UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 1998
or
[ ]Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
Commission File Number 0-6547
MCI COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 52-0886267
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1801 Pennsylvania Avenue, N.W., Washington, D.C. 20006
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (202) 872-1600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
As of June 30, 1998, the registrant had outstanding 135,998,932 shares of
Class A common stock and 598,071,828 shares of common stock.
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MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
FORM 10-Q
For The Quarter Ended June 30, 1998
INDEX
Page No.
--------
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
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Income Statements for the three and six months ended
June 30, 1998 and 1997 3
Balance Sheets as of June 30, 1998 and December 31, 1997 4-5
Statements of Cash Flows for the six months ended
June 30, 1998 and 1997 6
Statement of Stockholders' Equity for the six months
ended June 30, 1998 7
Notes to Interim Condensed Consolidated Financial
Statements 8-13
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 14-23
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 24
PART II: OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 25
SIGNATURE 26
EXHIBIT INDEX 27
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
INCOME STATEMENTS
(In millions, except per share amounts)
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Three Months Ended Six Months Ended
June 30, June 30,
------------------- -----------------
1998 1997 1998 1997
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REVENUE $5,370 $4,843 $10,658 $9,726
------ ------ ------ ------
OPERATING EXPENSES
Cost of services 2,839 2,547 5,722 5,072
Sales, operations and general 1,554 1,265 3,058 2,584
Depreciation 621 479 1,311 932
------ ------ ------ ------
TOTAL OPERATING EXPENSES 5,014 4,291 10,091 8,588
------ ------ ------ ------
INCOME FROM OPERATIONS 356 552 567 1,138
Interest expense (54) (58) (106) (116)
Interest income 12 4 16 10
Equity in income (losses) of
affiliated companies (23) (24) (47) (61)
Other income (expense), net 38 (4) 77 (7)
------ ------ ------ ------
INCOME BEFORE INCOME TAXES AND
TRUST DISTRIBUTIONS 329 470 507 964
Income tax provision 119 175 181 359
Distributions on subsidiary Trust mandatorily
redeemable preferred securities 15 15 30 30
------ ------ ------ ------
NET INCOME $ 195 $ 280 $ 296 $ 575
====== ====== ====== ======
BASIC EARNINGS PER COMMON SHARE $ .27 $ .41 $ .41 $ .84
DILUTED EARNINGS PER COMMON SHARE .26 .40 .40 .82
Weighted average number of common shares 729 689 722 688
Weighted average number of common shares
assuming dilution 745 708 737 705
Dividends declared per common share $ .025 $ .025 $ .025 $ .025
See accompanying Notes to Interim Condensed Consolidated Financial Statements.
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MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
BALANCE SHEETS
(In millions)
June 30, December 31,
1998 1997
----------- -----------
ASSETS
CURRENT ASSETS
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Cash and cash equivalents $ 1,126 $ 261
Receivables, net of allowance for
uncollectibles of $426 and $372 million 3,325 3,576
Other current assets 983 1,423
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TOTAL CURRENT ASSETS 5,434 5,260
------- -------
PROPERTY AND EQUIPMENT, net 14,140 13,868
OTHER ASSETS
Investment in affiliates 636 653
Investment in DBS 1,064 1,043
Investment in News Corp. 1,350 1,350
Other assets and deferred charges, net 1,054 991
Goodwill, net 2,308 2,345
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TOTAL OTHER ASSETS 6,412 6,382
------- -------
TOTAL ASSETS $25,986 $25,510
======= =======
See accompanying Notes to Interim Condensed Consolidated Financial Statements.
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MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
BALANCE SHEETS
(In millions)
June 30, December 31,
1998 1997
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,075 $1,321
Accrued telecommunications expense 2,564 2,416
Other accrued liabilities 2,562 2,248
Long-term debt due within one year 742 2,111
------- -------
TOTAL CURRENT LIABILITIES 6,943 8,096
------- -------
NONCURRENT LIABILITIES
Long-term debt 3,938 3,276
Deferred taxes and other 2,167 2,077
------- -------
TOTAL NONCURRENT LIABILITIES 6,105 5,353
------- -------
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
598 million shares 60 60
Additional paid in capital 6,489 6,343
Retained earnings 5,623 5,345
Accumulated other comprehensive income 2 19
Treasury stock, at cost,
0 million and 22 million shares - (470)
------- -------
TOTAL STOCKHOLDERS' EQUITY 12,188 11,311
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $25,986 $25,510
======= =======
See accompanying Notes to Interim Condensed Consolidated Financial Statements.
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MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(In millions)
Six Months Ended
June 30,
-------------------------
1998 1997
------ ------
OPERATING ACTIVITIES
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Receipts from customers $10,892 $9,311
Payments to suppliers and employees (8,533) (7,499)
Taxes paid, net (56) (167)
Interest paid (99) (115)
Interest received 8 5
------ ------
CASH FROM OPERATING ACTIVITIES 2,212 1,535
------ ------
INVESTING ACTIVITIES
Capital expenditures for property and equipment (1,500) (1,710)
Proceeds from sales and maturities of marketable securities
and other investments, net 40 91
Investment in Direct Broadcast Satellite (34) (127)
Investment in affiliates (44) (42)
Other, net 418 35
------ ------
CASH USED FOR INVESTING ACTIVITIES (1,120) (1,753)
------ ------
NET CASH FLOW BEFORE FINANCING ACTIVITIES 1,092 (218)
------ ------
FINANCING ACTIVITIES
Issuance of Senior Notes 1,172 -
Payment of Senior Notes and other debt (124) (160)
Commercial paper and bank credit facility activity, net (1,806) 135
Issuance of common stock for employee plans 579 251
Purchase of treasury stock - (93)
Distributions paid on Trust mandatorily redeemable
preferred securities (30) (30)
Payment of dividends on common stock and
class A common stock (18) (17)
------ ------
CASH FROM (USED FOR) FINANCING ACTIVITIES (227) 86
------ ------
Net increase (decrease) in cash and cash equivalents 865 (132)
Cash and cash equivalents - beginning balance 261 187
------ ------
Cash and cash equivalents - ending balance $1,126 $ 55
====== ======
Reconciliation of net income to cash from operating activities:
Net income $ 296 $ 575
Adjustments to net income:
Depreciation and amortization 1,338 953
Equity in (income) losses of affiliated companies 47 61
Deferred income tax provision 86 34
Net change in operating activity accounts other than cash and cash equivalents:
Receivables 251 (190)
Operating accounts payable and accrued liabilities (51) (204)
Other operating activity accounts 245 306
------ ------
Cash from operating activities $ 2,212 $1,535
====== ======
See accompanying Notes to Interim Condensed Consolidated Financial Statements.
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MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
STATEMENT OF STOCKHOLDERS' EQUITY
(In millions)
Accumulated
Class A Addit'l Other Treasury
Common Common Paid in Retained Comprehensive Stock Total
Stock Stock Capital Earnings Income at Cost Equity
-------------------------------------------------------------------------------------------------
Balance at
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December 31, 1997 $14 $60 $6,343 $5,345 $19 $(470) $11,311
Common stock issued
for employee stock
and benefit plans &
other activity
(22 million shares) - - 146 - - 470 616
Common stock dividends - - - (18) - - (18)
Comprehensive income
Net income - - - 296 - - -
Change in other
comprehensive income - - - - (17) - -
Total other
comprehensive income - - - - - - 279
Balance at
June 30, 1998 $14 $60 $6,489 $5,623 $ 2 $ - $12,188
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See accompanying Notes to Interim Condensed Consolidated Financial Statements.
