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 March 31, 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 March 31, 1998, the registrant had outstanding 135,998,932 shares of Class
A common stock and 588,383,449 shares of common stock.
<PAGE> PAGE: 3 MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
FORM 10-Q
For The Quarter Ended March 31, 1998
INDEX
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Page No.
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PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Income Statements for the three months ended
March 31, 1998 and 1997 3
Balance Sheets as of March 31, 1998 and December 31, 1997 4-5
Statements of Cash Flows for the three months ended
March 31, 1998 and 1997 6
Statement of Stockholders' Equity for the three months
ended March 31, 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 14-20
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 21
PART II: OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS 22
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 23
SIGNATURE 24
EXHIBIT INDEX 25
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
INCOME STATEMENTS
(In millions, except per share amounts)
Three Months Ended
March 31,
----------------------
1998 1997
<S> <C> <C>
REVENUE $5,288 $4,883
------ ------
OPERATING EXPENSES
Cost of services 2,883 2,525
Sales, operations and general 1,504 1,319
Depreciation 690 453
------ ------
TOTAL OPERATING EXPENSES 5,077 4,297
------ ------
INCOME FROM OPERATIONS 211 586
Interest expense (52) (58)
Interest income 4 6
Equity in income (losses) of
affiliated companies (24) (37)
Other income (expense), net 39 (3)
------ ------
INCOME BEFORE INCOME TAXES and
TRUST DISTRIBUTIONS 178 494
Income tax provision 62 184
Distributions on subsidiary Trust mandatorily
redeemable preferred securities 15 15
------ ------
NET INCOME $ 101 $ 295
====== ======
BASIC EARNINGS PER COMMON SHARE $ .14 $ .43
DILUTED EARNINGS PER COMMON SHARE $ .14 $ .42
Weighted average number of common shares 715 685
Weighted average number of common shares
assuming dilution 732 701
See accompanying Notes to Interim Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
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MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
BALANCE SHEETS
(In millions)
March 31, December 31,
1998 1997
ASSETS
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CURRENT ASSETS
Cash and cash equivalents $ 208 $ 261
Receivables, net of allowance for
uncollectibles of $399 and $372 million 3,872 3,576
Other assets 1,048 1,423
------- -------
TOTAL CURRENT ASSETS 5,128 5,260
------- -------
PROPERTY AND EQUIPMENT, net 13,944 13,868
OTHER ASSETS
Investment in affiliates 649 653
Investment in DBS 1,052 1,043
Investment in News Corp. 1,350 1,350
Other assets and deferred charges, net 1,015 991
Goodwill, net 2,327 2,345
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TOTAL OTHER ASSETS 6,393 6,382
------- -------
TOTAL ASSETS $25,465 $25,510
======= =======
See accompanying Notes to Interim Condensed Consolidated Financial Statements.
<PAGE>
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
BALANCE SHEETS
(In millions)
March 31, December 31,
1998 1997
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $1,270 $1,321
Accrued telecommunications expense 2,496 2,416
Other accrued liabilities 2,364 2,248
Long-term debt due within one year 1,107 2,111
------- -------
TOTAL CURRENT LIABILITIES 7,237 8,096
------- -------
NONCURRENT LIABILITIES
Long-term debt 3,615 3,276
Deferred taxes and other 2,101 2,077
------- -------
TOTAL NONCURRENT LIABILITIES 5,716 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
593 million shares 60 60
Additional paid in capital 6,350 6,343
Retained earnings 5,446 5,345
Accumulated other comprehensive income - 19
Treasury stock, at cost,
5 and 22 million shares (108) (470)
------- -------
TOTAL STOCKHOLDERS' EQUITY 11,762 11,311
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $25,465 $25,510
======= =======
See accompanying Notes to Interim Condensed Consolidated Financial Statements.
<PAGE>
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(In millions)
Three Months Ended
March 31,
-------------------------
1998 1997
------ ------
OPERATING ACTIVITIES
Receipts from customers $5,018 $4,570
Payments to suppliers and employees (4,190) (3,918)
Taxes paid (72) (99)
Interest paid (91) (95)
Interest received 5 6
------ ------
CASH FROM OPERATING ACTIVITIES 670 464
------ ------
INVESTING ACTIVITIES
Capital expenditures for property and equipment (712) (740)
Proceeds from sales and maturities of marketable securities, net - 176
Investment in Direct Broadcast Satellite (22) (69)
Investment in affiliates (24) (17)
Other, net 358 15
------ ------
CASH USED FOR INVESTING ACTIVITIES (400) (635)
------ ------
NET CASH FLOW BEFORE FINANCING ACTIVITIES 270 (171)
------ ------
FINANCING ACTIVITIES
Payment of Senior Notes and other debt (100) (113)
Commercial paper and bank credit facility activity, net (570) 271
Issuance of common stock for employee plans 362 133
Purchase of treasury stock - (93)
Distributions paid on Trust mandatorily redeemable
preferred securities (15) (15)
------ ------
CASH FROM (USED FOR) FINANCING ACTIVITIES (323) 183
------ ------
Net (decrease) increase in cash and cash equivalents (53) 12
Cash and cash equivalents - beginning balance 261 187
------ ------
Cash and cash equivalents - ending balance $ 208 $ 199
====== ======
Reconciliation of net income to cash from operating activities
Net income $ 101 $ 295
Adjustments to net income:
Depreciation and amortization 703 467
Equity in (income) losses of affiliated companies 24 37
Deferred income tax provision 31 114
Net change in operating activity accounts other than cash and cash equivalent
Receivables (296) (137)
Operating accounts payable and accrued liabilities 52 (237)
Other operating activity accounts 55 (75)
------ ------
Cash from operating activities $ 670 $ 464
====== ======
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
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<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1997 $14 $60 $6,343 $5,345 $19 $(470) $11,311
Common Stock issued
for employee stock
and benefit plans &
other activity
(17 million) - - 7 - - 362 369
Comprehensive income
Net income - - - 101 - - -
Change in Other
Comprehensive income - - - - (19) - -
Total Other
Comprehensive income - - - - - - 82
Balance at
March 31, 1998 $14 $60 $6,350 $5,446 $ - $(108) $11,762
===============================================================================================
</TABLE>
See accompanying Notes to Interim Condensed Consolidated Financial Statements.
