<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
---------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission file number: 0-11258
------------------------
WorldCom, Inc.
(Exact name of registrant as specified in its charter)
------------------------
Georgia 58-1521612
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
515 East Amite Street, Jackson, Mississippi 39201-2702
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code : (601) 360-8600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
--- ---
The number of outstanding shares of the registrant's Common Stock, par
value $.01 per share, was 902,032,733 on July 31, 1997.
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<PAGE> 2
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
June 30, 1997 and December 31, 1996 . . . . . . . . . 3
Consolidated Statements of Operations
for the three and six months ended June 30, 1997
and June 30, 1996 . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows for
the six months ended June 30, 1997 and
June 30, 1996 . . . . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . 17
Item 2. Changes in Securities . . . . . . . . . . . . . . . . 17
Item 3. Defaults upon Senior Securities . . . . . . . . . . . 17
Item 4. Submission of Matters to a Vote
of Securities Holders . . . . . . . . . . . . . . . . 17
Item 5. Other Information . . . . . . . . . . . . . . . . . . 18
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . 18
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
</TABLE>
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
WORLDCOM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars, Except Per Share Data)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------------ --------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 81,347 $ 222,729
Marketable securities 35,898 772,510
Accounts receivable, net of allowance for bad debts
of $118,310 in 1997
and $110,041 in 1996 1,144,531 999,962
Income taxes receivable 11,364 12,301
Deferred tax asset -- 276
Other current assets 376,870 288,314
------------ ------------
Total current assets 1,650,010 2,296,092
------------ ------------
Property and equipment:
Transmission equipment 3,007,436 2,371,376
Communications equipment 1,653,950 1,296,723
Furniture, fixtures and other 741,088 614,476
------------ ------------
5,402,474 4,282,575
Less - accumulated depreciation (586,131) (385,451)
------------ ------------
4,816,343 3,897,124
------------ ------------
Excess of cost over net tangible assets acquired, net of accumulated
amortization 13,022,069 12,947,432
Deferred income taxes 402,976 392,634
Other assets 353,187 328,695
------------ ------------
$ 20,244,585 $ 19,861,977
============ ============
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current liabilities:
Short-term debt and current maturities of long-term debt $ 20,060 $ 22,424
Accounts payable 449,089 588,738
Accrued line costs 715,543 649,324
Income taxes payable 1,503 1,481
Current deferred taxes payable 20,865 --
Other current liabilities 550,864 648,070
------------ ------------
Total current liabilities 1,757,924 1,910,037
------------ ------------
Long-term liabilities, less current portion:
Long-term debt 5,056,514 4,803,581
Other liabilities 253,451 188,383
------------ ------------
Total long-term liabilities 5,309,965 4,991,964
------------ ------------
Commitments and contingencies
Series A preferred stock, par value $.01 per share; authorized, issued
and outstanding: 94,992 shares in 1997 and 1996 (variable
liquidation preference) 1 1
Series B preferred stock, par value $.01 per share; authorized, issued and
outstanding: 12,743,921 shares in 1997 and 12,699,948 in 1996 (liquidation
preference of $1.00 per share plus unpaid dividends) 127 127
Preferred stock, par value $.01 per share; authorized: 34,905,008 shares
in 1997 and 1996 -- --
Common stock, par value $.01 per share; authorized: 2,500,000,000 shares; issued
and outstanding: 899,437,288 shares in 1997 and 885,080,264 shares
in 1996 8,994 8,851
Additional paid-in capital 14,952,046 14,855,881
Unrealized holding gain on marketable equity securities 34,473 28,832
Retained earnings (deficit) (1,818,945) (1,933,716)
------------ ------------
Total shareholders' investment 13,176,696 12,959,976
------------ ------------
$ 20,244,585 $ 19,861,977
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
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WORLDCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 1,770,084 $ 1,073,538 $ 3,447,323 $ 2,107,598
----------- ----------- ----------- -----------
Operating expenses:
Line costs 922,444 584,632 1,833,913 1,147,463
Selling, general and administrative 380,657 198,828 753,004 390,429
Depreciation and amortization 227,773 71,827 450,676 155,598
Provision to reduce carrying value of
certain assets -- 402,000 -- 402,000
----------- ----------- ----------- -----------
Total 1,530,874 1,257,287 3,037,593 2,095,490
----------- ----------- ----------- -----------
Operating income (loss) 239,210 (183,749) 409,730 12,108
Other income (expense):
Interest expense (77,705) (55,898) (153,160) (112,946)
Miscellaneous 2,260 1,988 10,661 4,149
----------- ----------- ----------- -----------
Income (loss) before income taxes and
extraordinary items 163,765 (237,659) 267,231 (96,689)
Provision for income taxes 85,158 5,509 138,960 60,172
----------- ----------- ----------- -----------
Net income (loss) before extraordinary items 78,607 (243,168) 128,271 (156,861)
Extraordinary items (net of income taxes of
$15,621 in 1996) -- (24,434) -- (24,434)
Preferred dividend requirement 6,611 355 13,221 860
----------- ----------- ----------- -----------
Net income (loss) applicable to common
shareholders $ 71,996 $ (267,957) $ 115,050 $ (182,155)
=========== =========== =========== ===========
Earnings per common share:
Net income (loss) applicable to common
shareholders before
extraordinary items:
Primary $ 0.08 $ (0.62) $ 0.13 $ (0.41)
=========== =========== =========== ===========
Fully diluted $ 0.08 $ (0.62) $ 0.13 $ (0.41)
=========== =========== =========== ===========
Extraordinary items $ -- $ (0.06) $ -- $ (0.06)
=========== =========== =========== ===========
Net income (loss) applicable to common
shareholders :
Primary $ 0.08 $ (0.69) $ 0.13 $ (0.47)
=========== =========== =========== ===========
Fully diluted $ 0.08 $ (0.69) $ 0.13 $ (0.47)
=========== =========== =========== ===========
Net income (loss) applicable to common
shareholders before non-cash
charges and extraordinary items:
Primary $ 0.08 $ 0.25 $ 0.13 $ 0.46
=========== =========== =========== ===========
Fully diluted $ 0.08 $ 0.25 $ 0.13 $ 0.46
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
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WORLDCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
--------------------------
1997 1996
------------ -------------
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $ 128,271 $(181,295)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary items -- 24,434
Provision to reduce carrying value of certain assets -- 402,000
Depreciation and amortization 450,676 155,598
Provision for losses on accounts receivable 43,110 27,553
Provision for deferred income taxes 108,395 30,428
Accreted interest on debt 57,529 --
Change in assets and liabilities, net of effect of
business combinations:
Accounts receivable (193,551) (172,700)
Income taxes, net 18,149 18,521
Other current assets (68,792) (49,352)
Accrued line costs 22,952 64,811
Accounts payable and other current liabilities (63,605) 15,885
Other (5,228) (9,442)
----------- ---------
Net cash provided by operating activities 497,906 326,441
----------- ---------
Cash flows from investing activities:
Capital expenditures (1,163,643) (251,581)
Sale of marketable securities, net 726,586 --
Acquisitions and related costs (358,546) (580)
Increase in intangible assets (46,914) (57,547)
Proceeds from disposition of long-term assets 23,417 8,724
Increase in other assets (67,245) (9,623)
Decrease in other liabilities (19,715) (20,991)
----------- ---------
Net cash used in investing activities (906,060) (331,598)
----------- ---------
Cash flows from financing activities:
Principal borrowings (repayments) on debt 193,563 (43,601)
Common stock issuance 86,430 26,075
Dividends paid on preferred stock (13,221) (860)
----------- ---------
Net cash provided by (used in) financing activities 266,772 (18,386)
----------- ---------
Net decrease in cash and cash equivalents (141,382) (23,543)
Cash and cash equivalents at beginning of period 222,729 42,244
----------- ---------
Cash and cash equivalents at end of period $ 81,347 $ 18,701
=========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
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WORLDCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(A) GENERAL
The financial statements of WorldCom, Inc. (the "Company" or "WorldCom")
included herein, are unaudited and have been prepared in accordance with
generally accepted accounting principles for interim financial reporting and
Securities and Exchange Commission ("SEC") regulations. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. In the opinion of management,
the financial statements reflect all adjustments (of a normal and recurring
nature) which are necessary to present fairly the financial position, results
of operations and cash flows for the interim periods. These financial
statements should be read in conjunction with the Annual Report of the Company
on Form 10-K for the year ended December 31, 1996. The results for the six
month period ended June 30, 1997, are not necessarily indicative of the results
that may be expected for the year ending December 31, 1997.