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MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. GENERAL
The accompanying unaudited interim condensed consolidated financial statements
have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission (SEC). The interim condensed consolidated
financial statements include the consolidated accounts of MCI Communications
Corporation and its majority-owned subsidiaries (collectively, the company) with
all significant intercompany transactions eliminated. In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
necessary for a fair statement of the financial position, results of operations
and cash flows for the interim periods presented have been made. The preparation
of the financial statements includes estimates that are used when accounting for
revenue, 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. Actual results could differ from those estimates. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles (GAAP) have
been condensed or omitted pursuant to such SEC rules and regulations. These
financial statements should be read in conjunction with the company's Annual
Report on Form 10-K for the year ended December 31, 1997.
NOTE 2. MCI WORLDCOM 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 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. On March 11, 1998, the stockholders of
the company and shareholders of WorldCom approved the Merger. On July 8, 1998,
and July 15, 1998, the European Commission and the United States Department of
Justice (DOJ) approved the merger, respectively, subsequently conditional to the
company's agreement to sell its public Internet services business. The Merger is
also subject to the approval of the Federal Communications Commission (FCC) and
various state regulatory agencies, approvals which the company expects to
receive in the summer of 1998. The Merger will be accounted for as a purchase in
accordance with GAAP.
The company and WorldCom have certain interconnection or other service
agreements at prevailing market rates in the ordinary course of their
businesses. For the three and six months ended June 30, 1998, the company
recognized revenue of approximately $214 million and $402 million, respectively,
for services provided by the company under these agreements. In addition, cost
of services during the same period for services provided by WorldCom was
approximately $18 million and $34 million, respectively, under such agreements.
As of June 30, 1998, amounts due from WorldCom, which were included in accounts
receivable, totaled approximately $225 million.
NOTE 3. COMPREHENSIVE INCOME
On January 1, 1998, the company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income". Total comprehensive
income is reported in the statement of stockholders' equity and includes net
income, unrealized gains and losses on marketable securities, net of tax, a
reclassification adjustment associated with gains and losses realized on
marketable securities in net income, net of tax, and foreign currency
translation adjustments.
NOTE 4. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In July, 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities", that will
be effective for the company's year ending December 31, 2000. Management is
currently evaluating the impact of the adoption of the statement and believes
there will not be a material impact to the company's financial statements. In
April 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position No. (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," which 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 company's financial statements taken as a whole. The AICPA also
issued SOP No. 98-5, "Reporting on the Costs of Start-up Activities," which will
be effective for the company's year ending December 31, 1999. The company is
currently evaluating the effects of this statement, however; management believes
its adoption will not have a material impact on the company's financial
statements taken as a whole. In 1997, the FASB issued SFAS No. 131, "Disclosure
about Segments of an Enterprise and Related Information," that will be effective
for the company's year ending December 31, 1998. The company is currently
evaluating the effects and believes that the adoption of this statement will not
have a material impact on the company's financial statements taken as a whole.
NOTE 5. DEBT
On April 22, 1998, the company issued $500 million aggregate principal amount of
6.50% Senior Notes due April 15, 2010 and $700 million aggregate principal
amount of 6.125% Callable/Redeemable Notes due April 15, 2012. The proceeds from
the issuance will be used for general corporate purposes, including the
repayment of short-term borrowings under the company's commercial paper program.
On April 28, 1998, the company extended its $4 billion revolving line of credit
loan agreement with several financial institutions. Borrowings under this
agreement mature on the earlier of April 26, 1999 or on the closing date of the
Merger.
NOTE 6. 1997 REORGANIZATION EFFORTS
In the second half of 1997, the company completed a comprehensive review of its
product and service offerings. As a result of this review, the company decided
to exit and restructure several business customer contracts, consolidate certain
operating centers and streamline or discontinue certain non-core or
under-performing Information Technology (IT) operations and reorganize certain
operations or eliminate certain product or service offerings within its core
business. For the year ended December 31, 1997, the company recorded $361
million in its costs of services to reflect costs and provisions to exit,
restructure or settle several business customer contracts and cease certain
product and service offerings. The company also recorded $282 million in sales,
operations and general expense primarily for reorganization efforts, which
included approximately $103 million of severance associated with a workforce
alignment and $93 million of obligations and penalties associated with lease,
vendor and customer contracts. The remainder represented other costs associated
with the company's business reorganization and certain legal costs.
Through June 30, 1998, the company expended approximately $447 million of the
accrued costs related to the above items, with the majority of the remaining
$196 million to be expended during the remainder of 1998. The remaining accrual,
which is included in other accrued liabilities on the accompanying balance
sheet, was primarily comprised of severance, lease obligations and customer and
vendor contract termination and commitment costs and certain legal costs. Cash
expenditures for these obligations will continue to be funded through cash from
operations. As a result of the workforce alignment associated with its
reorganization efforts, the company expected to reduce its workforce by
approximately 4,500 employees, of whom approximately 3,500 had left the company
by June 30, 1998. The remaining employees are expected to leave by the end of
1998.
NOTE 7. DIRECT BROADCAST SATELLITE (DBS) VENTURE
In May 1997, the company and The News Corporation Limited (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. In addition, the parties
agreed that the company's funding obligation to the DBS Venture would be limited
to $440 million. 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 and are pursuing the disposition of the other. 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 or upon the approval by the FCC of
the transfer of the orbital slot to the DBS Venture or another third party, 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. Under the terms of the Primestar Transaction, 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. On May 12, 1998 the Department of Justice
filed suit in the U.S. District Court for the District of Columbia seeking to
enjoin the completion of the Primestar Transaction.
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NOTE 8. EARNINGS PER SHARE
Earnings per share (EPS) are calculated in accordance with SFAS No. 128. The
following is a reconciliation of the numerators and the denominators of the
basic and diluted per share computations (in millions, except per share
amounts):
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Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
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Basic:
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Net income $195 $280 $296 $575
Weighted average common
shares outstanding 729 689 722 688
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Basic EPS $0.27 $0.41 $0.41 $0.84
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Diluted:
Net income $195 $280 $296 $575
Weighted average common
shares outstanding 729 689 722 688
----------------------- -----------------------
Effect of dilutive securities:
Shares of common stock issuable
upon the assumed exercise of
common stock equivalents 62 84 62 84
Shares of common stock assumed
repurchase for treasury (46) (65) (47) (67)
------------------------ ------------------------
Weighted average common
shares outstanding assuming
dilution 745 708 737 705
----------------------- -----------------------
Diluted EPS $0.26 $0.40 $0.40 $0.82
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NOTE 9. 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
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 British
Telecommunications plc (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 stockholder class actions pending in Delaware Chancery
Court has been amended and plaintiffs in four of the other purported stockholder
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 stockholders in connection with the Merger, the
agreement to pay a termination fee to WorldCom, and allege 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 were filed in the federal district court in Washington, D.C.,
as class actions on behalf of purchasers of the company's shares. The three
cases were consolidated on April 1, 1998. On or about May 8, 1998, the
plaintiffs in all three cases filed a consolidated amended complaint alleging,
on behalf of purchasers of the company's shares between July 11, 1997 and August
21, 1997, inclusive, 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 consolidated amended complaint seeks damages and other
relief. The company and the other defendants have moved to dismiss the
consolidated amended complaint.
