<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): August 25, 1996
WORLDCOM, INC.
(Exact Name of Registrant as Specified in its Charter)
Georgia 0-11258 58-1521612
(State or Other (Commission File (I.R.S. Employer
Jurisdiction of Number) Identification Number)
Incorporation)
515 East Amite Street
Jackson, Mississippi 39201-2702
(Address of Principal Executive Office)
Registrant's telephone number, including area code: (601) 360-8600
<PAGE> 2
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements of Business Acquired.
The financial statements of the business to be acquired, MFS
Communications Company, Inc. required by this item are
contained in the financial statements and footnotes thereto
listed in the Index on Page F-1 herein.
(b) Pro Forma Financial Information.
The pro forma financial information required by this item are
contained in the financial statements and footnotes thereto
listed in the Index on page F-1.
(c) Exhibits.
See Exhibit Index.
2
<PAGE> 3
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 hereunto duly authorized.
Dated: November 20, 1996
WORLDCOM, INC.
By: /s/ Scott D. Sullivan
----------------------------------
Scott D. Sullivan
Chief Financial Officer
3
<PAGE> 4
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Financial Statements Page Numbers
-------------------- ------------
<S> <C>
MFS Communications Company, Inc. for the nine month period ended
September 30, 1996 and 1995 (unaudited):
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . F-5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . F-7
WorldCom, Inc.:
Pro Forma Condensed Combined Financial Statements . . . . . . . . . . . . F-12
Pro Forma Condensed Combined Balance Sheet as of
September 30, 1996 . . . . . . . . . . . . . . . . . . . . . . . . F-13
Pro Forma Condensed Combined Income Statement for
the nine months ended September 30, 1996 . . . . . . . . . . . . . F-14
Pro Forma Condensed Combined Income Statement for
the fiscal year ended December 31, 1995 . . . . . . . . . . . . . F-15
Notes to Pro Forma Condensed Combined Financial Statements . . . . . . . . F-16
MFS Adjusted Historical Financial Statements . . . . . . . . . . . . . . . F-18
MFS Adjusted Historical Income Statement for the nine months
ended September 30, 1996 . . . . . . . . . . . . . . . . . . . . . F-19
MFS Adjusted Historical Income Statement for the year ended
December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . F-20
Notes to MFS Adjusted Historical Financial Statements . . . . . . . . . . F-21
</TABLE>
F-1
<PAGE> 5
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
(DOLLARS IN THOUSANDS SEPTEMBER 30 SEPTEMBER 30
----------------------------- -----------------------------
EXCEPT PER SHARE DATA) 1996 1995 1996 1995
<S> <C> <C> <C> <C>
Revenue $ 308,022 $ 153,717 $ 724,044 $ 412,062
Costs and expenses:
Operating expenses 272,806 144,559 664,890 403,576
Depreciation and
amortization 119,837 37,985 212,425 98,706
General and administrative
expenses 50,901 32,019 119,655 85,743
--------- --------- ---------- ---------
443,544 214,563 996,970 588,025
--------- --------- ---------- ---------
Loss from operations (135,522) (60,846) (272,926) (175,963)
Other income (expense):
Interest income 19,897 3,571 30,688 10,383
Interest expense, net (27,917) (9,422) (78,397) (28,173)
Other (482) (292) (2,109) (1,772)
--------- --------- ---------- ---------
Total other income
(expense) (8,502) (6,143) (49,818) (19,562)
--------- --------- ---------- ---------
Loss before income taxes (144,024) (66,989) (322,744) (195,525)
Income tax expense (100) (250) (300) (450)
--------- --------- ---------- ---------
Net loss (144,124) (67,239) (323,044) (195,975)
Dividends on preferred stock (7,460) (7,701) (21,992) (7,701)
--------- --------- ---------- ---------
Net loss applicable to common
stockholders $(151,584) $ (74,940) $ (345,036) $(203,676)
========= ========= ========== =========
Net loss per share applicable
to common stockholders ($0.79) ($0.58) ($2.34) ($1.58)
===== ===== ===== =====
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 6
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
(UNAUDITED)
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . $ 349,074 $ 51,182
Marketable securities . . . . . . . . . . . . . . . . 995,667 85,715
Accounts receivable . . . . . . . . . . . . . . . . . 269,559 140,302
Costs and earnings in excess of billings . . . . . . .
