<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 4, 1996
WORLDCOM, INC.
By: /s/ Scott D. Sullivan
-------------------------------
Scott D. Sullivan
Chief Financial Officer
3
<PAGE> 4
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
2.1 Agreement and Plan of Merger, dated as of August 25,
1996, among WorldCom, Inc., a Georgia corporation
("WorldCom"), HIJ Corp., a Delaware corporation and a
wholly owned subsidiary of WorldCom and MFS
Communications Company, Inc., a Delaware corporation
(incorporated herein by reference to Exhibit 2.1 to
WorldCom's Current Report on Form 8-K dated August 26,
1996)*
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)
23.1 Consent of Coopers & Lybrand L.L.P
23.2 Consent of Arthur Andersen LLP
</TABLE>
- --------------------------------
* The Registrant hereby agrees to furnish supplementally a copy of any
omitted schedules to this Agreement to the Securities and Exchange
Commission.
4
<PAGE> 5
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Financial Statements Page Numbers
-------------------- ------------
<S> <C>
MFS Communications Company, Inc. as of December 31, 1995 and 1994
and for the three years ended December 31, 1995:
Report of Independent Accountants F-2
Consolidated Statements of Operations F-3
Consolidated Balance Sheets F-4
Consolidated Statements of Changes in Stockholder's Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-9
MFS Communications Company, Inc. for the six month periods ended June 30,
1996 and 1995 (unaudited):
Consolidated Statements of Operations F-27
Consolidated Balance Sheets F-28
Consolidated Statements of Cash Flows F-30
Notes to Consolidated Financial Statements F-32
UUNET Technologies, Inc. as of December 31, 1995 and 1994
and for the three years ended December 31, 1995:
Report of Independent Public Accountants F-37
Consolidated Balance Sheets F-38
Consolidated Statements of Operations F-39
Consolidated Statements of Stockholder's Equity F-40
Consolidated Statements of Cash Flows F-41
Notes to Consolidated Financial Statements F-42
UUNET Technologies, Inc. for the six month periods
ended June 30, 1996 and 1995 (unaudited):
Consolidated Statements of Operations F-55
Consolidated Balance Sheets F-56
WorldCom, Inc.:
Pro Forma Condensed Combined Financial Statements F-57
Pro Forma Condensed Combined Balance Sheet as of
June 30, 1996 F-58
Pro Forma Condensed Combined Income Statement for
the six months ended June 30, 1996 F-59
Pro Forma Condensed Combined Income Statement for
the fiscal year ended December 31, 1995 F-60
Notes to Pro Forma Condensed Combined Financial Statements F-61
MFS Adjusted Historical Financial Statements F-63
MFS Adjusted Historical Balance Sheets as of June 30, 1996 F-64
MFS Adjusted Historical Income Statement for the six months
ended June 30, 1996 F-65
MFS Adjusted Historical Income Statement for the year ended
December 31, 1995 F-66
Notes to MFS Adjusted Historical Financial Statements F-67
</TABLE>
F-1
<PAGE> 6
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
MFS Communications Company, Inc.
We have audited the accompanying consolidated balance sheets of MFS
Communications Company, Inc. and Subsidiaries as of December 31, 1995 and 1994,
and the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of MFS
Communications Company, Inc. and Subsidiaries as of December 31, 1995 and 1994,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Omaha, Nebraska
February 14, 1996,
except for Note 20
as to which the
date is April 16, 1996.
F-2
<PAGE> 7
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three years ended December 31, 1995
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- --------
<S> <C> <C> <C>
Revenue................................................ $ 583,194 $ 286,747 $141,111
Costs and expenses:
Operating expenses..................................... 562,300 273,431 102,905
Depreciation and amortization.......................... 142,496 73,869 34,670
General and administrative expenses.................... 117,703 75,576 34,989
--------- --------- --------
Total costs and expenses............................... 822,499 422,876 172,564
--------- --------- --------
Loss from operations................................... (239,305) (136,129) (31,453)
Other income (expense):
Interest income........................................ 13,188 24,769 8,868
Interest expense....................................... (38,606) (40,879) (75)
Other.................................................. (2,575) (1,065) (329)
--------- --------- --------
Total other income (expense)........................... (27,993) (17,175) 8,464
--------- --------- --------
Loss before income taxes............................... (267,298) (153,304) (22,989)
Income tax benefit (expense)........................... (600) 2,103 7,220
--------- --------- --------
Net loss............................................... (267,898) (151,201) (15,769)
Dividends on preferred stock........................... (15,064) - -
--------- --------- --------
Net loss applicable to common stockholders............. $(282,962) $(151,201) $(15,769)
========= ========= ========
Net loss per share applicable to common stockholders... $ (2.21) $ (1.21) $ (0.15)
========= ========= ========
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
F-3
<PAGE> 8
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
at December 31, 1995 and 1994
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 51,182 $ 21,518
Marketable securities........................................................ 85,715 362,261
Accounts receivable.......................................................... 140,302 72,032
Costs and earnings in excess of billings on uncompleted contracts............ 45,142 24,397
Prepaid expenses and other current assets.................................... 51,703 33,456
---------- ----------
Total current assets......................................................... 374,044 513,664
Networks and equipment, at cost.............................................. 1,315,952 787,453
Less accumulated depreciation and amortization............................... (213,548) (113,863)
---------- ----------
Networks and equipment, net.................................................. 1,102,404 673,590
Other assets, net............................................................ 390,686 397,292
---------- ----------
Total assets................................................................. $1,867,134 $1,584,546
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable and long-term debt.......................... $ 1,995 $ 16,973
Current portion of capital lease obligations................................. 1,922 -
Accounts payable............................................................. 172,407 127,163
Accrued costs and billings in excess of revenue on uncompleted contracts..... 28,686 28,141
Accrued compensation......................................................... 6,119 12,719
Other current liabilities.................................................... 63,328 45,841
---------- ----------
Total current liabilities.................................................... 274,457 230,837
Notes payable and long-term debt, less current portion....................... 692,059 548,333
Capital lease obligations, less current portion.............................. 31,412 -
Other liabilities............................................................ 27,902 25,725
Minority interest............................................................ 10,972 9,548
Commitments and contingencies (Note 8)
Stockholders' equity:
Preferred stock, $.01 par value. Authorized 25,000,000 shares:
Series A, 8% cumulative convertible;
issued 95,000 in 1995, variable liquidation preference....................... 1 -
Series B, 7 3/4% cumulative convertible;
issued 15,000,000 in 1995, liquidation preference $1.00 per share plus unpaid
dividends.................................................................... 150 -
Common stock, $.01 par value. Authorized 400,000,000
shares; issued 130,260,228 in 1995 and 128,306,436 in 1994................... 651 642
Additional paid-in capital................................................... 1,512,394 1,050,339
Deferred charge.............................................................. (1,017) (3,351)
Foreign currency adjustment.................................................. 45 288
Unrealized investment gain (loss)............................................ 204 (5,265)
Accumulated deficit.......................................................... (555,221) (272,550)
---------- ----------
957,207 770,103
Treasury stock, 5,800,000 shares, at cost.................................... (126,875) -
---------- ----------
Total stockholders' equity................................................... 830,332 770,103
---------- ----------
Total liabilities and stockholders' equity................................... $1,867,134 $1,584,546
========== ==========
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
F-4
<PAGE> 9
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the three years ended December 31, 1995
(dollars in thousands)
<TABLE>
<CAPTION>
Series A Series B Additional Foreign Unrealized
Preferred Preferred Common Paid-in Deferred Currency Investment Accumulated Treasury
Stock Stock Stock Capital Charge Adjustment Gain (Loss) Deficit Stock Total
- ----------------------------- --------- --------- ------ ----------- --------- ---------- ----------- ----------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1993......................... $ - $ - $ 10 $ 404,033 $ - $ 53 $ - $(105,580) $ - $298,516
Recapitalization............. - - 407 (407) - - - - - -
Contribution from parent..... - - - 30,000 - - - - - 30,000
Issuances of stock........... - - 192 492,032 - - - - - 492,224
Stock options exercised...... - - 5 5,571 - - - - - 5,576
Issuance of common stock
warrants..................... - - - 7,000 (7,000) - - - - -
Amortization of deferred
charge....................... - - - - 1,316 - - - - 1,316
Foreign currency adjust-
ment......................... - - - - - (488) - - - (488)
Change in unrealized invest-
ment gain (loss)............. - - - - - - (270) - - (270)
Net loss..................... - - - - - - - (15,769) - (15,769)
----- ---- ---- ---------- ------- ---- ------ --------- --------- --------
Balance at December 31,
1993......................... - - 614 938,229 (5,684) (435) (270) (121,349) - 811,105
Issuance of stock for acqui-
sitions...................... - - 23 81,985 - - - - - 82,008
Stock options exercised...... - - 5 5,611 - - - - - 5,616
Settlement of deferred pur-
chase price adjust-
ments........................ - - - 24,514 - - - - - 24,514
Amortization of deferred
charge....................... - - - - 2,333 - - - - 2,333
Foreign currency adjust-
ment......................... - - - - - 723 - - - 723
Change in unrealized invest-
ment gain (loss)............. - - - - - - (4,995) - - (4,995)
Net loss..................... - - - - - - - (151,201) - (151,201)
----- ---- ---- ---------- ------- ---- ------ --------- --------- --------
Balance at December 31,
1994......................... - - 642 1,050,339 (3,351) 288 (5,265) (272,550) - 770,103
Issuances of stock for acqui-
sitions and other............ - - 2 6,910 - - - - - 6,912
Issuance of preferred
stock........................ 1 - - 306,454 - - - - - 306,455
Exchange of common stock
for preferred stock.......... - 150 - 126,725 - - - - (126,875) -
Stock options exercised...... - - 4 5,844 - - - - - 5,848
Stock compensation plans
additions.................... - - - 1,352 - - - - - 1,352
Amortization of deferred
charge....................... - - - - 2,334 - - - - 2,334
Foreign currency adjust-
ment......................... - - - - - (243) - - - (243)
Change in unrealized invest-
ment gain (loss)............. - - - - - - 5,469 - - 5,469
Stock dividend on Series A
Preferred Stock.............. - - 3 14,770 - - - (14,773) - -
Net loss..................... - - - - - - - (267,898) - (267,898)
----- ---- ---- ---------- ------- ---- ------ --------- --------- --------
Balance at December 31,
1995......................... $ 1 $150 $651 $1,512,394 $(1,017) $ 45 $ 204 $(555,221) $(126,875) $830,332
===== ==== ==== ========== ======= ==== ====== ========= ========= ========
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
F-5
<PAGE> 10
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three years ended December 31, 1995
(dollars in thousands)
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................. $(267,898) $(151,201) $ (15,769)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization............................ 142,496 73,869 34,670
Non cash interest expense................................ 35,503 40,212 -
Non cash compensation expense............................ 1,352 - -
Deferred income taxes.................................... - (2,163) (7,816)
(Gain) loss on sales of securities....................... 1,271 822 (207)
Changes in assets and liabilities, net of acquisitions:
Accounts receivable and other assets..................... (94,890) (43,807) (6,800)
Other liabilities........................................ 61,458 71,846 28,868
--------- --------- ----------
Net cash provided by (used in) operating activities...... (120,708) (10,422) 32,946
--------- --------- ----------
Cash flows from investing activities:
Purchases of network and equipment....................... (506,866) (363,376) (127,351)
Proceeds from sale-leaseback of equipment................ 40,111 - -
Acquisition of businesses, excluding cash acquired....... (15,289) (207,531) (1,300)
Acquisition of minority interest in subsidiaries......... (1,572) (5,804) -
Maturities of marketable securities...................... 220,497 281,071 378,906
Proceeds from sales of marketable securities............. 348,771 446,429 262,982
Purchases of marketable securities....................... (295,873) (621,569) (1,052,591)
Additions to deferred costs and other.................... (25,432) (16,215) (8,686)
--------- --------- ----------
Net cash used in investing activities.................... (235,653) (486,995) (548,040)
--------- --------- ----------
Cash flows from financing activities:
Proceeds from issuance of Series A Preferred Stock....... 306,455 - -
Proceeds from issuance of long term debt and notes
payable.................................................. 75,475 483,500 -
Payments on long-term debt............................... (4,974) (647) (21)
Capital contributions from parent........................ - - 30,000
Issuances of common stock................................ 1,000 - 492,424
Proceeds from exercise of stock options.................. 5,848 5,616 5,576
Other.................................................... 2,221 - 4,756
--------- --------- ----------
Net cash provided by financing activities................ 386,025 488,469 532,735
--------- --------- ----------
Net increase (decrease) in cash and cash equivalents..... 29,664 (8,948) 17,641
Cash and cash equivalents, beginning of year............. 21,518 30,466 12,825
--------- --------- ----------
Cash and cash equivalents, end of year................... $ 51,182 $ 21,518 $ 30,466
========= ========= ==========
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
F-6
<PAGE> 11
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the three years ended December 31, 1995
(dollars in thousands)
<TABLE>
<CAPTION>
Supplemental cash flow disclosures:
1995 1994 1993
------ ---- ----
<S> <C> <C> <C>
Cash paid during the year for interest.............. $2,744 $607 $ 23
Cash paid during the year for income taxes.......... $ 618 $492 $923
</TABLE>
Supplemental schedule of non cash financing and investing activities:
In 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>
The Company issued dividends of common stock valued at $14,773 on its Series
A Preferred Stock in 1995. The Company also issued 15,000,000 shares of Series
B Preferred Stock in exchange for 5,800,000 shares of the Company's common
stock during 1995. The Company recognized undeclared dividends of $291 on its
Series B Preferred Stock in 1995.
The Company capitalized non-cash interest expense of $18,796 in 1995 and
$5,450 in 1994 on network construction projects.
The Company incurred capital lease obligations of $34,593 in 1995 by entering
into sale-leaseback transactions for certain telecommunications equipment which
had previously been acquired.
In 1994, the Company recorded $24,514 of goodwill and additional paid in
capital related to the settlement of deferred purchase price adjustments from
acquisitions of stock of Chicago Fiber Optic Corporation in 1990 and 1991. The
liability for adjustments had been assumed by the Company's former majority
owner in 1993 (see Note 16).
In 1994, the Company purchased the common stock and all stock options of
Centex Telemanagement, Inc. for $202,083. In connection with the acquisition,
liabilities were assumed as follows:
<TABLE>
<S> <C>
Fair value of tangible assets acquired.... $ 79,483
Fair value of intangible assets acquired.. 193,719
Cash paid for stock....................... (202,083)
--------
Liabilities assumed....................... $ 71,119
========
</TABLE>
F-7
<PAGE> 12
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the three years ended December 31, 1995
(dollars in thousands)
Supplemental schedule of non cash financing and investing
activities:-(continued)
In 1994, the Company purchased the common stock of Cylix Communications
Corporation for $2,250 in cash and the issuance of stock. In connection with
the acquisition, liabilities were assumed as follows:
<TABLE>
<S> <C>
Fair value of tangible assets acquired.... $9,417
Fair value of intangible assets acquired.. 4,843
Cash paid for stock....................... (2,250)
Stock issued.............................. (5,990)
------
Liabilities assumed....................... $6,020
======
</TABLE>
In 1994, the Company purchased the common stock of RealCom Office
Communications, Inc. for $7,250 in cash and the issuance of stock. In
connection with the acquisition, liabilities were assumed as follows:
<TABLE>
<S> <C>
Fair value of tangible assets acquired.... $33,629
Fair value of intangible assets acquired.. 56,075
Cash paid for stock....................... (7,250)
Stock issued.............................. (53,052)
-------
Liabilities assumed....................... $29,402
=======
</TABLE>
The Company issued common stock with a value of $11,954 for other
acquisitions during 1994. In connection with these acquisitions, the Company
assumed liabilities of approximately $6,000, acquired networks and equipment of
approximately $5,000 and recorded goodwill and other intangibles.
The Company issued common stock with a value of $11,012 to acquire the
minority interest of two of its subsidiaries during 1994.
The accompanying notes are an integral part of the Consolidated Financial
Statements.