On May 7, 1998, GTE Corporation and three of its subsidiaries filed suit in the
U.S. District Court for the District of Columbia against the company and
WorldCom. The complaint alleges that the pending merger between the company and
WorldCom would have the effect of substantially lessening competition or tending
to create a monopoly, and thereby violate section 7 of the Clayton Act, with
respect to the markets for Internet backbone services, facilities to extend the
reach of the Internet backbone, wholesale and retail long-distance services and
international calling services. The complaint requests declaratory and
injunctive relief. At a scheduling conference on July 10, 1998, the District
Court set a trial date of May 10, 1999.
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.
NOTE 10. SUBSEQUENT EVENTS
Divesture of the Public Internet Services Business
On July 15, 1998, the company announced that it had entered into a letter
agreement (Letter Agreement) with Cable & Wireless plc (Cable & Wireless) to
sell its public Internet services business for $1.75 billion. The Letter
Agreement supersedes the letter of intent between the company and Cable &
Wireless to sell MCI's Internet backbone services business which was announced
on May 28, 1998. The completion of the transaction is subject to certain
conditions precedent, including the satisfaction of the conditions precedent to
the Merger, which include the approval by the FCC of the Merger. Either party
may terminate the Letter Agreement if the sale is not consummated by December
31, 1998.
Investment in Embratel
On July 29, 1998, the company acquired, through its wholly-owned subsidiary
Startel Participacoes Ltda., for approximately $2.3 billion, a 51.79% voting
interest and a 19.26% economic interest in Embratel Participacoes S.A., Brazil's
only facilities-based national communications provider. The purchase price will
be paid in installments of which $916 million was paid on July 29, 1998 with the
remainder to be paid prior to July 29, 2000.
Sale of Investment in Concert CS
On August 7, 1998, the company entered into an agreement with BT, Concert CS and
WorldCom addressing various aspects of certain agreements and relationships
among the parties. The agreement is conditioned upon the resolution of certain
operational matters between the company and Concert CS. Under the terms of the
agreement the company has agreed to sell to BT its interest in Concert CS for
$1.013 billion immediately after consummation of the Merger.
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MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
PART I.
ITEM 2.
GENERAL
- -------
The following discussion and analysis provides information that management
believes is relevant to an assessment and understanding of the consolidated
results of operations and financial condition of MCI Communications Corporation
and its subsidiaries (collectively, the company). The discussion should be read
in conjunction with the interim condensed consolidated financial statements and
notes thereto and the company's Annual Report on Form 10-K for the year ended
December 31, 1997.
MERGER AGREEMENT WITH WORLDCOM, INC.
- ------------------------------------
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 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.
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 communication services, information
technology and other services, 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 communication services, information
technology and other services 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.; the cost of the company's year 2000 compliance efforts; and the effect
of future technological changes on its business.
On March 11, 1998, the stockholders of the company and shareholders of WorldCom
approved the Merger. On July 8, 1998, and July 15, 1998, the European Commission
and the United States (U.S.) Department of Justice (DOJ) approved the merger,
respectively, subsequently conditional to the company's agreement to sell its
public Internet services business. The Merger is also subject to the approval of
the Federal Communications Commission (FCC) and various state regulatory
agencies, approvals which the company expects to receive in the summer of 1998.
The Merger will be accounted for as a purchase in accordance with generally
accepted accounting principles. The company believes that the 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.
DIVESTURE OF THE PUBLIC INTERNET SERVICES BUSINESS
On July 15, 1998, the company announced that it had entered into a letter
agreement (Letter Agreement) with Cable & Wireless plc (Cable & Wireless) to
sell its public Internet services business for $1.75 billion. The Letter
Agreement supersedes the letter of intent between the company and Cable &
Wireless to sell MCI's Internet backbone services business which was announced
on May 28, 1998. The completion of the transaction is subject to certain
conditions precedent, including the satisfaction of the conditions precedent to
the Merger, which include the approval by the FCC of the Merger. Either party
may terminate the Letter Agreement if the sale is not consummated by December
31, 1998.
TELECOMMUNICATIONS REGULATORY ENVIRONMENT
- -----------------------------------------
In 1998, the company began incurring per-line charges resulting from the FCC's
Access Reform Order and certain new universal service support obligation costs
resulting from the FCC's Universal Service Order. Under the Access Reform Order
adopted by the FCC in May 1997, interstate access charges were restructured to
shift more costs directly to end users. The Access Reform Order also reduced
per-minute charges long-distance carriers 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 the customers. In 1997, the FCC also
adopted the Universal Service Order which created new universal service support
obligations for telecommunications services for schools and libraries and rural
health care facilities. Despite rate reductions associated with the Access
Reform Order that went into effect January 1, 1998, cost of providing
telecommunications services for the first half of 1998 increased compared to the
first half of 1997.
In 1998, the company also recalibrated and will continue to recalibrate its
rates to ensure it is collecting amounts necessary to pay incumbent local
exchange company (ILEC) per-minute and per-line access charges and the universal
service obligations imposed directly on the company. During the first half of
1998, the company had experienced collection difficulties on such charges which
led to an increase in its allowance for uncollectibles. Certain provisions of
the Access Reform Order, Price Cap Order, and Universal Service Order are now
under review by various U.S. Courts of Appeal. In addition, the company has
renewed its requests that the FCC itself revisit access reform and mandate that
access charges decrease to cost. On August 6, 1998, the FCC began proceedings in
which it has proposed to reform its international settlements policy. Through
that policy the FCC regulates the fees that U.S. carriers pay to foreign
carriers for the termination of international calls from the U.S. The FCC
proposed to remove constraints under that policy that restrict the kinds of
arrangements the U.S. carriers may enter into with foreign carriers located in
World Trade Organization member countries.
CONSOLIDATED RESULTS OF OPERATIONS
- ----------------------------------
The company operates predominantly in the communications services industry which
includes a broad range of long-distance, local and wireless telecommunications
services. Long-distance telecommunications services comprise a wide spectrum of
domestic and international voice and data services, including long-distance
telephone, electronic messaging, teleconferencing and data communications and
Internet services. The company also provides information technology (IT)
services which include equipment deployment, consulting and systems integration
and outsourcing services. The following discusses the company's consolidated
results of operations for the three and six months ended June 30, 1998 and 1997,
respectively.
REVENUE
For the three and six months ended June 30, 1998, revenue increased 10.9% and
9.6% to $5,370 million and $10,658 million, respectively, from the comparable
periods in 1997. Communications services revenue, which includes voice,
messaging, data and Internet, grew 10.6% and 9.5% compared to traffic growth of
12.3% and 13.0% for the three and six months ended June 30, 1998, respectively,
from the comparable periods in 1997. The variance in the growth of revenue
versus traffic of (1.7%) and (3.5%) reflects the growth in IntraLata services,
and ongoing levels of industry pricing competition. IT services revenue
increased 11.3% and 15.2% to $464 million and $949 million for the three and six
months ended June 30, 1998, respectively, from the comparable prior year
periods, as a result of growth in the systems integration and outsourcing
businesses.