on uncompleted contracts . . . . . . . . . . . . . 91,669 45,142
Other current assets . . . . . . . . . . . . . . . . . 63,494 51,703
----------- -----------
Total current assets 1,769,463 374,044
Networks and equipment, at cost . . . . . . . . . . . . . . 1,950,617 1,315,952
Less accumulated depreciation
and amortization . . . . . . . . . . . . . . . . . (330,878) (213,548)
----------- -----------
Networks and equipment, net . . . . . . . . . . . 1,619,739 1,102,404
Goodwill, net . . . . . . . . . . . . . . . . . . . . . . . 2,166,397 281,848
Other assets, net . . . . . . . . . . . . . . . . . . . . . 261,188 108,838
----------- -----------
Total assets . . . . . . . . . . . . . . . . . . . . . $ 5,816,787 $ 1,867,134
=========== ===========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 7
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of notes payable and long-term
debt . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,256 $ 1,995
Current portion of capital lease obligations . . . . . . . . 4,737 1,922
Accounts payable . . . . . . . . . . . . . . . . . . . . . . 255,312 172,407
Accrued costs and billings in excess of
revenue on uncompleted contracts . . . . . . . . . . . . 53,549 28,686
Accrued compensation . . . . . . . . . . . . . . . . . . . . 21,331 6,119
Other current liabilities . . . . . . . . . . . . . . . . . 107,391 63,328
----------- ----------
Total current liabilities . . . . . . . . . . . . . . . 451,576 274,457
Notes payable and long-term debt, less current
portion . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,354,286 692,059
Capital lease obligations, less current portion . . . . . . . . . 33,825 31,412
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . 26,764 27,902
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . 13,311 10,972
Commitments and contingencies (Note 9)
Stockholders' equity:
Preferred stock, $.01 par value. Authorized
25,000,000 shares:
Series A, 8% cumulative convertible;
issued 94,992 in 1996 and 95,000 in 1995,
variable liquidation preference . . . . . . . . . . . 1 1
Series B, 7 3/4% cumulative convertible;
issued 15,000,000 in 1996 and 1995,
liquidation preference $1.00 per share
plus unpaid dividends . . . . . . . . . . . . . . . . 150 150
Common stock, $.01 par value. Authorized
400,000,000 shares; issued 221,642,709 in
1996 and 130,260,228 in 1995 (Note 5) . . . . . . . . . . 2,216 651
Additional paid-in capital . . . . . . . . . . . . . . . . . 4,911,760 1,512,394
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,172 (768)
Accumulated deficit . . . . . . . . . . . . . . . . . . . . (978,274) (555,221)
---------- ----------
3,937,025 957,207
Treasury stock, 5,800,000 shares, at cost - (126,875)
---------- ----------
Total stockholders' equity . . . . . . . . . . . . . . . 3,937,025 830,332
---------- ----------
Total liabilities and stockholders' equity . . . . . . . $5,816,787 $1,867,134
========== ==========
</TABLE>
- ---------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 8
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
(DOLLARS IN THOUSANDS) 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (323,044) $ (195,975)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 212,425 98,706
Non cash interest expense 71,272 26,193
Non cash compensation expense 10,915 -
Loss on sale of investments - 1,272
Changes in assets and liabilities, net
of effects of acquisitions:
Accounts receivable and other assets (155,358) (69,979)
Accounts payable and other liabilities 83,012 24,207
----------- ----------
Net cash used in operating activities (100,778) (115,576)
----------- ----------
Cash flows from investing activities:
Purchases of networks and equipment (533,122) (367,701)
Proceeds from maturities and sales of
marketable securities 411,985 499,795
Purchases of marketable securities (1,306,689) (297,801)
Purchases of minority interest in subsidiaries - (1,572)
Net cash acquired (used) in acquisitions of
businesses 7,712 (14,858)
Additions to deferred costs and other (20,940) (13,159)
----------- ----------
Net cash used in investing activities (1,441,054) (195,296)
----------- ----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt
and notes payable 633,892 6,075
Proceeds from issuance of common stock 1,280,996 -
Proceeds from issuance of preferred stock - 306,646
Payments on long-term debt, including current
portion (92,991) (3,407)
Proceeds from exercise of stock options 17,827 5,128
----------- ----------
Net cash provided by financing activities 1,839,724 314,442
----------- ----------
Net change in cash and cash equivalents 297,892 3,570
Cash and cash equivalents at beginning of period 51,182 21,518
----------- ----------
Cash and cash equivalents at end of period $ 349,074 $ 25,088
=========== ==========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON CASH FINANCING AND INVESTING ACTIVITIES:
The Company recognized common stock dividends on preferred stock of $21,992 and
$7,701 in the nine month periods ended September 30, 1996 and 1995,
respectively. The Company also issued 15,000,000 shares of Series B preferred
stock in exchange for 5,800,000 of the Company's common stock during the third
quarter of 1995.
The Company capitalized non-cash interest expense of $11,108 and $13,857 in the
nine month periods ended September 30, 1996 and 1995, respectively.
In the third quarter of 1996, the Company purchased the stock and stock options
of UUNET Technologies, Inc., for stock and stock options of the Company. In
connection with the acquisition, liabilities were assumed as follows:
<TABLE>
<S> <C>
Fair value of tangible assets acquired $ 164,005
Fair value of intangible assets acquired 2,076,388
Stock and stock options issued (2,114,090)
-----------
Liabilities assumed $ 126,303
===========
</TABLE>
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 9
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
SUPPLEMENTAL SCHEDULE OF NON CASH FINANCING AND INVESTING ACTIVITIES:
In the first nine months of 1995, the Company purchased the stock of companies
that provide telecommunications services in Richmond, Virginia, Denver,
Colorado and White Plains, New York for $12,655 in cash and the issuance of
stock. In connection with the acquisitions, liabilities were assumed as
follows:
<TABLE>
<S> <C>
Fair value of tangible assets acquired $11,328
Fair value of intangible assets acquired 13,226
Cash paid for stock (12,655)
Stock issued (5,912)
------
Liabilities assumed $ 5,987
=======
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 10
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. BASIS OF PRESENTATION:
The consolidated balance sheet of MFS Communications Company, Inc. and
Subsidiaries (the "Company") at December 31, 1995 was obtained from the
Company's audited balance sheet as of that date. All other financial
statements contained herein are unaudited and, in the opinion of
management, contain all adjustments necessary for a fair presentation of
financial position and results of operations and cash flows for the
periods presented. Such adjustments consist only of normal recurring
items. The Company's accounting policies and certain other disclosures
are set forth in the notes to the annual consolidated financial
statements.