(B) BUSINESS COMBINATIONS
On December 31, 1996, WorldCom, through a wholly owned subsidiary, merged with
MFS Communications Company, Inc. ("MFS"). MFS provides telecommunications
services and systems for business and government customers. MFS is a leading
provider of alternative local network access facilities via digital fiber optic
cable networks that it has installed in and around major United States cities,
and in several major European cities. MFS also provides domestic and
international long distance telecommunications services via its network
platform, which consists of MFS-owned transmission and switching facilities,
and network capacity leased from other carriers primarily in the United States
and Western Europe.
As a result of the merger (the "MFS Merger"), each share of MFS common stock
was converted into the right to receive 2.1 shares of WorldCom common stock
(the "Common Stock") or approximately 471.0 million WorldCom common shares in
the aggregate. Each share of MFS Series A 8% Cumulative Convertible Preferred
Stock ("MFS Series A Preferred Stock") was converted into the right to receive
one share of Series A 8% Cumulative Convertible Preferred Stock of WorldCom
("WorldCom Series A Preferred Stock") or 94,992 shares of WorldCom Series A
Preferred Stock in the aggregate. Each share of MFS Series B Convertible
Preferred Stock was converted into the right to receive one share of Series B
Convertible Preferred Stock of WorldCom ("WorldCom Series B Preferred Stock")
or approximately 12.7 million shares of WorldCom Series B Preferred Stock in
the aggregate. In addition, each depositary share representing 1/100th of a
share of MFS Series A Preferred Stock was exchanged for a depositary share
representing 1/100th of a share of WorldCom Series A Preferred Stock.
Upon effectiveness of the MFS Merger, the then outstanding and unexercised
options and warrants exercisable for shares of MFS common stock were converted
into options and warrants, respectively, exercisable for shares of Common Stock
having substantially the same terms and conditions as the MFS options and
warrants, except that (i) the exercise price and the number of shares issuable
upon exercise were divided and multiplied, respectively, by 2.1 and (ii) the
holders of each then outstanding and unexercised MFS "Shareworks Plus Award"
granted under the MFS 1993 Stock Plan instead received the cash value of such
award in accordance with the terms of such plan.
On August 12, 1996, MFS acquired UUNET Technologies, Inc. ("UUNET") through a
merger of a subsidiary of MFS with and into UUNET (the "UUNET Acquisition").
UUNET 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. UUNET provides both dedicated
and dial-up Internet access, and other applications and services which include
Web server hosting and integration services, client software and security
products, training, and network integration and consulting services.
The MFS Merger is being accounted for as a purchase for financial reporting
purposes.
The following unaudited pro forma combined results of operations for the
Company assume that the MFS Merger and the UUNET Acquisition were completed on
January 1, 1996 (in thousands, except per share data):
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<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
JUNE 30, 1996
-------------
<S> <C>
Revenues $2,578,195
Loss before extraordinary items (502,355)
Loss applicable to common shareholders (526,789)
Loss per common share:
Loss before extraordinary items (0.58)
Net loss (0.62)
</TABLE>
These pro forma amounts represent the historical operating results of these
acquired entities combined with those of the Company with appropriate
adjustments which give effect to amortization and the common shares issued.
These pro forma amounts are not necessarily indicative of operating results
which would have occurred if MFS and UUNET had been operated by current
management during the periods presented because these amounts do not reflect
cost savings related to full network optimization and the redundant effect on
operating, selling, general and administrative expenses.
(C) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid by the Company during the six months ended June 30, 1997 and
1996 amounted to $104.9 million and $116.3 million, respectively. Income taxes
paid during the six months ended June 30, 1997 and 1996 were $13.2 million and
$11.2 million, respectively. In conjunction with business combinations during
the six months ended June 30, 1997 and 1996, assumed assets and liabilities
were as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
---------------------------
1997 1996
----------- ------------
<S> <C> <C>
Fair value of assets acquired $ - $ 595
Excess of cost over net tangible assets acquired 256,970 26,267
Liabilities paid (assumed) 101,576 (26,282)
Common stock issued - -
----------- -----------
Net cash paid $ 358,546 $ 580
=========== ===========
</TABLE>
(D) LONG-TERM DEBT
On April 1, 1997, the Company completed the public offering of $2.0 billion
principal amount of debt securities. The net proceeds of the offering ($1.98
billion) were used to pay down commercial bank debt.
On July 3, 1997, the Company replaced its $3.75 billion revolving credit
facility (the "Old Credit Facility") with $5.0 billion in new revolving credit
facilities which consist of a $3.75 billion Facility A Revolving Credit
Agreement (the "Facility A Loans") and a $1.25 billion Facility B Revolving
Credit and Term Loan Agreement (the "Facility B Loans," and together with the
Facility A Loans, the "New Credit Facilities"). The Facility A Loans have a
four-year term which will be extended one year automatically upon the receipt
of certain regulatory approvals, and may be extended for up to two successive
one year terms thereafter to the extent of the committed amounts from those
lenders consenting thereto, with a requirement that lenders holding at least
two thirds of the committed amounts consent. The Facility B Loans, which are
contingent upon the receipt of certain regulatory approvals, have a 364 day
term, which may be extended for up to two successive 364 day terms thereafter
to the extent of the committed amounts from those lenders consenting thereto,
with a requirement that lenders holding at least two thirds of the committed
amounts consent. Alternatively, effective as of the end of such 364 day term,
the Company may elect to convert the Facility B Loans from revolving loans to
term loans with a maturity date corresponding with the maturity date then in
effect with respect to the Facility A Loans. The
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New Credit Facilities bear interest payable in varying periods, depending on the
interest period, not to exceed six months, at rates selected by the Company
under the terms of the New Credit Facilities, including a Base Rate or the
Eurodollar Rate, plus applicable margin. The applicable margin for a Eurodollar
Rate borrowing varies from 0.30% to 0.75% based upon the better of certain debt
ratings or a specified financial test. The New Credit Facilities are unsecured
but include a negative pledge of the assets of the Company and its subsidiaries
(subject to certain exceptions). The New Credit Facilities require compliance
with certain financial and operating covenants which limit, among other things,
the incurrence of additional indebtedness by the Company, investments by the
Company, sales of assets and mergers and dissolutions, which covenants are
generally less restrictive than those contained in the Old Credit Facility and
which do not restrict distributions to shareholders, provided the Company is not
in default under the New Credit Facilities. The current commitment fee for
any unborrowed portion of Facility A Loans and Facility B Loans are 0.15%
and 0.10%, respectively.