<TABLE>
<CAPTION>
The following provides supplemental detail for communications services and IT
services revenue:
Three Months Ended Six Months Ended
Percent Percent
June 30, 1998 1997 Change 1998 1997 Change
- ---------------------------------------------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C> <C> <C> <C>
Voice & Messaging $ 3,934 $ 3,654 7.7% $ 7,829 $ 7,367 6.3%
Data & Internet 1,001 809 23.7% 1,944 1,561 24.5%
Information Technology 464 417 11.3% 949 824 15.2%
Eliminations & Other (29) (37) 21.6% (64) (26) NM
-------------------------------- ----------------------------
Total Revenue $ 5,370 $ 4,843 10.9% $10,658 $ 9,726 9.6%
================================= ==============================
NM = Not meaningful
</TABLE>
Voice and messaging services include traditional switched services such as
domestic and international inbound and outbound services and local, call centers
and wireless services. Voice and messaging revenue increased by $280 million and
$462 million to $3,934 million and $7,829 million for the three and six months
ended June 30, 1998, respectively, over the comparable periods in 1997. The
revenue increase were primarily the results of growth in the mass markets, local
services expansion, and increases in certain commercial business services,
partially offset by the continued de-emphasis of wholesale carrier customer
sales. In the mass markets, revenue and volume increased primarily as a result
of growth in the company's transactional brands, such as 1-800-Collect(R) and
10-10-321(R), and pre-subscribed services, such as 5-Cent SundaysSM. For the
three and six months ended June 30, 1998, the company's continuing strategy to
retain and focus on high-value customers resulted in a reduction of customer
churn. In business markets, commercial services revenue and volume increased,
led by inbound, teleconferencing and prepaid card services. Local services
revenue increased by approximately 70% and 77% for the three and six months
ended June 30, 1998, respectively, from the comparable periods in 1997. This
increase in revenue is primarily the result of the expansion of facilities
based, switched services to a total of 31 markets as of June 30, 1998, an
increase of 6 markets since June 30, 1997. Local services are provided to both
business and residential customers.
Data and Internet services include all domestic and international private line,
virtual data, managed services and Internet access services. Data and Internet
revenue increased by $192 million and $383 million to $1,001 million and $1,944
million for the three and six months ended June 30, 1998, respectively, from the
comparable periods in 1997. The increase was primarily due to increased demand
for integrated data and Internet services. For the three and six months ended
June 30, 1998, data revenue increased by $159 million and $314 million to $912
million and $1,722 million, respectively, in comparison to prior year's periods.
This increase is primarily the result of growth in virtual data, international
private line and managed services. Internet revenue for the three and six months
ended June 30, 1998, increased by $33 million and $69 million to $89 million and
$172 million, respectively, over the comparable periods in 1997. As announced on
July 15, 1998, the company has agreed to sell its public Internet services
business to Cable & Wireless for $1.75 billion simultaneous with the completion
of the Merger. (See Divesture of the Public Internet Services Business on page
15.)
IT services, which consist solely of the operations of MCI Systemhouse, includes
equipment deployment, consulting and systems integration and outsourcing
services. IT revenue increased 11.3% and 15.2% to $464 million and $949 million
for the three and six months ended June 30, 1998, respectively, over the
comparable periods in 1997. IT services revenue growth was the result of
increases in systems integration and outsourcing business predominately driven
by contract wins in late 1997, offset by a decline in revenue from discontinued
service lines. Excluding the impact of revenue from service lines discontinued
during the first half of 1998, revenue for the three and six months ended June
30, 1998 was $444 million and $889 million, respectively, an increase of 21%
and 24.3%, respectively, in comparison to the same periods in 1997.
COST OF SERVICES
Cost of services consists of telecommunications expense and costs of other
products and services. Telecommunications expense is primarily comprised of
access 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. Cost of services for the three and six months ended June
30, 1998 increased 11.5% and 12.8% to $2,839 million and $5,722 million,
respectively, from the comparable prior year periods. Cost of services as a
percentage of revenue was 52.9% and 53.7%, from 52.6% and 52.1% for the three
and six months ended June 30, 1998, and 1997, respectively. The expense and
percentage of revenue increases in 1998 were primarily the results of
consolidated revenue growth and increases in direct operating expense in the
company's local service and IT businesses revenue mix. Telecommunications
expense as a percentage of communication services revenue decreased to 47.9%
from 48.7% for the three months ended June 30, 1998, and 1997, respectively.
This decrease was due to favorable domestic and international telecommunications
interconnections rates, and more efficient network usage; partially offset by
prescribed line and universal service support obligations and a reduction in
revenue rates as a result of competitive pricing. Telecommunications expense as
a percentage of communication services revenue increased to 49.0% from 48.5% for
the six months ended June 30, 1998, and 1997, respectively. The increase of
telecommunications expense as a percentage of communications revenue is the
result of a reduction in revenue rates due to competitive pricing, required
compensation to payphone owners and implementation of prescribed line and
universal service support obligations. The increase was partially offset by
lower domestic and international telecommunications interconnections rates, and
more efficient network usage.
SALES, OPERATIONS AND GENERAL EXPENSE
Sales, operations and general expense increased 22.8% and 18.3% to $1,554
million and $3,058 million for the three and six months ended June 30, 1998,
respectively, in comparison to the same periods in 1997. As a percentage of
revenue, sales, operations and general expense increased to 28.9% and 28.7%,
from 26.1% and 26.6% for the three and six months ended June 30, 1998, and 1997,
respectively. The increases for the three and six months ended June 30, 1998
were the result of increased human resource and support costs associated with
business growth primarily in local and information and technology services, year
2000 efforts and pre-merger retention bonuses. In connection with the Merger
Agreement, pre-merger retention bonus pools were established to retain key
executives and employees of the company. For the three and six months ended June
30, 1998, the company recorded compensation costs of $32 million and $67
million, respectively, under these retention bonus programs. The company expects
to recognize additional compensation costs of approximately $60 million in the
last half of 1998 and approximately $50 million in 1999 under these programs.
However, all unpaid amounts under these retention pools will be paid on the
closing date of the Merger if earlier than the scheduled pay-out date at which
time any unrecognized compensation costs would be accelerated and expensed by
the company.
DEPRECIATION EXPENSE
Depreciation expense increased $142 million and $379 million to $621 million and
$1,311 million for the three and six months ended June 30, 1998, respectively,
from the comparable prior year periods. Approximately $58 million and $195
million of these increases resulted from additional depreciation expense on
equipment disposed of during the three and six months ended June 30, 1998,
respectively, that was identified for disposition in connection with an asset
disposition plan adopted in the fourth quarter of 1997. The remaining increase
in depreciation expense represents the depreciation impact of property and
equipment additions placed into service partially offset by the impact of
equipment disposals.
INTEREST EXPENSE
Interest expense decreased $4 million and $10 million for the three and six
months ended June 30, 1998, respectively, from the same periods in 1997, due to
lower average total debt balances and interest rates.
INTEREST INCOME
Interest income increased $8 million and $6 million for the three and six months
ended June 30, 1998, respectively, from the same periods in 1997, due to
increased cash balances.
EQUITY IN INCOME (LOSSES) OF AFFILIATES
Equity in income (losses) of affiliates decreased $1 million and $14 million to
($23) million and ($47) million for the three and six months ended June 30,
1998, respectively, from the comparable periods in 1997. The decrease for the
six month period is primarily the result of a reduction in the company's share
of operating losses of ICS Communications, Inc. and Concert Communications
Company (Concert CS).
OTHER INCOME (EXPENSE), NET
Other income, net, was $38 million and $77 million an increase of $42 million
and $84 million for the three and six months ended June 30, 1998, and 1997,
respectively. For the three months ended June 30, 1998, the increase from the
comparable period in 1997 was the result of recognized gains of approximately
$43 million related to the sales of certain non-core holdings. For the six
months ended June 30, 1998, the increase from the comparable period in 1997 was
primarily the result of the aforementioned gains and a $51 million realized gain
resulting from the company's exchange of a marketable equity securities
investment in Brooks Fiber Properties, Inc. which occurred in the first quarter
of 1998.