F-8
<PAGE> 13
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
1. Organization:
The consolidated financial statements include the accounts of MFS
Communications Company, Inc. ("MFS"), and its majority owned subsidiaries (the
"Company"). MFS was incorporated on July 17, 1987 in Delaware and, prior to its
initial public offering in May 1993, was a wholly owned subsidiary of Kiewit
Diversified Group Inc. ("KDG"), which is a wholly owned subsidiary of Peter
Kiewit Sons', Inc. ("PKS"). In 1995, pursuant to a planned restructuring, all
of PKS' remaining interest in the Company's capital stock was distributed to
certain PKS stockholders.
The Company operates through its subsidiaries in two business segments,
telecommunications services and network systems integration. The
telecommunications segment is comprised of the MFS Telecom Companies, which
provides services to large business and government customers through MFS
Telecom and MFS Datanet, the MFS Intelenet Companies, which provides services
to small and medium sized business customers through MFS Intelenet, MFS
International, which provides services to business and government customers
internationally and Global Network Services, which manages the Company's
international network platform. The network systems integration segment
provides services primarily through MFS Network Technologies.
Where appropriate, items within the consolidated financial statements and
notes thereto have been reclassified from previous years to conform to current
year presentation.
2. Summary of Significant Accounting Policies:
(a) Principles of Consolidation:
The consolidated financial statements of the Company include the accounts of
all of its majority owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated.
(b) Recognition of Revenue:
The Company recognizes revenue on telecommunications services in the month
the related service is provided. Network systems integration revenue is
recognized on the percentage-of-completion method of accounting. Under the
percentage-of-completion method, an estimated percentage for each contract, as
determined by the Company's engineering estimate based on the amount of work
performed, is applied to total estimated profit. Provisions for losses are
recognized on uncompleted contracts when they become known. Claims for
additional revenue are recognized in the period when settled. Revisions in cost
and profit estimates, which are always reasonably possible to occur in the near
term under the percentage-of-completion method, are reflected in the accounting
period in which the facts which require the revision become known.
(c) Classification of Current Assets and Liabilities:
In accordance with industry practice, amounts realizable and payable under
network systems integration contracts which may extend beyond one year are
includable in current assets and liabilities. A one-year time period is used as
the basis for classification of all other current assets and liabilities.
(d) Networks and Equipment
The networks and equipment are stated at cost. Various costs are capitalized
during the installation and expansion of the networks. Provisions for
depreciation are computed using straight-line methods over estimated useful
lives beginning in the year an asset is put into service.
Electronic and related equipment, leasehold improvements, furniture and
office equipment and land and buildings are stated at cost. Leasehold
improvements primarily consist of extensions off the network to customer
locations. Depreciation is computed using primarily straight-line methods over
the estimated useful lives of the assets or, for capital leases, the term of
the related leases.
F-9
<PAGE> 14
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(dollars in thousands, except per share data)
2. Summary of Significant Accounting Policies (continued):
Costs of purchased software and certain costs to modify and improve certain
of the Company's computer software are recorded at cost and are being amortized
using the straight-line method over their estimated useful lives.
(e) Intangible Assets:
Costs incurred in developing new networks or expanding existing networks,
including network design, negotiation of rights-of-way and obtaining
legal/regulatory authorizations are deferred and amortized over five years.
Costs incurred to obtain access to buildings are deferred by the Company and
amortized over 15 years. Costs incurred to obtain city franchises are deferred
by the Company and amortized over the initial term of the franchise.
Pre-operating costs represent substantially all nondevelopment costs incurred
during the pre-operating phase of a newly-constructed network and are amortized
over five-year periods commencing with the start of operations.
Goodwill is being amortized primarily over periods of 40 years from the dates
of acquisition. The Company reviews the carrying amount of goodwill for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. Measurement of any impairment would
include a comparison of estimated future operating cash flows anticipated to be
generated during the remaining life of the goodwill to the net carrying value
of the goodwill.
The costs of rights-of-way and customer lists obtained in business
acquisitions are being amortized over estimated useful lives of 20 to 25 years
and three years, respectively.
(f) Income Taxes:
Prior to the Company's initial public offering in May 1993, the Company was
included in the consolidated income tax returns of PKS. Income taxes were
recognized as if the Company filed its own income tax returns on a separate
return basis.
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial statement
and tax bases of assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse.
(g) Minority Interest:
The Company has recorded the entire loss of other than wholly owned
subsidiaries where the loss applicable to the minority interest exceeds the
minority interest in such subsidiaries' equity.
(h) Translation of Foreign Financial Statements:
Assets and liabilities are translated into U.S. dollars at year-end exchange
rates. Revenues and expenses are translated using the average rates of exchange
for the period. Gains or losses resulting from foreign currency translation are
recorded as adjustments to stockholders' equity.
F-10
<PAGE> 15
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(dollars in thousands, except per share data)
2. Summary of Significant Accounting Policies (continued):
Cash equivalents generally consist of highly liquid debt instruments
purchased with a maturity of three months or less.
(j) Marketable Securities:
Marketable securities are being carried at fair value.
(k) Financial Instruments:
Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of marketable securities and accounts
receivable. Concentrations of credit risk of marketable securities is limited
due to investments in short-term, investment grade securities. Concentrations
of credit risk with respect to accounts receivable are limited due to the
dispersion of the Company's customer base among different industries and
geographic areas and remedies provided by terms of contracts and statutes.
(l) Loss Per Share:
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No.
83, stock options granted with exercise prices below the assumed initial public
offering price of $10.00 per share during the twelve-month period preceding the
date of the initial filing of the Registration Statement have been included in
the calculation of common stock equivalent shares, using the treasury stock
method, as if they were outstanding for the first quarter ended March 31, 1993.
The number of shares used in computing loss per share was as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Common stock............................. 127,786,000 124,874,000 104,572,000
Common stock equivalents Stock options
using the initial public offering price.. - - 1,192,000
----------- ----------- -----------
127,786,000 124,874,000 105,764,000
=========== =========== ===========
</TABLE>
(m) Estimates in Financial Statements:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
3. Financial Instruments:
The following methods and assumptions were used to determine the
classification and fair value of each class of financial instruments for which
it is practicable to estimate that value:
(a) Cash and cash equivalents:
Cash equivalents generally consist of highly liquid debt instruments
purchased with a maturity of three months or less and are carried at fair value
which approximates cost due to the short maturities.
F-11
<PAGE> 16
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(dollars in thousands, except per share data)
3. Financial Instruments (continued):
(b) Marketable Securities:
The Company has classified all marketable securities other than cash
equivalents as available-for-sale. The amortized costs of the securities used
in computing unrealized and realized gains and losses are determined by
specific identification. Fair values are estimated based on quoted market
prices. Net unrealized gains and losses are reported as a separate component of
stockholders' equity. The Company has not invested in derivative financial
instruments.
Marketable securities at December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
Unrealized Unrealized Estimated
Amortized Holding Holding Fair
1995 Cost Gain Loss Value
- ---------------------------------------------------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury and other U.S. government corporations
and agencies debt securities........................ $ 48,652 $ 204 $ - $ 48,856
Corporate debt securities........................... 36,859 6 6 36,859
-------- -------- ------ --------
Total marketable securities......................... $ 85,511 $ 210 $ 6 $ 85,715
======== ======== ====== ========
1994
- ----------------------------------------------------
U.S. Treasury debt securities....................... $274,191 $ - $3,299 $270,892
Corporate debt securities........................... 93,335 - 1,966 91,369
-------- -------- ------ --------
Total marketable securities......................... $367,526 $ - $5,265 $362,261
======== ======== ====== ========
</TABLE>
The amortized costs and estimated fair value of investments in debt
securities at December 31, 1995, by contractual maturity are as follows:
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
- ------------------------------------ --------- ---------
<S> <C> <C>
Due within 1 year........................ $ 43,546 $43,541
Due after 1 year through 5 years......... 37,936 38,140
Due after 5 years through 10 years....... - -
Due after 10 years....................... 4,029 4,034
-------- -------
$ 85,511 $85,715
======== =======
</TABLE>
Sales activity in available-for-sale securities is summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
- ----------------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
Proceeds from sale of available-for-sale securities.. $348,771 $446,429 $262,982
Gross realized gains................................. - 137 662
Gross realized losses................................ 1,271 959 455
</TABLE>
(c) Long Term Debt:
The fair value of the Company's long-term debt is estimated based on the
quoted market price for the same or similar issues or on borrowing rates
currently available to the Company for debt with similar terms and maturities.
The fair market value of the Company's long-term debt was $732,003 and $496,359
at December 31, 1995 and 1994, respectively.
F-12
<PAGE> 17
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(dollars in thousands, except per share data)
4. Networks and Equipment:
Networks and equipment consist of the following:
<TABLE>
<CAPTION>
1995 1994
- ---------------------------------------------------------- ---------- --------
<S> <C> <C>
Telecommunications networks............................... $ 287,719 $171,770
Electronic and related equipment.......................... 628,609 370,788
Leasehold improvements.................................... 106,012 76,328
Furniture, office equipment and other..................... 36,225 27,838
Land and buildings........................................ 11,656 1,202
Computer software......................................... 37,516 29,417
Capitalized lease assets, primarily electronic equipment.. 34,593 -
Networks-in-progress...................................... 173,622 110,110
---------- --------
$1,315,952 $787,453
========== ========
</TABLE>
Amortization expense for 1995 and accumulated amortization at December 31,
1995 for capitalized lease assets was $254.
5. Other Assets:
Other assets consist of the following:
<TABLE>
<CAPTION>
1995 1994
- --------------------------------------------- --------- ---------
<S> <C> <C>
Deferred development and preoperating costs.. $ 56,635 $35,604
Goodwill..................................... 297,970 286,533
Rights-of-way................................ 15,069 15,080
Customer list................................ 67,200 72,100
Deferred financing costs..................... 23,699 18,899
Other noncurrent assets...................... 989 4,478
-------- --------
461,562 432,694
Less accumulated amortization................ (70,876) (35,402)
-------- --------
$390,686 $397,292
======== ========
</TABLE>
Amortization of intangible assets and deferred costs was $41,946 in 1995,
$25,419 in 1994 and $6,547 in 1993.
F-13
<PAGE> 18
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(dollars in thousands, except per share data)
6. Notes Payable and Long-Term Debt:
At December 31, 1995 and 1994, notes payable and long-term debt consist of
the following:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
9 3/8% Senior Discount Notes, due January 15, 2004.......................$596,648 $544,413
Credit Facilities, including interest at a variable rate (approximately
7.4% at December 31, 1995).............................................. 65,000 -
Vendor Credit Facilities, including interest at a variable rate (approx-
imately 7.0% at December 31, 1995)...................................... 4,400 -
Notes Payable to bank, including interest at prime plus 1.85%
(7.85% at December 31, 1995) maturing in 1999, collateralized by
certain equipment of a subsidiary....................................... 20,000 16,210
Note Payable to credit corporation, with quarterly payments includ-
ing interest at LIBOR + 2.5% (8.56% at December 31, 1995)
through March 31, 2000.................................................. 3,967 -
Equipment Finance Agreement with monthly payments including
interest at 9.27% through March 31, 1999, collateralized by certain
subsidiary assets....................................................... 3,988 4,670
Other................................................................... 51 13
-------- --------
694,054 565,306
Less: Current portion................................................... (1,995) (16,973)
-------- --------
$692,059 $548,333
======== ========
</TABLE>
Aggregate annual principal maturities as of December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996....... $ 1,995
1997....... 2,330
1998....... 23,160
1999....... 67,528
2000....... 1,304
</TABLE>
(a) The Senior Discount Notes:
The Company issued the Senior Discount Notes (the "1994 Senior Discount
Notes") on January 19, 1994 and recorded the net proceeds, exclusive of
transaction costs, of approximately $500,000 as long-term debt. The Company is
accruing to the principal amount of the 1994 Senior Discount Notes of $788,320
through January 1999. Cash interest will not accrue on the 1994 Senior Discount
Notes prior to January 15, 1999, however, the Company may elect to commence the
accrual of cash interest at any time prior to that date. Commencing July 15,
1999 cash interest will be payable semi-annually.
On or after January 15, 1999, the 1994 Senior Discount Notes will be
redeemable at the option of the Company, in whole or in part from time to time,
at the following prices (expressed in percentages of the principal amount at
the 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>
1999................. 103.52%
2000................. 102.34%
2001................. 101.17%
2002 and thereafter.. 100.00%
</TABLE>
F-14
<PAGE> 19
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(dollars in thousands, except per share data)
6. Notes Payable and Long-Term Debt (continued):
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 1994
Senior Discount Notes as stipulated in the note agreement. The 1994 Senior
Discount Notes are senior unsecured obligations of the Company and are
subordinated to all current and future indebtedness of the Company's
subsidiaries, including trade accounts payable. The 1994 Senior Discount Notes
contain certain covenants which, among other things, restrict the Company's
ability to incur additional 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 another company.
(b) The Credit Facilities:
In April 1995, the Company reached agreement with a syndicate of commercial
banks for an aggregate of $250,000 of revolving credit facilities (the "Credit
Facilities" or the "MFS Credit Facility" and the "MFS Telecom Credit
Facility"). The Credit Facilities provide for borrowings of $150,000 by MFS
Communications Company, Inc. and $100,000 by MFS Telecom. The commitments of
the banks under the Credit Facilities shall be reduced quarterly starting July
31, 1998 through April 30, 2000. The obligations of the Company under the MFS
Credit Facility have been guaranteed by substantially all of the Company's
subsidiaries and collateralized by a security interest in the capital stock of
substantially all of the Company's U.S. subsidiaries and a security interest in
several franchise agreements held by certain of the Company's subsidiaries. The
obligations of MFS Telecom under the Telecom Credit Facility have been
guaranteed by the Company and certain of the Company's subsidiaries and
collateralized by a security interest in the capital stock of substantially all
of MFS Telecom's U.S. operating subsidiaries. The Company may repay any amounts
borrowed under the Credit Facilities without premium or penalty at any time.
The Credit Facilities provide for interest at a variable rate and a variable
commitment fee on any unused balances. The Credit Facilities contain certain
financial covenants and certain restrictions on the Company's ability to incur
debt, sell assets, pay cash dividends and enter into transactions with
affiliates, among other things. Borrowings under the MFS Telecom Credit
Facility are to be used only for the construction and acquisition of
telecommunications assets, as defined in the agreement.
(c) The Vendor Credit Facilities:
In July 1995, the Company established two credit facilities to borrow up to
an aggregate of $120 million for purchases of switching equipment through
mid-1997 (the "Vendor Credit Facilities"). The facilities are collateralized by
the purchased equipment and partially guaranteed by the Swedish Export Credits
Guarantee Board and the equipment manufacturer. Borrowings under the Vendor
Credit Facilities will be repaid under various schedules, through 2002. The
Company may repay any amounts borrowed under the facilities without premium or
penalty at any time.
The Vendor Credit Facilities provide for interest at a variable rate and a
commitment fee on any unused balances. The Vendor Credit Facilities contain
certain financial covenants and other restrictions similar to the Credit
Facilities.
(d) The Notes Payable:
In April 1995, the Company extended the maturity dates on the Notes Payable
to bank from 1995 to 1999. In addition, in connection with an acquisition in
1995, the Company assumed the Note Payable to credit corporation.
F-15
<PAGE> 20
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(dollars in thousands, except per share data)
6. Notes Payable and Long-Term Debt (continued):
(e) Other Debt:
Subsequent to year end, the Company entered into a $20,000 loan agreement
with an equipment manufacturer and a bank. The loan, which includes interest at
a variable rate, must be used to purchase equipment supplied by the
manufacturer. The loan must be repaid in semi-annual installments of $2,000
starting June 20, 1996, and is collateralized by the equipment purchased. The
agreement contains certain financial covenants and restrictions similar to the
Credit Facilities.
Subsequent to year end the Company issued Senior Discount Notes (the "1996
Senior Discount Notes") and recorded the net proceeds, exclusive of transaction
costs, of approximately $600 million as long-term debt. The Company will accrue
to the principal amount of the 1996 Senior Discount Notes of $924,000 through
January 2006. 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 Company utilized a
portion of the proceeds from the 1996 Senior Discount Notes to repay the
outstanding balances under the Credit Facilities and a portion of the Notes
Payable to bank. In connection with the issuance of the 1996 Senior Discount
Notes, certain amendments to the financial covenants of the Credit Facilities
and the Vendor Credit Facilities were made which, among other things, allowed
the Company to issue the 1996 Senior Discount Notes.
