
Other 5 1 1
===========================================================================================================================
Effective income tax rate 38% 38% 39%
===========================================================================================================================
</TABLE>
In 1997, 1996, and 1995, the company recorded a tax benefit of $44 million, $60
million, and $25 million, respectively, to additional paid-in capital for tax
deductions related to common stock transactions with its employee benefit plans.
At December 31, 1997, for federal income tax purposes, the company had $179
million of Alternative Minimum Tax (AMT) credit carryforwards available that had
no expiration date. In addition, the company had available $576 million of U.S.
net operating loss carryforwards expiring through 2012, $121 million which were
subject to limitation due to change in ownership control, $159 million of
Canadian net operating loss carryforwards expiring through 2004 and $53 million
of U.K. net operating loss carryforwards which had an indefinite life.
At December 31, 1997, 1996, and 1995, the company's net deferred income tax
liability was comprised of the following:
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C>
Deferred income tax asset $ 929 $ 550 $ 587
Deferred income tax liability (2,343) (1,871) (1,627)
===========================================================================================================================
Net deferred income tax liability $(1,414) $(1,321) $(1,040)
===========================================================================================================================
The components of these amounts are:
Communications system $(2,373) $(1,885) $(1,577)
Customer discounts (22) (77) (87)
Allowance for uncollectibles 37 114 56
Reorganization and realignment expenses 228 34 61
Domestic equity investments (6) 62 38
Alternative minimum and general
business tax credits 41 - 104
Net operating loss carryforward 296 96 33
Capital losses carryforward 64 - -
Other, net 321 335 332
===========================================================================================================================
Net deferred income tax liability $(1,414) $(1,321) $(1,040)
===========================================================================================================================
</TABLE>
The company believes that it is more likely than not that it will realize the
deferred income tax asset and, accordingly, no valuation allowance has been
recorded in the three years ended December 31, 1997.
NOTE 13. ASSET DISPOSALS
In connection with an asset disposition plan adopted in the fourth quarter of
1997, the company will dispose of certain equipment primarily in the first half
of 1998. The net book value of the assets to be disposed of aggregated $265
million with no significant proceeds expected. The productive assets included in
the disposition plan were identified in response to changes in specific
customer, product and technology strategies. The major part of this plan
included the early replacement of central processing units and data storage
devices. The company reassessed and consequently revised its strategies related
to data processing and storage in order to maximize facility space in its data
centers which is critical to support growth in products that require customer
collocation in such centers. The company will replace this equipment with
devices that offer greater processing and storage capabilities with reduced
operating and maintenance costs and less floor space. Depreciation expense in
1997 includes $60 million representing the net book value of the assets included
in the disposition plan which had been removed from service by December 31,
1997. The company will continue to use the remaining assets until they are
removed from service and accelerate the recognition of depreciation expense on
these assets over their shortened remaining service period. The company expects
that substantially all of the remaining assets will be decommissioned and
disposed of by June 30, 1998. This change will result in estimated additional
depreciation expense of up to approximately $190 million in the first half of
1998. The company had been depreciating this equipment over estimated lives
averaging six years. This would compare with an average life of four years, had
the assets been depreciated over the revised service period as contemplated in
the fourth quarter 1997 disposition plan. Moreover, had the company originally
depreciated these assets ratably over such revised service period, depreciation
expense, exclusive of the $60 million referred to above, would have been
approximately $59 million, $55 million and $43 million higher in 1997, 1996 and
1995, respectively.
During the third quarter of 1995, the company recorded a $520 million charge for
an asset write-down. The write-down primarily related to communications systems
and administrative assets that had become redundant due to the consolidation of
its core business and centralization of major administrative functions or were
no longer aligned with strategic product offerings. 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."
NOTE 14. CONTINGENCIES
The company, in the normal course of business, is a party to a number of
lawsuits and regulatory and other proceedings and has included accrued loss
contingencies in other accrued liabilities for certain of these matters. The
company does not expect that the results in these lawsuits and proceedings will
have a material adverse effect on the consolidated financial position or results
of operations of the company.
On November 4, 1996, and thereafter, 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 15 complaints filed in the Court of Chancery
in the State of Delaware. BT was named as a defendant in 13 of the complaints.