<PAGE>
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. The Merger is also
subject to the receipt of required regulatory approvals, which the companies
expect 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 months ended March 31, 1998, the company recognized
revenue of approximately $188 million 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 $16 million under such
agreements.
<PAGE>
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 1997, the Financial Accounting Standards Board 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 financial statements taken as a
whole. In 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 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 financial statements taken
as a whole.
NOTE 5. 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 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 March 31, 1998, the company expended approximately $213 million of the
accrued costs related to the above items, with the majority of the remaining
$430 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 3,200 had left the company
by March 31, 1998. The remaining employees are expected to leave by the end of
1998.
NOTE 6. DIRECT BROADCAST SATELLITE (DBS) VENTURE
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. 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.
<PAGE>
NOTE 7. 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):
<TABLE>
<CAPTION>
For the three months ended March 31, 1998 1997
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Basic:
Net income $ 101 $ 295
======================
Weighted average common shares outstanding 715 685
======================
Basic EPS $0.14 $0.43
======================
Diluted:
Net income $ 101 $ 295
======================
Weighted average common shares outstanding 715 685
======================
Effect of dilutive securities:
Shares of common stock issuable upon the
assumed exercise of common stock
equivalents 57 73
Shares of common stock assumed
repurchased for treasury (40) (57)
Weighted average common shares outstanding
assuming dilution 732 701
======================
Diluted EPS $0.14 $0.42
======================
</TABLE>
NOTE 8. 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 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.
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.
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 9. SUBSEQUENT EVENTS
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.
<PAGE>
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
PART I.
ITEM 2. MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
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.
<PAGE>
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 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.
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 in the first quarter of 1998 increased versus the
first quarter 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 quarter of
1998, the company experienced collection difficulties on such charges that lead
to an increase in its allowance for doubtful accounts. Certain provisions of
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.
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 includes equipment deployment, consulting and systems integration
and outsourcing services. The following discusses the company's consolidated
results of operations for the three months ended March 31, 1998 and 1997,
respectively.
REVENUE
For the three months ended March 31, 1998, revenue increased $405 million or
8.3% to $5,288 million over the three months ended March 31, 1997. During this
period, communications services revenue, which includes voice, messaging, data
and Internet, grew 8.4% compared to traffic growth of 13.8%. The variance in the
growth of revenue versus traffic of (5.4%) reflects the net impact of access
cost reduction flow-through, growth in IntraLata services, the launch of 5-Cent
SundaysSM in the later half of 1997, and ongoing levels of industry pricing
competition. IT services revenue increased 19.2% to $485 million for the three
months ended March 31, 1998 from the three months ended March 31, 1997, as a
result of growth in the systems integration and outsourcing business.
The following provides a supplemental breakout of communications services and IT
services revenue:
<TABLE>
<CAPTION>
Percentage
March 31, 1998 1997 Change
- ---------------------------------------------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C>
Voice & Messaging $ 3,895 $ 3,713 4.9%
Data & Internet 943 752 25.4%
Information Technology 485 407 19.2%
Eliminations & Other (35) 11 NM
------- ------ ------
Total Revenue $ 5,288 $ 4,883 8.3%
======= ======= ======
</TABLE>
NM = Not meaningful
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 $182 million or
4.9% for the three months ended March 31, 1998, compared to the three months
ended March 31, 1997 due to revenue growth in the mass markets, and local
services expansion partially offset by the continued de-emphasis of the
wholesale carrier customer sales channel. In the mass markets, year over year
revenue and volume growth resulted primarily from improvement in transactional
brands including 10-321(R) and 1-800-COLLECT(R) and a reduction in churn
primarily due to the launch of 5-Cent SundaysSM. Year-over-year, local services
revenue increased by 87% primarily as a result of the expansion of facilities
based, switched services to 10 additional markets for a total of 31 markets as
of March 31, 1998.
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 $191 million or 25.4% for the three months ended March 31,
1998, compared to the three months ended March 31, 1997, primarily due to
increased demand for such services. For this period, data revenue increased by
$155 million or 22% to $860 million primarily as the result of growth in virtual
data, private line and managed services. Internet revenue for the three months
ended March 31, 1998, increased by $36 million or 77% to $83 million from the
three months ended March 31, 1997.