7. Leases:
Capitalized leases consist of leases of electronic telecommunications
equipment. The Company is also leasing premises under various operating leases
which, in addition to rental payments, require payments for insurance,
maintenance, property taxes and other executory costs related to the leases.
Certain leases provide for adjustments in lease cost based upon adjustments in
the consumer price index and increases in the landlord's management costs. The
lease agreements have various expiration dates and renewal options through
2009.
Future minimum payments by year and in the aggregate, under the capital
leases and non cancelable operating leases with initial or remaining terms of
one year or more consist of the following at December 31, 1995:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
- ------------------------------------------------ --------- ---------
<S> <C> <C>
1996............................................ $ 5,188 $28,422
1997............................................ 5,660 27,095
1998............................................ 5,660 24,055
1999............................................ 5,793 19,819
2000............................................ 6,451 16,310
Subsequent to 2000.............................. 21,524 84,100
--------
Total minimum lease payments.................... 50,276
Amounts representing interest................... (16,942)
--------
Present value of future minimum lease payments.. 33,334
Less amounts due in one year.................... (1,922)
--------
$ 31,412
========
</TABLE>
Rent expense under lease agreements was $27,150 in 1995, $17,789 in 1994 and
$8,724 in 1993.
F-16
<PAGE> 21
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(dollars in thousands, except per share data)
8. Commitments and Contingencies:
Under the terms of stockholder agreements, from time to time, minority
stockholders in certain subsidiaries have the option to put shares to the
Company at a purchase price equal to an appraised value of such shares.
The Company has issued standby letters of credit to various city governmental
agencies and building lessors, amounting to approximately $10,341 at December
31, 1995. It is management's belief that the underlying obligations will be met
in the normal course of business without material adverse effect on the
Company's financial position.
The Company is also obligated under rights-of-way and franchise agreements
with various entities for the use of their rights-of-way for the installation
of its telecommunications systems.
In 1994, several former stockholders of MFS Telecom, a subsidiary of the
Company, filed a lawsuit against the Company, 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 allege that certain information was
concealed from them, which caused them to sell their shares at an inadequate
price. KDG has agreed to indemnify the Company against any claims asserted by
the former stockholders.
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.
9. Income Taxes:
Prior to the Company's initial public offering in May 1993 the Company was
included in the consolidated income tax returns of PKS. Income taxes were
recognized on a separate return basis as if the Company filed its own income
tax returns.
The Company and its parent entered into the Tax Sharing Agreement pursuant to
which the parent has agreed to indemnify the Company against federal, state or
local income tax liabilities of the consolidated or combined group of which the
parent is the common parent for taxable periods beginning on or after January
1, 1993 during which the Company was a member of such group. In addition,
pursuant to the Tax Sharing Agreement, for all taxable periods beginning on or
after January 1, 1993, the Company would pay to the parent amounts equal to the
taxes that the Company would otherwise have to pay if it were to file separate
federal, state or local income tax returns, except that the Company will not be
entitled to carry forward certain net operating losses generated prior to
January 1, 1993. As a result of the Company's initial public offering in 1993,
the Tax Sharing Agreement applies only to the January-May 1993 period for
federal income tax purposes. The Company will recognize tax benefits on losses
incurred subsequent to January 1, 1993 only to the extent the Company can
utilize those benefits.
Loss before income taxes is comprised of a loss of approximately $251,000 and
$139,000 from domestic operations and approximately $16,000 and $14,000 from
foreign operations in 1995 and 1994, respectively. Substantially all of the
Company's loss before income taxes prior to 1994 was derived from domestic
operations.
F-17
<PAGE> 22
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(dollars in thousands, except per share data)
9. Income Taxes (continued):
Income tax benefit (expense) consists of the following:
<TABLE>
<CAPTION>
1995 1994 1993
----- ------ ------
<S> <C> <C> <C>
Current
U.S. Federal...................................... $ - $ - $ -
State and other................................... (600) (60) (596)
----- ------ ------
(600) (60) (596)
----- ------ ------
Deferred
U.S. Federal...................................... - 2,163 7,816
State............................................. - - -
----- ------ ------
- 2,163 7,816
----- ------ ------
$(600) $2,103 $7,220
===== ====== ======
</TABLE>
The actual income tax benefit (expense) differs from the "expected" income
tax benefit (computed by applying the U.S. federal corporate tax rate of 35% in
1995, 1994 and 1993 to loss before income taxes) as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- ------
<S> <C> <C> <C>
Federal income tax benefit at statutory rate...... $93,554 $53,656 $8,046
Unutilized tax benefit due to net operating loss.. (91,157) (49,680) -
Goodwill amortization............................. (2,713) (1,676) (627)
State income taxes and other...................... (284) (197) (199)
------- ------- ------
$ (600) $ 2,103 $7,220
======= ======= ======
</TABLE>
At December 31, 1995, the Company had net operating loss carryforwards for
income tax purposes of approximately $444,000 which expire in years 1997
through 2010. A valuation reserve has been recognized to offset the related
deferred tax assets due to the uncertainty of realizing the benefit of the loss
carryforwards.
The components of deferred taxes were as follows:
<TABLE>
<CAPTION>
1995 1994
-------- -------
<S> <C>
Deferred tax assets:
Net operating losses.......................... $155,338 $78,692
Other......................................... 14,523 14,771
-------- -------
Total deferred tax assets..................... 169,861 93,463
-------- -------
Deferred tax liabilities:
Deferred charges.............................. 8,552 6,861
Accumulated depreciation...................... 13,880 19,150
Acquisition intangibles, other than goodwill.. 11,621 21,280
-------- -------
Total deferred tax liabilities................ 34,053 47,291
-------- -------
Net deferred tax assets....................... 135,808 46,172
Less: Valuation allowance..................... (135,808) (46,172)
-------- -------
Net deferred tax liabilities.................. $ - $ -
======== =======
</TABLE>
F-18
<PAGE> 23
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(dollars in thousands, except per share data)
10. Series A Preferred Stock:
In May 1995, the Company issued 9,500,000 Depositary Shares (the "Depositary
Shares"), each representing a one one-hundredth interest in a share of Series A
8% cumulative convertible preferred stock (the "Series A Preferred Stock"), in
a public offering. The proceeds of the offering, net of expenses, was $306,455.
The Depositary Shares are mandatorily convertible into an aggregate of
19,000,000 shares of common stock. The Depositary Shares are also redeemable at
the option of the Company into shares of common stock on or after May 31, 1998
at a ratio that will vary depending upon certain factors, including the market
price of the common stock at the time of redemption and the status of dividend
payments. The Depositary Shares are also convertible at the option of the
holder at any time at a rate of 163.94 shares of common stock for each share of
Series A Preferred Stock (equivalent to a conversion price of $20.43 per share
of common stock), subject to certain adjustments.
The Depositary Shares are entitled to receive dividends, when, as, and if
they are declared by the Board of Directors, accruing at the rate of $2.68 per
share per annum, payable quarterly in arrears on each February 28, March 31,
August 31 and November 30. Dividends are payable in cash or in shares of common
stock, at the election of the Company. Certain of the Company's debt agreements
restrict the Company's ability to pay cash dividends, and as a result, the
Company does not anticipate that it will pay cash dividends on the Series A
Preferred Stock for the foreseeable future. The Company paid the dividends on
August 31 and November 30, 1995 in common stock valued at $14,773.
The Depositary Shares are entitled to vote on the basis of .1000 of a vote
for each Depositary Share held (equivalent to 10 votes for each share of Series
A Preferred Stock). The Series A Preferred Stock has a liquidation preference
equal to the greater of (i) the sum of (a) $3,350 per share and (b) all accrued
and unpaid dividends thereon to the date of liquidation and (ii) the value of
the shares of the Company's common stock into which such Series A Preferred
Stock are convertible on the date of liquidation.
11. Spin-Off:
Pursuant to a planned restructuring of PKS' ownership in the Company's
capital stock, on September 30, 1995, the Company issued 15,000,000 shares of
Series B, 7 3/4% cumulative convertible preferred stock (the "Series B
Preferred Stock") to a wholly owned subsidiary of PKS in exchange for 5,800,000
shares of the Company's common stock, which are being held in treasury. Also
pursuant to that restructuring, PKS purchased $1,000 of the Company's common
stock and then distributed all of its shares of the Company's common stock and
the shares of Series B Preferred Stock to certain of its stockholders. The
Series B Preferred Stock received by PKS' stockholders are subject to certain
restrictions regarding sale or transfer through September 30, 2001. The common
stock received and the Series B Preferred Stock issued in the exchange have
been accounted for based upon the market value of the common stock on September
30, 1995.
The Series B Preferred Stock is convertible into shares of common stock at
any time after the first anniversary of the date of issuance at a conversion
price of $21.563 (an effective conversion rate of 0.0463768 shares of common
stock for each share of Series B Preferred Stock). Dividends on the Series B
Preferred Stock accrue at the rate of 7 3/4% per annum and are payable in cash.
Dividends will be paid only when, as and if declared by the Board of Directors
of the Company. Certain of the Company's debt agreements restrict the Company's
ability to pay cash dividends, and as a result the Company anticipates that, in
the near future, dividends on the Series B Preferred Stock will not be declared
but will continue to accrue. Upon conversion, accrued but unpaid dividends are
payable in cash or shares of common stock at the Company's election. At
December 31, 1995, the Company has recognized undeclared dividends of $291, or
$.02 per Series B preferred share.
Shares of Series B Preferred Stock are also redeemable at the option of the
Company at any time after September 30, 2001 at a redemption price of $1.00 per
share, plus accrued and unpaid dividends. The redemption price will be payable
in cash or shares of the Company's common stock at the Company's election.
F-19
<PAGE> 24
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(dollars in thousands, except per share data)
11. Spin-Off (continued):
Each share of Series B Preferred Stock has the right to ten votes on all
matters presented to the Company's stockholders, however the shares are subject
to an irrevocable proxy that has been granted to the Secretary and Assistant
Secretary of the Company on all matters other than the election of directors
and matters as to which holders of the Series B Preferred Stock vote as a
separate class. That proxy requires the Secretary and Assistant Secretary of
the Company to vote all of the shares of Series B Preferred Stock in proportion
to the vote of the holders of the Company's common stock. The Series B
Preferred Stock has a liquidation preference over Junior Stock, as defined, of
$1.00 per share, plus an amount equal to unpaid dividends thereon, including
accrued dividends, whether or not declared.
12. Common Stock Warrants:
The Company entered into an agreement on June 8, 1993 to issue 1,500,000
common stock warrants to an investment bank in consideration for the provision
of financial advisory services to the Company over a three-year period. The
warrants vest quarterly through June 7, 1996, and are exercisable at $13.125
per share during the five-year period following the date each portion vests and
becomes exercisable. The fair value of the warrants as of June 8, 1993 has been
accounted for within stockholders' equity as additional paid-in capital, with
an offsetting deferred charge to equity and will be amortized over the
three-year vesting period. In the event of a change in control as defined in
the agreement, the warrants immediately vest and become exercisable.
13. Stockholder Rights Plan:
In September 1995, the Company executed a Rights Agreement that provides for
the issuance of preferred stock purchase rights which expire in October 2005.
The rights generally will be exercisable and transferable apart from the common
stock only after the tenth day following public disclosure that a person or
group has acquired beneficial ownership of 15% or more of the common stock or,
the tenth business day after the date on which a person commences a tender or
exchange offer upon consummation of which such person or group would
beneficially own 15% or more of the common stock of the Company.
If any person becomes the beneficial owner of 15% or more of the Company's
common stock other than pursuant to an offer for all shares which is fair to
and otherwise in the best interests of the Company and its subsidiaries, then
each right not owned by a 15% or more stockholder or certain related parties
will entitle the holder to purchase shares of common stock of the Company (or,
in certain circumstances as determined by the Board of Directors of the
Company, cash, other property, or other securities) having a value equal to
twice the right's exercise price. The rights may not be exercised while they
are redeemable . The Company is generally entitled to redeem the rights at $.01
per right at any time until the tenth day following public disclosure that a
person or group has become the beneficial owner of 15% or more of the Company's
common stock.
In addition, if, after any person has become a 15%-or-more stockholder, the
Company is involved in a merger or other business combination transaction with
another person in which its common stock is changed or converted, or sells 50%
or more of its assets or earning power to another person, each right will
entitle its holder to purchase, at the right's then-current exercise price,
shares of common stock of such other person having a value of twice the right's
exercise price.
14. Shelf Registration:
The Company has filed a shelf Registration Statement on Form S-3 with the
Securities and Exchange Commission for the sale, from time to time, of one or
more series of unsecured debt or equity securities having an aggregate value of
$1.0 billion. In January 1996, the Company issued the 1996 Senior Discount
Notes which represented a partial drawdown of approximately $600 million on the
shelf registration.
F-20
<PAGE> 25
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(dollars in thousands, except per share data)
15. Employee Benefit Plans:
(a) 401(k) Plan:
The Company administers a 401(k) Plan whereby eligible employees may
voluntarily contribute a percentage of compensation. The Company has not
contributed to the plan. Full-time employees who have attained 21 years of age
are eligible to participate.
(b) Stock Option Plans:
On November 23, 1992, the Board of Directors adopted the 1992 Stock Plan,
which authorizes, among other things, the grant of options at not less than
100% of the fair market value at the date of the option grant. On that date an
aggregate of 12,000,000 shares of common stock were reserved for the exercise
of nonqualified stock options. Effective August 31, 1993, the Board of
Directors adopted the 1993 Stock Plan, which authorizes the grant of options at
not less than 100% of the fair market value at the date of the option grant.
The Company has registered 20,000,000 shares of common stock for the grant of
options under the 1993 plan. The Compensation Committee of the Board of
Directors administers the stock plans. Options vest over a five-year period.
Certain non-executive employees have received credit for years of past service
under the 1992 stock plan.
Information regarding the Company's stock option plans is summarized below:
<TABLE>
<CAPTION>
1993 1992
Plan Plan Total
--------------- -------------- --------------
<S> <C> <C> <C>
Shares under option:
Outstanding December 31, 1992.. - 12,000,000 12,000,000
Granted........................ 2,320,000 - 2,320,000
Exercised...................... - (925,416) (925,416)
Cancelled...................... - (381,488) (381,488)
--------------- -------------- --------------
Outstanding December 31, 1993.. 2,320,000 10,693,096 13,013,096
Granted........................ 4,801,606 363,790 5,165,396
Exercised...................... - (935,452) (935,452)
Cancelled...................... (313,562) (210,894) (524,456)
--------------- -------------- --------------
Outstanding December 31, 1994.. 6,808,044 9,910,540 16,718,584
Granted........................ 5,704,850 79,146 5,783,996
Exercised...................... (96,980) (720,482) (817,462)
Cancelled...................... (602,414) (140,436) (742,850)
--------------- -------------- --------------
Outstanding December 31, 1995.. 11,813,500 9,128,768 20,942,268
=============== ============== ==============
Option price range per share:
At December 31, 1993........... $16.25 $6.025 $ 6.025-$16.25
At December 31, 1994........... $12.375-$18.00 $6.025-$16.375 $6.025-$18.00
At December 31, 1995........... $12.375-$26.625 $6.025-$17.50 $6.025-$26.625
Options price range for shares
exercised:
During the year ended December
31, 1993....................... - $6.025 $6.025
During the year ended December
31, 1994....................... - $6.025 $6.025
During the year ended December
31, 1995....................... $12.375-$17.125 $6.025 $6.025-$17.125
</TABLE>
F-21
<PAGE> 26
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(dollars in thousands, except per share data)
15. Employee Benefit Plans (continued):
<TABLE>
<S> <C>
Options exercisable:
At December 31, 1993.. - 1,999,602 1,999,602
At December 31, 1994.. 432,806 4,513,794 4,946,600
At December 31, 1995.. 1,751,756 5,110,706 6,862,462
</TABLE>
(c) Shareworks:
Effective October 1995, the Company implemented a new employee benefit plan
which is comprised of a grant plan and a match plan jointly known as
Shareworks. The plan was offered to each domestic employee hired after
September 1, 1995, and also made available to all current employees that choose
to be ineligible for future grants under the Company's Stock Option Plans. 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 will vest after three years with any additional
grants vesting immediately once the initial three year period has been met.