The complaints were brought by alleged stockholders of the company, individually
and purportedly as class actions on behalf of all other stockholders of the
company. In general, the complaints allege that the company's directors breached
their fiduciary duty in connection with the MCI BT Merger Agreement, that BT
aided and abetted those breaches of duty, that BT owes fiduciary duties to the
other stockholders of the company and that it breached those duties in
connection with the MCI BT Merger Agreement. The complaints seek damages and
injunctive 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 MCI BT Merger
Agreement and WorldCom's exchange offer. The complaint seeks injunctive relief,
damages, and other relief.
One of the purported shareholder class actions pending in Delaware Chancery
Court has been amended and plaintiffs in four of the other purported shareholder
class actions have moved to amend their complaints to name WorldCom and Merger
Sub. as additional defendants. They generally allege that the defendants
breached their fiduciary duty to shareholders in connection with the Merger, the
agreement to pay a termination fee to WorldCom, and alleged discrimination in
favor of BT in connection with the Merger. They seek, inter alia, damages and
injunctive relief prohibiting the consummation of the Merger and the payment of
the inducement fee to BT.
Three complaints have been filed in the federal district court in Washington,
D.C., as class actions on behalf of purchasers of the company's shares during
three different periods from; August 14, 1997 through August 22, 1997; August 14
through August 20, 1997 and July 10 through July 22, 1997. The three complaints
allege that the company and certain of its officers and directors failed to
disclose material information about the company, including that the company was
renegotiating the terms of the MCI BT Merger Agreement dated November 3, 1996.
The complaints seek damages and other relief.
The company believes 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>
NOTE 15. BASIC AND DILUTED EARNINGS PER SHARE
The company implemented SFAS No. 128 in 1997, which requires certain disclosures
relating to the calculation of earnings per share. The following is a
reconciliation of the numerators and denominators of the basic and diluted EPS
computations for net income.
Basic Earnings Per Share
<TABLE>
<CAPTION>
For the Year ended December 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------------
(In millions, except per share amounts)
<S> <C> <C> <C>
Net income $ 149 $ 1,202 $ 548
========================================
Weighted average shares of common
stock outstanding 693 687 680
========================================
Basic earnings per share for net income $0.22 $1.75 $ 0.81
========================================
</TABLE>
SFAS No. 128 replaces primary EPS with basic EPS and excludes the effect of
common stock equivalents when computing basic EPS. In previous years, the
company included the effect of common stock equivalents for the calculation of
primary EPS in accordance with APB Opinion No. 15. At December 31, 1996, and
1995, primary EPS were disclosed as $1.73 and $0.80, respectively.
Diluted Earnings Per Share
<TABLE>
<CAPTION>
For the Year ended December 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------------
(In millions, except per share amounts)
<S> <C> <C> <C>
Net income $ 149 $ 1,202 $ 548
==============================================
Adjustment of shares outstanding:
Weighted average shares of common
stock outstanding 693 687 680
Shares of common stock issuable upon the
assumed exercise of common stock
equivalents 71 55 52
Shares of common stock assumed
repurchased for treasury (57) (47) (45)
`
Adjusted shares of common stock and
common stock equivalents for
computation 707 695 687
===============================================
Diluted earnings per share for net income $0.21 $ 1.73 $0.80
===============================================
</TABLE>
SFAS No. 128 requires that the average stock price for the period always be used
in determining the number of treasury shares assumed repurchased for treasury,
rather than the higher of the average or ending stock price, as required
previously under APB Opinion No. 15. Accordingly, fully diluted EPS has been
restated from $1.72 and $0.79 at December 31, 1996 and 1995, respectively, to
reflect diluted EPS in accordance with SFAS No. 128.
<PAGE>
The following provides information regarding those options to purchase common
stock that were excluded from the computation of diluted EPS under the treasury
stock method because the options' exercise prices was greater than the average
market price of the common shares. Had they been included in the computation,
these options would have had an antidilutive effect on EPS.
