<PAGE> 1
===============================================================================
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 September 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
(State or other jurisdiction of 58-1521612
incorporation or organization) (I.R.S. Employer 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 903,380,987 on November 5, 1997.
===============================================================================
<PAGE> 2
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Number
------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 1997 and December 31, 1996........................ 3
Consolidated Statements of Operations
for the three and nine months ended September 30, 1997
and September 30, 1996......................................... 4
Consolidated Statements of Cash Flows for
the nine months ended September 30, 1997 and
September 30, 1996.............................................. 5
Notes to Consolidated Financial Statements....................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations....................................................... 12
PART II. OTHER INFORMATION
Item 1 Legal Proceedings ............................................... 20
Item 2. Changes in Securities and Use of Proceeds ....................... 20
Item 3. Defaults upon Senior Securities.................................. 21
Item 4. Submission of Matters to a Vote
of Securities Holders............................................ 21
Item 5. Other Information................................................ 21
Item 6. Exhibits and Reports on Form 8-K................................. 21
Signature ................................................................. 22
Exhibit Index ................................................................. 23
</TABLE>
Page 2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item I. Financial Statements.
WORLDCOM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars, Except Per Share Data)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 59,190 $ 222,729
Marketable securities 6,866 772,510
Accounts receivable, net of allowance for bad debts of $128,583 in 1997
and $110,041 in 1996 1,175,105 999,962
Income taxes receivable 8,390 12,301
Deferred tax asset -- 276
Other current assets 375,829 288,314
------------ ------------
Total current assets 1,625,380 2,296,092
------------ ------------
Property and equipment:
Transmission equipment 3,453,524 2,371,376
Communications equipment 1,815,875 1,296,723
Furniture, fixtures and other 812,331 614,476
------------ ------------
6,081,730 4,282,575
Less-accumulated depreciation (662,909) (385,451)
------------ ------------
5,418,821 3,897,124
------------ ------------
Excess of cost over net tangible assets acquired, net of accumulated
amortization 13,002,512 12,947,432
Deferred tax asset 339,488 392,634
Other assets 427,167 328,695
------------ ------------
$ 20,813,368 $ 19,861,977
============ ============
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current liabilities:
Short-term debt and current maturities of long-term debt $ 11,086 $ 22,424
Accounts payable 439,225 588,738
Accrued line costs 739,742 649,324
Income taxes payable 2,500 1,481
Deferred tax liability 46,127 --
Other current liabilities 631,605 648,070
------------ ------------
Total current liabilities 1,870,285 1,910,037
------------ ------------
Long-term liabilities, less current portion:
Long-term debt 5,348,638 4,803,581
Other liabilities 228,445 188,383
------------ ------------
Total long-term liabilities 5,577,083 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 12,445,113 shares in 1997 and 12,699,949 in 1996 (liquidation
preference of $ 1.00 per share plus unpaid dividends) 124 127
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: 907,159,586 shares in 1997 and 885,080,264 shares in 1996 9,072 8,851
Additional paid-in capital 15,035,896 14,855,881
Unrealized holding gain on marketable equity securities 33,733 28,832
Retained earnings (deficit) (1,712,826) (1,933,716)
------------ ------------
Total shareholders' investment 13,366,000 12,959,976
============ ============
$ 20,813,368 $ 19,861,977
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
Page 3
<PAGE> 4
WORLDCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
----------------------------- ----------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 1,901,199 $ 1,143,428 $ 5,348,522 $ 3,251,026
----------- ----------- ----------- -----------
Operating expenses:
Line costs 971,894 625,176 2,805,807 1,772,639
Selling, general and administrative 387,845 212,473 1,140,849 602,902
Depreciation and amortization 231,543 73,436 682,219 229,034
Provision to reduce carrying value of certain assets -- -- -- 402,000
----------- ----------- ----------- -----------
Total 1,591,282 911,085 4,628,875 3,006,575
----------- ----------- ----------- -----------
Operating income 309,917 232,343 719,647 244,451
Other income (expense):
Interest expense (81,789) (55,085) (234,949) (168,031)
Miscellaneous 6,133 1,840 16,794 5,989
----------- ----------- ----------- -----------
Income before income taxes and extraordinary items 234,261 179,098 501,492 82,409
Provision for income taxes 121,816 69,843 260,776 130,015
----------- ----------- ----------- -----------
Net income (loss) before extraordinary items 112,445 109,255 240,716 (47,606)
Extraordinary items (net of income taxes of $ 15,621 in 1996) -- -- -- (24,434)
Preferred dividend requirement 6,606 -- 19,827 860
----------- ----------- ----------- -----------
Net income (loss) applicable to common shareholders $ 105,839 $ 109,255 $ 220,889 $ (72,900)
=========== =========== =========== ===========
Earnings per common share:
Net income (loss) applicable to common shareholders before
extraordinary items:
Primary $ 0.12 $ 0.27 $ 0.25 $ (0.12)
=========== =========== =========== ===========
Fully diluted $ 0.12 $ 0.27 $ 0.25 $ (0.12)
=========== =========== =========== ===========
Extraordinary items $ -- $ -- $ -- $ (0.06)
=========== =========== =========== ===========
Net income (loss) applicable to common shareholders:
Primary $ 0.12 $ 0.27 $ 0.25 $ (0.18)
=========== =========== =========== ===========
Fully diluted $ 0.12 $ 0.27 $ 0.25 $ (0.18)
=========== =========== =========== ===========
Net income (loss) applicable to common shareholders before
non-cash charges and extraordinary items:
Primary $ 0.12 $ 0.27 $ 0.25 $ 0.73
=========== =========== =========== ===========
Fully diluted $ 0.12 $ 0.27 $ 0.25 $ 0.73
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
Page 4
<PAGE> 5
WORLDCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