2. ACQUISITION OF UUNET TECHNOLOGIES, INC.:
Effective August 12, 1996, the Company purchased the common stock, and
options to purchase the common stock, of UUNET Technologies, Inc.
("UUNET"). UUNET is a provider of a comprehensive range of Internet
access services, applications, and consulting services to businesses,
professionals and on-line service providers. The total cost of the
acquisition was approximately $2,114,090, excluding transaction costs and
liabilities assumed. The Company issued approximately 58.2 million
shares of common stock and approved options to purchase approximately 6.2
million shares of the Company's common stock in the acquisition.
The acquisition has been accounted for as a purchase and accordingly, the
acquired assets and liabilities have been recorded at their estimated
fair values at the date of the acquisition, and the results of operations
have been included in the accompanying financial statements since the
date of acquisition. The total purchase price in excess of the fair
market of the net assets acquired, including identifiable intangibles,
was recorded as goodwill. The goodwill is being amortized on a
straight-line basis over a 5 year life.
The following unaudited pro forma information shows the results of the
Company as though the acquisition occurred as of the beginning of each
period indicated. These results include certain adjustments consistent
with the Company's accounting policies related to amortization of
intangible assets. These results are not necessarily indicative of the
results that actually would have been obtained if the acquisition had
been in effect at the beginning of each period or which may be attained
in the future.
<TABLE>
<CAPTION>
Nine months ended
September 30,
1996 1995
-------------------------
<S> <C> <C>
Revenue $847,572 $466,871
Net loss (585,333) (527,021)
Loss per share applicable
to common stockholders (3.11) (2.82)
</TABLE>
F-7
<PAGE> 11
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
3. MERGER AGREEMENT:
The Company and WorldCom, Inc. ("WorldCom") announced the execution of a
merger agreement dated August 25, 1996. According to the terms of the
merger agreement each share of MFS common stock will be exchanged for 2.1
shares of WorldCom common stock and each share of MFS Series A and Series
B preferred stock will be exchanged for shares of WorldCom preferred
stock. WorldCom is one of the largest long distance telecommunications
companies in the United States, offering domestic and international
voice, data and video products and services to business customers, other
carriers and the residential market. The merger is expected to close in
late 1996 or early 1997 following approval of various federal, state and
local regulatory authorities. Approval of the shareholders of the
Company and WorldCom is also required.
4. INCOME TAXES:
The income tax expense of $100 and $250 for the three months ended
September 30, 1996 and 1995, respectively, and $300 and $450 for the nine
months ended September 30, 1996 and 1995, respectively, resulted from
estimated state and foreign tax liabilities.
5. CAPITAL STOCK:
In the first quarter of 1996, the Company retired the shares of common
stock that were held in treasury. The value of the treasury shares
reduced common stock, paid in capital and increased the accumulated
deficit upon retirement. In addition, the Company's stockholders
approved an amendment to the Company's restated certificate of
incorporation to increase the number of authorized shares of common stock
to 400,000,000.
On April 1, 1996 the Board of Directors declared a two-for-one common
stock split. The stock split was effected in the form of a stock
dividend that was payable to stockholders of record on April 16, 1996.
The conversion features of the Company's Series A and Series B preferred
stock were adjusted pursuant to their terms to maintain the proportionate
rights of those preferred stocks. In this report, all per share amounts
and numbers of shares have been restated to reflect the stock split. In
addition, an amount equal to the $.01 par value of the shares outstanding
at April 16, 1996 has been transferred from additional paid in capital to
common stock.
6. LOSS PER SHARE:
Loss per common share has been computed using the weighted average number
of shares outstanding for each period. The number of shares used in
computing loss per share, which have been adjusted due to the two-for-one
stock split, was 190,697,000 and 147,455,000 for the three and nine month
periods ended September 30, 1996 and 129,319,000 and 129,005,000 for the
three and nine month periods ended September 30, 1995, respectively.
7. LONG TERM DEBT:
(a)Loan Agreement:
On January 2, 1996, the Company entered into a $20,000 loan agreement
with an equipment manufacturer and a bank. The loans under the
agreement, which include interest at a variable rate, will be used to
purchase equipment supplied by the manufacturer. The loans are being
repaid in semi-annual principal installments of $2,000 beginning June 20,
1996, subject to certain adjustments, and are collateralized by the
equipment purchased. The agreement contains certain covenants and
restrictions similar to the Company's Credit Facilities. The Company may
prepay any amounts under the agreement without premium or penalty at any
time.
F-8
<PAGE> 12
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
7. LONG TERM DEBT: (continued)
(b)The 1996 Senior Discount Notes:
The Company issued 8 7/8% Senior Discount Notes on January 18, 1996 (the
"1996 Senior Discount Notes") and recorded the net proceeds, exclusive of
transaction costs, of approximately $600,000 as long-term debt. The
Company is accruing to the principal amount of the 1996 Senior Discount
Notes of $924,000 through January 15, 2001. Cash interest will not
accrue on the 1996 Senior Discount Notes prior to January 15, 2001,
however, the Company may elect to commence the accrual of cash interest
at any time prior to that date. Commencing July 15, 2001, cash interest
will be payable semi-annually.