<TABLE>
<CAPTION>
For the Year ended December 31, 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Number of Options Excluded: 0.2 million 20.0 million 19.8 million
Price Range Covered by Excluded Options: $38.38 - $42.56 $28.00 - $30.25 $22.50 - $28.75
Date Range for Expiration of Options: May 7, 2007 - June 28, 2003 - April 27, 2003 -
July 9, 2007 November 2, 2006 December 5, 2005
</TABLE>
NOTE 16. SELECTED QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Dec. 31, Sept. 30, June 30, Mar. 31,
1997 1997 1997 1997
- ---------------------------------------------------------------------------------------------------------------------------
(In millions, except per share amounts)
<S> <C> <C> <C> <C>
Revenue $5,108 $4,819 $4,843 $4,883
Operating expenses:
Cost of services 2,866 3,018 2,547 2,525
Sales, operations and general 1,912 1,444 1,265 1,319
Depreciation including asset-write-down 607 543 479 453
Income (loss) from operations (277) (186) 552 586
Equity in income (losses) of affiliated companies (37) (46) (24) (37)
Net income (loss) (244) (182) 280 295
Basic earnings (loss) per common share (.35) (.26) .41 .43
Diluted earnings (loss) per common share (.35) (.26) .40 .42
Weighted average number of common shares 703 695 689 685
Weighted average number of common shares - assuming dilution 703 695 708 701
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
Basic earnings per common share .44 .44 .44 .43
Diluted earnings per common share .44 .44 .43 .42
Weighted average number of common shares 685 685 689 689
Weighted average number of common shares -
assuming dilution 694 691 698 701
</TABLE>
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.
EPS amounts have been restated to conform to SFAS No. 128.
- ------------------------------------------------------------
Concert is a trademark of Concert Communications Company and is used under
license.
<PAGE>
REPORT OF MANAGEMENT
The management of the company is responsible for the
financial information and representations contained in the financial statements,
notes and all other sections of the annual report. The financial statements have
been prepared in conformity with generally accepted accounting principles
appropriate under the circumstances to reflect, in all material respects, the
substance of events and transactions which have occurred. In preparing the
financial statements, it is necessary that management make informed estimates
and judgments based on currently available information in order to record the
results of certain events and transactions.
The company maintains a system of internal controls designed to enable
management to meet its responsibility for reporting reliable financial
information. The system is designed to provide reasonable assurance that assets
are safeguarded and transactions are recorded and executed with managements
authorization. Internal control systems are subject to inherent limitations due
to the necessity to balance costs incurred with benefits provided. The company
believes that the existing system of internal controls provides reasonable
assurance that errors or irregularities that could be material to the financial
statements are prevented or would be detected in a timely manner.
The board of directors pursues its oversight role for the financial statements
through its audit committee, which is comprised solely of directors who are not
officers or employees of the company. They are responsible for engaging, subject
to stockholder approval, the independent accountants. The audit committee meets
periodically with management and the independent accountants to review their
activities in connection with financial reporting matters. The independent
accountants have full and free access to meet with the audit committee, without
management representatives present, to discuss the results of their examination
and the adequacy and quality of internal controls and financial reporting.
The report of our independent accountants, Price Waterhouse LLP, appears
herewith. Their audit of the financial statements includes a review of the
companys system of internal controls and testing of records as required by
generally accepted auditing standards.
/s/ David M.Case
David M. Case
Vice President and Controller
April 9, 1998
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of MCI Communications Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated income statements, statements of cash flows and stockholders
equity present fairly, in all material respects, the financial position of MCI
Communications Corporation and its subsidiaries at December 31, 1997 and 1996,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the companys 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
April 9, 1998
Washington, D.C.