IT services, which consists solely of the operations of MCI Systemhouse,
includes equipment deployment, consulting and systems integration and
outsourcing services. IT revenue increased 19.2% to $485 million for the three
months ended March 31, 1998 compared to the three months ended March 31, 1997,
primarily as the result of increases in systems integration and outsourcing
business predominately driven by contract wins in late 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 months ended March 31, 1998
increased $358 million or 14% in comparison to the three months ended March 31,
1997. Cost of services as a percentage of revenue was 54.5% and 51.7% for the
three months ended March 31, 1998 and 1997, respectively. The expense and
percentage of revenue increases in 1998 were primarily the result of
consolidated revenue growth and increases in direct operating expenses in the
company's local services and IT businesses. Telecommunications expense as a
percentage of communication services revenue increased to 50.2% for the three
months ended March 31, 1998 from 48.4% for the three months ended March 31,
1997. This increase was due to a reduction in revenue rates as a result of
competitive pricing, increased per-line charges related to the FCC Access Reform
Order, implementation of universal service support obligations and required
compensation to payphone owners. These increases were partially offset by a
decrease of international settlement expense and per-minute access charges along
with more efficient network usage.
SALES, OPERATIONS AND GENERAL EXPENSE
Sales, operations and general expense increased $185 million or 14% to $1,504
million for the three months ended March 31, 1998 compared to $1,319 million for
same period in 1997. As a percentage of revenue, sales, operations and general
expense increased to 28.4% for the three months ended March 31, 1998 from 27%
from the first three months ended March 31, 1997. The increases in expense and
related percentage of revenue were primarily the result of business expansion
and growth within the local services and IT businesses and the related increase
in personnel costs, as well as employee pre-merger retention bonuses incurred
during the quarter.
DEPRECIATION EXPENSE
Depreciation expense increased $237 million or 52.3% to $690 million for the
three months ended March 31, 1998 compared to $453 million for the three months
ended March 31, 1997. Approximately $137 million or 58% of the increase resulted
from additional depreciation expense on equipment identified for disposition in
connection with the asset disposition plan adopted in the fourth quarter of
1997. The company expects to recognize an additional $57 million in additional
depreciation in the second quarter of 1998 as a result of this plan. The
remaining increase in depreciation expense represents the depreciation impact of
property and equipment additions placed into service since March 31, 1997,
partially offset by the impact of equipment disposals.
INTEREST EXPENSE
Interest expense decreased $6 million for the three month ended March 31, 1998
due to a lower average total debt balance.
EQUITY IN INCOME (LOSSES) OF AFFILIATES
Equity in income (losses) of affiliates decreased $13 million to ($24) million
in the first quarter 1998 from the comparable period in 1997. The decrease is
primarily results from a reduction in the company's share of operating losses of
ICS Communications, Inc. and Concert Communications Company (Concert CS).
<PAGE>
OTHER INCOME (EXPENSE), NET
Other income, net was $39 million for the three months ended March 31, 1998
including the impact of a $51 million realized gain resulting from the exchange
of a marketable equity security investment in Brooks Fiber Properties, Inc.
held by the company.
INCOME TAX PROVISION
The provision for income taxes decreased by $122 million to $62 million for the
three months ended March 31, 1998 compared to March 31, 1997 as a result of the
1998 reduction in pre-tax income. The company's effective tax rate approximated
38% for each quarter.
NET INCOME
Net income decreased $194 million to $101 million or $.14 per basic and diluted
share for the three months ended March 31, 1998 compared with net income of $295
million or $.43 per basic share and $.42 per diluted share for the three months
ended March 31, 1997. The decrease in net income is the result of increases in
operating expenses 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 offset by the increase in other income, net and
the lower provision for income taxes for the three months ended March 31, 1998.
Basic and diluted earnings per common share for the three months ended March 31,
1998 compared to the three months ended March 31, 1997 were affected by an
increase in the number of treasury shares issued since March 31, 1997 to support
benefit programs.
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 first quarter of 1998, Concert CS distributor revenue
amounted to approximately $212 million. The company's share of Concert CS losses
reported in accordance with U.S. GAAP was $(3) million and $(6) million for the
three months ended March 31, 1998 and 1997, respectively. 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 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 quarter of 1998, the company funded an additional $15 million
in Avantel, a 44.5% owned business venture with Grupo Financiero
Banamex-Accival. At March 31, 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 $(20) million and $(21) million for
the three months ended March 31, 1998 and 1997, respectively. The company
expects Avantel to continue to generate operating losses as Avantel expands its
service and customer bases in Mexico's telecommunications market.
DIRECT BROADCAST SATELLITE (DBS) VENTURE
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. 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 is continuing its evaluation and upgrade of its computer systems and
applications for the year 2000. The company is also seeking confirmation from
its primary 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 during
the three months ended March 31, 1998 were not material to sales, operations,
and general expense and were consistent with the company's planned expenditures
for the period. The company expects to incur approximately $400 million in
expenses in 1998 and 1999 as it implements its year 2000 plan. The company
expects to be year 2000 compliant on or before December 31, 1999.
<PAGE>
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------------------------
CASH FLOWS
- ----------
Cash from operating activities increased by $206 million to $670 million for the
three months ended March 31, 1998 compared to the three months ended March 31,
1997. Receipts from customers increased by $448 million due primarily to the
increase in revenue. Payments to suppliers and employees increased by $272
million as a result of increases in operating expense and the timing of the
related payments. Taxes and interest paid for the three months ended March 31,
1998 declined from the year ago period as a result of lower income tax and
interest expenses. Cash used for investing activities decreased by $235 million
for the three months ended March 31, 1998 compared to the three months ended
March 31, 1997. The decrease was the result of lower expenditures for property
and equipment and investments in DBS and affiliates of $68 million, a $343
million increase in other investing, 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, net of $176 million. Cash from
operating activities and financing activities was used to support the company's
investing activities for the three months ended March 31, 1998.