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 will match 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 through December 31, 1995 was $1,352.
(d) Shareworks Plus:
Subsequent to year end the Company implemented a new employee stock
compensation plan which grants stock options to certain key executive employees
under a plan known as Shareworks Plus. Under this plan, the value received by
the employee upon exercise is determined by the rate of increase in the
Company's stock compared to the rate of increase in the S&P 500, a common
composite measurement of the stock price of a group of companies. If the stock
price of the Company's common stock does not increase faster than the S&P, or
if the Company's stock price decreases, the value to be received by the
employee upon exercise is $0. If the stock price of the Company's common stock
increases at a rate faster than the S&P 500 the value received by the employee
upon exercise, which will normally be paid in common stock of the Company,
increases. The first grant of approximately 450,000 options under Shareworks
Plus, which are immediately vested, was made on January 1, 1996. Subject to the
approval of the Company's Compensation Committee of the Board of Directors,
additional grants will be made quarterly.
(e) Accounting for Stock-Based Compensation:
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), Accounting for Stock-Based
Compensation. SFAS 123 encourages entities to adopt a fair value based method
of accounting for employee stock compensation plans, however it also allows an
entity to continue to measure compensation cost for those plans using the
intrinsic value based method of accounting. Under the intrinsic value based
method, many companies, including MFS, have not recognized compensation cost
for many of their stock compensation plans. Under the fair value based method,
many companies would recognize compensation costs for those same plans.
The Company plans to adopt SFAS 123 in the first quarter of 1996. While the
Company has not yet determined the total effect of adopting SFAS 123, it
believes that the adoption of the standard will result in material non-cash
charges to operations in 1996 and thereafter. The amount of the non-cash charge
will be dependent upon a number of factors, including the number of options
granted and the fair value estimated at the time of grant.
F-22
<PAGE> 27
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(dollars in thousands, except per share data)
16. Acquisitions:
In 1995, the Company acquired all of the issued and outstanding shares of
capital stock of companies that provide telecommunications services in
Richmond, Virginia, Denver, Colorado and White Plains, New York. The total cost
of the acquisitions was approximately $18,567, excluding transaction costs and
liabilities assumed. The cost of one of these acquisitions included the
issuance of 342,720 shares of the Company's common stock valued at $5,912.
These operations have been integrated into MFS Telecom. The effect on the
Company's operations as a result of these acquisitions was not significant.
Effective November 14, 1994, the Company purchased all the outstanding stock
of RealCom Office Communications, Inc. ("RealCom"). RealCom was a Shared Tenant
Services company that provides telecommunications services, including long
distance, equipment and outsourcing. The total cost of the acquisition was
approximately $60,302, excluding transaction costs and liabilities assumed.
Included in the cost of the acquisition were 2,720,606 shares of the Company's
common stock valued at $53,052. RealCom operations have been integrated into
MFS Intelenet.
Effective November 1, 1994, the Company purchased all the outstanding stock
of Cylix Communications Corporation ("Cylix"). Cylix provides data
communications services by providing connectivity for IBM compatible hosts to
remote sites. The total cost of the acquisition was approximately $8,240,
excluding transaction costs and liabilities assumed. Included in the cost of
the acquisition were 355,490 shares of the Company's common stock valued at
$5,990. Cylix operations have been integrated into MFS Datanet.
Effective May 18, 1994, the Company purchased the common stock and all stock
options of Centex Telemanagement, Inc. ("Centex"). Centex provides
telecommunications management services for small and medium-sized businesses.
The total cost of the acquisition was approximately $202,083, excluding
transaction costs and liabilities assumed. Centex operations have been
integrated into MFS Intelenet.
In the first quarter of 1994, the Company acquired all of the issued and
outstanding shares of a company that provided telecommunications services in
Rochester, Albany and Buffalo, New York and acquired cable and various
rights-of-way agreements from a company which provided the base for the
Company's network in St. Louis, Missouri. These operations have been integrated
into MFS Telecom.
These acquisitions have been accounted for as purchases and accordingly, the
acquired assets and liabilities were 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 dates of acquisition. The
total purchase price in excess of the fair market value of the net assets
acquired was recorded as goodwill. The goodwill is being amortized on a
straight-line basis over a 40-year life.
F-23
<PAGE> 28
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(dollars in thousands, except per share data)
16. Acquisitions (continued):
The following unaudited pro forma information shows the results of the
Company as though the acquisitions in 1994 occurred as of the beginning of each
period indicated. These results include certain adjustments consistent with the
Company's accounting policies related to revenue recognition and amortization
of intangible assets. These results are not necessarily indicative of the
results that actually would have been attained if the acquisitions had been in
effect at the beginning of each period or which may be attained in the future.
<TABLE>
<CAPTION>
Year Ended December 31
----------------------
1994 1993
---------- ---------
<S> <C> <C>
Revenue...................................... $421,925 $400,371
Net loss..................................... (176,483) (56,054)
Loss per common and common equivalent share.. (1.38) (0.51)
</TABLE>
In 1994, the Company recorded $24,514 of additional goodwill relating to the
settlement of a deferred purchase price adjustment that arose prior to 1994. In
April 1990, the Company acquired 80% of the voting stock of Chicago Fiber Optic
Corporation, now doing business as Metropolitan Fiber Systems of Chicago, Inc.
("MFS Chicago"). The acquisition was accounted for as a purchase. A portion of
the purchase price of the stock acquired was to be based upon the fair market
value of MFS Chicago in April 1993. During 1991, the Company acquired an
additional 10% of the voting stock of MFS Chicago for a deferred purchase price
based upon the MFS Chicago fair market value as of April 1993. The deferred
purchase price associated with these purchases of MFS Chicago stock was assumed
by KDG, the Company's majority stockholder, without recourse to the Company in
1993 and was settled in the first quarter of 1994. The Company recorded the
settlement as goodwill and a capital contribution by KDG.
The Company also acquired the interest of certain minority shareholders of
its subsidiaries during 1995 and 1994.
17. Related Party Transactions:
The Company incurred expense for services provided by a former affiliate as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ------ ----
<S> <C> <C> <C>
Administrative services.. $600 $1,200 $900
Office lease expense..... 365 364 357
Aircraft expense......... 325 477 516
Insurance expense........ 125 287 364
</TABLE>
An officer of the Company is a partner in a law firm that provides legal
services to the Company. The Company paid legal fees to this firm of
approximately $6,063 in 1995, $2,854 in 1994 and $2,900 in 1993.
A director of the Company was the chairman of a company that received $35 for
management services in 1993 for a network systems integration project in the
United Kingdom. In 1993, the Company acquired the director's company for
$1,300.
F-24
<PAGE> 29
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(dollars in thousands, except per share data)
18. Segment Industry Data:
The Company operates in two reportable segments primarily within the United
States: telecommunications services and network systems integration services. A
summary of the Company's operations by industry follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- --------
<S> <C> <C> <C>
Revenue:
Telecommunications services.... $ 498,225 $ 228,707 $ 70,048
Network systems integration.... 221,986 155,869 115,942
Intersegment activity.......... (137,017) (97,829) (44,879)
---------- ---------- --------
Total.......................... $ 583,194 $ 286,747 $141,111
========== ========== ========
Operating income (loss):
Telecommunications services.... $ (234,055) $ (131,216) $(35,379)
Network systems integration.... (5,250) (4,913) 3,478
---------- ---------- --------
Total.......................... (239,305) (136,129) (31,901)
Interest income (expense) net.. (25,418) (16,110) 8,793
Unallocated income (expense)... (2,575) (1,065) 119
---------- ---------- --------
Loss before income taxes....... $ (267,298) $(153,304) $(22,989)
========== ========== ========
Identifiable assets:
Telecommunications services.... $1,793,958 $1,540,675 $864,932
Network systems integration.... 106,088 81,053 54,232
Intersegment activity.......... (32,912) (37,182) (12,227)
---------- ---------- --------
Total.......................... $1,867,134 $1,584,546 $906,937
========== ========== ========
Capital expenditures:
Telecommunications services.... $ 504,568 $ 359,188 $126,491
Network systems integration.... 2,298 4,188 860
---------- ---------- --------
Total.......................... $ 506,866 $ 363,376 $127,351
========== ========== ========
Depreciation and amortization:
Telecommunications services.... $ 139,947 $ 72,209 $ 33,771
Network systems integration.... 2,549 1,660 899
---------- ---------- --------
Total.......................... $ 142,496 $ 73,869 $ 34,670
========== ========== ========
</TABLE>
The Company generated 30% of its revenue during 1993 from a contract with the
Department of General Services-State of Iowa, relative to a network systems
integration project.
F-25
<PAGE> 30
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(dollars in thousands, except per share data)
19. Quarterly Summary of Operations (Unaudited):
The following table presents unaudited quarterly operating results for the
first quarter of 1994 through the fourth quarter of 1995. The Company believes
that all necessary adjustments have been included in the amounts stated below
to present fairly the quarterly results when read in conjunction with the
Consolidated Financial Statements and notes thereto. Results of operations for
any particular quarter are not necessarily indicative of results of operations
for a full year or predictive of future periods.
<TABLE>
<CAPTION>
1994 1995
-------------------------------------- --------------------------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th
-------- ------- ------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Telecommunications services...... $ 22,068 $46,646 $72,880 $87,113 $103,788 $117,079 $131,432 $145,926
Network systems integration...... 12,440 14,786 16,099 14,715 14,552 22,926 22,285 25,206
-------- ------- ------- ------- -------- -------- -------- --------
Total............................ 34,508 61,432 88,979 101,828 118,340 140,005 153,717 171,132
Loss from operations............. (18,588) (27,495) (37,010) (53,036) (56,556) (58,561) (60,846) (63,342)
Other expense, net............... (859) (4,326) (5,819) (6,171) (7,252) (6,167) (6,143) (8,431)
Loss before income taxes......... (19,447) (31,821) (42,829) (59,207) (63,808) (64,728) (66,989) (71,773)
Income tax benefit (expense)..... 972 156 975 - (100) (100) (250) (150)
Net loss......................... (18,475) (31,665) (41,854) (59,207) (63,908) (64,828) (67,239) (71,923)
Loss per share applicable to com-
mon stockholders................. (.15) (.26) (.34) (.47) (.50) (.51) (.58) (.64)
EBITDA(1)........................ (6,927) (11,575) (16,024) (27,734) (27,483) (26,913) (22,861) (19,553)
</TABLE>
- ------
(1) EBITDA consists of earnings (loss) before interest, income taxes,
depreciation, amortization and other non-operating income or expenses.
EBITDA is commonly used in the communications industry to analyze companies
on the basis of operating performance. EBITDA is not intended to represent
cash flows for the periods. See Consolidated Financial Statements of Cash
Flows.
20. Stock Split:
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.
F-26
<PAGE> 31
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
(dollars in thousands, ------------------ ----------------
except per share data) 1996 1995 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $ 229,706 $140,005 $ 416,022 $ 258,345
Costs and expenses:
Operating expenses 217,911 139,135 392,084 259,017
Depreciation and amortization 47,979 31,648 92,588 60,721
General and administrative
expenses 33,862 27,783 68,754 53,724
--------- -------- --------- ---------
299,752 198,566 553,426 373,462
--------- -------- --------- ---------
Loss from operations (70,046) (58,561) (137,404) (115,117)
Other income (expense):
Interest income 5,147 3,520 10,791 6,812
Interest expense, net (26,854) (9,123) (50,480) (18,751)
Other (843) (564) (1,627) (1,480)
--------- -------- --------- ---------
Total other income (expense) (22,550) (6,167) (41,316) (13,419)
--------- -------- --------- ---------
Loss before income taxes (92,596) (64,728) (178,720) (128,536)
Income tax expense (100) (100) (200) (200)
--------- -------- --------- ---------
Net loss (92,696) (64,828) (178,920) (128,736)
Dividends on preferred stock (7,460) - (14,532) -
--------- -------- --------- ---------
Net loss applicable to common
stockholders $(100,156) $(64,828) $(193,452) $(128,736)
--------- -------- --------- ---------
Net loss per share applicable
to common stockholders ($0.79) $ (0.50) $ (1.54) $ (1.00)
========= ======== ========= =========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-27
<PAGE> 32
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---- ----
(unaudited)
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents........................ $ 74,680 $ 51,182
Marketable securities............................ 212,448 85,715
Accounts receivable.............................. 198,722 140,302
Costs and earnings in excess of billings on
uncompleted contracts........................... 56,646 45,142
Other current assets............................. 53,029 51,703
---------- ----------
Total current assets............................ 595,525 374,044
Networks and equipment, at cost................... 1,634,310 1,315,952
Less accumulated depreciation and amortization... (282,918) (213,548)
---------- ----------
Networks and equipment, net..................... 1,351,392 1,102,404
Goodwill, net..................................... 277,910 281,848
Other assets, net................................. 128,213 108,838
---------- ----------
Total assets...................................... $2,353,040 $1,867,134
========== ==========
</TABLE>
F-28
<PAGE> 33
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---- ----
(unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of notes payable
and long-term debt.............................. $ 2,025 $ 1,995
Current portion of capital lease obligations..... 2,862 1,922
Accounts payable................................. 174,259 172,407
Accrued costs and billings in excess of
revenue on uncompleted contracts................ 42,740 28,686
Accrued compensation............................. 14,157 6,119
Other current liabilities........................ 75,244 63,328
---------- ---------
Total current liabilities...................... 311,287 274,457
Notes payable and long-term debt,
less current portion............................. 1,299,210 692,059
Capital lease obligations, less current portion... 30,145 31,412
Other liabilities................................. 26,864 27,902
Minority interest................................. 11,591 10,972
Commitments and contingencies (Note 7)
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 126,824,589 in
1996 and 130,260,228 in 1995 (Note 3).......... 1,268 651
Additional paid-in capital....................... 1,501,234 1,512,394
Deferred charge.................................. - (1,017)
Foreign currency adjustment...................... (842) 45
Unrealized investment gain (loss)................ (790) 204
Accumulated deficit.............................. (827,078) (555,221)
---------- ----------
673,943 957,207
Treasury stock, 5,800,000 shares, at cost........ - (126,875)
---------- ----------
Total stockholders' equity..................... 673,943 830,332
---------- ----------
Total liabilities and stockholders'equity...... $2,353,040 $1,867,134
========== ==========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-29
<PAGE> 34
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
----------------
(dollars in thousands) 1996 1995
- ------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(178,920) $(128,736)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 92,588 60,721
Non cash interest expense 45,954 17,474
Non cash compensation expense 6,885 -
Loss on sale of securities - 1,271
Changes in assets and liabilities,
net of effects of acquisitions:
Accounts receivable and other current assets (80,019) (35,271)
Other liabilities 35,110 17,708
--------- ---------
Net cash used in operating activities (78,402) (66,833)
--------- ---------
Cash flows from investing activities:
Purchases of networks and equipment (311,933) (249,435)
Proceeds from maturities and sales
of marketable securities 280,985 319,266
Purchases of marketable securities (404,596) (278,983)
Purchases of minority interest in subsidiaries - (1,522)
Acquisitions of businesses, excluding cash acquired - (14,858)
Additions to deferred costs and other (12,096) (9,607)
--------- ---------
Net cash used in investing activities (447,640) (235,139)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of long-term debt
and notes payable 643,812 6,075
Proceeds from issuance of preferred stock - 306,646
Payments of debt financing costs (20,487) -
Payments on long-term debt, including current portion (88,102) (3,035)
Proceeds from exercise of stock options 14,317 2,339
--------- ---------
Net cash provided by financing activities 549,540 312,025
--------- ---------
Net change in cash and cash equivalents 23,498 10,053
Cash and cash equivalents at beginning of period 51,182 21,518
--------- ---------
Cash and cash equivalents at end of period $ 74,680 $ 31,571
========= =========
- ------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-30
<PAGE> 35
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
Supplemental schedule of non cash financing and investing activities:
The Company recognized a common stock dividend on preferred stock of $14,144
in the six month period ended June 30, 1996.
The Company capitalized non-cash interest expense of $7,108 and $8,852 in
the six month periods ended June 30, 1996 and 1995, respectively.