Exhibit 21
- ----------
(1 of 1)
Significant Subsidiaries of MCI Communications Corporation at
December 31, 1997
Subsidiary State of Incorporation
---------- ----------------------
MCI International, Inc. Delaware
MCI International Telecommunications Corporation Delaware
MCI Telecommunications Corporation Delaware
Telecom*USA, Inc. Delaware
Exhibit 23
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, 333-02887,
333-08569, 333-12845, 333-12847, 333-12849, 333-23089, 333-29623, 333-32451,
333-38897, and 333-46785) and the Prospectuses constituting part of the
Registration Statements on Form S-3 (Nos. 33-57155, 333-02593, and 333-11193) of
MCI Communications Corporation ("MCI") of our report dated April 9, 1998, which
appears in Exhibit 13 to this Annual Report on Form 10-K (which report is
incorporated by reference in this Annual Report on Form 10-K). We also consent
to the incorporation by reference of our report on the Financial Statement
Schedule, which appears in Exhibit 99(c) which is also incorporated by reference
in this Form 10-K.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Washington, DC
April 15, 1998
<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, 1997
and the income statement for the year ended December 31, 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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 261
<SECURITIES> 0
<RECEIVABLES> 3,576
<ALLOWANCES> 372
<INVENTORY> 0
<CURRENT-ASSETS> 5,260
<PP&E> 21,724
<DEPRECIATION> 7,856
<TOTAL-ASSETS> 25,510
<CURRENT-LIABILITIES> 8,096
<BONDS> 3,276
750
0
<COMMON> 74
<OTHER-SE> 11,237
<TOTAL-LIABILITY-AND-EQUITY> 25,510
<SALES> 0
<TOTAL-REVENUES> 19,653
<CGS> 0
<TOTAL-COSTS> 18,978
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 235
<INCOME-PRETAX> 299
<INCOME-TAX> 90
<INCOME-CONTINUING> 149
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 149
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.21
</TABLE>
<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
and 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> 1.75
<EPS-DILUTED> 1.73
</TABLE>
<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, 1995
and the income statement for the year ended December 31, 1995 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-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 471
<SECURITIES> 373
<RECEIVABLES> 2,912
<ALLOWANCES> 260
<INVENTORY> 0
<CURRENT-ASSETS> 4,505
<PP&E> 15,547
<DEPRECIATION> 5,238
<TOTAL-ASSETS> 19,301
<CURRENT-LIABILITIES> 4,870
<BONDS> 3,444
0
0
<COMMON> 74
<OTHER-SE> 9,528
<TOTAL-LIABILITY-AND-EQUITY> 19,301
<SALES> 0
<TOTAL-REVENUES> 15,265
<CGS> 0
<TOTAL-COSTS> 14,147
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 149
<INCOME-PRETAX> 897
<INCOME-TAX> 349
<INCOME-CONTINUING> 548
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 548
<EPS-PRIMARY> 0.81
<EPS-DILUTED> 0.80
</TABLE>
<TABLE>
<CAPTION>
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
----------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
December 31, 1997 $273 $624 $525 $372
December 31, 1996 260 572 559 273
December 31, 1995 226 437 403 260
</TABLE>
<TABLE>
<CAPTION>
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, 1997:
<S> <C>
Debt(a):
Secured debt:
Capital lease obligations............................ $ 528
Other secured obligations............................ 22
-------
Total secured debt...................................... 550
-------
Unsecured debt:
Senior Notes, net.................................... 1,468
Senior Debentures, net............................... 1,384
Commercial paper borrowings.......................... 1,806
Other unsecured debt................................. 179
-------
Total unsecured debt.................................... 4,837
-------
Total debt................................................ 5,387
-------
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........................... 6,362
Retained earnings.................................... 5,345
Treasury stock, at cost, 44 million shares........... (470)
-------
Total stockholders' equity................................ 11,311
-------
Total capitalization...................................... $17,448
=======
</TABLE>
(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 7 of Notes to Consolidated Financial
Statements in the company's Annual Report to Stockholders, which Note 7 is
included in Exhibit 13 to the company's Annual Report on Form 10-K for the year
ended December 31, 1997. Interest rates on capital lease obligations, on a
weighted average basis, approximated 8.6% per annum at December 31, 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 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.
Exhibit 99 (c)
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders of MCI Communications Corporation
Our audits of the consolidated financial statements referred to in our report
dated April 9, 1998 appearing in Exhibit 13 to this Annual Report on Form 10-K
(which report and consolidated financial statements are incorporated by
reference in this Annual Report on Form 10-K) also included an audit of the
Financial Statement Schedule in Exhibit 99 (a) of this Form 10-K. 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
April 9, 1998
Washington, D.C.