The following table sets forth the long-term debt of the Company as of June 30,
1997, and as adjusted to give effect to the New Credit Facilities (in
thousands):
<TABLE>
<S> <C>
New Credit Facilities $ 1,581,550
7.55% Senior Notes Due 2004 600,000
7.75% Senior Notes Due 2007 1,100,000
7.75% Senior Notes Due 2027 300,000
Senior Discount Notes Due 2004 714,572
Senior Discount Notes Due 2006 692,680
Other debt 87,772
-----------
$ 5,076,574
Less: Short-term debt and current maturities 20,060
-----------
$ 5,056,514
===========
</TABLE>
The 7.55% Senior Notes Due 2004 (the "Notes Due 2004"), which will mature on
April 1, 2004, the 7.75% Senior Notes Due 2007 (the "Notes Due 2007"), which
will mature on April 1, 2007, and the 7.75% Senior Notes Due 2027 (the "Notes
Due 2027"), which will mature on April 1, 2027 (collectively, with the Notes
Due 2004 and the Notes Due 2007, the "Notes"), bear interest payable
semiannually on April 1 and October 1 of each year, commencing October 1, 1997,
and limit the incurrence of liens. Each holder of the Notes Due 2027 may
require the Company to repurchase all or a portion of the Notes Due 2027 owned
by such holder on April 1, 2009 at a purchase price equal to 100% of the
principal amount thereof.
The Notes Due 2004 and the Notes Due 2007 are redeemable, as a whole or in
part, at the option of the Company, at any time or from time to time, and the
Notes Due 2027 will be redeemable, as a whole or in part, at the option of the
Company, at any time and from time to time beginning April 2, 2009, at
respective redemption prices equal to the greater of (i) 100% of the principal
amount of the Notes to be redeemed or (ii) the sum of the present values of the
Remaining Scheduled Payments (as defined therein) discounted at the Treasury
Rate (as defined therein) plus 15 basis points for the Notes Due 2004 or plus
20 basis points for the Notes Due 2007 and the Notes Due 2027, plus in the case
of each of clause (i) and (ii) accrued interest to the date of redemption.
In July 1997, WorldCom offered to exchange (the "Exchange Offers") (i) $871.60
principal amount of its 9-3/8% Senior Notes due January 15, 2004 (CUSIP #98155K
AD 4) for each $1,000 principal amount at stated maturity, as of the date of
their original issuance, of outstanding 9-3/8% Senior Discount Notes due January
15, 2004 of MFS, properly tendered, and (ii) $737.91 principal amount of its
8-7/8% Senior Notes due January 15, 2006 (CUSIP #98155K AE 2) for each $1,000
principal amount at stated maturity, as of the date of their original issuance,
of outstanding 8-7/8% Senior Discount Notes due January 15, 2006 of MFS,
properly tendered. In connection with the Exchange Offers, the Company also
solicited consents to certain amendments to the respective indentures governing
the MFS notes (the "Consent Solicitations"). Both the Exchange Offers and the
Consent Solicitations are upon the terms and subject to the conditions set forth
in the Prospectus and Consent Solicitation dated July 3, 1997, as supplemented
by the Supplement dated August 5, 1997, and letters of transmittal related to
the Exchange Offers and the Consent Solicitations.
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On August 8, 1997, the Company announced that it has exercised its option to
accept all MFS notes validly tendered in its on-going Exchange Offers and
Consent Solicitations. The Company has received requisite consents from
holders of notes of MFS to allow the Company to accept tenders as of such date
and prior to the expiration of the Exchange Offers and Consent Solicitations
and thereby effect certain amendments to the respective indentures governing
the MFS notes. On August 13, 1997, the Company exchanged approximately $597.7
million and $532.6 million of its 9-3/8% Senior Notes due January 15, 2004 and
its 8-7/8% Senior Notes due January 15, 2006, respectively, for MFS notes
validly tendered as of the close of business on August 8, 1997 and effected the
amendments to the respective indentures governing the MFS notes in accordance
with the terms of the Exchange Offers and Consent Solicitations. The Exchange
Offers and Consent Solicitations expire at 5:00 p.m., New York City time, on
August 19, 1997.
(E) CONTINGENCIES
On February 8, 1996, President Clinton signed the Telecommunications Act of 1996
(the "Telecom Act"), which permits, without limitation, the Bell Operating
Companies (the "BOCs") to provide domestic and international long distance
services to customers located outside of the BOC's home regions; permits a
petitioning BOC to provide domestic and international long distance service to
customers within its home region upon a finding by the Federal Communications
Commission (the "FCC") that a petitioning BOC has satisfied certain criteria for
opening up its local exchange network to competition and that its provision of
long distance services would further the public interest; and removes existing
barriers to entry into local service markets. Additionally, there were
significant changes in: the manner in which carrier-to-carrier arrangements are
regulated at the federal and state level; procedures to revise universal service
standards; and, penalties for unauthorized switching of customers. The FCC has
instituted proceedings addressing the implementation of this legislation.
On August 8, 1996, the FCC released its First Report and Order in the Matter of
Implementation of the Local Competition Provisions in the Telecom Act (the "FCC
Interconnect Order"). In the FCC Interconnect Order, the FCC established
nationwide rules designed to encourage new entrants to participate in the local
service markets through interconnection with the incumbent local exchange
carriers ("ILEC"), resale of the ILEC's retail services and unbundled network
elements. These rules set the groundwork for the statutory criteria governing
BOC entry into the long distance market. The Company cannot predict the effect
such legislation or the implementing regulations will have on the Company or
the industry. Motions to stay implementation of the FCC Interconnect Order
have been filed with the FCC and federal courts of appeal. Appeals
challenging, among other things, the validity of the FCC Interconnect Order
have been filed in several federal courts of appeal and assigned to the Eighth
Circuit Court of Appeals for disposition. The Eighth Circuit Court of Appeals
has among other things, vacated the pricing rules adopted in the FCC
Interconnect Order. Inasmuch as these rules had been previously stayed by the
Court and state regulatory agencies have conducted separate implementation
proceedings and related arbitrations, the Company believes that the vacation
of these rules by the Court will not have a material adverse effect on the
Company. Certain BOCs have raised constitutional challenges to restrictions of
the Telecom Act on inter-local access and transport area services and certain
practices implementing the cost provisions of the Telecom Act ordered by certain
state public utility commissions. The Company cannot predict either the outcome
of these or future challenges to the Telecom Act and appeals or the eventual
effect on its business or the industry in general.
On December 24, 1996, the FCC released a Notice of Proposed Rulemaking ("NPRM")
seeking to reform the FCC's current access charge policies and practices to
comport with a competitive or potentially competitive local access service
market. On May 7, 1997, the FCC announced that it will issue a series of
orders that will reform Universal Service Subsidy allocations and adopt various
reforms to the existing rate structure for interstate access that are designed
to reduce access charges, over time, to more economically efficient levels and
rate structures. In particular, the FCC adopted changes to its rate structures
for Common Line, Local Switching and Local Transport rate elements. The FCC
generally removed from minute-of-use access charges costs that are not incurred
on a per-minute-of-use basis, with such costs being recovered through flat
rated charges. Over one hundred parties are seeking to have the FCC reconsider
various aspects of this decision; others have filed court appeals challenging
the validity of the FCC's actions. Access charges are a principal component of
the Company's line cost expense. The Company cannot predict whether or not the
result of this proceeding will have a material impact upon its consolidated
financial position or results of operations.
In the NPRM, the FCC tentatively concluded that information services providers
(including, among others, Internet service providers) should not be subject to
existing interstate access charges. However, the FCC recognized that these
services and recent technological advances may be constrained by current
regulatory practices that have their foundations in traditional services and
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technologies. The FCC issued on December 24, 1996, a Notice of Inquiry to seek
comment on whether it should, in addition to access charge reform, consider
actions relating to interstate information services and the Internet. Changes
in the regulatory environment relating to the telecommunications or
Internet-related services industry could have an adverse effect on the
Company's Internet-related services business. The Telecom Act may permit
telecommunications companies, BOCs or others to increase the scope or reduce
the cost of their Internet access services. The Company cannot predict the
effect that the Notice of Inquiry, the Telecom Act or any future legislation,
regulation or regulatory changes may have on its business.