In the first six 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:
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
=======
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-31
<PAGE> 36
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. Income Taxes:
The income tax expense of $100 for the three months ended June 30, 1996
and 1995, and $200 for the six months ended June 30, 1996 and 1995,
resulted from estimated state and foreign tax liabilities.
3. 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.
In July, 1996 the Company sold 35,650,000 shares of $.01 par value common
stock at $37.125 per share. The proceeds of the offering, net of the
underwriters discount and expenses of the offering, was approximately
$1.3 billion.
4. 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 126,176,000 and 125,596,000 for the three and
six month periods ended June 30, 1996 and 128,960,000 and 128,845,000
for the three and six month periods ended June 30, 1995, respectively.
F-32
<PAGE> 37
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
5. 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 must be
repaid in semi-annual principal installments of $2,000 starting 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.
(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:
Year Percentage
2001.................. 103.32%
2002.................. 102.21%
2003.................. 101.11%
2004 and thereafter... 100.00%
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.
F-33
<PAGE> 38
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
6. Stock Compensation Programs:
The Company has three stock based compensation programs in effect at
June 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 six months of 1996 were not material.
(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 June 30, 1996 was $2,193.
(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 923,000 awards under this plan during
the first six 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.
F-34
<PAGE> 39
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
6. Stock Compensation Programs:(continued)
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.
The Company recognized compensation expense of $890 related to the
Shareworks plan and $5,995 related to the Shareworks Plus program in the
six month period ended June 30, 1996. The pro forma impact of adopting
the fair value method of accounting in the six month period ended June
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 923,000 awards during the first six months of 1996, at
initial exercise prices that range from $26.62 to $31.13. Approximately
216,000 awards were exercised during the six month period ended June 30,
1996. The fair value of the awards granted was estimated to be $6.50
per award.
7. 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.
F-35
<PAGE> 40
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
8. Merger Agreement:
On August 12,1996 the Company issued approximately 58 million shares of
common stock and approximately 6 million options to purchase the
Company's common stock as consideration for UUNET Technologies, Inc.
(UUNET) common stock and options to purchase UUNET common stock,
respectively. The aggregate purchase price is estimated to be
approximately $2.1 billion. The Company anticipates that a substantial
portion of the purchase price will be allocated to intangible assets
including goodwill and expects to amortize those intangible assets over
periods of up to five years. The actual allocation of the purchase
price and determination of useful lives will be made after further
evaluation.
F-36
<PAGE> 41
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To UUNET Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of UUNET
Technologies, Inc. (a Delaware corporation) and Subsidiaries, as of December
31, 1994 and 1995, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of UUNET Technologies, Inc., and
Subsidiaries, as of December 31, 1994 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
January 31, 1996
F-37
<PAGE> 42
UUNET TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value amounts)
<TABLE>
<CAPTION>
December 31,
------------------
1994 1995
-------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................. $10,493 $ 60,424
Accounts receivable, net of allowance of $455 and $1,647, respectively, for
doubtful accounts.......................................................... 5,387 17,768
Inventories................................................................ 1,214 1,251
Prepaid expenses and other current assets.................................. 1,253 2,149
------- --------
Total current assets....................................................... 18,347 81,592
Property and equipment, net................................................ 11,080 54,523
Investments in affiliates.................................................. - 1,321
Other assets............................................................... 198 174
------- --------
Total assets............................................................... $29,625 $137,610
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable........................................... $ 1,060 $ 4,652
Accounts payable........................................................... 4,876 10,580
Accrued expenses........................................................... 4,826 24,604
Deferred revenues.......................................................... 3,315 3,421
------- --------
Total current liabilities.................................................. 14,077 43,257
Notes payable, net of current portion...................................... 1,196 13,686
------- --------
Total liabilities.......................................................... 15,273 56,943
------- --------
Commitments and contingencies (Notes 6 and 9)
Redeemable Convertible Preferred Stock, $.001 par value; (Notes 1 and 4):
Series A, B, C, D and E, 20,000 shares authorized; 11,150 shares issued
and outstanding as of December 31, 1994.................................... 14,073 -
------- --------
Stockholders' equity (Notes 1 and 5):
Preferred Stock, $.001 par value; 500 shares authorized as of December
31, 1995; none issued or outstanding....................................... - -
Common Stock, $.001 par value; 50,000 shares authorized as of
December 31, 1995; 10,393 and 32,057 shares issued and outstanding
as of December 31, 1994 and 1995, respectively............................. 10 32
Additional paid-in capital................................................. 9,584 108,071
Deferred compensation...................................................... (207) (165)
Notes receivable from officers and stockholders (Note 5)................... (113) -
Foreign currency translation adjustment.................................... 301 282
Accumulated deficit........................................................ (9,296) (27,553)
------- --------
Total stockholders' equity................................................. 279 80,667
------- --------
Total liabilities and stockholders' equity................................. $29,625 $137,610
======= ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-38
<PAGE> 43
UUNET TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1993 1994 1995
--------- --------- ----------
<S> <C> <C> <C>
Revenues:
Internet services......................................... $ 10,039 $ 16,860 $ 71,521
Software.................................................. 13,980 16,278 22,940
-------- -------- ---------
Total revenues............................................ 24,019 33,138 94,461
-------- -------- ---------
Costs and expenses:
Cost of revenues-
Internet services......................................... 6,452 10,262 46,393
Software.................................................. 7,240 9,369 12,946
Network operations and support............................ 3,850 6,764 13,127
Sales and marketing....................................... 5,558 9,681 18,762
General and administrative................................ 2,248 5,288 12,709
Acquisition expense....................................... - - 11,067
-------- -------- ---------
Total costs and expenses.................................. 25,348 41,364 115,004
-------- -------- ---------
Loss from operations...................................... (1,329) (8,226) (20,543)
Interest income........................................... 36 440 2,747
Interest expense.......................................... (103) (76) (808)
Equity in net loss of affiliates.......................... - - (127)
Loss on sale of investment in related party (Note 7)...... (433) - -
-------- -------- ---------
Loss before income taxes.................................. (1,829) (7,862) (18,731)
Benefit (provision) for income taxes (Note 10)............ (197) (126) 474
-------- -------- ---------
Net loss.................................................. $ (2,026) $ (7,988) $ (18,257)
======== ======== =========
Unaudited pro forma data (Note 1):
Pro forma net loss per common and equivalent share........ $ (0.35) $ (0.63)
Shares used in computing pro forma net loss per common and
equivalent share.......................................... 22,946 28,987
</TABLE>
The accompanying notes are an integral part of these statements.
F-39
<PAGE> 44
UUNET TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Stockholders' Equity
-------------------------
Redeemable
Convertible
Preferred Stock Common Stock Additional
------------------- ------------- Paid-in
Shares Amount Shares Amount Capital
----------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1992, AS PREVIOUSLY REPORTED............................ 100 $ 200 5,100 $ 5 $-
Adjustment for pooling of interests with Unipalm (Note 1)..................... 200 314 2,205 2 1,061
------- ------- ------ ------ ---------
BALANCE, DECEMBER 31, 1992, AS RESTATED....................................... 300 514 7,305 7 1,061
Issuance of Series A Preferred Stock, net of issuance costs of $24, together
with warrants to purchase Series B Preferred Stock ........................... 4,119 2,476 - - -
Redemption of Unipalm Preferred Stock......................................... (200) (314) - - -
Foreign currency translation adjustment....................................... - - - - -
Unipalm fiscal year conversion (Note 1)....................................... - - - - -
Net loss...................................................................... - - - - -
------- ------- ------ ------ ---------
BALANCE, DECEMBER 31, 1993, AS RESTATED....................................... 4,219 2,676 7,305 7 1,061
Issuance of Series B Preferred Stock, net of issuance costs of $15............ 3,300 3,285 - - -
Issuance of Series C Preferred Stock, net of issuance costs of $58............ 3,631 8,112 - - -
Exercise of stock options and stock purchase rights........................... - - 2,170 2 320
Deferred compensation......................................................... - - - - 208
Amortization of deferred compensation......................................... - - - - -
Sale of Common Stock in connection with an initial public offering by Unipalm,
net of issuance costs of $880 (Note 1)........................................ - - 918 1 7,995
Foreign currency translation adjustment....................................... - - - - -
Dividends distributed by Unipalm.............................................. - - - - -
Net loss...................................................................... - - - - -
------- ------- ------ ------ ---------
BALANCE, DECEMBER 31, 1994, AS RESTATED....................................... 11,150 14,073 10,393 10 9,584
Issuance of Series D Preferred Stock, net of issuance costs of $45, together
with warrant to purchase Series E Preferred Stock............................. 1,664 3,849 - - -
Issuance of Series E Preferred Stock.......................................... 2,500 12,500 - - -
Sale of Common Stock in connection with an initial public offering, net of
issuance costs of $6,576...................................................... - - 5,309 5 67,742
Conversion of Preferred Stock in connection with an initial public offering... (15,314) (30,422) 15,314 15 30,407
Exercise of stock options and stock purchase rights........................... - - 889 1 338
Issuance of Common Stock for Unipalm outstanding options (Note 1)............. - - 152 1 -
Amortization of deferred compensation......................................... - - - - -
Repayment of notes receivable................................................. - - - - -
Foreign currency translation adjustment....................................... - - - - -
Net loss...................................................................... - - - - -
------- ------- ------ ------ ---------
BALANCE, DECEMBER 31, 1995.................................................... - $- 32,057 $32 $108,071
======= ======= ====== ====== =========
<CAPTION>
Stockholders' Equity
---------------------------------------------------
Notes
Receivable
from Foreign Retained
Officers Currency Earnings
Deferred and Translation (Accumulated
Compensation Stockholders Adjustment Deficit)
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1992, AS PREVIOUSLY REPORTED........................... $ - $ - $ - $ 582
Adjustment for pooling of interests with Unipalm (Note 1).................... - - 255 392
----------- ----------- ---------- -----------
BALANCE, DECEMBER 31, 1992, AS RESTATED...................................... - - 255 974
Issuance of Series A Preferred Stock, net of issuance costs of $24, together
with warrants to purchase Series B Preferred Stock .......................... - - - -
Redemption of Unipalm Preferred Stock........................................ - - - -
Foreign currency translation adjustment...................................... - - (342) -
Unipalm fiscal year conversion (Note 1)...................................... - - - (127)
Net loss..................................................................... - - - (2,026)
----------- ----------- ---------- -----------
BALANCE, DECEMBER 31, 1993, AS RESTATED...................................... - - (87) (1,179)
Issuance of Series B Preferred Stock, net of issuance costs of $15........... - - - -
Issuance of Series C Preferred Stock, net of issuance costs of $58........... - - - -
Exercise of stock options and stock purchase rights.......................... - (113) - -
Deferred compensation........................................................ (208) - - -
Amortization of deferred compensation........................................ 1 - - -
Sale of Common Stock in connection with an initial public offering by Unipalm
net of issuance costs of $880 (Note 1)....................................... - - - -
Foreign currency translation adjustment...................................... - - 388 -
Dividends distributed by Unipalm............................................. - - - (129)
Net loss..................................................................... - - - (7,988)
----------- ----------- ---------- -----------
BALANCE, DECEMBER 31, 1994, AS RESTATED...................................... (207) (113) 301 (9,296)
Issuance of Series D Preferred Stock, net of issuance costs of $45, together
with warrant to purchase Series E Preferred Stock............................ - - - -
Issuance of Series E Preferred Stock......................................... - - - -
Sale of Common Stock in connection with an initial public offering, net of
issuance costs of $6,576..................................................... - - - -
Conversion of Preferred Stock in connection with an initial public offering.. - - - -
Exercise of stock options and stock purchase rights.......................... - - - -
Issuance of Common Stock for Unipalm outstanding options (Note 1)............ - - - -
Amortization of deferred compensation........................................ 42 - - -
Repayment of notes receivable................................................ - 113 - -
Foreign currency translation adjustment...................................... - - (19) -
Net loss..................................................................... - - - (18,257)
----------- ----------- ---------- -----------
BALANCE, DECEMBER 31, 1995................................................... $(165) $- $282 $(27,553)
=========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-40
<PAGE> 45
UUNET TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1993 1994 1995
--------- --------- ----------
<S> <C>
Cash flows from operating activities:
Net loss......................................................... $(2,026) $(7,988) $(18,257)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities-
Unipalm fiscal year conversion................................... (127) - -
Depreciation and amortization.................................... 1,209 2,151 8,322
Stock option compensation........................................ - 1 42
Write-off of property and equipment.............................. 350 582 1,846
Loss on sale of investment in related party...................... 433 - -
Equity in net loss of affiliates................................. - - 127
Cash provided by (used in) changes in assets and liabilities:
Accounts receivable, net......................................... (58) (2,333) (12,430)
Inventories...................................................... (90) (414) (39)
Prepaid expenses and other current assets........................ (294) (515) (906)
Accounts payable................................................. 1,042 2,124 5,741
Accrued expenses................................................. 745 2,862 19,875
Deferred revenues................................................ 304 2,312 111
-------- -------- ---------
Net cash provided by (used in) operating activities.............. 1,488 (1,218) 4,432
-------- -------- ---------
Cash flows from investing activities:
Purchases of property and equipment.............................. (3,121) (9,394) (53,654)
Repayments of notes receivable from officers and stockholders.... - - 113
Investments in affiliates........................................ (15) - (1,462)
Advances to related party........................................ (266) - -
Repayments from related party.................................... 475 - -
-------- -------- ---------
Net cash used in investing activities............................ (2,927) (9,394) (55,003)
-------- -------- ---------
Cash flows from financing activities:
Proceeds from notes payable...................................... 435 1,302 20,766
Repayments of notes payable...................................... (683) (740) (4,641)
Proceeds from sale of Preferred Stock, net....................... 2,476 11,397 16,349
Proceeds from sale of Common Stock, net.......................... - 8,205 68,087
Redemption of shares............................................. (314) - -
Dividends distributed by Unipalm................................. - (129) -
-------- -------- ---------
Net cash provided by financing activities........................ 1,914 20,035 100,561
-------- -------- ---------
Effect of foreign currency exchange rate changes on cash and cash
equivalents...................................................... 197 213 (59)
-------- -------- ---------
Net increase in cash and cash equivalents........................ 672 9,636 49,931
Cash and cash equivalents, beginning of period................... 185 857 10,493
-------- -------- ---------
Cash and cash equivalents, end of period......................... $ 857 $10,493 $ 60,424
======== ======== =========
Supplemental disclosure of cash flow information:
Cash paid for interest........................................... $196 $121 $718
Cash paid for income taxes....................................... 250 202 41
Supplemental disclosure of noncash financing activities:
Stockholder notes received for shares of Common Stock............ - 113 -
</TABLE>
The accompanying notes are an integral part of these statements.
F-41
<PAGE> 46
UUNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES:
Organization and Operations
UUNET Technologies, Inc. ("UUNET") was incorporated in the state of Delaware
in 1990. UUNET and its wholly-owned subsidiaries are collectively referred to
herein as the "Company." The Company is a leading worldwide provider of a
comprehensive range of Internet access options, applications, and consulting
services to businesses, professionals and on-line services providers. The
Company's Internet access options provide dedicated and dial-up Internet
access. Other applications and services include Web server hosting and
integration services, client software and security products, training, and
network integration and consulting services. In addition, the Company
developed, operates and maintains the high speed dial-up network for Microsoft
Corporation ("Microsoft").
The Company has incurred cumulative losses of approximately $28.3 million
during the three-year period ended December 31, 1995. The Company's operations
are subject to certain risks and uncertainties including, among others, actual
and potential competition by entities with greater financial resources,
experience and market presence than the Company, risks associated with
consolidation in the industry, risks associated with acquisitions and
international expansion, the need to manage growth and expansion, certain
technology and regulatory risks, and dependence upon sole and limited source
suppliers. See "Risk Factors" elsewhere in this Prospectus.
Acquisition of Unipalm
On November 15, 1995, UUNET acquired Unipalm Group plc ("Unipalm"), a
provider of Internet access options, networking software, training and
consulting services in the United Kingdom and Europe. Under the terms of the
tender offer made by UUNET, Unipalm shareholders received 0.1543 of a share of
UUNET Common Stock for each Unipalm share. Each holder of a Unipalm option
received 0.1543 of a share of UUNET Common Stock for each option, after taking
into account the fair market value of such options. Accordingly, UUNET issued
3,338,009 shares of its Common Stock for all of the outstanding shares of
Unipalm stock and options to acquire shares of Unipalm stock, and paid cash for
fractional shares. The acquisition was accounted for as a pooling of interests
and, as such, UUNET's financial statements have been restated to include the
results of Unipalm for all periods presented.