Cash used for financing activities was ($323) million for the three months ended
March 31, 1998 compared to net cash proceeds from financing activities of $183
million for the three months ended March 31, 1997. The company was able to repay
net commercial paper and other debt amounts of approximately $670 million during
the three months ended March 31, 1998 with proceeds received from issuances of
treasury shares to support employee benefit programs and proceeds from other
investing activities, net.
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
For the three months ended March 31, 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 will be 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 will be amortized
over the life of the Senior Notes. The company believes it will be able to meet
its current and long-term liquidity and capital requirements from cash from
operating activities and its commercial paper program.
<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. Based
upon the composition of the company's variable rate debt outstanding at March
31, 1998, which was primarily borrowings under its commercial paper program, the
company does not believe a hypothetical 100 basis point increase in short-term
rates would be material to net income.
<PAGE>
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
FORM 10-Q
PART II. OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURTITY HOLDERS
(a) The date of the meeting was March 11, 1998 and it was a special meeting.
(b) No directors were elected at the special meeting.
(c) Holders of common stock and Class A common stock voted at the special
meeting on the following matter which was set forth in the company's
Proxy Statement dated January 22, 1998:
(1) Of the 707,229,867 shares outstanding as of the
Record Date, 564,075,056 shares were voted for, and
2,795,762 shares were voted against, the approval of
the merger agreement between the company and
WorldCom, Inc. with 1,228,692 abstaining from voting.
(d) Not applicable
<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
- ----------- -----------
10(a) First Amendment to the Revolving Credit
Agreement, dated as of April 28, 1998, by and
between MCI and the banks named therein.
12 Computation of Ratio of Earnings to Fixed Charges.
27(a) Financial Data Schedule as of March 31, 1998.
27(b) Financial Data Schedule as of March 31, 1997.
99(a) Capitalization Schedule as of March 31, 1998.
b)Reports on Form 8-K
For the three months ended March 31, 1998, the company filed one Current Report
on Form 8-K on February 2, 1998, which was amended April 10, 1998.
<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: May 15, 1998 Signed: /s/ David M Case
David M. Case
Vice President and Controller
<PAGE>
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
FORM 10-Q
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
10(a) First Amendment to the Revolving Credit Agreement, dated as of
April 28, 1998, by and between the company and the banks named therein.
12 Computation of Ratio of Earnings to Fixed Charges.
27(a) Financial Data Schedule as of March 31, 1998.
27(b) Financial Data Schedule as of March 31, 1997.
99(a) Capitalization Schedule as of March 31, 1998.
</TABLE>
Exhibit 10(a)
EXECUTION COPY
FIRST AMENDMENT TO REVOLVING CREDIT AGREEMENT
THIS FIRST AMENDMENT TO REVOLVING CREDIT AGREEMENT (this
"Amendment"), dated as of April 28, 1998, is entered into by and
among MCI COMMUNICATIONS CORPORATION, a Delaware corporation (the
"Company") and the several financial institutions party to the
Credit Agreement referred to below (collectively, the "Banks").
RECITALS
A. The Company, the Banks, Bank of America National Trust
and Savings Association, as Competitive Bid Agent and Operating
Agent, Citibank, N.A., as Syndication Agent, The Chase Manhattan
Bank and NationsBank of Texas, N.A., as Co-Documentation Agents,
and the Co-Agents named therein are parties to a Revolving Credit
Agreement, dated as of April 30, 1997 (the "Credit Agreement")
pursuant to which the Banks have extended to the Company a
revolving credit facility and a competitive bid facility.
B. The Company has requested that the Banks agree to certain
amendments of the Credit Agreement.
C. CIBC Inc., LTCB Trust Company, The Sanwa Bank, Limited,
New York Branch, Toronto Dominion (New York), Inc. and The Toyo
Trust & Banking Co., Ltd., New York Branch (collectively, the
"Departing Banks") have declined to consent to such amendments and,
as a result, are withdrawing from the Credit Agreement.
D. Bank of America National Trust and Savings Association,
The Chase Manhattan Bank, Citibank, N.A. and NationsBank of Texas,
N.A. (collectively, the "Increasing Banks") have agreed to increase
the aggregate amount of their Commitments by an amount equal to the
aggregate amount of the Commitments of the Departing Banks.
E. The Banks (other than the Departing Banks) are willing to
so amend the Credit Agreement, subject to the terms and conditions
of this Amendment.
NOW, THEREFORE, for valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto
hereby agree as follows:
1. Defined Terms. Unless otherwise defined herein,
capitalized terms used herein shall have the meanings, if any,
assigned to them in the Credit Agreement.