The 1996 Senior Discount Notes mature on January 15, 2006. On or after
January 15, 2001, the 1996 Senior Discount Notes will be redeemable at
the option of the Company, in whole at any time or in part from time to
time, at the following prices (expressed in percentages of the principal
amount thereof at stated maturity) if redeemed during the twelve months
beginning January 15 of the years indicated below, in each case together
with interest accrued to the redemption date:
<TABLE>
<CAPTION>
Year Percentage
<S> <C>
2001 . . . . . . . . . . . . . . 103.32%
2002 . . . . . . . . . . . . . . 102.21%
2003 . . . . . . . . . . . . . . 101.11%
2004 and thereafter . . . . . . 100.00%
</TABLE>
In addition, under certain conditions related to a change in control of
the Company, the Company may be required to repurchase all or any part of
the 1996 Senior Discount Notes as stipulated in the note agreement. The
1996 Senior Discount Notes are senior unsecured obligations of the
Company, with a ranking equal to the 1994 Senior Discount Notes, and are
subordinated to all current and future indebtedness of the Company's
subsidiaries, including trade payables. The 1996 Senior Discount Notes
contain certain covenants which, among other things, restrict the ability
of the Company to incur debt, create liens, enter into sale and leaseback
transactions, pay dividends, make certain restricted payments, enter into
transactions with affiliates, and sell assets or merge with or into
another company.
(c)UUNET debt:
In connection with the acquisition of UUNET in the third quarter of 1996,
the Company assumed long-term debt of approximately $34,429. This debt
is primarily related to an agreement that provides for the purchase of
equipment used in the construction of a network to be used by Microsoft
Corporation ("Microsoft") and UUNET (see Note 10). Principal and
interest, at the higher of 7.74% or the applicable federal rate at the
time of an advance (6.48% at September 30, 1996) are payable on each
advance quarterly over five years. Borrowings under the agreement are
collateralized by the equipment purchased.
8. STOCK COMPENSATION PROGRAMS:
The Company has several stock based compensation programs in effect at
September 30, 1996. The programs are described as follows:
(a)Stock Option Plans:
The Company's 1992 and 1993 Stock Plans authorize, among other things,
the grant of options at not less than 100% of the fair market value at
the date of the option grant. The Compensation Committee of the Board of
Directors administers the stock plans. Options vest over a five-year
period and are generally exercisable up to five years after the grant is
completely vested. Options granted under the 1992 and 1993 plans during
the first nine months of 1996 were not material.
F-9
<PAGE> 13
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
8. STOCK COMPENSATION PROGRAMS: (continued)
(b)Shareworks:
In 1995 the Company implemented an employee benefit plan which is
comprised of a grant plan and a match plan jointly known as Shareworks.
The grant plan enables the Company to grant shares of the Company's
common stock to eligible employees based upon a percentage of the
employee's eligible pay, up to 5%. The original grant vests after three
years with any additional grants vesting immediately once the initial
three year period has been met. On December 29, 1995, the Company
granted approximately 128,000 shares of stock under this part of the
plan. The Company has not granted any shares during 1996.
The match plan allows eligible employees to defer between 1% and 10% of
eligible pay to purchase common stock of the Company at the stock price
on each pay period date. The Company matches the shares purchased by the
employee on a one-for-one basis. The stock which is credited to each
employee's account to match the employee's purchase during any calendar
quarter, vests three years after the end of that quarter. The amount
deferred by employees for purchases of stock from January 1, 1996 through
September 30, 1996 was $3,970.
(c)Shareworks Plus:
In 1996 the Company implemented a new employee stock compensation program
which grants stock awards with a four- year life and immediate vesting to
certain key executive employees under a program known as Shareworks Plus.
Under this program, the value received by the employee upon exercise of
the award is determined by the rate of increase in the Company's stock
price compared to the rate of increase in the S&P 500 index, measured
from the grant date. If the Company's common stock price performance is
at or below the price performance of the S&P 500 index, or under certain
other circumstances defined in the program, the value to be received by
the employee upon exercise is $0. If the Company's common stock price
performance is above the price performance of the S&P 500 index the value
received by the employee upon exercise, which will normally be paid in
common stock of the Company, increases. The Company granted
approximately 1,392,000 awards under this plan during the first nine
months of 1996. Subject to the approval of the Company's Compensation
Committee of the Board of Directors, additional grants will be made
quarterly. Terms of the Shareworks Plus program may be modified from
time to time by the Compensation Committee of the Board of Directors.
In the first quarter of 1996, the Company adopted the accounting
provisions of Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS 123). SFAS 123 encourages
entities to adopt the fair value method of accounting for their
stock-based compensation plans. Under the fair value based method,
compensation cost for stock based compensation plans is measured at the
grant date based on the fair value of the award and is recognized over
the service period, which for the Company is the vesting period. For the
Company's Shareworks Plus program, the fair value was determined using
option-pricing models that take into account the stock price at the grant
date, the exercise price, a two year expected life for the award, an
estimated volatility of 30% for the Company's stock price, no expected
dividends, and a risk-free interest rate of 5.27% over the expected life
of the award. For the Company's other stock compensation plan,
Shareworks, the fair value of the match shares was determined by
reference to the market value of the stock that was purchased by the
employee and the fair value of the grant shares was determined by the
market value of the stock at the grant date.
F-10
<PAGE> 14
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
8. STOCK COMPENSATION PROGRAMS:(CONTINUED)
The Company recognized compensation expense of $10,915 related to the
Shareworks and Shareworks Plus programs in the nine month period ended
September 30, 1996. The pro forma impact of adopting the fair value
method of accounting in the nine month period ended September 30, 1995
was immaterial primarily because the number of options granted in that
period under the 1992 and 1993 Stock Option Plans were not material and
the fact that the Shareworks and Shareworks Plus programs were not yet
implemented. During the initial phase-in period, the effects of applying
SFAS 123 for recognizing compensation cost may not be representative of
the effects on reported net loss or income for future quarters or years
because the options in the Stock Option Plans and the match and grant
shares made under the Shareworks program vest over several years and
additional awards will be made in the future.