Combined and separate results of UUNET and Unipalm during the periods
preceding the acquisition are as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended Nine Months
December 31, Ended
------------------- September 30,
1993 1994 1995
--------- --------- -------------
(Unaudited)
<S> <C> <C> <C>
Revenues:
Previously reported... $ 7,895 $12,414 $33,394
Unipalm............... 16,124 20,724 27,260
------- ------- -------
Total................. $24,019 $33,138 $60,654
------- ------- -------
Net income (loss):
Previously reported... $(2,244) $(6,949) $ (750)
Unipalm............... 218 (1,039) (5,641)
------- ------- -------
Total................. $(2,026) $(7,988) $(6,391)
======= ======= =======
</TABLE>
F-42
<PAGE> 47
UUNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES-(Continued):
Unipalm previously had an April 30 fiscal year-end. In order to conform
Unipalm's fiscal year-end to UUNET's calendar year-end, the statement of
operations for Unipalm for its fiscal year ended April 30, 1994 has been
combined with UUNET's statement of operations for its year ended December 31,
1993. The consolidated statement of operations for the year ended December 31,
1993 includes four months (January 1, 1994 through April 30, 1994) which are
also included in the consolidated statement of operations for the year ended
December 31, 1994. Accordingly, an adjustment has been made in the year ended
December 31, 1993 to retained earnings for the duplication of net income of
$127,000 for such four month period. Revenues of Unipalm for that four-month
period were approximately $6.1 million.
In connection with the acquisition, the Company recorded one-time charges in
the fourth quarter of 1995 for acquisition-related costs of $11.1 million.
These costs consisted primarily of investment banking and professional fees,
and direct costs necessary to complete the transaction, including taxes and
printing and mailing costs.
Investments in Affiliates
The following summarizes the Company's investments in various international
Internet access and related services providers (in thousands):
<TABLE>
<CAPTION>
December 31,
------------
1994 1995
----- ------
<S> <C>
Accounted for by the equity method... $ - $ 484
Accounted for by the cost method..... - 837
----- ------
Total................................ $ - $1,321
===== ======
</TABLE>
Subsequent to year end, UUNET acquired a 40% interest in the outstanding
capital of EUnet Deutschland GmbH ("EUnet Germany"), a provider of Internet
access options, applications and consulting services in Germany, for $1.6
million.
In January 1996, UUNET and UUNET Canada, Inc. ("UUNET Canada") entered into a
letter of intent providing for an increase in UUNET's equity ownership of UUNET
Canada from 20% to 51%. On April 1, 1996, UUNET paid $3,585,329 in cash and
issued 27,079 shares of Common Stock for the additional 31 percent interest in
UUNET Canada.
Initial Public Offerings
In May 1995, UUNET completed an initial public offering of 5,433,750 shares
of Common Stock at a price per share of $14.00, of which 5,308,750 shares were
sold by UUNET and 125,000 shares were sold by a selling stockholder. After the
underwriting discounts, commissions and other expenses, net proceeds to UUNET
from the initial public offering were approximately $67.7 million. Upon the
closing of the initial public offering, all outstanding shares of Redeemable
Convertible Preferred Stock, including those shares issued in connection with
warrants for the purchase of 2,500,000 shares of Series E Preferred Stock
exercised immediately prior to the closing of the initial public offering,
automatically converted into Common Stock.
In March 1994, Unipalm completed an initial public offering, with net
proceeds of approximately $8.0 million.
F-43
<PAGE> 48
UUNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES-(Continued):
Summary of Significant Accounting Policies
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of revenues and expenses during the reporting
periods and reported amounts of assets and liabilities at the date of the
financial statements.
Principles of Consolidation
The consolidated financial statements include the accounts of UUNET and all
majority-owned subsidiaries. All material intercompany balances and
transactions have been eliminated. Investments in affiliated companies owned
20% or more are accounted for using the equity method, while investments in
companies owned less than 20% are accounted for using the cost method.
Pro Forma Net Loss Per Common and Equivalent Share
Pro forma net loss per common and equivalent share is based on the weighted
average number of shares outstanding during the periods presented. Pursuant to
the Securities and Exchange Commission Staff Accounting Bulletin No. 83, all
shares, options and warrants issued during the twelve months immediately
preceding the initial public offering were treated as if they had been
outstanding through March 31, 1995, using the treasury stock method and at a
per share price of $14.00, the initial public offering price. Subsequent to
March 31, 1995, the effects of warrants and options have not been considered
because the effect would be antidilutive.
Earnings per share data prior to 1994 has been omitted because the automatic
conversion of the Redeemable Preferred Stock into Common Stock materially
changed UUNET's capitalization. Fully-diluted loss per share is not presented
as it would not materially differ from primary loss per share.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity
of three months or less to be cash equivalents. Cash equivalents as of December
31, 1994 consisted of U.S. Treasury Bills totaling approximately $3.0 million.
Cash equivalents as of December 31, 1995 consisted of short-term commercial
paper totaling approximately $8.7 million. As of December 31, 1994 and 1995,
the fair value of these securities approximated cost.
Concentrations of Cash and Accounts Receivable
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash, cash equivalents and accounts
receivable. As of December 31, 1994, the Company had concentrations of cash in
two banks in the form of demand deposits and money market accounts, totaling
approximately $1.2 million at one bank and $5.8 million at the other bank. As
of December 31, 1995, the Company had concentrations of cash in a financial
institution money market fund of approximately $47.8 million and short-term
commercial paper of approximately $8.7 million. Also as of December 31, 1995,
UUNET had approximately $6.4 million in accounts receivable from Microsoft (see
Note 2). The Company believes that concentrations of credit risk with respect
to the remaining balance in accounts receivable are limited due to the large
number of entities comprising the Company's customer base. The Company
maintains an allowance for doubtful accounts for accounts receivable based upon
factors surrounding the credit risk of specific customers, historical trends
and other information.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market,
and consist primarily of third party packaged software for resale.
F-44
<PAGE> 49
UUNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES-(Continued):
Property and Equipment
Property and equipment are recorded at cost. Depreciation, including
depreciation of assets acquired under capital lease agreements, is recorded on
a straight-line basis for financial reporting purposes. Property and equipment
consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------ Useful Lives
1994 1995 (In Years)
-------- --------- ------------
<S> <C> <C> <C>
Network and computer equipment.... $11,480 $58,244 4 - 5
Furniture and office equipment.... 1,743 6,899 4 - 10
Purchased software................ 1,357 1,908 3 - 4
Vehicles.......................... 693 1,029 4
------- -------
Property and equipment, at cost... 15,273 68,080
Less-Accumulated depreciation..... (4,193) (13,557)
------- -------
Property and equipment, net....... $11,080 $54,523
======= =======
</TABLE>
The Company leases certain vehicles and computer equipment under
noncancelable capital leases. Total cost of equipment capitalized under capital
leases as of December 31, 1994 and 1995 was approximately $1,398,000 and
$5,220,000, respectively, while related accumulated depreciation was
approximately $405,000 and $1,478,000, respectively.
Accrued Expenses
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------
1994 1995
------ -------
<S> <C>
Network costs............... $ 912 $10,501
Acquisition expenses........ - 7,377
Compensation and benefits... 2,009 3,407
Professional fees........... 467 820
Other....................... 1,438 2,499
------ -------
Total....................... $4,826 $24,604
====== =======
</TABLE>
Foreign Currency Translation
Assets and liabilities of foreign subsidiaries are translated at the exchange
rate in effect at each year-end. Statements of operations accounts are
translated at the average rate of exchange during the year. Translation
adjustments arising from differences in exchange rates from period to period
are included in the foreign currency translation adjustment account in
stockholders' equity. Gains and losses from transactions denominated in a
foreign currency are included in operations currently.
Revenue Recognition
Internet services revenues consist primarily of monthly service fees,
equipment sales and installation charges. Service fees consist of fixed monthly
amounts and/or hourly amounts based on usage and are recognized as the service
is provided. Payments received in advance of providing services are deferred
until the period such services are provided. Equipment sales and installation
charges are recognized when installation is completed.
F-45
<PAGE> 50
UUNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES-(Continued):
Revenues under network agreements (Note 2) are included in Internet services
revenues and are recognized as costs are incurred plus the applicable fees
earned. Adjustments to fees provided as incentives under contract provisions
and estimated losses on contracts, if any, are recorded when such adjustments
or losses are known.
Software revenues consist primarily of the sale of packaged third party
software. The Company recognizes revenue on software product sales at the time
of delivery of the software, provided no significant future vendor obligations
exist. Customer support fees are deferred and recognized ratably over the
period of the service obligation.
Cost of Revenues
Internet services cost of revenues consists primarily of network
telecommunication costs, depreciation of network equipment, and the cost of
equipment and other products sold to customers. Software cost of revenues
consists primarily of packaged third party software costs.
Network Operations and Support
Network operations and support expenses consists primarily of the costs of
operating and monitoring the network and providing technical support to
customers.
Recent Pronouncement
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," which is effective for the Company's December 31, 1996 financial
statements. SFAS No. 123 allows companies to either account for stock-based
compensation under the new provisions of SFAS No. 123 or under the provisions
of APB 25, but requires pro forma disclosure in the footnotes to the financial
statements as if the measurement provisions of SFAS 123 had been adopted. The
Company intends to continue accounting for its stock-based compensation in
accordance with the provisions of APB 25. As such, the adoption of SFAS No. 123
will not impact the financial position or the results of operations of the
Company.
2. NETWORK AGREEMENTS:
In December 1994, UUNET and Microsoft entered into a binding Memorandum of
Understanding, which was formalized into a definitive agreement (the "Microsoft
Agreement") in March 1995, 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 constructing,
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. In March 1995 and as
part of this strategic relationship, Microsoft purchased 1,664,000 shares of
Series D Preferred Stock at $2.34 per share and in May 1995 exercised warrants
to purchase 2.5 million shares of Series E Preferred Stock at $5.00 per share
(Notes 4 and 5). Upon closing of the initial public offering, Microsoft's
Preferred Stock was converted into 4,164,000 shares of Common Stock. UUNET also
entered into a $26.0 million loan agreement (Note 3) with Microsoft, which
allows UUNET to borrow funds to finance the purchase of equipment for the
construction of the Dial-Up Network. 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 from network services relating to the Dial-Up Network
represented 20.4% of total revenues for the year ended December 31, 1995.
F-46
<PAGE> 51
UUNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
3. BORROWING ARRANGEMENTS:
In December 1994, UUNET entered into a Credit Agreement with a bank to
provide for a $500,000 working capital line of credit ("Working Capital
Facility"), a $1,000,000 term facility ("Term Facility") and a $3,500,000
equipment facility ("Equipment Facility"). No amounts had been borrowed under
the Working Capital Facility, which expired in August 1995. The Term Facility
and Equipment Facility accrued interest at the bank's prime rate plus 1.75%
(10.5% at December 31, 1994). As of December 31, 1994, UUNET had borrowed the
$1,000,000 available under the Term Facility, which was repaid in June 1995.
During 1995, UUNET borrowed approximately $2,500,000 under the Equipment
Facility, all of which was repaid in June 1995. The Term Facility and Equipment
Facility expired in 1995.
UUNET had notes payable to a related party (Note 7) that were due in monthly
installments through December 1995. Interest was fixed at rates of 8% or 10%,
and the notes were secured by specified network computer equipment of UUNET.
The notes were repaid in full in April 1995. Interest expense on these notes
was approximately $58,000, $33,000 and $4,000 in 1993, 1994 and 1995,
respectively. UUNET also had a note payable to a stockholder ($59,000 at
December 31, 1993) that was due and repaid in full in September 1994. Interest
accrued at 8% annually.
In connection with the Microsoft Agreement, UUNET obtained a $26.0 million
equipment loan facility from Microsoft to finance equipment purchases in
conjunction with the construction of the Dial-Up Network. Principal and
interest, at the higher of the Applicable Federal Rate ("AFR") in effect on the
date of the Microsoft Agreement (7.74%) or the AFR in effect at the time of the
advance (5.79% as of December 31, 1995), are payable on each advance quarterly
over five years. Borrowings under the agreement are collateralized by the
equipment purchased. The carrying amount of the equipment loan facility as of
December 31, 1995 approximated fair market value. As of December 31, 1995,
$10,501,000 was available for future advances under this facility.
Notes payable outstanding consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------
1994 1995
-------- --------
<S> <C>
Note payable to Microsoft.......... $- $14,595
Notes payable to banks............. 1,000 -
Notes payable to related parties... 199 -
Capital leases..................... 1,057 3,743
------ -------
Total obligations.................. 2,256 18,338
Less: Current portion.............. (1,060) (4,652)
------ -------
Long-term obligations.............. $1,196 $13,686
====== =======
</TABLE>
Aggregate future principal payments on notes payable and future minimum lease
payments under capital leases as of December 31, 1995, are as follows (in
thousands):
<TABLE>
<CAPTION>
Years Ending Capital
December 31, Notes Leases Total
- ------------------------------------- ------- ------- --------
<S> <C>
1996................................. $3,100 $1,833 $4,933
1997................................. 3,100 1,630 4,730
1998................................. 3,100 550 3,650
1999................................. 3,100 86 3,186
2000................................. 2,195 - 2,195
------- ------ -------
14,595 4,099 18,694
Less: Amount representing interest... - (356) (356)
------- ------ -------
Total................................ $14,595 $3,743 $18,338
======= ====== =======
</TABLE>
F-47
<PAGE> 52
UUNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
4. REDEEMABLE CONVERTIBLE PREFERRED STOCK:
Redeemable Convertible Preferred Stock consists of the following (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
December 31,
----------------------------
1994 1995
-------------- -------------
Shares Amount Shares Amount
------ ------- ------ ------
<S> <C> <C> <C> <C>
Series A Preferred Stock, $.001 par value; 4,219 shares desig-
nated and authorized as Series A; preference in liquidation of
$0.64 per share, $2,700 in the aggregate...................... 4,219 $ 2,676 - $ -
Series B Preferred Stock, $.001 par value; 3,300 shares desig-
nated and authorized as Series B; preference in liquidation of
$1.00 per share, $3,300 in the aggregate...................... 3,300 3,285 - -
Series C Preferred Stock, $.001 par value; 4,000 shares desig-
nated and authorized as Series C; preference in liquidation of
$2.25 per share, $8,170 in the aggregate...................... 3,631 8,112 - -
Series D Preferred Stock, $.001 par value, 1,664 shares desig-
nated and authorized as Series D; preference in liquidation of
$2.34 per share............................................... - - - -
Series E Preferred Stock, $.001 par value, 2,500 shares desig-
nated and authorized as Series E; preference in liquidation of
$5.00 per share............................................... - - - -
------ ------- ----- -----
Total......................................................... 11,150 $14,073 - $ -
====== ======= ===== =====
</TABLE>
Preferred Stock Warrants
In connection with the sale of Series A Preferred Stock in 1993, UUNET issued
warrants for the purchase of 3,300,000 shares of Series B Preferred Stock at an
exercise price of $1.00 per share. These warrants were exercised during 1994,
which resulted in gross proceeds of $3,300,000 to UUNET.
As part of its strategic relationship with Microsoft, UUNET issued warrants
to Microsoft for the purchase of 2,500,000 shares of Series E Preferred Stock
in March 1995, at an exercise price of $5.00 per share. These warrants were
exercised in May 1995, which resulted in gross proceeds of $12.5 million to
UUNET.
5. STOCKHOLDERS' EQUITY:
Microsoft has agreed that it will not directly or indirectly, except in
connection with any exercise of its right of first refusal, acquire shares of
Common Stock which when combined with its holdings, would result in Microsoft
owning greater than 18.11% of the then outstanding shares of Common Stock.