<PAGE>
2. Amendments to Credit Agreement.
(a) Section 1.01 of the Credit Agreement is hereby amended
by:
(i) deleting therefrom the definition of "Applicable
Margin" in its entirety and substituting therefor the
following:
"'Applicable Margin' means, with respect to
Eurodollar Rate Advances, 0.15% per annum.";
(ii) deleting therefrom the definition of "Merger" in its
entirety;
(iii) deleting therefrom the definition of
"Termination Date" in its entirety and substituting therefor
the following:
"'Termination Date' means the earliest to occur of:
(a) April 26, 1999;
(b) a Change of Control;
(c) a merger, consolidation or combination by the
Company, directly or indirectly, with or into any other
Person, whether the Company is the surviving corporation
in any such transaction or otherwise;
(d) a sale, conveyance, transfer or other
disposition by the Company, directly or indirectly
(whether in one or a series of transactions), of all or
substantially all of its assets, whether now owned or
hereafter acquired; and
(e) the date on which the Commitments shall
otherwise terminate in accordance with the provisions of
this Agreement."; and
(iv) inserting the following new definition in its
appropriate alphabetical order:
"'Change of Control' means (a) any "person" or
"group" of persons (within the meaning of Section 13 or
14 of the Securities Exchange Act of 1934, as amended)
shall acquire "beneficial ownership" (within the meaning
of Rule 13d-3 promulgated by the Securities and Exchange
Commission under said Act) of more than 30% of the shares
of capital stock of the Company having the power to vote
for the election of directors, or (b) during any period
of 12 consecutive months, commencing before or after the
date of this Agreement and ending after the date of this
Agreement, individuals who on the first day of such
period were directors of the Company
2
<PAGE>
(together with any replacement or additional directors
who shall have been nominated or elected by a majority of
directors then in office) shall cease to constitute a
majority of the board of directors of the Company."
(b) Section 2.10 of the Credit Agreement is hereby amended by
deleting paragraph (a) thereof in its entirety and substituting
therefor the following:
"(a) Facility Fee. The Company will pay to the Operating
Agent, for the account of each Bank, a facility fee for the
period from and including the Effective Date to but excluding
the Termination Date at the rate of (i) 0.035% per annum for
the period from and including the Effective Date to but
excluding April 28, 1998 and (ii) 0.05% per annum thereafter,
on the actual amount of such Bank's Commitment from time to
time in effect, regardless of utilization, payable (x)
quarterly in arrears on each February 15, May 15, August 15
and November 15, commencing on May 15, 1997 and (y) on the
Termination Date."
(c) Section 3.12 of the Credit Agreement is hereby amended
by deleting the date "December 31, 1996" from each place where such
date appears and substituting therefor the date "December 31,
1997".
(d) Section 6.02 of the Credit Agreement is hereby amended by
deleting such Section in its entirety and substituting therefor the
following:
"6.02 Sale or Lease of Assets. The Company shall
not, directly or indirectly,
(a) sell, convey, transfer or otherwise dispose of
(whether in one or a series of transactions) any of the shares
of capital stock of MCI Telecom;
(b) sell, lease, convey, transfer or otherwise dispose
of (whether in one or a series of transactions) all or
substantially all of its assets, business or property, whether
now owned or hereafter acquired; or
(c) permit MCI Telecom to, directly or indirectly, sell,
lease, convey, transfer or otherwise dispose of (whether in
one or a series of transactions) all or a material part of the
assets, business or property of MCI Telecom (including
accounts and notes receivable, with or without recourse),
whether now owned or hereafter acquired, or enter into any
agreement to do any of the foregoing, except:
(i) dispositions by MCI Telecom of obsolete or
worn-out property or real property no longer used or
useful in its business;
(ii) sales by MCI Telecom to local exchange
carriers, with or without recourse, of customer
receivables in the ordinary course of business;
3
<PAGE>
(iii) dispositions by MCI Telecom of assets
acquired, either directly or through the acquisition of
the owner of such assets, after the date of this
Agreement; provided, that each such disposition shall be
for fair and adequate consideration; and
(iv) dispositions (including sales pursuant to
sale-leaseback transactions) by MCI Telecom not otherwise
permitted hereunder which are made for fair market value;
provided that the book value of all Disposed Assets (as
hereinafter defined) disposed of pursuant to this Section
6.02(c)(iv) after the date of this Agreement does not
exceed 20% of the greater of (A) the book value of the
assets of MCI Telecom as of December 31, 1997 and (B) the
book value of the assets of MCI Telecom as of the date of
the most recent financial statements furnished to the
Operating Agent pursuant to Section 5.01.
For purposes of Section 6.02(c)(iv), the term "Disposed
Assets" shall mean all assets of MCI Telecom other than cash
and cash equivalents, equity investments, intercompany
receivables (but only if the receivables in question are being
transferred to the Company or any of its Subsidiaries),
franchises, licenses, permits, patents, patent applications,
copyrights, trademarks, trade names, goodwill, experimental or
organizational expense, and other like intangibles (but
excluding rights of way treated as assets)."
(e) Section 6.03 of the Credit Agreement is hereby amended by
deleting such Section in its entirety and substituting therefor the
following:
"6.03 Consolidations and Mergers. The Company shall
not, nor shall it permit MCI Telecom to, merge, consolidate or
combine, directly or indirectly, with or into any Person,
except MCI Telecom may merge, consolidate or combine with or
into, or transfer assets to, any other Person, if immediately
after giving effect thereto, (a) no Default or Event of
Default would exist, and (b) MCI Telecom shall be the
surviving corporation in such merger, consolidation or
combination."