The Company is involved in other legal and regulatory proceedings generally
incidental to its business. In some instances, rulings by regulatory
authorities in some states may result in increased operating costs to the
Company. While the results of these various legal and regulatory matters
contain an element of uncertainty, the Company believes that the probable
outcome of any of the legal or regulatory matters, or all of them combined,
should not have a material adverse effect on the Company's consolidated
financial position or results of operations.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Quarterly Report on Form 10-Q may be deemed to include forward looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
that involve risk and uncertainty, including financial, regulatory environment
and trend projections. Although the Company believes that its expectations are
based on reasonable assumptions, it can give no assurance that its expectations
will be achieved. The important factors that could cause actual results to
differ materially from those in the forward looking statements herein (the
"Cautionary Statements") include, without limitation, the Company's degree of
financial leverage, risks associated with debt service requirements and
interest rate fluctuations, risks associated with acquisitions and the
integration thereof, risks of international business, dependence on
availability of transmission facilities, regulation risks including the impact
of the Telecom Act, contingent liabilities, and the impact of competitive
services and pricing, as well as other risks referenced from time to time in
the Company's filings with the SEC, including the Company's Form 10-K for the
year ended December 31, 1996. All subsequent written and oral forward-looking
statements attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by the Cautionary Statements. The
following discussion and analysis relates to the financial condition and
results of operations of the Company for the three and six month periods ended
June 30, 1997 and 1996, and should be read in conjunction with the consolidated
financial statements and notes thereto.
GENERAL
The Company is one of the largest telecommunications companies in the United
States, serving local, long distance and Internet customers domestically and
internationally. The Company's operations have grown significantly in each
year of its operations as a result of internal growth, the MFS Merger, the
selective acquisition of smaller long distance companies with limited
geographic service areas and market shares, the consolidation of certain third
tier long distance carriers with larger market shares, and international
expansion.
As a result of the MFS Merger on December 31, 1996, each share of MFS common
stock was converted into the right to receive 2.1 shares of WorldCom Common
Stock or approximately 471.0 million WorldCom common shares in the aggregate.
Each share of MFS Series A Preferred Stock was converted into the right to
receive one share of WorldCom Series A Preferred Stock or 94,992 shares in the
aggregate. Each share of MFS Series B Convertible Preferred Stock was
converted into the right to receive one share of WorldCom Series B Convertible
Preferred Stock or approximately 12.7 million shares in the aggregate. In
addition, each depositary share representing 1/100th of a share of MFS Series A
Preferred Stock was exchanged for a depositary share representing 1/100th of a
share of WorldCom Series A Preferred Stock (the "Depositary Shares").
Upon effectiveness of the MFS Merger, the then outstanding and unexercised
options and warrants exercisable for shares of MFS common stock were converted
into options and warrants, respectively, exercisable for shares of Common Stock
having substantially the same terms and conditions as the MFS options and
warrants, except that (i) the exercise price and the number of shares issuable
upon exercise were divided and multiplied, respectively, by 2.1 and (ii) the
holders of each then outstanding and unexercised MFS "Shareworks Plus Award"
granted under the MFS 1993 Stock Plan instead received the cash value of such
option in accordance with the terms of such plan.
MFS provides telecommunications services and systems for business and
government customers. MFS is a leading provider of alternative local network
access facilities via digital fiber optic cable networks that it has installed
in and around major United States
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cities, and in several major European cities. MFS also provides domestic and
international long distance telecommunications services via its network
platform, which consists of MFS-owned transmission and switching facilities, and
network capacity leased from other carriers primarily in the United States and
Western Europe. The MFS Merger is being accounted for as a purchase;
accordingly, the operating results of MFS are reflected in the Company's results
of operations from the acquisition date.
On August 12, 1996, MFS completed the UUNET Acquisition. UUNET 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. UUNET provides both dedicated and dial-up Internet access,
and other applications and services which include Web server hosting and
integration services, client software and security products, training, and
network integration and consulting services.
The MFS Merger has allowed the Company to take advantage of the Congressional
intent behind the Telecom Act and the FCC Interconnect Order by bringing
together leading growth companies from four key telecom industry segments:
long distance, local, Internet and international. The Company believes that
the MFS Merger enhances the combined entity's opportunities for future growth,
creates a stronger competitor in the changing telecommunications industry,
allows provision of end-to-end bundled services over a global network, and
provides the opportunity for significant cost savings for the combined
organization.
The most significant portion of the Company's line costs is access charges,
which are highly regulated. The FCC has announced that it will revise its
rules regarding access charges in a manner that will, over time, revamp the
access rate element structure and, over the near term, reduce the overall
access revenues collected by the incumbent local exchange carriers. The FCC's
rate element restructuring is intended to align costs with the manner in which
they are incurred by the incumbent local exchange carriers. As a result, the
current usage based system will be replaced with a system composed of flat rate
charges and usage based charges. The FCC has also announced that subsidy
systems for local telephone services and services to schools, libraries, and
hospitals will be implemented. A portion of those subsidies currently are
funded by access charges. Accordingly, access charges will be reduced by an
amount to be transferred to the subsidy systems. The subsidy systems will
result in additional charges being placed on all telecommunications providers,
which charges may be directly recovered from the end users. The Company cannot
predict what effect continued regulation and increased competition between LECs
and other IXCs will have on future access charges or the Company's business.
However, the Company believes that it will be able to continue to reduce
transport costs through effective utilization of its network, favorable
contracts with carriers and network efficiencies made possible as a result of
expansion of the Company's customer base by acquisitions and internal growth.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the Company's
statements of operations as a percentage of its operating revenues.
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<TABLE>
<CAPTION>
For the Three Months Ended June 30, For the Six Months Ended June 30,
----------------------------------- ---------------------------------
Actual Actual Pro Forma Actual Actual Pro Forma
1997 1996 1996 1997 1996 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- ----- -----
Operating expenses:
Line costs 52.1% 54.5% 54.4% 53.2% 54.4% 54.3%
Selling, general and
administrative 21.5% 18.5% 25.0% 21.8% 18.5% 25.0%
Depreciation and
amortization 12.9% 6.7% 15.2% 13.1% 7.4% 15.9%
Provision to reduce carrying
value of certain assets - 37.4% 30.1% - 19.1% 15.6%
----- ----- ----- ----- ----- -----
Operating income (loss) 13.5% (17.1%) (24.8%) 11.9% 0.6% (10.7%)
Other income (expense):
Interest expense (4.4%) (5.2%) (6.2%) (4.4%) (5.4%) (6.4%)
Miscellaneous 0.1% 0.2% 0.5% 0.3% 0.2% 0.5%
----- ----- ----- ----- ----- -----
Income (loss) before income
taxes and extraordinary items 9.3% (22.1%) (30.5%) 7.8% (4.6%) (16.5%)
Income tax expense 4.8% 0.5% 0.4% 4.0% 2.9% 2.3%
----- ----- ----- ----- ----- -----
Net income (loss) 4.4% (22.7%) (30.9%) 3.7% (7.4%) (18.9%)
Extraordinary items - (2.3%) (1.8%) - (1.2%) (0.9%)
Preferred dividend requirement 0.4% 0.0% 0.6% 0.4% 0.0% 0.6%
----- ----- ----- ----- ----- -----
Net income (loss) applicable
to common shareholders 4.1% (25.0%) (33.3%) 3.3% (8.6%) (20.4%)
===== ===== ===== ===== ===== =====
</TABLE>
Revenues for the three months ended June 30, 1997 increased 64.9% to $1.77
billion on 8.93 billion revenue minutes as compared to $1.07 billion on 5.70
billion revenue minutes for the three months ended June 30, 1996. For the six
months ended June 30, 1997, revenues increased 63.6% to $3.45 billion on 17.45
billion revenue minutes versus $2.11 billion on 11.31 billion revenue minutes
for the same period of the prior year. The increase in total revenues and
minutes is primarily attributable to the MFS Merger and internal growth of
the Company.