INCOME TAX PROVISION
The provision for income taxes decreased by $56 million and $178 million to $119
million and $181 million for the three and six months ended June 30, 1998,
respectively, from the comparable periods in 1997. The decreases are the result
of the 1998 reduction in pre-tax income. The company's effective tax rate
approximated 38% for each period.
NET INCOME
Net income decreased $85 million and $279 million to $195 million and $296
million for the three and six months ended June 30, 1998, respectively, from the
same periods during 1997. The decrease in net income for the three and six
months ended June 30, 1998 are the result of increases in operating expense
associated with, and in response to, growth and competitive initiatives as well
as the additional depreciation expense for equipment subject to the asset
disposition plan adopted in 1997 offset by the increase in other income, net and
the lower provision for income taxes.
GLOBAL AND OTHER ALLIANCES
CONCERT CS
During the first quarter of 1998, the company invested $8 million in Concert CS,
its 24.9% owned international services venture with British Telecommunications
plc, (BT). For the three and six months ended June 30, 1998, Concert CS
distributor revenue amounted to approximately $232 million and $444 million,
respectively. The company's share of Concert CS losses reported in accordance
with U.S. GAAP was $(2) million and $(5) million for the three and six months
ended June 30, 1998, respectively. BT has agreed to exercise its call option to
acquire the company's shares in Concert CS immediately following the effective
time of the Merger.
On August 7, 1998, the company entered into an agreement with BT, Concert CS
and WorldCom addressing various aspects of certain agreements and relationships
among the parties. The agreement is conditioned upon the resolution of certain
operational matters between the company and Concert CS. Under the terms of the
agreement the company has agreed to sell to BT its interest in Concert CS for
$1.013 billion immediately after consummation 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.
TELEFONICA de ESPANA S.A. ALLIANCE (Telefonica)
In April 1997, the company formed a strategic alliance with 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.
AVANTEL S.A. de C.V (Avantel)
During the first half of 1998, the company funded an additional $37 million in
Avantel, a 44.5% owned business venture with Grupo Financiero Banamex-Accival.
At June 30, 1998, Avantel has approximately 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 was $(23) million and $(43) million for the three and
six months ended June 30, 1998, respectively. The company expects Avantel to
continue to generate operating losses as Avantel expands its service and
customer bases in Mexico's telecommunications market.
INVESTMENT in EMBRATEL
On July 29, 1998, the company acquired, through its wholly-owned subsidiary
Startel Participacoes Ltda., for approximately $2.3 billion, a 51.79% voting
interest and a 19.26% economic interest in Embratel Participacoes S.A., Brazil's
only facilities-based national communications provider. The purchase price will
be paid in installments of which $916 million was paid on July 29, 1998 with the
remainder to be paid prior to July 29, 2000.
DIRECT BROADCAST SATELLITE (DBS) VENTURE
In May 1997, the company and The News Corporation Limited (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. In addition, the parties
agreed that the company's funding obligation to the DBS Venture would be limited
to $440 million. 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 and are pursuing the disposition of the other. 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 or upon the approval by the FCC of
the transfer of the orbital slot to the DBS Venture or another third party, 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. Under the terms of the Primestar Transaction, 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. On May 12, 1998 the Department of Justice
filed suit in the U.S. District Court for the District of Columbia seeking to
enjoin the completion of the Primestar Transaction.
YEAR 2000 EFFORTS
The company continues to evaluate and upgrade its computer systems and
applications for the year 2000. The company's objective is to target year 2000
compliance for all of its major systems, including network and customer
interfacing systems, on or before March 31, 1999. All other systems are targeted
for compliance by June 1999. The company is currently testing the systems and
applications that have been corrected or reprogrammed to date for year 2000
compliance.
As part of its year 2000 plan, the company is seeking confirmation from its
domestic and foreign interconnecting carriers and major communications
equipment vendors (Primary Vendors) that they are developing and implementing
plans to become year 2000 compliant. Confirmations received to date from its
Primary Vendors have indicated that such respondents are in the process of
implementing remediation procedures to ensure that their computer systems are
year 2000 compliant by December 31, 1999. The company has already started
testing with some of its Primary Vendors and expects to have started testing
with all of its Primary Vendors by the second quarter of 1999.
In addition, the company is developing a contingency plan to deal with potential
year 2000 related business interruptions that may occur on January 1, 2000 or
thereafter. The company believes this plan will be ready for implementation in
early 1999 and it is anticipated that contingency plan testing will begin during
the first quarter of 1999.
To achieve its year 2000 compliance plan, 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 by the company for the six months ended June 30, 1998 were
approximately $52 million and are included in sales, operations and general
expense and were consistent with the planned expenditures for the period. The
company expects to incur approximately $350 million in expenses in the last half
of 1998 and 1999 to support its compliance initiatives. Although the company
expects its systems to be year 2000 compliant on or before December 31, 1999, it
cannot predict the outcome or the success of its year 2000 joint testing program
or the year 2000 compliance programs of the Primary Vendors, nor can it predict
the impact on its financial condition or results of operations, if any, in the
event that such joint testing compliance objectives and year 2000 compliance
programs of its Primary Vendors are not successful.
<PAGE>
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------------------------
CASH FLOWS
- -------------------
Cash from operating activities increased by $677 million to $2,212 million for
the six months ended June 30, 1998 compared to the six months ended June 30,
1997. Receipts from customers increased by $1,581 million due primarily to the
increase in revenue and improved collection experience. Payments to suppliers
and employees increased by $1,034 million as a result of increases in operating
expenses and the timing of the related payments. Taxes and interest paid for the
six months ended June 30, 1998 declined from the year ago period primarily as a
result of lower income taxes and interest expenses, and income tax refunds. Cash
used for investing activities decreased by $633 million for the six months ended
June 30, 1998 compared to the six months ended June 30, 1997. The decrease was
the result of lower expenditures for property and equipment and investments in
DBS and affiliates of $301 million. These investing activities were offset by a
$383 million increase in other investing activities, net primarily the result of
$360 million of proceeds received from a sale-lease back transaction offset by a
reduction in proceeds received from marketable securities and other investments,
net of $51 million. Cash from operating activities and financing activities was
used to support the company's investing activities for the six months ended June
30, 1998.
Cash used for financing activities was ($227) million for the six months ended
June 30, 1998 compared to net cash proceeds from financing activities of $86
million for the six months ended June 30, 1997. During the six months ended June
30, 1998, the company was able to repay approximately $1.8 billion in commercial
paper and other debt balances. These balances were repaid in-part from proceeds
raised from issuances of common stock to support employee benefit programs and
proceeds from debt issuances of $500 million aggregate principal amount of 6.50%
Senior Notes and $700 million aggregate principal amount of 6.125%
Callable/Redeemable notes issued in April 1998. Other financing activities
included distributions paid on Trust mandatorily redeemable preferred securities
of $30 million and dividend payments of $18 million. Cash from financing
activities for the six months ended June 30, 1997 consisted of payments of
Senior Notes and other debt of $160 million, distributions paid on Trust
mandatorily redeemable preferred securities of $30 million, and dividend
payments of $17 million offset by net commercial paper borrowings of $135
million and issuances of common stock to support employer benefit programs net
of treasury share repurchases of $158 million.