Under the Company's Shareworks Plus program, the Company granted
approximately 1,392,000 awards during the first nine months of 1996, at
initial exercise prices that range from $26.62 to $37.63. Approximately
337,000 awards were exercised during the nine month period ended
September 30, 1996. The fair value of the awards granted was estimated
to be $6.50 per award.
(d)UUNET Stock Option Plans:
The Company adopted UUNET's existing stock option plans upon acquisition.
The exercise of options in those plans would result in the issuance of
approximately 6.2 million shares of the Company's common stock. The
effective exercise prices in those plans range from $0.03 to $42.19 per
share.
9. COMMITMENTS AND CONTINGENCIES:
In 1994, several former stockholders of MFS Telecom, a subsidiary of the
Company, filed a lawsuit against the Company, the Company's former
majority stockholder, Kiewit Diversified Group Inc. ("KDG"), and the
Company's chief executive officer regarding the sale of their shares of
MFS Telecom to the Company in September 1992. The plaintiffs alleged
that certain information was concealed from them, which caused them to
sell their shares at an inadequate price. KDG agreed to indemnify the
Company against any claims asserted by the former stockholders. During
July 1996 this lawsuit was settled with no cost to the Company.
The Company is also involved in various other claims and regulatory
proceedings incidental to its business. Management believes that any
resulting liability beyond that provided should not materially affect the
Company's financial position, results of operations or cash flows.
10. NETWORK AGREEMENT:
UUNET and Microsoft are parties to an agreement (the "Microsoft
Agreement") for the development, operation and maintenance of a high
speed dial-up and ISDN TCP/IP access network (the "Dial-Up Network").
Microsoft is obligated to reimburse UUNET for the cost of the facilities
and maintaining and operating the Dial-Up Network, as well as pay a
management fee. The initial term of the Microsoft Agreement expires in
March 2000, and it may be extended by Microsoft for an additional
five-year term. UUNET also entered into a loan agreement with Microsoft
which allows UUNET to borrow funds to finance the purchase of equipment
for the construction of the Dial-Up Network (see Note 7). UUNET owns the
network equipment, subject to Microsoft's security interest. UUNET
controls and operates the Dial-Up Network and is able to sell a portion
of the Dial-Up Network capacity to other customers. Revenues of the
Company for the third quarter of 1996 include $18,239 related to this
agreement.
F-11
<PAGE> 15
WORLDCOM PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited Pro Forma Condensed Combined Balance Sheet as of
September 30, 1996 and unaudited Pro Forma Condensed Combined Income Statements
for the nine months ended September 30, 1996 and for the year ended December
31, 1995 illustrate the effect of the proposed merger by and among WorldCom,
Inc. ("WorldCom"), MFS Communications Company, Inc. ("MFS") and HIJ Corp.
("Acquisition Subsidiary"), a wholly owned subsidiary of WorldCom, pursuant to
an Amended and Restated Agreement and Plan of Merger dated as of August 25,
1996 (the "Merger Agreement") whereby Acquisition Subsidiary would merge with
and into MFS in a transaction which would result in the survival of MFS as a
wholly owned subsidiary of WorldCom (the "Merger"). The Pro Forma Condensed
Combined Financial Statements illustrate the effect of the proposed Merger as
if the Merger had occurred on September 30, 1996 for the Pro Forma Condensed
Combined Balance Sheet and as of January 1, 1995 for the Pro Forma Condensed
Combined Income Statements.
Pursuant to the terms of the Merger Agreement, each share of MFS common stock,
together with the associated preferred stock purchase rights issued under the
MFS Rights Agreement dated as of September 30, 1995 between MFS and Continental
Stock Transfer & Trust Company, as amended, will be converted into the right
to receive 2.1 shares of WorldCom common stock, together with the associated
preferred stock purchase rights issued under the WorldCom Rights Agreement
dated as of August 25, 1996 between WorldCom and The Bank of New York, and each
share of MFS Series A preferred stock, and MFS Series B preferred stock (other
than those held by holders of MFS Series B preferred stock exercising
dissenter's rights) will be converted into the right to receive, respectively,
one share of WorldCom Series A preferred stock and one share of WorldCom Series
B preferred stock. The Merger will be accounted for as a purchase transaction.
These Pro Forma Condensed Combined Financial Statements should be read in
conjunction with the historical financial statements of WorldCom, MFS and UUNET
Technologies, Inc. ("UUNET"), which are incorporated by reference herein and
the MFS Adjusted Historical Financial Statements which are set forth elsewhere
herein.
The Pro Forma Condensed Combined Financial Statements are presented for
comparative purposes only and are not intended to be indicative of actual
results had the transactions occurred as of the dates indicated above nor do
they purport to indicate results which may be attained in the future.