(f) Article VII of the Credit Agreement is hereby amended by:
(i) deleting clause (e) thereof in its entirety and
substituting therefor the following:
"(e) Certain Article VI Defaults The Company shall
fail to perform or observe any term, covenant or
agreement contained in Section 6.01 (other than by reason
of an attachment or involuntary lien), 6.02 (other than
by reason of an event specified in the definition of
"Termination Date"), 6.03 (other than by reason of an
event specified in the definition of "Termination Date"),
6.06 or 6.08; or the Company shall fail to perform or
observe any term, covenant or agreement contained in
Section
4
<PAGE>
6.01 (if by reason of an attachment or
involuntary Lien) or 6.07 and such default shall continue
unremedied for a period of fifteen (15) days; or"
(ii) deleting clause (f) thereof in its entirety and
substituting therefor the following:
"(f) Other Covenant Defaults. The Company shall
fail to perform or observe any term, covenant or
agreement contained in Article V or Article VI (other
than those terms, covenants and agreements contained in
Section 6.01, 6.02, 6.03, 6.06, 6.07 or 6.08), and such
default shall continue unremedied for a period of thirty
(30) days; provided, that the failure to perform or
observe Section 5.12 shall not be an Event of Default
until such failure shall continue unremedied for a period
of thirty (30) days after notice thereof shall have been
given to the Company by the Majority Banks; or"
(iii) deleting the word "or" appearing at the end of
clause (l) thereof; and
(iv) deleting clause (m) thereof in its entirety.
(g) Schedule I to the Credit Agreement is hereby amended by
deleting such Schedule in its entirety and substituting therefor a
new Schedule I in the form of Annex I hereto.
(h) Schedule II to the Credit Agreement is hereby amended by
deleting therefrom all references to the respective Departing
Banks.
3. Representations and Warranties. The Company hereby
represents and warrants to the Agent and the Banks as follows:
(a) No Default or Event of Default has occurred and is
continuing.
(b) The execution and delivery by the Company of this
Amendment and the performance by the Company of the Credit
Agreement, as amended hereby (the "Amended Agreement"), have been
duly authorized by all necessary corporate and other action and do
not and will not require any registration with, consent or approval
of, notice to or action by, any Person (including any Governmental
Authority) in order to be effective and enforceable. The Amended
Agreement constitutes the legal, valid and binding obligation of
the Company, enforceable against it in accordance with its terms.
(c) All representations and warranties of the Company
contained in the Amended Agreement are true and correct as of the
date hereof as if made on the date hereof.
4. Effective Date. This Amendment will become effective as
of the date first written above on the date that the Operating
Agent shall have received each of the following, in form and
5
<PAGE>
substance satisfactory to the Operating Agent, its counsel and the
Banks and in sufficient copies for each Bank:
(a) a duly executed original (or, if elected by the Operating
Agent, an executed facsimile copy) of this Amendment from the
Company and each of the Banks (including the Departing Banks);
(b) a copy of a resolution passed by the Company's board of
directors, certified by the Secretary or an Assistant Secretary of
the Company as being in full force and effect on the date hereof,
authorizing the execution and delivery by the Company of this
Amendment and the performance by the Company of the Amended
Agreement;
(c) a certificate of the Secretary or Assistant Secretary of
the Company certifying as of the date hereof the names and true
signatures of the officers of the Company authorized to execute and
deliver this Amendment;
(d) a duly executed Pro Rata Note payable to each of the
Increasing Banks in a principal amount equal to the new amount of
such Increasing Bank's Commitment as set forth on Annex I hereto;
(e) evidence satisfactory to it that the Operating Agent has
been paid, for the account of the respective Departing Banks, all
facility fees payable to such Banks that are accrued but unpaid as
of the date hereof and all other amounts, if any, due to such Banks
under the Credit Agreement; and
(f) an opinion of the General Counsel to the Company, dated
the date hereof and substantially in the form of Exhibit A-1
hereto, and an opinion of Kramer, Levin, Naftalis & Frankel,
special New York counsel to the Company, dated the date hereof and
substantially in the form of Exhibit A-2 hereto, but in each case
also covering such other matters incident to the transactions
contemplated by this Amendment as the Operating Agent shall
reasonably require.
The Operating Agent shall ask each of the Departing Banks to
return the Notes originally executed and delivered in connection
with the Credit Agreement to the Operating Agent. Upon receipt of
such Notes, the Operating Agent shall mark such Notes "Cancelled"
and return such Notes to the Company. In addition, the Operating
Agent shall ask each of the Increasing Banks to return the Pro Rata
Notes originally executed and delivered in connection with the
Credit Agreement to the Operating Agent. Upon receipt of such
Notes, the Operating Agent shall mark such Notes "Superseded" and
return such Notes to the Company. Each Increasing Bank agrees to
return to the Operating Agent such Pro Rata Note for such purpose.
For purposes of determining compliance with the foregoing
conditions specified in this Section 4, each Bank that has executed
this Amendment shall be deemed to have consented to, approved or
accepted or to be satisfied with, each document or other matter
either sent by the
6
<PAGE>
Operating Agent to such Bank for consent, approval, acceptance or satisfaction,
or required hereunder to be consented to or approved by or acceptable or
satisfactory to, such Bank.
5. Release of Departing Banks. The Company hereby releases
the Departing Banks from their respective Commitments under the
Credit Agreement, which Commitments are terminated upon the
effectiveness of this Amendment. The Company acknowledges and
agrees that the obligations and liabilities of the Company
contained in the Credit Agreement which by their terms survive
termination of the Commitments for any period of time shall survive
the termination of the Departing Banks' respective Commitments for
the respective periods of time specified in the Credit Agreement.
6. Miscellaneous.
(a) Except as herein expressly amended, all terms, covenants
and provisions of the Credit Agreement are and shall remain in full
force and effect. All references in the Loan Documents to the
Credit Agreement shall henceforth be deemed to refer to the Credit
Agreement as amended hereby.
(b) This Amendment shall be binding upon and inure to the
benefit of the parties hereto and thereto and their respective
successors and assigns. No third party beneficiaries are intended
in connection with this Amendment.