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------------------------------
For the six months ended June 30, 1998, the company funded its capital
expenditures and other investment activities through cash from operations and
other financing activities. The company expects net capital expenditures of
approximately $3.1 billion for 1998 and expects to fund a majority of the
expenditures with cash from operations. The company has a $4 billion bank credit
facility that supports the company's commercial paper program and may be used to
fund short-term fluctuations in working capital and other corporate
requirements. In April 1998, this facility was extended until the earlier of the
consummation of the Merger or April 26, 1999. In April 1998, the company also
issued $500 million aggregate principal amount of 6.50% Senior Notes due April
15, 2010 and $700 million aggregate principal amount of 6.125%
Callable/Redeemable Notes due April 15, 2012 under its $1.2 billion shelf
registration. The proceeds from these issuances were used to repay maturing
commercial paper balances and for other general corporate purposes. After these
issuances, there were no amounts available for issuance under the shelf
registration. Upon issuance of the $500 million Senior Notes, the company
terminated an interest rate swap which had been designated as a hedge against
adverse market interest rate changes. The swap had a negative fair value of
approximately $27 million at the time of the transaction which is being
amortized over the life of the Senior Notes. On July 29, 1998 the company
invested approximately $916 million for its interest in Embratel Participacoes
S.A. This was funded with cash from operations. The company believes it will be
able to meet its current and long-term liquidity and capital requirements from
cash from operating activities, its commercial paper program and other investing
activities.
<PAGE>
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
FORM 10-Q
PART I.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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. The
company believe its market risk exposure is not material. At June 30, 1998, the
company had no amounts of variable rate debt outstanding.
<PAGE>
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
FORM 10-Q
PART II. OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
a)Exhibits
Exhibit No. Description
- ----------- -----------
<TABLE>
<CAPTION>
<S> <C>
10(a) Share Purchase Agreement for Common Shares issued by Embratel
Participacoes S.A. with the option of scheduled payments.
12 Computation of Ratio of Earnings to Fixed Charges.
27(a) Financial Data Schedule as of June 30, 1998.
27(b) Financial Data Schedule as of June 30, 1997.
27(c) Financial Data Schedule as of September 30, 1997.
99(a) Capitalization Schedule as of June 30, 1998.
b)Reports on Form 8-K
For the three months ended June 30, 1998, the company filed two Current Reports
on Form 8-K on April 27, 1998,and May 29, 1998, (amended July 22, 1998).
</TABLE>
<PAGE>
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
FORM 10-Q
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MCI COMMUNICATIONS CORPORATION
Date: August 14, 1998 Signed: /s/ David M. Case
-----------------------
David M. Case
Vice President and Controller
<PAGE>
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
FORM 10-Q
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
<TABLE>
<CAPTION>
<S> <C>
10(a) Share Purchase Agreement for Common Shares issued by Embratel
Participacoes S.A.with the option of scheduled payments.
12 Computation of Ratio of Earnings to Fixed Charges.
27(a) Financial Data Schedule as of June 30, 1998.
27(b) Financial Data Schedule as of June 30, 1997.
27(c) Financial Data Schedule as of September 30, 1997.
99(a) Capitalization Schedule as of June 30, 1998.
</TABLE>
Share Purchase Agreement for Common Shares
issued by Embratel Participacoes S.A. with
the option of scheduled payment, as
stipulated below:
This Share Purchase Agreement, made and entered into this 4th day of August
1998, by and between the UNION, represented in the manner set forth in art. 10,
items V, "b" and VII of Decree Law 147, of February 3, 1967, by the Attorney
General's Office of the National Treasury, according to the delegation of powers
registered in Ordinance PGFN/PG No. 410, of July 15, 1998, published in the
Official Journal of the Union on July 16, 1998, to the Banco Nacional de
Desenvolvimento Economico e Social - BNDES, which in this act is represented by
the Manager of its Capital Market Department, Mr. Carlos Alves Vidinha, a
Brazilian, married, administrator, bearer of identity card No. 3.225.536, issued
by IFP/RJ, and registered in the Individual Taxpayer Registry CPF/MG under No.
385.467.607-72, according to the sub-delegation of powers registered in BNDES
Ordinance No. 76, of July 20, 1998, and STARTEL PARTICIPACOES LTDA., a company
with its head office on Av. Paulista, 949, 10th floor, suite 101 Room B,
Cerqueira Cesar, Sao Paulo - SP, registered in the Tax Roll - CGC/MF No.
02.570.353/0001-52, by its legal undersigned representative(s), hereinafter
referred to as BUYER,
WHEREAS
the UNION, in the capacity of majority shareholder of EMBRATEL PARTICIPACOES
S.A., a company with its head office at SCN - Quadra CN2, lote F, 2(degree)
andar, sala 204, Brasilia - DF, registered in the CGC/MF under No.
02.558.124/0001-12 (hereinafter referred to as COMPANY), holds 64,405,151,125
(sixty-four billion, four hundred and five million, one hundred and fifty-one
thousand, one hundred and twenty-five) common shares, issued by the COMPANY,
representing 51.79% (fifty-one point seventy-nine percent) of the voting capital
(hereinafter referred to as COMMON SHARES);
the UNION, by means of BNDES/MC Public Notice 01/98 (hereinafter referred to as
NOTICE), publicly announced the COMPANY's denationalization conditions by means
of the sale of the COMMON SHARES in a Special Public Auction held on July 29,
1998 (hereinafter referred to as AUCTION), within the scope of the
denationalization process of the Federal Telecommunications Companies, pursuant
to Law 9,472, of July 16, 1997;
the BUYER was declared winner of the sales AUCTION of the COMMON SHARES;
resolved to sign the present Share Purchase Agreement, as follows:
ONE
OBJECT
1.1 - By the present instrument, and in accordance with the NOTICE, the UNION
hereby sells the BUYER the COMMON SHARES, clear and disencumbered of any legal
or conventional onus or burden, for the price of R$ 2,650,000,000.00 (two
billion, six hundred and fifty million reais).
1.2 - The transfer of the COMMON SHARES takes place by means of the execution of
this contract, which as of now is valid as the deed for the appropriate
registration in the deposit account in the name of the BUYER in the books of the
depositing institution responsible for the COMPANY's book shares system, as soon
as this system is implemented, without prejudice to the BUYER's immediate
exercise of all the political and asset rights inherent to the ownership of the
COMMON SHARES.
TWO
PAYMENT TERMS
2.1 - The price of the COMMON SHARES shall be paid in the Country's legal tender
in 3 (three) installments, in the following manner: (a) the first at sight,
equivalent to 40% (forty percent) of the price offered; (b) the remainder in two
equal annual installments, falling due in 12 (twelve) and 24 (twenty-four)
months, respective, from this date.
2.2 - The installments of the scheduled price payment will be price-level
restated by the General Price Index - Internal Availability - IGP-DI variation
published by the Fundacao Getulio Vargas, plus interest of 12% (twelve percent)
per year on the adjusted amount, from this date to its payment;
2.3 - The BUYER may advance payment of the scheduled portion of the price
payment. In the event of the advance payment of the third installment to a date
prior to or on the same date that the second installment falls due, the interest
corresponding to the third installment will be of 9% (nine percent) per annum,
instead of the percentage provided for in item 2.2. above;
2.4 - Payment delays of any of the payment installments will result in a late
payment fine of 10% (ten percent) of the installment in arrears, adjusted in
accordance with clause 2.2., regardless of the accelerated maturity of the
installment falling due, if any;
2.5 - In guarantee of the price's full payment, the BUYER hereby delivers
pledging of 51,395,310,598 (fifty-one billion, three hundred and ninety-five
million, three hundred and ten thousand, five hundred and ninety-eight) COMMON
SHARES in favor of the UNION;
2.5.1. - The guaranty presented according to this Clause 2.5. may later
be replaced by other guarantees that might be accepted by Banco
Nacional de Desenvolvimento Economico e Social - BNDES.