F-12
<PAGE> 16
WORLDCOM PRO FORMA CONDENSED COMBINED BALANCE SHEET(1)
AS OF SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
WORLDCOM/MFS
WORLDCOM MFS PRO FORMA PRO FORMA
HISTORICAL(2) HISTORICAL(2) ADJUSTMENTS COMBINED
------------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Current assets........................... $ 825,914 $ 1,769,463 $ -- $ 2,595,377
Property, plant and equipment, net....... 1,765,547 1,619,739 -- 3,385,286
Goodwill and other intangibles, net...... 4,012,234 2,312,863 6,392,367 (3) 12,717,464
Other assets............................. 251,271 114,722 -- 365,993
----------- ----------- ----------- -----------
Total assets........................... $ 6,854,966 $ 5,816,787 $ 6,392,367 $19,064,120
=========== =========== =========== ===========
Current liabilities...................... $ 901,710 $ 451,576 $ 35,000 (4) $ 1,388,286
Long-term debt........................... 3,276,641 1,388,111 -- 4,664,752
Other liabilities........................ 234,273 40,075 -- 274,348
Shareholders' equity:
Preferred stock........................ -- 151 (151)(5) 151
151 (6)
Common stock........................... 4,084 2,216 (2,216)(5) 8,738
4,654 (6)
Paid in capital........................ 2,184,633 4,911,760 (4,911,760)(5) 14,614,220
12,429,587 (6)
Retained earnings...................... 208,703 (978,274) 978,274 (5) (1,931,297)
(2,140,000)(7)
Other.................................. 44,922 1,172 (1,172)(5) 44,922
----------- ----------- ----------- -----------
Total shareholders' equity............. 2,442,342 3,937,025 6,357,367 12,736,734
----------- ----------- ----------- -----------
Total liabilities and shareholders'
equity.............................. $ 6,854,966 $ 5,816,787 $ 6,392,367 $19,064,120
=========== =========== =========== ===========
</TABLE>
F-13
<PAGE> 17
WORLDCOM PRO FORMA CONDENSED COMBINED INCOME STATEMENT(1)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MFS WORLDCOM/MFS
WORLDCOM ADJUSTED PRO FORMA PRO FORMA
HISTORICAL(2) HISTORICAL(8) ADJUSTMENTS COMBINED
------------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues................................ $ 3,235,552 $ 847,572 $ (65,271)(9) $4,017,853
Operating expenses:
Cost of sales......................... 1,763,421 473,204 (65,271)(9) 2,171,354
Selling, general and administrative... 597,558 421,030 -- 1,018,588
Depreciation and amortization......... 228,489 487,881 (91,159)(10) 625,211
Provision to reduce carrying value of
certain assets..................... 402,000 -- -- 402,000
----------- --------- --------- ----------
Operating income (loss)................. 244,084 (534,543) 91,159 (199,300)
Other income (expense):
Interest expense, net................. (167,946) (48,629) -- (216,575)
Other................................. 5,810 (1,767) -- 4,043
----------- --------- --------- ----------
Income (loss) before tax................ 81,948 (584,939) 91,159 (411,832)
Provision for income taxes.............. 129,843 394 (103,708)(11) 26,529
----------- --------- --------- ----------
Net income (loss) from continuing
operations............................ (47,895) (585,333) 194,867 (438,361)
Preferred dividend requirement.......... 860 21,992 -- 22,852
----------- --------- --------- ----------
Net income (loss) applicable to common
shareholders.......................... $ (48,755) $(607,325) $ 194,867 $ (461,213)
=========== ========= ========= ==========
Number of shares issued and outstanding:
Primary............................... 393,869 195,208 214,729 803,806
=========== ========= ========= ==========
Fully diluted......................... 393,869 195,208 214,729 803,806
=========== ========= ========= ==========
Loss per share(12):
Primary............................... $ (0.12) $ (3.11) $ (0.57)
=========== ========= ==========
Fully diluted......................... $ (0.12) $ (3.11) $ (0.57)
=========== ========= ==========
</TABLE>
F-14
<PAGE> 18
WORLDCOM PRO FORMA CONDENSED COMBINED INCOME STATEMENT(1)
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MFS WORLDCOM/MFS
WORLDCOM ADJUSTED PRO FORMA PRO FORMA
HISTORICAL(2) HISTORICAL(8) ADJUSTMENTS COMBINED
------------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues................................ $ 3,639,875 $ 671,810 $ (44,661)(9) $4,267,024
Operating expenses:
Cost of sales......................... 1,992,413 360,678 (44,661)(9) 2,308,430
Selling, general and administrative... 660,149 420,162 -- 1,080,311
Depreciation and amortization......... 311,265 583,131 (121,545)(10) 772,851
----------- --------- --------- ----------
Operating income (loss)................. 676,048 (692,161) 121,545 105,432
Other income (expense):
Interest expense, net................. (249,062) (39,414) -- (288,476)
Other................................. 11,801 13,233 -- 25,034
----------- --------- --------- ----------
Income (loss) before tax................ 438,787 (718,342) 121,545 (158,010)
Provision for income taxes.............. 171,127 600 (93,727)(11) 78,000
----------- --------- --------- ----------
Net income (loss) from continuing
operations............................ 267,660 (718,942) 215,272 (236,010)
Preferred dividend requirement.......... 33,191 15,064 -- 48,255
----------- --------- --------- ----------
Net income (loss) applicable to common
shareholders.......................... $ 234,469 $(734,006) $ 215,272 $ (284,265)
=========== ========= ========= ==========
Number of shares issued and outstanding:
Primary............................... 386,898 185,938 164,300 737,136
=========== ========= ========= ==========
Fully diluted......................... 402,990 185,938 148,208 737,136
=========== ========= ========= ==========
Earnings (loss) per share(12):
Primary............................... $ 0.65 $ (3.95) $ (0.39)
=========== ========= ==========
Fully diluted......................... $ 0.64 $ (3.95) $ (0.39)
=========== ========= ==========
</TABLE>
F-15
<PAGE> 19
NOTES TO WORLDCOM PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
1. The pro forma financial data do not give effect to any potential cost
savings and synergies that could result from the Merger. The Pro Forma
Condensed Combined Balance Sheet reflects the write-off of intangible assets
consisting of in-process research and development ("R&D") projects of $2.14
billion related to the Merger. The effect of this charge has not been
reflected in the accompanying Pro Forma Condensed Combined Income Statements
as it is a non-recurring charge. Additionally, the Pro Forma Condensed
Combined Balance Sheet does not give effect to the potential repurchase of
MFS Notes for cash at 101% of the accreted value thereof. WorldCom
anticipates that if these rights are exercised, additional capital
availability may be generated through a combination of commercial bank debt
and public market debt. The pro forma data are not necessarily indicative of
the operating results or financial position that would have occurred had the
Merger been consummated at the dates indicated, nor necessarily indicative
of future operating results or financial position.