On a pro forma basis, as though the MFS Merger and the UUNET Acquisition
occurred at the beginning of 1996, revenues and traffic for the second quarter
of 1997 increased 33% and 37%, respectively, compared with pro forma revenues
of $1.33 billion on 6.50 billion revenue minutes for the second quarter of
1996. For the six month period ended June 30, 1997, revenues and traffic
increased 34% and 36%, respectively, versus pro forma revenues of $2.58 billion
on 12.81 billion revenue minutes for the same period of the prior year.
The pro forma and actual revenue increases for the three and six month periods
ended June 30, 1997 and 1996 reflect the following increases by category
(dollars in millions):
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<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
Actual Pro forma Actual Pro forma
1997 1996 Change 1997 1996 Change
--------- ---------- ------ ---------- ----------- ------
-
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Domestic switched $ 966.8 $ 794.1 22% $1,918.7 $1,568.2 22%
Domestic private line 371.7 276.2 35% 724.4 539.5 34%
International 197.0 107.7 83% 360.8 194.6 85%
Internet 125.8 54.0 133% 237.0 93.0 155%
-------- -------- --- -------- -------- ---
CORE REVENUES $1,661.3 $1,232.0 35% $3,240.9 $2,395.3 35%
Other revenues 108.8 102.4 6% 206.4 182.9 13%
-------- -------- --- -------- -------- ---
TOTAL REVENUES $1,770.1 $1,334.4 33% $3,447.3 $2,578.2 34%
======== ======== === ======== ======== ===
</TABLE>
The following discusses the results of operations for the three and six month
periods ended June 30, 1997 as compared to pro forma results for the comparable
prior year periods. Changes in actual results of operations are shown in the
Consolidated Statements of Operations and the foregoing tables and, as noted
above, primarily reflect the MFS Merger and the internal growth of the Company.
Domestic switched revenues for the second quarter experienced a 22% pro forma
year-over-year increase driven by a gain of 33% in traffic. For the six month
period ended June 30, 1997, domestic switched revenues increased 22% over the
prior year pro forma amount on a 32% increase in traffic. This increase was due
primarily to strong volume gains in both the retail and wholesale markets. The
Company's revenue and minute gaps continue to be driven by strong wholesale
revenues, international settlement reduction pass throughs and product mix.
Domestic private line revenues for the three and six month periods ended June
30, 1997 increased 35% and 34%, respectively, over the pro forma prior year
amounts. These increases are due primarily to increased demand for higher
capacity circuits for corporate networks, Intranet and other Internet related
services.
International revenues -- those revenues originating outside of the United
States -- for the second quarter of 1997 were $197 million, an increase of 83%,
as compared with $108 million for the pro forma prior year second quarter. For
the six month period ended June 30, 1997, international revenues increased 85%
to $361 million versus $195 million for the same pro forma period of the prior
year. This performance is due to continuing strong traffic growth in the United
Kingdom and a growing presence in Continental Europe.
Internet revenues for the three and six month periods ended June 30, 1997
increased 133% and 155%, respectively, over the prior year pro forma amounts.
Strong demand for both dedicated and dial-up access was somewhat offset by
provisioning constraints on the dial-up access side, which are expected to
improve in the third and fourth quarters.
Other revenues for the second quarter of 1997 were $109 million, up 6%, as
compared with $102 million for the pro forma prior year second quarter. For the
six month period ended June 30, 1997, other revenues increased 13% to $206
million versus $183 million for the pro forma period of the prior year. Other
revenues include MFS Network Technologies, operator services, broadcast
operations and other equipment and software sales.
Line costs as a percentage of revenues for the second quarter of 1997 were
52.1% as compared to 54.5% reported for the same period of the prior year and
54.4% pro forma for the second quarter of 1996. On a year-to-date basis, line
costs as a percentage of revenues decreased to 53.2% as compared to 54.4%
reported for the same period of the prior year and 54.3% pro forma for the six
month period ended June 30, 1996. These decreases are attributable to changes
in the product mix and synergies and economies of scale resulting from network
efficiencies achieved from the assimilation of MFS into the Company's
operations.
Selling, general and administrative expenses for the second quarter of 1997
increased to $380.7 million or 21.5% of revenues as compared to $198.8 million
or 18.5% of revenues as reported for the second quarter of 1996. On a year-to-
date basis, these expenses increased to $753.0 million or 21.8% of revenues
from $390.4 million or 18.5% of revenues for the six months ended June
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30, 1996. The increase in selling, general and administrative expenses as a
percentage of revenues on a reported basis results from the Company's expanding
operations, primarily through the MFS Merger. The decrease in selling, general
and administrative expenses as a percentage of revenues for the three and six
month periods ended June 30, 1997 as compared to 25.0% of revenues for the same
pro forma periods of the prior year, results from the assimilation of the MFS
into the Company's strategy of cost control.
Depreciation and amortization expense for the second quarter of 1997 increased
to $227.8 million or 12.9% of revenues from $71.8 million or 6.7% of revenues
for the second quarter of 1996. On a year-to-date basis, this expense
increased to $450.7 million or 13.1% of revenues versus $155.6 million or 7.4%
of revenues for the comparable 1996 period. This increase reflects increased
amortization associated with the MFS Merger and additional depreciation related
to capital expenditures.
In the second quarter of 1996, the Company incurred non-cash charges related
to a write-down in the carrying value of certain assets, including goodwill and
equipment. Because of events resulting from the passage of the Telecom Act,
and changes in circumstances impacting certain non-core operations, management
estimates of the Company's fair value of operating assets within its core and
non-core businesses resulted in a non-cash charge of $344 million after tax or
$0.88 per share. On a pretax basis, the write-down was $402 million and
included $139 million for network facilities and $263 million for non-core
businesses, primarily operator services goodwill.
Interest expense in the second quarter of 1997 was $77.7 million or 4.4% of
revenues, as compared to $55.9 million or 5.2% of revenues reported in the
second quarter of 1996. For the six months ended June 30, 1997, interest
expense was $153.2 million or 4.4% of revenues, as compared to $112.9 million
or 5.4% of revenues for the first six months of 1996. The increase in interest
expense is attributable to higher debt levels as the result of additional debt
acquired with the MFS Merger, higher capital expenditures, and the 1997 fixed
rate debt financings, offset by lower interest rates in effect on the Company's
variable rate long-term debt.
In the second quarter of 1996, the Company recorded extraordinary items
totaling $24.4 million, net of income tax benefit of $15.6 million. The items
included $4.2 million in connection with the Company's 1996 debt refinancing,
and $20.2 million related to a write-off of deferred international costs.
Previously, a portion of the outbound call fee due the foreign carrier was
deferred and accounted for as a cost attributable to the revenue associated
with the inbound call. Currently, the outbound call fee due the foreign
carrier is expensed as incurred.
For the quarter ended June 30, 1997, net income, taking into account the
increased amortization for intangibles related to the MFS Merger, was $72.0
million, or $0.08 per common share, compared with net income, before non-cash
charges, of $100.1 million, or $0.25 per common share as reported for the
second quarter of 1996. On a pro forma basis, before non-cash charges, loss
per share was $0.09 per common share for the second quarter of 1996. Including
the non-cash, after tax charges, the Company reported a net loss of $268.0
million or $0.69 per share for the second quarter of 1996.