(c) This Amendment shall be governed by, and construed in
accordance with, the law of the State of New York applicable to
contracts made and to be prepared entirely within such State.
(d) This Amendment may be executed in any number of
counterparts, each of which shall be deemed an original, but all
such counterparts together shall constitute but one and the same
instrument. Each of the parties hereto understands and agrees that
this document (and any other document required herein) may be
delivered by any party thereto either in the form of an executed
original or an executed original sent by facsimile transmission to
be followed promptly by mailing of a hard copy original, and that
receipt by the Operating Agent of a facsimile transmitted document
purportedly bearing the signature of a Bank or the Company shall
bind such Bank or the Company, respectively, with the same force
and effect as the delivery of a hard copy original. Any failure by
the Operating Agent to receive the hard copy executed original of
such document shall not diminish the binding effect of receipt of
the facsimile transmitted executed original of such document of the
party whose hard copy page was not received by the Operating Agent.
(e) This Amendment, together with the Credit Agreement,
contains the entire and exclusive agreement of the parties hereto
with reference to the matters discussed herein and therein. This
Amendment supersedes all prior drafts and communications with
respect thereto. This Amendment may not be amended except in
accordance with the provisions of Section 9.01 of the Credit
Agreement.
(f) If any term or provision of this Amendment shall be
deemed prohibited by or invalid
7
<PAGE>
under any applicable law, such provision shall be invalidated without affecting
the remaining provisions of this Amendment or the Credit Agreement.
(g) The Company agrees to pay or reimburse the Operating
Agent, within fifteen (15) days after demand, for all its
reasonable out-of-pocket costs and expenses incurred in connection
with the preparation, execution and delivery of this Amendment and
any other documents prepared in connection herewith, including the
reasonable fees and out-of-pocket expenses of counsel to the
Operating Agent (including the allocated cost of in-house counsel)
with respect thereto; provided, that any demand for payment or
reimbursement of any of the foregoing shall be accompanied by an
itemized statement or statements covering the related costs,
expenses or allocated cost.
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Amendment as of the date first above written.
MCI COMMUNICATIONS CORPORATION
By:
Title:
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By:
Title:
THE CHASE MANHATTAN BANK
By:
Title:
8
<PAGE>
CITIBANK, N.A.
By:
Title:
NATIONSBANK OF TEXAS, N.A.
By:
Title:
THE BANK OF NEW YORK
By:
Title:
THE BANK OF NOVA SCOTIA
By:
Title:
9
<PAGE>
THE FIRST NATIONAL BANK OF CHICAGO
By:
Title:
MELLON BANK, N.A.
By:
Title:
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK
By:
Title:
THE FUJI BANK LIMITED,
NEW YORK BRANCH
By:
Title:
10
<PAGE>
THE SUMITOMO BANK, LIMITED,
NEW YORK BRANCH
By:
Title:
THE BANK OF TOKYO-MITSUBISHI,
LTD., NEW YORK BRANCH
By:
Title:
WELLS FARGO BANK, N.A.
By:
Title:
By:
Title:
COMERICA BANK
By:
Title:
11
<PAGE>
THE DAI-ICHI KANGYO BANK, LTD.
By:
Title:
DEUTSCHE BANK AG, NEW YORK
AND/OR CAYMAN ISLANDS BRANCHES
By:
Title:
By:
Title:
WACHOVIA BANK OF GEORGIA, N.A.
By:
Title:
12
<PAGE>
BANQUE NATIONALE DE PARIS
By:
Title:
By:
Title:
BARCLAYS BANK PLC
By:
Title:
FIRST NATIONAL BANK OF MARYLAND
By:
Title:
SUNTRUST BANK,
CENTRAL FLORIDA, N.A.
By:
Title:
13
<PAGE>
UNION BANK OF SWITZERLAND,
NEW YORK BRANCH
By:
Title:
By:
Title:
FIRST UNION NATIONAL BANK
(formerly known as Signet Bank)
By:
Title:
14
<PAGE>
Each of the undersigned Departing Banks acknowledges and
agrees that:
(a) such Bank is withdrawing from the Credit Agreement;
(b) all fees and other amounts due to such Bank under the
Credit Agreement have been paid in full;
(c) such Bank's obligations to the Agents under Section 8.07
of the Credit Agreement survive the termination of such Bank's
Commitment;
(d) such Bank's obligations to the Operating Agent and the
Company pursuant to Section 2.15 of the Credit Agreement remain in
full force and effect with respect to all amounts paid to such Bank
(and all Taxes paid or payable with respect thereto) on or prior to
the termination of such Bank's Commitment; and
(e) upon the effectiveness of this Amendment, such Bank
releases the Company from all of its obligations and liabilities to
such Bank under the Credit Agreement and the other Loan Documents,
except for such obligations and liabilities which by their terms
survive termination of the Commitments for any period of time,
which obligations and liabilities shall survive the termination of
such Bank's Commitment for the respective periods of time specified
in the Credit Agreement.
Each of the undersigned Departing Banks further agrees to
return to the Operating Agent the Notes originally executed and
delivered to such Bank pursuant to the Credit Agreement and
authorizes the Operating Agent to mark such Notes "Cancelled" and
return such Notes to the Company.
CIBC INC.
By:
Title:
LTCB TRUST COMPANY
By:
Title:
15
<PAGE>
THE SANWA BANK, LIMITED,
NEW YORK BRANCH
By:
Title:
TORONTO-DOMINION (NEW YORK), INC.