Microsoft also has agreed that it will not (i) enter into any voting agreement
or voting trust in connection with UUNET securities, (ii) form, or participate
in the formation of, any legal entity for the purpose of acquiring, voting or
disposing of UUNET securities, or (iii) act in concert with any person or
entity for the purpose of acquiring, holding, voting or disposing of UUNET
securities if by so acting Microsoft or such other person would be required to
file a Schedule 13D or 13G with the Securities and Exchange Commission or to
amend a previously filed Schedule 13D or 13G. UUNET has granted Microsoft a
right of first refusal and a right of first offer with respect to certain
acquisitions of more than 50 percent of the stock or assets of UUNET that may
be proposed in the future.
F-48
<PAGE> 53
UUNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
5. STOCKHOLDERS' EQUITY-(Continued):
Increase in Authorized Shares
On January 31, 1996, the stockholders of UUNET at a Special Meeting of
Stockholders approved the increase in the authorized shares of Common Stock to
175,000,000, and UUNET filed a Certificate of Amendment to Restated Certificate
of Incorporation effecting such increase.
Notes Receivable from Employees for Stock Purchases
During 1994, certain employees of UUNET signed promissory notes in favor of
UUNET in conjunction with the purchase of stock under the terms and conditions
of UUNET's Incentive Stock Plan. The loans accrued interest at 8% annually and
were repaid during 1995.
Incentive Stock and Equity Incentive Plans
UUNET's Incentive Stock Plan (the "Option Plan") was adopted in 1990 and was
terminated on May 25, 1995. Under the Option Plan, the Board of Directors of
UUNET had the authority to grant incentive stock options, nonqualified stock
options and stock purchase rights at their discretion. Options granted under
the Option Plan are exercisable for periods up to ten years from the date of
grant. All options outstanding on the date of the Option Plan termination
remained exercisable in accordance with their terms.
In 1995, UUNET adopted an Equity Incentive Plan (the "Incentive Plan"), which
provides for the grant of options, restricted stock, stock purchase rights and
performance shares to employees of the Company. Incentive stock options and
nonqualified stock options may be granted under the Incentive Plan at exercise
prices of 100% and at least 85%, respectively, of the fair market value of
Common Stock at the date of grant. Restricted stock awards consist of shares of
Common Stock with transfer restrictions that lapse over a period not to exceed
ten years. Stock purchase rights provide for the purchase of shares of Common
Stock at a price of at least 85% of the Common Stock's fair market value. These
stock purchase rights are generally exercisable for a period of 30 days after
the date of grant. Performance awards of shares of Common Stock may be granted
for attainment of performance criteria determined by the Board of Directors of
UUNET. A total of 2,669,514 shares of Common Stock were reserved for issuance
under the Incentive Plan and the Option Plan. Any shares not issued or reserved
under the Option Plan become available for issuance under the Incentive Plan.
On January 31, 1996, the stockholders of UUNET at a Special Meeting of
Stockholders approved an increase in the number of shares reserved for issuance
under the Incentive Plan to 6,669,514.
The following table summarizes all option and purchase right activity under
the Option Plan and the Incentive Plan for the three years ended December 31,
1995:
<TABLE>
<CAPTION>
Number of Exercise Price
Shares Per Share
------------ --------------
<S> <C> <C>
Outstanding as of December 31, 1992... 350,000 $ 1.00
Granted............................... 175,000 1.00
----------- ------------
Outstanding as of December 31, 1993... 525,000 1.00
Granted............................... 4,680,450 0.05-$ 0.25
Exercised............................. (2,110,950) 0.05- 0.25
Canceled.............................. (1,160,042) 0.05- 0.16
----------- ------------
Outstanding as of December 31, 1994... 1,934,458 0.05- 1.00
Granted............................... 991,150 5.00- 75.00
Exercised............................. (862,661) 0.05- 1.00
Canceled.............................. (86,783) 0.05- 45.00
----------- ------------
Outstanding as of December 31, 1995... 1,976,164 $0.05-$75.00
=========== ============
</TABLE>
F-49
<PAGE> 54
UUNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
5. STOCKHOLDERS' EQUITY-(Continued):
As of December 31, 1994 and 1995, options to purchase 771,049 and 383,751
shares, respectively, were exercisable.
Compensation equal to the difference between the assumed fair value of Common
Stock at the grant date and the exercise price of the options, if any, is
recognized ratably over the vesting period. Compensation expense related to
options granted in 1994 is approximately $207,000 and will be recognized over
the vesting period, which is generally five years. Compensation expense
relating to stock options was $1,000 in 1994 and $42,000 in 1995.
Prior to the acquisition, Unipalm maintained its own stock option plan. Stock
options granted under the Unipalm plan were 194,078 and 39,347 in 1994 and
1995, respectively. The statement of stockholders' equity reflects the exercise
of vested options of 36,862 and 26,089 in 1994 and 1995, respectively. All
remaining Unipalm options outstanding at the time of the acquisition were
exchanged for UUNET Common Stock.
1995 Performance Option Plan
In 1995, UUNET adopted the 1995 Performance Option Plan (the "Performance
Plan") that provides for grants of nonqualified stock options to purchase
shares of Common Stock to employees of UUNET. Options to purchase 161,180
shares of Common Stock at an exercise price of $6.00 per share were granted in
February 1995, of which options to purchase 17,600 shares were canceled as of
December 31, 1995. Options granted under the Performance Plan were exercisable
on December 31, 2004, subject to acceleration provisions if the Company met
performance goals specified in the Performance Plan. Such performance goals
were achieved in 1995, resulting in the acceleration of vesting of the options
outstanding under the Performance Plan to March 31, 1996.
Employee Stock Purchase Plan
In 1995, UUNET adopted the Employee Stock Purchase Plan (the "Purchase Plan")
to permit employees of UUNET to purchase Common Stock at a price equal to 85%
of the lesser of the fair market value at the beginning or end of the
enrollment period as defined by the Purchase Plan. The first enrollment period
begins in February 1996.
Nonemployee Directors Stock Option Plan
In 1995, UUNET adopted the Nonemployee Directors Stock Option Plan (the
"Directors Plan") to grant nonqualified stock options to directors of UUNET who
are not employees. Eligible nonemployee directors will be granted an option to
purchase 7,500 shares of Common Stock on the day of their election, re-election
or appointment. The exercise price of all options will be equal to the fair
market value of Common Stock on the grant date. The options will vest ratably
over a three-year period. As of December 31, 1995, no options had been granted
under the Directors Plan.
Reserved Shares
The Company has reserved 6,843,565 shares of Common Stock for issuance
pursuant to stock plans as of January 31, 1996.
F-50
<PAGE> 55
UUNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
6. COMMITMENTS AND CONTINGENCIES:
Telecommunications Lines
The Company has guaranteed monthly usage levels with various communications
vendors through January 2009. As of December 31, 1995, the annual commitments
(exclusive of usage discounts) were as follows (in thousands):
<TABLE>
<CAPTION>
Years Ending December 31, Amount
- ------------------------- --------
<S> <C>
1996..................... $ 37,448
1997..................... 31,407
1998..................... 30,002
1999..................... 22,780
2000..................... 10,638
Thereafter............... 10,464
--------
Total.................... $142,739
========
</TABLE>
Facilities Leases
The Company leases and subleases office space at various locations with
expiration dates through April 2001. In 1994, UUNET terminated its then
existing office lease in conjunction with the signing of a sublease agreement
and recorded approximately $330,000 for costs associated with lease termination
and idle equipment during the lease termination period. During 1995, the
Company recorded lease termination and idle equipment costs of approximately
$1.8 million classified as general and administrative expense in the
accompanying statements of operations as a result of consolidating
substantially all of Unipalm's operations into a new facility. Rent expense for
the years ended December 31, 1993, 1994 and 1995, including lease termination
and idle equipment costs, was approximately $828,000, $1,323,000 and
$3,361,000, respectively.
Future minimum annual lease payments under all operating lease and sublease
agreements as of December 31, 1995, were as follows (in thousands):
<TABLE>
<CAPTION>
Years Ending December 31, Amount
- ------------------------- ------
<S> <C>
1996..................... $2,599
1997..................... 2,361
1998..................... 2,382
1999..................... 1,248
2000..................... 1,109
Thereafter............... 284
------
Total.................... $9,983
======
</TABLE>
7. RELATED PARTY TRANSACTIONS:
In 1993, UUNET realized a loss of $433,000 on the disposition to a third
party of its investment in an affiliate. The investment in this affiliate
consisted of shares of common stock, capital contributions and loans totaling
$778,000. The disposition included agreements settling guarantees and
obligations of UUNET for the benefit of this affiliate.
F-51
<PAGE> 56
UUNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
7. RELATED PARTY TRANSACTIONS-(Continued):
At its inception, UUNET acquired the assets and liabilities of UUNET
Communications Services, Inc. ("UCS"). UUNET assumed all of the assets,
liabilities and customers of UCS in exchange for a note and a five- year
royalty agreement. The carrying amounts of the assets and liabilities assumed
were equal to the historical book value of UCS. The agreement required UUNET to
pay UCS a royalty equal to 4% of the gross revenue billed for certain services.
Royalty expense for the years ended December 31, 1993, 1994 and 1995, was
approximately $76,000, $99,000 and $55,000, respectively. In 1995, UUNET
entered into an agreement with UCS, whereby UUNET repaid all of its UCS debt
obligations and agreed upon and prepaid all of its royalty obligations to UCS.
8. SEGMENT AND GEOGRAPHIC INFORMATION:
The Company sells its products and services in several geographic regions.
Net revenues relating to each region are as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1993 1994 1995
-------- ------- -------
<S> <C>
United States... $7,984 $13,989 $59,305
Europe.......... 15,737 19,004 34,405
Other........... 298 145 751
------- ------- -------
$24,019 $33,138 $94,461
======= ======= =======
</TABLE>
A summary of net revenues, operating income (loss) and identifiable assets by
operating location is as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1993 1994 1995
--------- --------- ----------
<S> <C> <C> <C>
Net revenues:
United States............... $ 7,895 $12,414 $ 57,375
Europe...................... 16,124 20,724 37,086
------- ------- --------
Total net revenues.......... $24,019 $33,138 $ 94,461
======= ======= ========
Operating income (loss):
United States............... $(1,758) $(6,974) $(1,300)
Europe...................... 429 (1,252) (8,176)
Acquisition costs........... - - (11,067)
------- ------- --------
Total operating loss........ $(1,329) $(8,226) $(20,543)
======= ======= ========
Identifiable assets:
United States............... $ 3,645 $12,025 $118,385
Europe...................... 14,312 17,600 19,225
------- ------- --------
Total identifiable assets... $17,957 $29,625 $137,610
======= ======= ========
</TABLE>
Net revenues are categorized by the location of the office from which the
sales were generated, rather than the customer's geographic location.
F-52
<PAGE> 57
UUNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
9. EMPLOYEE RETIREMENT PLAN:
Effective January 1, 1995, UUNET adopted a 401(k) salary deferral plan (the
"401(k) Plan"). Employees of UUNET are eligible to participate in the 401(k)
Plan when they reach age 21 and have completed half of a year of service with
UUNET. The 401(k) Plan replaced a Simplified Employee Pension ("SEP") Plan,
which allowed UUNET to make discretionary contributions. Total expense related
to the SEP Plan was approximately $165,000 and $451,000 for the years ended
December 31, 1993 and 1994, respectively; no contribution was made during 1995.
UUNET matched 1% of contributions made by eligible employees in 1995 under the
401(k) Plan, which expense totaled $71,000 for the year ended December 31,
1995.
10. INCOME TAXES:
The Company records income taxes in accordance with SFAS 109, "Accounting for
Income Taxes." The adoption of SFAS 109 by UUNET on January 1, 1993, had no
effect on the consolidated financial position or results of operations for the
year ended December 31, 1993.
The components of the benefit (provision) for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1993 1994 1995
------- ------ -------
<S> <C> <C> <C>
Current:
Federal........................ $15 $ - $ -
State.......................... 2 - -
Foreign........................ (123) (242) 570
----- ----- ----
Total current.................. (106) (242) 570
----- ----- ----
Deferred:
Federal........................ - - -
State.......................... - - -
Foreign........................ (91) 116 (96)
----- ----- ----
Total deferred................. (91) 116 (96)
----- ----- ----
Total.......................... $(197) $(126) $474
===== ===== ====
</TABLE>
Significant components of the Company's deferred tax assets (liabilities) are
as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------
1994 1995
--------- ---------
<S> <C>
Net operating loss carryforwards................... $ 2,146 $ 5,547
Accruals not currently deductible for tax purposes. 1,753 2,351
Depreciation....................................... (646) (2,170)
Allowance for doubtful accounts.................... 76 446
------- -------
Gross deferred tax assets.......................... 3,329 6,174
Valuation allowance................................ (3,233) (6,174)
------- -------
Net deferred tax assets............................ $ 96 $ -
======= =======
</TABLE>
F-53
<PAGE> 58
UUNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
10. INCOME TAXES-(Continued):
A reconciliation between the Company's effective tax rate and the federal
income tax rate on loss from continuing operations is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Statutory federal income tax rate.............................. (34)% (34)% (34)%
State income taxes............................................. (4) (4) (4)
Difference in tax rates on consolidated foreign subsidiaries... (1) 1 2
Acquisition expense............................................ - - 18
Losses not benefited........................................... 47 34 16
Other.......................................................... 3 5 (1)
----- ---- ----
Effective income tax rate...................................... 11% 2% (3)%
===== ==== ====
</TABLE>
As of December 31, 1995, the Company had U.S. federal and foreign net
operating loss ("NOLs") of approximately $12,177,000 and $2,455,000,
respectively. The federal NOLs expire in years 2008 through 2010; foreign NOLs
may be utilized in future years to the extent of foreign income. The amount of
federal NOLs available to be used in any given year may be limited in the event
of significant changes in the ownership of UUNET. Management believes that the
prior ownership changes will not significantly limit the Company's ability to
use its NOLs. The Company has fully reserved its deferred tax assets as of
December 31, 1995.