2.6 - Extrajudicial foreclosure of the COMMON SHARES presented as a guaranty for
the purposes of Clause 2.5. above is hereby authorized in the case of the
BUYER'S default for payment of the debt, pursuant to articles 774, II, of the
Civil Code and 275 of the Commercial Code;
2.7 - For the purpose of the extrajudicial sale expressly authorized herein, the
BUYER in this act grants the UNION the irrevocable and irreversible mandate, in
accordance with article 1,317, I and II, of the Civil Code, with specific
powers, in the name of the BUYER, to sell the pledged COMMON SHARES to
whomsoever offers the best price, with the authority to sign contracts and other
instruments, transfer terms of the COMMON SHARES, receive the price and give
acquittance;
2.8 In accordance with paragraph one of article 39, of Law 6,404/76, this
instrument shall be registered in the financial institution responsible for
recording the shares issued by the COMPANY in its books, within the period of
10 (ten) days from the execution of this instrument.
2.9 - The UNION declares it has received the amount of R$ 1,060,000,000 (one
million and sixty million reais) equivalent to the installment paid at sight by
the BUYER, for which it hereby gives full, irreducible and general acquittance;
THREE
RESPONSIBILITY FOR NON-SUBSISTENT ASSETS AND
UNDISCLOSED LIABILITIES
3.1 - The UNION, Ministry of Communications ("MC"), Telecomunicacoes Brasileiras
S.A. - TELEBRAS, the COMPANY, BNDES, Special Supervision Committee - CES and the
independent consultants hired by the BNDES ("CONSULTANTS") shall not be held
responsible for any non-subsistent assets or undisclosed liabilities, whether or
not mentioned in the PUBLIC NOTICE, or in any other document comprising
information concerning the denationalization process of the Federal
Telecommunications Companies.
FOUR
DIVIDENDS
4.1 - The BUYER shall be entitled to the dividends that may be declared as of
the transfer of ownership of the COMMON SHARES.
FIVE
BUYER'S SPECIAL OBLIGATIONS
5.1 - The BUYER and its possible successors are jointly and severally bound, for
whatsoever purpose, including as a result of the later assignment and transfer
of COMMON SHARES, on an irrevocable and irreversible basis and in accordance
with the prevailing legislation, to rigorously perform all the following special
obligations, without prejudice to those provided for in the NOTICE, exercising,
to this end, its voting right in the COMPANY's General Meetings, so as to:
5.1.1 - order full compliance with the Concession Contracts,
Authorization Terms, Brazilian Satellite Exploitation Right
Granting Term and the Commitment Term for Participation in the
Intelsat and Inmarsat Organizations, established by the National
Telecommunications Agency - ANATEL and the COMPANY's subsidiary;
5.1.2 - rigorously comply with and ensure that the COMPANY and its
respective subsidiary comply with the legal and regulatory statutes
and contractual provisions pertinent to the provision of the
telecommunications services granted, taking care that the COMPANY
and its subsidiary undertake the necessary investments to maintain
and improve these services, always with a view to adequately
serving the user and the service's universalization;
5.1.3 - to provide, regardless of that set forth in the Concession
Contract, requests for documents or any information relating to the
COMPANY and its subsidiary that may be solicited by MC, the BNDES
or federal control and auditing agencies, and permit that UNION
employees or persons duly authorized by same have access to the
books and documents relating to the COMPANY's managements prior to
the denationalization;
5.1.4 - assure the COMPANY's current employees and those of its
respective subsidiary, the Supplementary Pension Plans of Telos -
Fundacao Embratel de Seguridade Social, in accordance with the
terms stipulated in the prevailing Statutes and Regulations of the
Benefits Plan, adhering and ratifying the Adhesion Contracts
already executed by the COMPANY and its respective subsidiary with
said entity of Supplementary Pension Plans;
5.1.5 - replace, within the period of 90 (ninety) days, from the
financial settlement of the AUCTION, the sureties or any other
guarantees offered by TELEBRAS or the UNION and by the officers
directly indicated by TELEBRAS and by the UNION in all the
contracts and financial operations, whose rights and obligations
have been assumed by the COMPANY or that are of the responsibility
of the COMPANY's subsidiary;
5.1.6 - exceptionally, in the event the respective creditors or
beneficiaries of the guarantees in the guaranteed or
contra-guaranteed obligations do not agree with the replacement
referred to above, the purchasers shall be obliged to offer
contra-guarantees of a real nature or bank guarantees in favor of
TELEBRAS or the UNION, or other duly accepted guarantees and under
the conditions normally practiced by the market;
5.1.6.1 - the term for replacing or offering the
contra-guarantees referred to in items 5.1.5. and 5.1.6.
above, shall, in any of the hypotheses, be of 90 (ninety)
days, counted from the AUCTION's financial settlement
date;
5.1.7 - order the fulfillment of the universalization goals of the
telecommunications services in accordance with the terms of the
Universalization Goals Plan for the Telecommunications Services
rendered under the public regime, as that approved by Decree 2, 592
of May 15, 1998;
5.1.8 - continue the COMPANY's registration process for negotiating its
securities in the stock exchange with the Brazilian Securities
Commission and stock exchanges, in accordance with the terms of CVM
Instruction 202, of December 6, 1993, in addition to obtaining
approval for the Depositary Receipts program of the COMPANY's
preferred shares, pursuant to CMN Resolution 1,927, of May 27,
1992, with the North American market;
5.1.9 - once registered, maintain the COMPANY as a publicly traded
company, with the registrations referred to in item 5.1.8. above
always current;
5.1.10 - maintain the permanent nature of the COMPANY's Audit Committee.
5.1.11. - maintain the Sole Paragraph of Article 13 of the COMPANY's By-Laws
unchanged;
5.1.12 - order that the COMPANY or its subsidiary offer the employees
Contractual Rescission Incentive Plans, in the case of management
restructuring conducted within 180 (one hundred and eighty) days of
the financial settlement of the at sight installment.
SIX
IRREVOCABILITY AND IRREVERSIBILITY
6.1 - The sale of the COMMON SHARES, object of this instrument, is made on an
irrevocable and irreversible basis, binding the parties and their successors and
assignees for any whatsoever purpose.
SEVEN
GENERAL PROVISIONS
7.1 - The obligations arising from this contract have a specific performance.
7.2 - This contract completes and is as integral part of the NOTICE, will be
interpreted in conformity with the DEFINITIONS AND ABBREVIATIONS of item 1.1 of
Chapter 1 of the PUBLIC NOTICE and is complemented by the other provisions
stipulated therein.
7.3 - The BUYER is obliged to promote, at its expense, this instrument's
registration in a Registry of Deeds and Documents, and, within the period of 30
(thirty) days from the execution of this instrument, remit a certificate of the
registration with said Registry and the account statement of the deposit
concerning the registration provided for in clause 2.8 of this instrument to:
Attorney General of the National Treasury Esplanada
dos Ministerios Edificio sede do Ministerio da
Fazenda - 8(0) andar
Attn.: Procurador Geral da Fazenda Nacional
7.4 - The UNION shall remit to the Federal Control Secretary an authenticated
copy of this instrument within the period of 10 (ten) days from this date, as
set forth in art. 34 of Decree 93,872, of December 23, 1986.