2. These columns represent historical results of operations and financial
position.
3. This adjustment reflects the excess of cost over net tangible assets
acquired. For purposes of allocating the acquisition costs among the various
assets acquired, WorldCom has tentatively considered the carrying value of
the acquired assets to approximate their fair value, with all of the excess
of such acquisition costs being attributed to R&D in-process (network design
and development projects in-process), goodwill, network technology and
assembled work force. It is WorldCom's intention, subsequent to the Merger,
to more fully evaluate the acquired assets and, as a result, the allocation
of the acquisition costs among the tangible and intangible assets acquired
may change. The following is a summary of the adjustment to goodwill and
other intangibles:
<TABLE>
<S> <C>
Purchased R&D in-process................................ $ 2,140,000
Write-off of purchased R&D in-process................... (2,140,000)
Goodwill................................................ 8,228,230
Network technology...................................... 400,000
Assembled work force.................................... 42,000
Direct merger costs..................................... 35,000
Elimination of MFS goodwill and other intangibles....... (2,312,863)
-----------
$ 6,392,367
===========
</TABLE>
Goodwill is being amortized over a 40 year life while network technology and
assembled work force are being amortized over 5 years and 10 years,
respectively.
4. This adjustment reflects liabilities incurred, such as investment advisory,
legal, accounting and consulting fees, related to the Merger.
5. These adjustments represent the elimination of MFS' stockholders' investment
accounts.
6. This adjustment represents the issuance of approximately 465.4 million
shares of WorldCom Common Stock in accordance with the Merger Agreement and
the exchange ratio of 2.1 shares of WorldCom Common Stock for each share of
MFS Common Stock outstanding, and the exchange of each share of MFS Series A
Preferred Stock and MFS Series B Preferred Stock for one share of WorldCom
Series A Preferred Stock or one share of WorldCom Series B Preferred Stock,
respectively.
7. This adjustment reflects the write-off of intangible assets consisting of
in-process R&D projects of $2.14 billion. See Note 1.
8. The MFS Adjusted Historical Financial Statements for the nine months ended
September 30, 1996 and the year ended December 31, 1995 include the effect
of MFS's acquisition in August 1996 of UUNET and the issuance of
approximately 58 million shares of MFS Common Stock and options to
purchase MFS Common Stock valued at approximately $2.1 billion in
connection with such acquisition (the "UUNET Acquisition"). See "MFS
Adjusted Historical Financial Statements" which are set forth elsewhere
herein.
9. These adjustments eliminate the revenues and corresponding line costs
attributable to the intercompany traffic among WorldCom, MFS and UUNET.
F-16
<PAGE> 20
10. This entry reflects the adjustment to amortization for the effect of the
intangible assets acquired in the Merger (see Note 3).
11. These entries represent the tax effect of adjustments due to inclusion of
the acquired operations.
12. Pro forma per share data are based on the number of WorldCom common shares
that would have been outstanding had the Merger occurred on the earliest
date presented.
F-17
<PAGE> 21
MFS ADJUSTED HISTORICAL FINANCIAL STATEMENTS
The following unaudited adjusted historical financial statements give pro forma
effect to the merger of MFS with UUNET. The adjusted historical statements of
operations assume that the UUNET Acquisition occurred as of January 1, 1995.
The adjusted historical financial statements are not necessarily indicative of
the results that actually would have been attained if the UUNET Acquisition had
been in effect on the dates indicated or which may be attained in the future.
Such statements should be read in conjunction with the MFS and UUNET historical
consolidated financial statements and notes which are set forth elsewhere
herein.