For the six months ended June 30, 1997, net income was $115.1 million or $0.13
per share compared with $185.9 million, or $0.46 per share, before non-cash
charges, for the six months ended June 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1997, the Company's total debt was $5.08 billion, up $250.6
million from December 31, 1996 as a result of the increased capital
expenditures offset by the application of available cash and marketable
securities against such debt.
On July 3, 1997, the Company replaced its $3.75 billion revolving credit
facility (the "Old Credit Facility") with $5.0 billion in new revolving credit
facilities which consist of a $3.75 billion Facility A Revolving Credit
Agreement (the "Facility A Loans") and a $1.25 billion Facility B Revolving
Credit and Term Loan Agreement (the "Facility B Loans," and together with the
Facility A Loans, the "New Credit Facilities"). The Facility A Loans have a
four-year term which will be extended one year automatically upon the receipt
of certain regulatory approvals, and may be extended for up to two successive
one year terms thereafter to the extent of the committed amounts from those
lenders consenting thereto, with a requirement that lenders holding at least
two thirds of the committed amounts consent. The Facility B Loans, which are
contingent upon the receipt of certain regulatory approvals, have a 364 day
term, which may be extended for up to two successive 364 day terms thereafter
to the extent of the committed amounts from those lenders consenting thereto,
with a requirement that lenders holding at least two thirds of the committed
amounts consent. Alternatively, effective as of the end of such 364 day term,
the Company may elect to convert the Facility B Loans from revolving loans to
term loans with a maturity date corresponding with the maturity date then in
effect with respect to the Facility A Loans. The New Credit Facilities bear
interest payable in varying periods, depending on the interest period, not to
exceed six months, at rates
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<PAGE> 15
selected by the Company under the terms of the New Credit Facilities, including
a Base Rate or the Eurodollar Rate, plus applicable margin. The applicable
margin for a Eurodollar Rate borrowing varies from 0.30% to 0.75% based upon
the better of certain debt ratings or a specified financial test. The New
Credit Facilities are unsecured but include a negative pledge of the assets of
the Company and its subsidiaries (subject to certain exceptions). The New
Credit Facilities require compliance with certain financial and operating
covenants which limit, among other things, the incurrence of additional
indebtedness by the Company, investments by the Company, sales of assets and
mergers and dissolutions, which covenants are generally less restrictive than
those contained in the Old Credit Facility and which do not restrict
distributions to shareholders, provided the Company is not in default under the
New Credit Facilities. The current commitment fee for any unborrowed portion
of the Facility A Loans and the Facility B Loans are 0.15% and 0.10%,
respectively.
As of July 3, 1997, the Company had available liquidity of $2.28 billion under
its New Credit Facilities and from available cash and marketable securities.
Upon the receipt of certain regulatory approvals, expected in the third
quarter of 1997, the Company will have access to an additional $1.25 billion
under its New Credit Facilities.
Additionally, on April 1, 1997, the Company completed the public offering of
$2.0 billion principal amount of debt securities. The net proceeds of the
offering ($1.98 billion) were used to pay down commercial bank debt. The
public offering on April 1, 1997 included $600 million principal amount of
7.55% Senior Notes due 2004, $1.1 billion principal amount of 7.75% Senior
Notes due 2007 and $300 million principal amount of 7.75% Senior Notes due
2027. The Notes bear interest payable semiannually on April 1 and October 1 of
each year, commencing October 1, 1997, and limit the incurrence of liens. Each
holder of the Notes Due 2027 may require the Company to repurchase all or a
portion of the Notes Due 2027 owned by such holder on April 1, 2009 at a
purchase price equal to 100% of the principal amount thereof.
The Notes Due 2004 and the Notes Due 2007 are redeemable, as a whole or in
part, at the option of the Company, at any time or from time to time, and the
Notes Due 2027 will be redeemable, as a whole or in part, at the option of the
Company, at any time and from time to time beginning April 2, 2009, at
respective redemption prices equal to the greater of (i) 100% of the principal
amount of the Notes to be redeemed or (ii) the sum of the present values of the
Remaining Scheduled Payments (as defined therein) discounted at the Treasury
Rate (as defined therein) plus 15 basis points for the Notes Due 2004 or plus
20 basis points for the Notes Due 2007 and the Notes Due 2027, plus in the case
of each of clause (i) and (ii) accrued interest to the date of redemption.
The Company has historically utilized cash flow from operations to finance
capital expenditures and a mixture of cash flow, debt and stock to finance
acquisitions. The Company expects to experience increased capital intensity
due to network expansions and believes that funding needs in excess of
internally generated cash flow will be met by utilization of the Company's New
Credit Facilities.
In connection with the MFS Merger and pursuant to a change of control
provision, WorldCom offered to repurchase the MFS $924.0 million 8 7/8% Senior
Discount Notes due 2006 and the MFS $788.3 million 9 3/8% Senior Discount Notes
due 2004 (collectively the "MFS notes") at 101% of the accreted value as of
February 27, 1997, which was $670.0 million and $666.1 million, respectively.
The offer to repurchase began January 28, 1997 and ended February 27, 1997. As
of the expiration of the offer, approximately $14.3 million of the MFS notes
were repurchased. Prior to the amendments to the indentures governing the MFS
notes that were effected on August 13, 1997, the MFS notes contained certain
covenants which, among other things, restricted MFS' ability to incur
additional debt, create liens, enter into sale-leaseback transactions, pay
dividends, make certain restricted payments, enter into transactions with
affiliates and sell assets or merge with another company.
In July 1997, WorldCom offered to exchange (the "Exchange Offers") (i) $871.60
principal amount of its 9-3/8% Senior Notes due January 15, 2004 (CUSIP #98155K
AD 4) for each $1,000 principal amount at stated maturity, as of the date of
their original issuance, of outstanding 9-3/8% Senior Discount Notes due January
15, 2004 of MFS, properly tendered, and (ii) $737.91 principal amount of its
8-7/8% Senior Notes due January 15, 2006 (CUSIP #98155K AE 2) for each $1,000
principal amount at stated maturity, as of the date of their original issuance,
of outstanding 8-7/8% Senior Discount Notes due January 15, 2006 of MFS,
properly tendered. In connection with the Exchange Offers, the Company also
solicited consents to certain amendments to the respective indentures governing
the MFS notes (the "Consent Solicitations"). Both the Exchange Offers and the
Consent Solicitations are upon the terms and subject to the conditions set forth
in the Prospectus and Consent Solicitation dated July 3, 1997, as supplemented
by the Supplement dated August 5, 1997, and letters of transmittal related to
the Exchange Offers and the Consent Solicitations.
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On August 8, 1997, the Company announced that it has exercised its option to
accept all MFS notes validly tendered in its on-going Exchange Offers and
Consent Solicitations. The Company has received requisite consents from holders
of notes of its MFS subsidiary to allow the Company to accept tenders prior to
the expiration of the Exchange Offers and Consent Solicitations and thereby
effect certain amendments to the respective indentures governing the MFS notes.
On August 13, 1997, the Company exchanged approximately $597.7 million and
$532.6 million of its 9-3/8% Senior Notes due January 15, 2004 and its 8-7/8%
Senior Notes due January 15, 2006, respectively, for MFS notes validly tendered
as of the close of business on August 8, 1997 and effected the amendments to the
respective indentures governing the MFS notes in accordance with the terms of
the Exchange Offers and Consent Solicitations. The Exchange Offers and Consent
Solicitations expire at 5:00 p.m., New York City time, on August 19, 1997.
For the six months ended June 30, 1997, the Company's cash flow from operations
was $497.9 million, increasing from $326.4 million in the comparable period for
1996. The increase in cash flow from operations was primarily attributable to
internal growth and synergies and economies of scale resulting from network
efficiencies and selling, general and administrative cost savings achieved
from the assimilation of MFS into the Company's operations.