By:
Title:
THE TOYO TRUST & BANKING CO.,
LTD., NEW YORK BRANCH
By:
Title:
By:
Title:
16
<PAGE>
ANNEX I
to Amendment
SCHEDULE I
Commitments
Bank of America National Trust
and Savings Association $450,000,000
The Chase Manhattan Bank $350,000,000
Citibank, N.A. $350,000,000
NationsBank of Texas, N.A. $350,000,000
The Bank of New York $235,000,000
The Bank of Nova Scotia $235,000,000
The First National Bank of Chicago $235,000,000
Mellon Bank, N.A. $235,000,000
Morgan Guaranty Trust Company of New York $235,000,000
The Fuji Bank, Limited, New York Branch $190,000,000
The Sumitomo Bank, Limited,
New York Branch $190,000,000
The Bank of Tokyo-Mitsubishi, Ltd. $145,000,000
Wells Fargo Bank, N.A. $145,000,000
Comerica Bank $ 95,000,000
The Dai-Ichi Kangyo Bank, Ltd. $ 95,000,000
Deutsche Bank AG, New York
and/or Cayman Islands Branches $ 95,000,000
Wachovia Bank of Georgia, N.A. $ 95,000,000
Banque Nationale de Paris $ 50,000,000
Barclays Bank plc $ 50,000,000
First National Bank of Maryland $ 50,000,000
SunTrust Bank, Central Florida, N.A. $ 50,000,000
Union Bank of Switzerland,
New York Branch $ 50,000,000
First Union National Bank (formerly known as Signet Bank) $ 25,000,000
<TABLE>
<CAPTION>
Exhibit 12
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In millions, except ratio amounts)
(unaudited)
Three Months Ended
March 31, 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) $ 163 $ 479 $ 239 $1,955 $ 897 $1,280 $1,045
Add:
Fixed charges 137 138 568 460 344 315 315
Less:
Capitalized interest 37 35 153 118 93 78 61
----- ----- ------ ------ ------ ------ ------
Total earnings $ 263 $ 582 $ 654 $2,297 $1,148 $1,517 $1,299
===== ===== ====== ====== ====== ====== ======
Fixed Charges:
Fixed charges on
indebtedness,
including amortization
of debt discount and
premium(a) $ 104 $ 108 $ 448 $ 349 $ 242 $ 231 $ 239
Interest portion of
operating lease
rentals(b) 33 30 120 111 102 84 76
----- ----- ------ ------ ------ ------ ------
Total fixed charges $ 137 $ 138 $ 568 $ 460 $ 344 $ 315 $ 315
===== ===== ====== ====== ====== ====== ======
Ratio of earnings to
fixed charges 1.92 4.22 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 March 31, 1998 and
the income statement for the three months ended March 31, 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 208
<SECURITIES> 0
<RECEIVABLES> 4,271
<ALLOWANCES> 399
<INVENTORY> 0
<CURRENT-ASSETS> 5,128
<PP&E> 21,619
<DEPRECIATION> 7,675
<TOTAL-ASSETS> 25,465
<CURRENT-LIABILITIES> 7,237
<BONDS> 3,615
750
0
<COMMON> 74
<OTHER-SE> 11,688
<TOTAL-LIABILITY-AND-EQUITY> 25,465
<SALES> 0
<TOTAL-REVENUES> 5,288
<CGS> 0
<TOTAL-COSTS> 5,077
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 52
<INCOME-PRETAX> 178
<INCOME-TAX> 62
<INCOME-CONTINUING> 101
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 101
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.14
</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 March
31, 1997 and the income statement for the three months ended March 31, 1997
and is qualifified in its entirety by reference to such financial
statements.
</LEGEND>
<CIK> 0000064079
<NAME> MCI Communications Corporation
<MULTIPLIER> 1000000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 199
<SECURITIES> 16
<RECEIVABLES> 3907
<ALLOWANCES> 290
<INVENTORY> 0
<CURRENT-ASSETS> 4845
<PP&E> 19417
<DEPRECIATION> 6924
<TOTAL-ASSETS> 23607
<CURRENT-LIABILITIES> 4965
<BONDS> 4984
750
0
<COMMON> 74
<OTHER-SE> 10865
<TOTAL-LIABILITY-AND-EQUITY> 23607
<SALES> 0
<TOTAL-REVENUES> 4883
<CGS> 0
<TOTAL-COSTS> 4297
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 58
<INCOME-PRETAX> 494
<INCOME-TAX> 184
<INCOME-CONTINUING> 295
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 295
<EPS-PRIMARY> 0.43
<EPS-DILUTED> 0.42
</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 March 31, 1998:
<S> <C>
Debt(a):
Secured debt:
Capital lease obligations............................ $ 502
Other secured obligations............................ 8
-------
Total secured debt...................................... 510
-------
Unsecured debt:
Senior Notes, net.................................... 1,434
Senior Debentures, net............................... 1,383
Commercial paper borrowings.......................... 1,236
Other unsecured debt................................. 153
Capital lease obligations 6
-------
Total unsecured debt.................................... 4,212
-------
Total debt................................................ $ 4,722
-------
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........................... 6,350
Retained earnings.................................... 5,446
Accumulated other comprehensive income -
Treasury stock, at cost, 5 million shares........... (108)
-------
Total stockholders' equity................................ $11,762
-------
Total capitalization...................................... $17,234
=======
(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 8.5% per annum at March 31, 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>