EIGHT
PUBLICATION
8.1 - It shall be incumbent upon the BUYER to promote, at its expense,
publication of this instrument in the Official Gazette, within the period of 20
(twenty) days.
NINE
JURISDICTION
9.1 - The parties hereby agree to submit to the jurisdiction of and that venue
is proper in the court of Brasilia, DF, with the express exclusion of any other,
however more privileged it may be, to settle any doubts arising from this
Contract.
And, in witness whereof, the parties execute this Agreement in 3 (three)
countercopies of the same tenor and to a sole effect, in the presence of the
undersigned witnesses, extracting the copies required for its publication and
execution.
Rio de Janeiro, August 4 , 1998
- -------------------------- --------------------------------------
Carlos Alves Vidinha Luis Fernando Motta Rodrigues
UNION BUYER
Witnesses:
--------------------------------- --------------------------------
Name: Luiz Carlos Mendonca de Barros Name: Wilma Motta
Identity: 2.822.923 SSP-SP Identity: 3.173.766-3 SSP-SP
CPF: 005.761.668-04 CPF: 141.948.008-18
- ------------------------------------------------------
Name: Dan Crawford
<TABLE>
<CAPTION>
Exhibit 12
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In millions, except ratio amounts)
(unaudited)
Six Months Ended
June 30, Year Ended December 31,
1998 1997 1997 1996 1995 1994 1993
----- ----- ---- ---- ---- ---- ----
Earnings:
<S> <C> <C> <C> <C> <C> <C> <C>
Income before
income taxes and
extraordinary item(a) $ 477 $ 934 $ 239 $1,955 $ 897 $1,280 $1,045
Add:
Fixed charges 275 280 568 460 344 315 315
Less:
Capitalized interest 70 75 153 118 93 78 61
----- ----- ------ ------ ------ ------ ------
Total earnings $ 682 $1,139 $ 654 $2,297 $1,148 $1,517 $1,299
===== ===== ====== ====== ====== ====== ======
Fixed Charges:
Fixed charges on
indebtedness,
including amortization
of debt discount and
premium(a) $ 206 $ 221 $ 448 $ 349 $ 242 $ 231 $ 239
Interest portion of
operating lease
rentals(b) 69 59 120 111 102 84 76
----- ----- ------ ------ ------ ------ ------
Total fixed charges $ 275 $ 280 $ 568 $ 460 $ 344 $ 315 $ 315
===== ===== ====== ====== ====== ====== ======
Ratio of earnings to
fixed charges 2.48 4.07 1.15 4.99 3.34 4.82 4.12
==== ==== ====== ====== ====== ====== ======
(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>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet of MCI Communications Corporation and Subsidiaries at June 30, 1998 and
the income statement for the six months ended June 30, 1998 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000064079
<NAME> MCI Communications Corporation
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,126
<SECURITIES> 0
<RECEIVABLES> 3,325
<ALLOWANCES> 426
<INVENTORY> 0
<CURRENT-ASSETS> 5,434
<PP&E> 22,444
<DEPRECIATION> 8,304
<TOTAL-ASSETS> 25,986
<CURRENT-LIABILITIES> 6,943
<BONDS> 3,938
750
0
<COMMON> 74
<OTHER-SE> 12,114
<TOTAL-LIABILITY-AND-EQUITY> 25,986
<SALES> 0
<TOTAL-REVENUES> 10,658
<CGS> 0
<TOTAL-COSTS> 10,091
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 106
<INCOME-PRETAX> 507
<INCOME-TAX> 181
<INCOME-CONTINUING> 296
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 296
<EPS-PRIMARY> 0.41
<EPS-DILUTED> 0.40
</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 June 30, 1997 and
the income statement for the six months ended June 30, 1997 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000064079
<NAME> MCI Communications Corporation
<MULTIPLIER> 1000000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 55
<SECURITIES> 95
<RECEIVABLES> 3,670
<ALLOWANCES> 306
<INVENTORY> 0
<CURRENT-ASSETS> 845
<PP&E> 20,370
<DEPRECIATION> 7,084
<TOTAL-ASSETS> 24,251
<CURRENT-LIABILITIES> 6,846
<BONDS> 3,259
750
0
<COMMON> 74
<OTHER-SE> 11,276
<TOTAL-LIABILITY-AND-EQUITY> 24,251
<SALES> 0
<TOTAL-REVENUES> 9,726
<CGS> 0
<TOTAL-COSTS> 8,588
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 116
<INCOME-PRETAX> 964
<INCOME-TAX> 359
<INCOME-CONTINUING> 575
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 575
<EPS-PRIMARY> 0.84
<EPS-DILUTED> 0.82
</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 September 30, 1997
and the income statement for the nine months ended September 30, 1997 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000064079
<NAME> MCI Communications Corporation
<MULTIPLIER> 1000000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 139
<SECURITIES> 10
<RECEIVABLES> 3,561
<ALLOWANCES> 344
<INVENTORY> 0
<CURRENT-ASSETS> 893
<PP&E> 21,258
<DEPRECIATION> 7,475
<TOTAL-ASSETS> 24,717
<CURRENT-LIABILITIES> 7,327
<BONDS> 3,282
750
0
<COMMON> 74
<OTHER-SE> 11,247
<TOTAL-LIABILITY-AND-EQUITY> 24,717
<SALES> 0
<TOTAL-REVENUES> 14,545
<CGS> 0
<TOTAL-COSTS> 13,593
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 174
<INCOME-PRETAX> 684
<INCOME-TAX> (246)
<INCOME-CONTINUING> 393
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 393
<EPS-PRIMARY> 0.57
<EPS-DILUTED> 0.56
</TABLE>
<TABLE>
<CAPTION>
Exhibit 99(a)
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CAPITALIZATION SCHEDULE
(In millions)
(unaudited)
Set forth below is the capitalization of the company as of June 30, 1998:
Debt(a):
Secured debt:
<S> <C>
Capital lease obligations............................ $ 539
Other secured obligations............................ 8
-------
Total secured debt...................................... 547
-------
Unsecured debt:
Senior Notes, net.................................... 2,630
Senior Debentures, net............................... 1,384
Commercial paper borrowings.......................... -
Other unsecured debt................................. 114
Capital lease obligations 5
-------
Total unsecured debt.................................... 4,133
-------
Total debt................................................ $ 4,680
-------
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........................... 6,489
Retained earnings.................................... 5,623
Accumulated other comprehensive income 2
Treasury stock, at cost, 0 million shares........... -
-------
Total stockholders' equity................................ $12,188
-------
Total capitalization...................................... $17,618
=======
(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 of the company's Annual Report to Stockholders, which is included in
Exhibit 13 to the company's Annual Report on Form 10-K for the year ended
December 31, 1997. Interest rates on capital lease obligations, on a weighted
average basis, approximated 9.4% per annum at June 30, 1998.
(b) On May 29, 1996, MCI Capital I, a wholly-owned Delaware statutory business
trust (Trust), issued $750 million aggregate principal amount of 8% Cumulative
Quarterly Income Preferred Securities, Series A (preferred securities) due on
June 30, 2026. The Trust exists for the sole purpose of issuing the preferred
securities and investing the proceeds in the company's 8% Junior Subordinated
Deferrable Interest Debentures, Series A (Subordinated Debt Securities) due June
30, 2026.
</TABLE>