In 1997, the Company's existing receivables purchase agreement generated
additional proceeds of $15.8 million, bringing the total amount outstanding to
$390.8 million. The Company used these proceeds to reduce outstanding debt
under the Company's New Credit Facilities. As of June 30, 1997, the purchaser
owned an undivided interest in a $831.2 million pool of receivables which
includes the $390.8 million sold.
Cash used in investing activities for the six months ended June 30, 1997 totaled
$906.1 million. The sale of marketable securities provided $726.6 million of
proceeds which were used to cover capital expenditures of $1.16 billion and
acquisition and related costs of $358.5 million primarily from the MFS Merger.
Cash used in investing activities included $973.9 million for normal capital
expenditures and an additional $189.7 million for additional city pair network
construction. Primary capital expenditures include purchases of switching,
transmission, communication and other equipment. Approximately $2.5 billion is
currently anticipated for transmission and communications equipment purchases in
1997 without regard to possible future acquisitions, if any.
Included in cash flows from financing activities are payments of $13.2 million
for preferred dividend requirements. The Company has never paid cash dividends
on its Common Stock. 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, May 31, August 31 and November 30. Dividends are payable in cash
or in shares of Common Stock, at the election of the Company. The Company paid
the dividends on February 28, 1997 and May 31, 1997 in cash and expects to
continue to pay dividends in cash on the Depositary Shares. Dividends on the
WorldCom Series B Preferred Stock accrue at the rate per share of $0.0775 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. The Company anticipates
that dividends on the WorldCom 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.
Absent significant capital requirements for other acquisitions, the Company
believes that cash flow from operations and available liquidity will be more
than adequate to meet the Company's capital needs for the remainder of 1997.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities."
This Statement establishes accounting and reporting standards for transfers and
servicing of financial assets and extinguishment of liabilities. The Statement
provides standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings. This Statement is effective
for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, and is to be applied
prospectively. The adoption of this standard did not have a material adverse
effect on the Company's consolidated results of operations or financial
position.
In February 1997, the FASB issued SFAS 128 "Earnings Per Share." This Statement
establishes standards for computing and presenting earnings per share ("EPS")
and applies to entities with publicly held common stock or potential common
stock. It also requires dual presentation of basic and diluted EPS on the face
of the income statement for all entities with complex capital structures. This
Statement is effective for financial statements issued for periods ending after
December 15, 1997. WorldCom believes that the adoption of this standard will
not have a material effect on the Company's consolidated results of operations
or financial position.
In February 1997, the FASB issued SFAS 129 "Disclosure of Information About
Capital Structure." This Statement establishes standards for disclosing
information about an entity's capital structure and applies to all entities.
This Statement is effective for financial statements for periods ending after
December 15, 1997. WorldCom
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believes that the adoption of this standard will not have a material effect on
the Company's consolidated results of operations or financial position.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities.
None
Item 3. Defaults upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
On May 22, 1997, the Company held the Annual Meeting of Shareholders
for the purposes of:
1. Electing a Board of fourteen (14) directors; and
2. Considering and acting upon a proposal to approve the Company's
Performance Bonus Plan.
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The tabulation of the voting, which includes the WorldCom Series A and Series
B Preferred Stock, is as follows: Abstentions and
<TABLE>
<CAPTION>
For Against or Withheld Broker Non-Votes
Election of Directors:
<S> <C> <C> <C>
Carl J. Aycock 763,527,413 25,019,248 0
Max E. Bobbitt 763,538,916 25,007,845 0
James Q. Crowe 763,776,370 24,770,391 0
Bernard J. Ebbers 773,457,287 15,089,474 0
Francesco Galesi 763,452,596 25,094,165 0
Richard R. Jaros 775,339,285 13,207,476 0
Stiles A. Kellett, Jr. 763,394,076 25,152,685 0
David C. McCourt 773,611,418 14,935,343 0
John A. Porter 763,493,686 25,053,075 0
Walter Scott, Jr. 774,896,925 13,649,836 0
John W. Sidgmore 773,637,139 14,909,622 0
Scott D. Sullivan 764,208,365 24,338,396 0
Lawrence C. Tucker 763,462,361 25,084,400 0
Michael B. Yanney 757,007,821 13,538,940 0
Performance Bonus Plan 602,308,227 174,369,203 11,869,326
</TABLE>
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits
See Exhibit Index
B. Reports on Form 8-K
(i) Current Report on Form 8-K dated March 26, 1997 (filed April 2,
1997) reporting under Item 7(c) Financial Statements and
Exhibits, certain exhibits as required in accordance with Item
601 of Regulation S-K regarding the issuance of $2.0 billion in
Senior Notes.
(ii) Current Report on Form 8-K dated May 22, 1997 (filed June 6,
1997) reporting under Item 5, Other Information, the
amendment of the Rights Agreement by and between the Company
and The Bank of New York, as Rights Agent, and under Item 7(c),
Financial Statements and Exhibits, certain exhibits as required
in accordance with Item 601 of Regulation S-K regarding such
Agreement.
(iii) Current Report on Form 8-K dated June 30, 1997 (filed July
7, 1997) reporting under Item 5, Other Information, the
resignation of certain directors, the replacement of the Old
Credit Facility with the New Credit Facilities, and the
approval of the Performance Bonus Plan, and under Item 7(c)
Financial Statements and Exhibits, certain exhibits as required
in accordance with Item 601 of Regulation S-K regarding the New
Credit Facilities and the Performance
Bonus Plan.
Page 18
<PAGE> 19
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report on Form 10-Q to be signed on its
behalf by Scott D. Sullivan, thereunto duly authorized to sign on behalf of the
registrant and as the principal financial officer thereof.
WORLDCOM, INC.
By: /s/ SCOTT D. SULLIVAN
-----------------------------------
Scott D. Sullivan
Chief Financial Officer
Dated: August 14, 1997
Page 19
<PAGE> 20
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------ -----------
<S> <C>
1.1 Form of Underwriting Agreement Standard Provisions for Debt
Securities, with form of Terms Agreement (incorporated herein
by reference to Exhibit 1.1 to the Company's Current Report on
Form 8-K dated March 26, 1997(File No. 0-11258))
1.2 Terms Agreement dated March 26, 1997, by and among WorldCom,
Inc. and Salomon Brothers Inc, Goldman, Sachs & Co., Credit
Suisse First Boston and NationsBanc Capital Markets, Inc.