F-54
<PAGE> 59
UUNET TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -------------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Internet services $ 54,026 $ 13,655 $ 93,030 $ 22,470
Software 2,993 6,350 7,002 12,555
--------- --------- --------- ---------
Total revenues 57,019 20,005 100,032 35,025
--------- --------- --------- ---------
Costs and expenses:
Cost of revenues-
Internet services 34,507 8,316 59,569 12,806
Software 1,862 3,336 4,253 6,893
Network operations and support 6,701 3,384 11,966 5,699
Sales and marketing 9,238 4,126 16,036 7,336
General and administrative 3,275 3,111 6,401 4,950
--------- --------- --------- ---------
Total costs and expenses 55,583 22,273 98,225 37,684
--------- --------- --------- ---------
Income (loss) from operations 1,436 (2,268) 1,807 (2,659)
Interest income 368 433 945 627
Interest expense (453) (141) (782) (224)
Equity in net loss of affiliates (540) --- (926) ---
Minority interest 356 --- 356 ---
Other (100) --- (100) ---
--------- --------- --------- ---------
Income (loss) before income taxes 1,067 (1,976) 1,300 (2,256)
Benefit for income taxes --- 122 --- 139
--------- --------- --------- ---------
Net income (loss) $1,067 $(1,854) $1,300 ($2,117)
========= ========= ========== ==========
Pro forma net income (loss) per common
and equivalent share $0.03 $(0.07) $0.04 ($0.08)
========= ========= ========== ==========
Shares used in computing pro forma net income
(loss) per common and equivalent share 33,863 26,788 33,580 26,281
========= ========= ========== ==========
</TABLE>
F-55
<PAGE> 60
UUNET TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value amounts)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 31,781 $ 60,424
Accounts receivable, net 31,575 17,768
Inventories 1,758 1,251
Prepaid expenses and other current assets 4,281 2,149
-------- --------
Total current assets 69,395 81,592
Property and equipment, net 94,436 54,523
Investments in affiliates 6,493 1,321
Other assets 3,180 174
-------- --------
$173,504 $137,610
======== ========
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Current portion of notes payable $ 8,025 $ 4,652
Accounts payable 23,357 10,580
Accrued expenses 26,505 24,604
Deferred revenues 6,241 3,421
-------- --------
Total current liabilities 64,128 43,257
Notes payable, net of current portion 23,556 13,686
-------- --------
Total liabilities 87,684 56,943
-------- --------
Minority interest 841 --
-------- --------
Stockholders' equity:
Preferred Stock, $0.001 par value; 500 shares
authorized, no shares issued or outstanding -- --
Common Stock, $0.001 par value; 175,000 shares
authorized as of June 30, 1996; 32,469 and
32,057 issued and outstanding, respectively 32 32
Additional paid-in capital 111,056 108,071
Deferred compensation (144) (165)
Foreign currency translation adjustment 288 282
Accumulated deficit (26,253) (27,553)
-------- --------
Total stockholders' equity 84,979 80,667
-------- --------
$173,504 $137,610
======== ========
</TABLE>
F-56
<PAGE> 61
WORLDCOM PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited Pro Forma Condensed Combined Balance Sheet as of June
30, 1996 and unaudited Pro Forma Condensed Combined Income Statements for the
six months ended June 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 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 June 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
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-57
<PAGE> 62
WORLDCOM PRO FORMA CONDENSED COMBINED BALANCE SHEET (1)
AS OF JUNE 30, 1996
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MFS WorldCom
WorldCom Adjusted Pro Forma Pro Forma
Historical (2) Historical (3) Adjustments Combined
-------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Current assets $ 812,329 $ 1,944,920 $ - $ 2,757,249
Property, plant and equipment, net 1,633,596 1,458,412 - 3,092,008
Goodwill and other intangibles, net 4,059,911 2,367,670 6,136,861 (4) 12,564,442
Other assets 167,416 97,938 - 265,354
-------------- --------------- -------------- ---------------
Total assets $ 6,673,252 $ 5,868,940 $ 6,136,861 $ 18,679,053
============== =============== ============== ===============
Current liabilities $ 993,699 $ 401,585 $ 35,000 (5) $ 1,430,284
Long-term debt 3,346,596 1,352,911 - 4,699,507
Other liabilities 236,907 39,296 - 276,203
Stockholders' equity:
Preferred stock - 151 (151) (6) 151
151 (7)
Common stock 3,959 2,202 (2,202) (6) 8,583
4,624 (7)
Paid in capital 1,942,490 4,901,505 (4,901,505) (6) 14,254,724
12,312,234 (7)
Retained earnings 103,569 (827,078) 827,078 (6) (2,036,431)
(2,140,000) (8)
Other 46,032 (1,632) 1,632 (6) 46,032
-------------- --------------- -------------- ---------------
Total stockholders' equity 2,096,050 4,075,148 6,101,861 12,273,059
-------------- --------------- -------------- ---------------
Total liabilities and
stockholders' equity $ 6,673,252 $ 5,868,940 $ 6,136,861 $ 18,679,053
============== =============== ============== ===============
</TABLE>
F-58
<PAGE> 63
WORLDCOM PRO FORMA CONDENSED COMBINED INCOME STATEMENT (1)
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MFS WorldCom
WorldCom Adjusted Pro Forma Pro Forma
Historical (2) Historical (3) Adjustments Combined
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenues $ 2,087,586 $ 512,917 $ (36,005) (9) $ 2,564,498
Operating expenses:
Cost of sales 1,135,201 282,837 (36,005) (9) 1,382,033
Selling, general
and administrative 384,332 263,889 - 648,221
Depreciation and
amortization 155,353 316,461 (62,316) (10) 409,498
Other 402,000 - - 402,000
-------------- ------------- ------------- --------------
Operating income 10,700 (350,270) 62,316 (277,254)
Other income (expense):
Interest expense (112,889) (51,262) - (164,151)
Other 4,143 9,439 - 13,582
-------------- ------------- ------------- --------------
Income (loss) before tax (98,046) (392,093) 62,316 (427,823)
Provision for income taxes 60,122 200 (59,322) (11) 1,000
-------------- ------------- ------------- --------------
Net income (loss) from
continuing operations (158,168) (392,293) 121,638 (428,823)
Preferred dividend requirement 860 14,532 - 15,392
-------------- ------------- ------------- --------------
Net income (loss) applicable to
common shareholders $ (159,028) $ (406,825) $ 121,638 $ (444,215)
============== ============= ============= ==============
Number of shares issued
and outstanding:
Primary 389,363 183,319 201,651 774,333
============== ============= ============= ==============
Fully diluted 389,363 183,319 201,651 774,333
============== ============= ============= ==============
Earnings (loss) per share (12):
Primary $ (0.41) $ (2.22) $ (0.57)
============== ============= ==============
Fully diluted $ (0.41) $ (2.22) $ (0.57)
============== ============= ==============
</TABLE>
F-59
<PAGE> 64
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
WorldCom Adjusted Pro Forma Pro Forma
Historical (2) Historical (3) Adjustments Combined
------------- -------------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues $ 3,639,875 $ 671,810 $ (39,429) (9) $ 4,272,256
Operating expenses:
Cost of sales 1,992,413 360,678 (39,429) (9) 2,313,662
Selling, general
and administrative 660,149 420,162 - 1,080,311
Depreciation and
amortization 311,265 580,164 (124,633) (10) 766,796
------------- -------------- ------------- ------------
Operating income (loss) 676,048 (689,194) 124,633 111,487
Other income (expense):
Interest expense (249,062) (39,414) - (288,476)
Other 11,801 13,233 - 25,034
------------- -------------- ------------- ------------
Income (loss) before tax 438,787 (715,375) 124,633 (151,955)
Provision for income taxes 171,127 600 (169,727) (11) 2,000
------------- -------------- ------------- ------------
Net income (loss) from
continuing operations 267,660 (715,975) 294,360 (153,955)
Preferred dividend requirement 33,191 15,064 - 48,255
------------- -------------- ------------- ------------
Net income (loss) applicable to
common shareholders $ 234,469 $ (731,039) $ 294,360 $ (202,210)
============= ============== ============= ============
Number of shares issued
and outstanding:
Primary 386,898 185,509 163,828 736,235
============= ============== ============= ============
Fully diluted 402,990 185,509 147,736 736,235
============= ============== ============= ============
Earnings (loss) per share (12):
Primary $ 0.65 $ (3.94) $ (0.27)
============= ============== ============
Fully diluted $ 0.64 $ (3.94) $ (0.27)
============= ============== ============
</TABLE>
F-60
<PAGE> 65
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. 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. The MFS Adjusted Historical Financials Statements as of June 30, 1996 and
for the six months then ended 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
the acquisition (the "UUNET Acquisition"). The MFS Adjusted Historical
Balance Sheet also reflects MFS's July 1996 common stock offering of
approximately 35.7 million shares for net proceeds of approximately $1.3
billion. See "MFS Adjusted Historical Financial Statements" which are set
forth elsewhere herein.
4. 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), network technology,
assembled workforce and goodwill. It is WorldCom's intention, subsequent
to the acquisition, 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 recap of this
entry.
<TABLE>
<S> <C>
Purchased R&D in-process $ 2,140,000
Write-off of purchased
R&D in-process (2,140,000)
Goodwill 8,027,531
Network technology 400,000
Assembled work force 42,000
Direct merger costs 35,000
Elimination of MFS Adjusted
Historical goodwill (2,367,670)
-----------
$ 6,136,861
===========
</TABLE>
F-61
<PAGE> 66
Goodwill is being amortized over 40 years while network technology and
assembled work force are being amortized over 3 years and 10 years,
respectively.
5. This adjustment reflects liabilities incurred, such as compensation costs
and legal, accounting and consulting fees, related to the Merger.
6. These adjustments represent the elimination of MFS's shareholders'
investment accounts.
7. This adjustment represents the issuance of approximately 462.4 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 the Series
A and Series B preferred stock of MFS for, respectively, one share of
Series A 8% cumulative convertible preferred stock or one share of Series B
convertible preferred stock of WorldCom.
8. This adjustment reflects the write-off of intangible assets consisting of
in-process research and development projects of $2.14 billion. See Note 1.
9. These adjustments eliminate the revenues and corresponding line costs
attributable to the intercompany traffic among WorldCom, MFS and UUNET.
10. This entry reflects the adjustment to amortization for the effect of the
intangible assets acquired in the Merger (see Note 4).
11. These entries represent 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 Merger.
12. Pro forma per share data are based on the number of WorldCom common and
common equivalent shares that would have been outstanding had the Merger
occurred on the earliest date presented.
F-62
<PAGE> 67
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 balance sheet
assumes that the UUNET Acquisition occurred on June 30, 1996. The
adjusted historical balance sheet as of June 30, 1996 also gives pro forma
effect for the July 1996 sale by MFS of 35.7 million shares of common
stock for net proceeds of $1.3 billion. 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 indicted 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-63
<PAGE> 68
MFS ADJUSTED HISTORICAL BALANCE SHEET (1)
As of June 30, 1996
(In thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Subsequent MFS
MFS Issuance of UUNet Pro Forma Adjusted
Historical(2) Stock Historical(2) Adjustments Historical
------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Current assets $ 595,525 $ 1,280,000(3) $ 69,395 $ - $ 1,944,920
Property, plant and equipment, net 1,363,976 - 94,436 - 1,458,412
Goodwill and other intangibles, net 300,596 - 4,678 2,062,396(4) 2,367,670
Other assets 92,943 - 4,995 - 97,938
============ ============ ============ ============ ============
Total assets $ 2,353,040 $ 1,280,000 $ 173,504 $ 2,062,396 $ 5,868,940
============ ============ ============ ============ ============
Current liabilities $ 311,287 $ - $ 64,128 $ 26,170(5) $ 401,585
Long-term debt 1,329,355 - 23,556 - 1,352,911
Other liabilities 38,455 - 841 - 39,296
Stockholders' equity:
Preferred stock 151 - - - 151
Common stock 1,268 357(3) 32 (32)(6) 2,202
577 (7)
Paid in capital 1,501,234 1,279,643(3) 111,056 (111,056)(6) 4,901,505
2,120,628 (7)
Retained earnings (827,078) - (26,253) 26,253 (6) (827,078)
Other (1,632) - 144 (144)(6) (1,632)
------------ ------------ ------------ ------------ ------------
Total stockholders' equity 673,943 1,280,000 84,979 2,036,226 4,075,148
------------ ------------ ------------ ------------ ------------
Total liabilities and equity $ 2,353,040 $ 1,280,000 $ 173,504 $ 2,062,396 $ 5,868,940
============ ============ ============ ============ ============
</TABLE>
F-64
<PAGE> 69
MFS ADJUSTED HISTORICAL INCOME STATEMENT (1)
FOR THE SIX MONTHS ENDED JUNE 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 $ 416,022 $ 100,032 $ (3,137) (8) $ 512,917
Operating expenses:
Cost of sales 231,352 54,622 (3,137) (8) 282,837
Selling, general
and administrative 229,486 34,403 - 263,889
Depreciation and
amortization 92,588 9,200 214,673 (4) 316,461
------------- ------------ ------------ ------------
Operating income (loss) (137,404) 1,807 (214,673) (350,270)
Other income (expense):
Interest expense (50,480) (782) - (51,262)
Other 9,164 275 - 9,439
------------- ------------ ------------ ------------
Income (loss) before tax (178,720) 1,300 (214,673) (392,093)
Provision for income taxes 200 - - 200
------------- ------------ ------------ ------------
Net income (loss) from
continuing operations (178,920) 1,300 (214,673) (392,293)
Preferred dividend requirement 14,532 - - 14,532
------------- ------------ ------------ ------------
Net income (loss) applicable to
common shareholders $ (193,452) $ 1,300 $ (214,673) $ (406,825)
============= ============ ============ ============
Number of shares issued
and outstanding:
Primary 125,596 57,723 (7) 183,319
============= ============ ============
Fully diluted 125,596 57,723 (7) 183,319
============= ============ ============
Loss per share:
Primary $ (1.54) $ (2.22)
============= ============
Fully diluted $ (1.54) $ (2.22)
============= ============
</TABLE>
F-65
<PAGE> 70
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) (8) $ 671,810
Operating expenses:
Cost of sales 315,506 51,017 (5,845) (8) 360,678
Selling, general
and administrative 364,497 55,665 - 420,162
Depreciation and
amortization 142,496 8,322 429,346 (4) 580,164
------------ ------------- ------------ ------------
Operating loss (239,305) (20,543) (429,346) (689,194)
Other income (expense):
Interest expense (38,606) (808) - (39,414)
Other 10,613 2,620 - 13,233
------------ ------------- ------------ ------------
Loss before tax (267,298) (18,731) (429,346) (715,375)
Provision for income taxes 600 (474) 474 (9) 600
------------ ------------- ------------ ------------
Net loss from
continuing operations (267,898) (18,257) (429,820) (715,975)
Preferred dividend requirement 15,064 - - 15,064
------------ ------------- ------------ ------------
Net loss applicable to
common shareholders $ (282,962) $ (18,257) $ (429,820) $ (731,039)
============ ============= ============ ============
Number of shares issued
and outstanding:
Primary 127,786 57,723 (7) 185,509
============ ============ ============
Fully diluted 127,786 57,723 (7) 185,509
============ ============ ============
Loss per share:
Primary $ (2.21) $ (3.94)
============ ============
Fully diluted $ (2.21) $ (3.94)
============ ============
</TABLE>
F-66
<PAGE> 71
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 or financial position that would have occurred
had the UUNET Acquisition been consummated on 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 MFS' July 1996 common stock offering of
approximately 35.7 million shares of MFS Common Stock for net proceeds of
approximately $1.3 billion
4. This adjustment reflects 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. The following is a recap of the
entry to goodwill and other intangibles.
<TABLE>
<S> <C>
Goodwill $1,931,574
Other intangibles 135,500
Elimination of UUNET
goodwill (4,678)
----------
$2,062,396
==========
</TABLE>
5. This adjustment reflects liabilities incurred, such as compensation costs
and legal, accounting and consulting fees, related to the UUNET Acquisition.
6. This adjustment reflects the elimination of the equity accounts of UUNET.
7. This adjustment reflects the issuance of MFS Common Stock and options to
purchase MFS Common Stock as consideration for the UUNET Common Stock and
options to purchase UUNET Common Stock, respectively, in connection with
the UUNET Acquisition. The MFS Common Stock was valued at $34.69 per
share for purposes of calculating the UUNET Acquisition consideration.
8. This adjustment reflects the elimination of intercompany revenues and
expenses.
9. 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-67
<PAGE> 72
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
2.1 Agreement and Plan of Merger, dated as of August 25,
1996, among WorldCom, Inc., a Georgia corporation
("WorldCom"), HIJ Corp., a Delaware corporation and a
wholly owned subsidiary of WorldCom and MFS
Communications Company, Inc., a Delaware corporation
(incorporated herein by reference to Exhibit 2.1 to
WorldCom's Current Report on Form 8-K dated August 26,
1996)*
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)
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Arthur Andersen LLP
</TABLE>
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* The Registrant hereby agrees to furnish supplementally a copy of any
omitted schedules to this Agreement to the Securities and Exchange
Commission.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the following registration
statements of WorldCom, Inc. on the following forms:
Form S-3 Registration No. 33-63810 Form S-8 Registration No. 33-69322
Form S-3 Registration No. 33-71516 Form S-8 Registration No. 33-71450
Form S-3 Registration No. 33-71510 Form S-8 Registration No. 33-52168
Form S-3 Registration No. 33-87514 Form S-8 Registration No. 33-89072
Form S-3 Registration No. 33-77964 Form S-8 Registration No. 333-02115
Form S-3 Registration No. 33-87516 Form S-8 Registration No. 333-10349
Form S-3 Registration No. 33-58719
of our report dated February 14, 1996, except for Note 20 as to which the date
is April 16, 1996, on our audits of the consolidated financial statements of
MFS Communications Company, Inc. as of December 31, 1995 and 1994, and for the
three years in the period ended December 31, 1995, which report is included in
this Current Report on Form 8-K/A of WorldCom, Inc.
Coopers & Lybrand L.L.P.
Omaha, Nebraska
November 1, 1996
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report dated January 31, 1996 on the Consolidated Financial Statements of
UUNET Technologies, Inc. included in this Form 8-K/A, into WorldCom, Inc.'s
previously filed registration statements on Forms S-3 (File Nos. 33-63810,
33-71516, 33-71510, 33-87514, 33-77964, 33-87516 and 33-58719) and on Forms S-8
(File Nos. 33-69322, 33-71450, 33-52168, 33-89072, 333-02115 and 333-10349).
ARTHUR ANDERSEN LLP
Washington, D.C.
November 1, 1996