F-18
<PAGE> 22
MFS ADJUSTED HISTORICAL INCOME STATEMENT(1)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MFS
MFS UUNET PRO FORMA ADJUSTED
HISTORICAL(2) HISTORICAL(2) ADJUSTMENTS HISTORICAL
------------- ------------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues................................... $ 724,044 $ 129,047 $ (5,519)(3) $ 847,572
Operating expenses:
Cost of sales............................ 407,618 71,105 (5,519)(3) 473,204
Selling, general and administrative...... 376,927 44,103 0 421,030
Depreciation and amortization............ 212,425 11,811 263,645 (4) 487,881
--------- --------- --------- ----------
Operating income........................... (272,926) 2,028 (263,645) (534,543)
Other income (expense):
Interest expense......................... (47,709) (920) 0 (48,629)
Other.................................... (2,109) 342 0 (1,767)
--------- --------- --------- ----------
Income (loss) before tax................... (322,744) 1,450 (263,645) (584,939)
Provision for income taxes................. 300 94 0 394
--------- --------- --------- ----------
Net income (loss) from continuing
operations............................... (323,044) 1,356 (263,645) (585,333)
Preferred dividend requirement............. 21,992 0 0 21,992
--------- --------- --------- ----------
Net income (loss) applicable to common
stockholders............................. $(345,036) $ 1,356 $(263,645) $ (607,325)
========= ========= ========= ==========
Number of shares issued and outstanding:
Primary.................................. 147,455 47,753 195,208
========= ========= ==========
Fully diluted............................ 147,455 47,753 195,208
========= ========= ==========
Loss per share(5):
Primary.................................. $ (2.34) $ (3.11)
========= ==========
Fully diluted............................ $ (2.34) $ (3.11)
========= ==========
</TABLE>
F-19
<PAGE> 23
MFS ADJUSTED HISTORICAL INCOME STATEMENT(1)
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MFS
MFS UUNET PRO FORMA ADJUSTED
HISTORICAL(2) HISTORICAL(2) ADJUSTMENTS HISTORICAL
------------- ------------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues.................................... $ 583,194 $ 94,461 $ (5,845)(3) $ 671,810
Operating expenses:
Cost of sales............................. 315,506 51,017 (5,845)(3) 360,678
Selling, general and administrative....... 364,497 55,665 -- 420,162
Depreciation and amortization............. 142,496 8,322 432,313(4) 583,131
--------- --------- --------- ----------
Operating loss.............................. (239,305) (20,543) (432,313) (692,161)
Other income (expense):
Interest expense.......................... (38,606) (808) -- (39,414)
Other..................................... 10,613 2,620 -- 13,233
--------- --------- --------- ----------
Loss before tax............................. (267,298) (18,731) (432,313) (718,342)
Provision for income taxes.................. 600 (474) 474(6) 600
--------- --------- --------- ----------
Net loss from continuing operations......... (267,898) (18,257) (432,787) (718,942)
Preferred dividend requirement.............. 15,064 -- -- 15,064
--------- --------- --------- ----------
Net loss applicable to common
stockholders.............................. $(282,962) $ (18,257) $(432,787) $ (734,006)
========= ========= ========= ==========
Number of shares issued and outstanding:
Primary................................... 127,786 58,152 185,938
========= ========= =========
Fully diluted............................. 127,786 58,152 185,938
========= ========= =========
Loss per share(5):
Primary................................... $ (2.21) $ (3.95)
========= ==========
Fully diluted............................. $ (2.21) $ (3.95)
========= ==========
</TABLE>
F-20
<PAGE> 24
NOTES TO MFS ADJUSTED HISTORICAL FINANCIAL STATEMENTS.
1. The unaudited adjusted historical financial data do not give effect to any
potential cost savings and synergies that could result from the UUNET
Acquisition. The adjusted historical data are not necessarily indicative of
the operating results that would have occurred had the UUNET Acquisition been
consummated on the dates indicated nor necessarily indicative of future
operating results.
2. These columns represent historical results of operations. The UUNET
historical column for the nine months ended September 30, 1996 includes
results through the date of acquisition, August 12, 1996. One-time merger
related costs of $15.7 million have not been included in UUNET's results of
operations for this period. The results of operations for UUNET since August
12, 1996 are included in the MFS historical column.
3. This adjustment reflects the elimination of intercompany revenues and
expenses.
4. This adjustment reflects the amortization of the excess of the purchase price
over the net book value (which approximates fair value) of the net tangible
assets acquired which was recorded as goodwill, a customer contract and
customer list. The pro forma adjustment to depreciation and amortization
represents the amortization of the goodwill and other intangibles and was
calculated using the straight-line method over a five year life for goodwill
and three to four year lives for other intangibles.
5. Pro forma per share data are based on the number of MFS common shares that
would have been outstanding had the UUNET Acquisition occurred on the
earliest date presented.
6. This represents the tax effect of adjustments due to inclusion of the
acquired operations. The remaining pro forma combined income tax provision
results from state and foreign tax liabilities that would not be eliminated
as a result of the UUNET Acquisition.
F-21
<PAGE> 25
EXHIBIT INDEX
<TABLE>
<CAPTION>
PAGE
EXHIBIT NO. DESCRIPTION NUMBER
----------- ----------- ------
<S> <C> <C>
2.1 Amended and Restated Agreement and Plan of Merger, by and
among WorldCom, Inc., ("WorldCom"), HIJ Corp., and MFS
Communications Company, Inc. ("MFS"), dated as of August 25,
1996, (incorporated herein by reference to Exhibit 2.1 to
WorldCom's Registration Statement on Form S-4 (File No.
333-16015))*
2.2 Stock Option Agreement, dated as of August 25, 1996,
between WorldCom, Inc. and MFS Communications Company,
Inc. (incorporated herein by reference to Exhibit 2.2 to
WorldCom's Current Report on Form 8-K dated August 26, 1996)
10.1 Agreement, dated as of August 25, 1996, between
WorldCom, Inc. and MFS Communications Company,
(incorporated herein by reference to Exhibit 10.1 to
WorldCom's Current Report on Form 8-K dated August 26, 1996)
99.1 Stock Option Agreement, dated as of August 25, 1996, between
WorldCom, Inc. and MFS Communications Company, Inc.
(incorporated herein by reference to Exhibit 99.1 to
WorldCom's Current Report on Form 8-K dated August 26, 1996)
</TABLE>
- -----------------------------------
* The Registrant hereby agrees to furnish supplementally a copy of any
omitted schedules to this Agreement to the Securities and Exchange
Commission.