(incorporated herein by reference to Exhibit 1.2 to the
Company's Current Report on Form 8-K dated March 26, 1997
(File No. 0-11258))
4.1 Second Amended and Restated Articles of Incorporation of
WorldCom, Inc. (including preferred stock designations) as of
December 31, 1996 (incorporated herein by reference to Exhibit
3.1 to the Company's Current Report on Form 8-K dated
December 31, 1996 (File No. 0-11258))
4.2 Restated Bylaws of WorldCom, Inc. (incorporated by reference
to Exhibit 4.2 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996 (File No. 0-11258))
4.3 Form of 7.55% Senior Note due 2004 (incorporated herein by
reference to Exhibit 4.1 to the Company's Current Report on
Form 8-K dated March 26, 1997 (File No. 0-11258))
4.4 Form of 7.75% Senior Note due 2007 (incorporated herein by
reference to Exhibit 4.2 to the Company's Current Report on
Form 8-K dated March 26, 1997(File No. 0-11258))
4.5 Form of 7.75% Senior Note due 2027 (incorporated herein by
reference to Exhibit 4.3 to the Company's Current Report on
Form 8-K dated March 26, 1997(File No. 0-11258))
4.6 Senior Indenture dated March 1, 1997 by and between WorldCom,
Inc. and Mellon Bank, N.A., as trustee (incorporated herein by
reference to Exhibit 4.6 to the Company's Form 10-Q for the
period ended March 31, 1997(File No. 0-11258))
4.7 Form of First Supplemental Indenture of WorldCom to Mellon
Bank, N.A. relating to 9-3/8% Notes Due 2004 and 8-7/8%
Senior Notes Due 2006 (including form of 9-3/8% Senior Note
Due 2004 attached as Exhibit A thereto and form of 8-7/8%
Senior Note Due 2006 attached as Exhibit B thereto)
(incorporated herein by reference to Exhibit 4.9 to the
Company's Registration Statement on Form S-4 (Registration
No. 333-27345))
10.1 Memorandum between the Company and James Q. Crowe dated June
26, 1997
*10.2 Facility A Revolving Credit Agreement among WorldCom, Inc.,
NationsBank of Texas, N.A. (Managing Agent and Administrative
Agent), Bank of America NT & SA, Bank of Montreal, The Bank of
New York, The Bank of Nova Scotia, Bank of Tokyo-Mitsubishi
Trust Company, Barclays Bank PLC, Canadian Imperial Bank of
Commerce, The Chase Manhattan Bank, Citibank, N.A., Credit
Lyonnais New York Branch, First Union National Bank, Fleet
National Bank, The Industrial Bank of Japan, Limited, Atlanta
Agency, Morgan Guaranty Trust Company of New York, Royal Bank
of Canada, and Toronto Dominion (Texas), Inc. (Agents) and
the Lenders named therein (Facility A Lenders), dated as of
July 3, 1997. (Incorporated herein by reference to Exhibit
10.1 to the Company's Current Report on Form 8-K dated June
30, 1997 (File No. 0-11258))
</TABLE>
Page 20
<PAGE> 21
<TABLE>
<CAPTION>
Exhibit
No. Description
- -------- -----------
<S> <C>
*10.3 Facility B Revolving Credit and Term Loan Agreement among
WorldCom, Inc., NationsBank of Texas, N.A. (Managing Agent and
Administrative Agent), Bank of America NT & SA, Bank of
Montreal, The Bank of New York, The Bank of Nova Scotia, Bank
of Tokyo-Mitsubishi Trust Company, Barclays Bank PLC, Canadian
Imperial Bank of Commerce, The Chase Manhattan Bank,
Citibank, N.A., Credit Lyonnais New York Branch, First Union
National Bank, Fleet National Bank, The Industrial Bank of
Japan, Limited, Atlanta Agency, Morgan Guaranty Trust Company
of New York, Royal Bank of Canada, and Toronto Dominion
(Texas), Inc. (Agents) and the Lenders named therein (Facility
B Lenders), dated as of July 3, 1997. (Incorporated herein by
reference to Exhibit 10.2 to the Company's Current Report on
Form 8-k dated June 30, 1997 (File No. 0-11258))
10.4 WorldCom, Inc. Performance Bonus Plan (incorporated herein by
reference to Exhibit A to the Company's Proxy Statement dated
April 21, 1997 (File No. 0-11258))
11.1 Computation of per share earnings
27.1 Financial Data Schedule
</TABLE>
* The Registrant hereby agrees to furnish supplementally a copy of any omitted
schedules to this Agreement to the Securities and Exchange Commission
Page 21
<PAGE> 1
Exhibit 10.1
MEMORANDUM
Date: June 26, 1997
To: Bernie Ebbers
From: Jim Crowe
Subject: Resignation
As we agreed this morning during our meeting in Jackson, I resigned as
WorldCom's Chairman, member of the Board of Directors, and as an employee,
effective immediately. This is a modification of our February 11, 1997
agreement, which will of course otherwise remain effective.
In addition to what we discussed, I think it is also appropriate to further
modify the agreement to immediately eliminate any requirements that WorldCom
continue to make payments or extend benefits to me including salary, community
donation allowance, availability of an office and secretarial support. I
further believe it would be appropriate to modify the agreement to allow me the
right to exercise my outstanding stock options immediately rather than wait
until November 24, 1997, and to clarify the fact that my one-year option
exercise period started today. If you agree to these additional modifications
to our February 11, 1997 agreement, please sign below.
Please call if we need to discuss any of these matters.
JQC/dms
Agreed:
/s/ BERNARD J. EBBERS
- ----------------------
Bernard J. Ebbers
<PAGE> 1
Exhibit 11.1
WORLDCOM, INC. AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
-------------------------------------------------------------
June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Primary:
Weighted average shares outstanding 895,461 391,160 891,853 389,363
Common stock equivalents 24,568 - 26,299 -
Common stock equivalents issuable upon conversion of:
Series A preferred stock 32,703 - 32,703
--------- ---------- -------- ----------
952,732 391,160 950,855 389,363
========= ========== ======== ==========
Net income (loss) applicable to common shareholders
before extraordinary items $ 71,996 $ (243,523) $115,050 $ (157,721)
Extraordinary items - (24,434) - (24,434)
Add back:
Series A preferred dividend 6,364 - 12,728 -
--------- ---------- -------- ----------
Net income (loss) applicable to common shareholders $ 78,360 $ (267,957) $127,778 (182,155)
========= ========== ======== ==========
Primary earnings (loss) per share:
Applicable to common shareholders before extraordinary items $ 0.08 $ (0.62) $ 0.13 (0.41)
========= ========== ======== ==========
Extraordinary items $ - $ (0.06) $ - (0.06)
========= ========== ======== ==========
Applicable to common shareholders $ 0.08 $ (0.69) $ 0.13 (0.47)
========= ========== ======== ==========
Fully diluted:
Weighted average shares outstanding 895,461 391,160 891,853 389,363
Common stock equivalents 29,256 - 28,644 -
Common stock issuable upon conversion of:
Series A preferred stock 32,703 - 32,703 -
Series B preferred stock 1,246 - 1,251 -
--------- ---------- -------- ----------
958,666 391,160 954,451 389,363
========= ========== ======== ==========
Net income (loss) applicable to common shareholders
before extraordinary items $ 71,996 $ (243,523) $115,050 (157,721)
Extraordinary items - (24,434) - (24,434)
Add back:
Series A preferred dividend 6,364 - 12,728 -
Series B preferred dividend 247 - 493 -
--------- ---------- -------- ----------
Net income (loss) applicable to common shareholders $ 78,607 $ (267,957) $128,271 (182,155)
========= ========== ======== ==========
Fully diluted earnings (loss) per share:
Applicable to common shareholders before extraordinary items $ 0.08 $ (0.62) $ 0.13 (0.41)
========= ========== ======== ==========
Extraordinary items $ - $ (0.06) $ - (0.06)
========= ========== ======== ==========
Applicable to common shareholders $ 0.08 $ (0.69) $ 0.13 (0.47)
========= ========== ======== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM WORLDCOM,
INC.'S FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 81,347
<SECURITIES> 35,898
<RECEIVABLES> 1,262,841
<ALLOWANCES> 118,310
<INVENTORY> 0
<CURRENT-ASSETS> 1,650,010
<PP&E> 5,402,474
<DEPRECIATION> 586,131
<TOTAL-ASSETS> 20,244,585
<CURRENT-LIABILITIES> 1,757,924
<BONDS> 5,056,514
0
128
<COMMON> 8,994
<OTHER-SE> 13,167,574
<TOTAL-LIABILITY-AND-EQUITY> 20,244,585
<SALES> 0
<TOTAL-REVENUES> 3,447,323
<CGS> 1,833,913
<TOTAL-COSTS> 3,037,593
<OTHER-EXPENSES> (10,661)
<LOSS-PROVISION> 43,110
<INTEREST-EXPENSE> 153,160
<INCOME-PRETAX> 267,231
<INCOME-TAX> 138,960
<INCOME-CONTINUING> 128,271
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 115,050
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.13
</TABLE>