-----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 240,716 $ (72,040)
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 682,219 229,034
Provision for losses on accounts receivable 76,246 42,422
Provision for deferred income taxes 224,426 101,079
Accreted interest on debt 62,675 --
Change in assets and liabilities, net of effect of business combinations:
Accounts receivable (250,283) (170,669)
Income taxes, net 28,067 12,718
Other current assets (113,178) (46,416)
Accrued line costs 21,660 7,489
Accounts payable and other current liabilities 8,141 (15,800)
Other (6,778) (18,226)
----------- -----------
Net cash provided by operating activities 973,911 496,025
----------- -----------
Cash flows from investing activities:
Capital expenditures (1,925,814) (415,343)
Sale of marketable securities, net 766,623 --
Acquisitions and related costs (441,726) (18,535)
Increase in intangible assets (81,720) (71,240)
Proceeds from disposition of long-term assets 70,019 21,962
Increase in other assets (121,823) (106,866)
Decrease in other liabilities (24,476) (39,784)
----------- -----------
Net cash used in investing activities (1,758,917) (629,806)
----------- -----------
Cash flows from financing activities:
Principal borrowings on debt 525,191 76,326
Common stock issuance 112,695 35,191
Dividends paid on preferred stock (19,827) (860)
Other 3,408 (275)
----------- -----------
Net cash provided by financing activities 621,467 110,382
----------- -----------
Net decrease in cash and cash equivalents (163,539) (23,399)
Cash and cash equivalents at beginning of period 222,729 42,244
----------- -----------
Cash and cash equivalents at end of period $ 59,190 $ 18,845
=========== ===========
</TABLE>
The accompanying notes we an integral part of these statements.
Page 5
<PAGE> 6
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 nine month period
ended September 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.
Page 6
<PAGE> 7
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):
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996
------------------------
<S> <C>
Revenues $ 4,033,125
Loss before extraordinary items (562,800)
Loss applicable to common shareholders (587,234)
Loss per common share:
Loss before extraordinary items (0.65)
Net loss (0.68)
</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 nine months ended September 30, 1997 and
1996 amounted to $133.7 million and $170.8 million, respectively. Income taxes
paid during the nine months ended September 30, 1997 and 1996 were $12.0 million
and $16.0 million, respectively. In conjunction with business combinations
during the nine months ended September 30, 1997 and 1996, assumed assets and
liabilities were as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-----------------------------
1997 1996
---------- ----------
<S> <C> <C>
Fair value of assets acquired $ 3,714 $ 12,065
Excess of cost over net tangible assets acquired 273,192 60,698
Liabilities paid (assumed) 220,111 (30,877)
Common stock issued (55,291) (23,351)
---------- ----------
Net cash paid $ 441,726 $ 18,535
========== ==========
</TABLE>
Page 7
<PAGE> 8
(D) LONG-TERM DEBT
As of September 30, 1997, the long-term debt of the Company consists of the
following (in thousands):
<TABLE>
<S> <C>
New Credit Facilities $ 1,951,850
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 680,115
Senior Discount Notes Due 2006 666,723
Other debt 61,036
-----------
$ 5,359,724
Less: Short-term debt and current maturities 11,086
-----------
$ 5,348,638
===========
</TABLE>
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
five-year term 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 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 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.
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 included 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"). The Notes bear interest
payable semiannually on April 1 and October 1 of each year, which payments
commenced 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
Page 8
<PAGE> 9
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 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 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 (collectively the "MFS notes"), 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").
In August 1997, the Company exercised its option to accept all MFS notes validly
tendered in its on-going Exchange Offers and Consent Solicitations. The Company
received requisite consents from holders of notes of MFS 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. As of August 22, 1997, the Company exchanged
approximately $680.1 million and $666.7 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 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, and, in most instances completed, proceedings addressing the
implementation of this legislation.
In implementing the Telecom Act, the FCC established nationwide rules designed
to encourage new entrants to participate in the local services markets through
interconnection with the incumbent local exchange carriers ("ILECs"), resale of
ILEC's retail services, and use of individual and combinations of unbundled
network elements. These rules set the groundwork for the statutory criteria
governing BOC entry into the long distance market. Appeals of the FCC order
adopting those rules were consolidated before the United States Court of Appeals
for the Eighth Circuit (the "Eighth Circuit"). The Eighth Circuit found
premature constitutional challenges to certain practices implementing cost
provisions of the Telecom Act that were ordered by certain state public utility
commissions, vacated significant portions of the FCC's nationwide pricing rules,
and, confined the use of combined unbundled network elements to instances where
the requesting carrier itself would do the combining. The Company expects that
the FCC and certain other parties will appeal the Eighth Circuit's decisions to
the United States Supreme Court. Certain BOCs have also raised constitutional
challenges to restrictions in the Telecom Act preventing BOCs from entering the
long distance market in their home regions. The Company cannot predict either
the outcome of these or future challenges to the Telecom Act, any related
appeals of regulatory or court decisions, or the eventual effect on its business
or the industry in general.
The FCC has denied applications filed by Ameritech and SBC Corporation ("SBC")
seeking authority to provide interLATA long distance service in Michigan and
Oklahoma, respectively. SBC has appealed the FCC's denial of its application to
the United States Court of Appeals. In its latest denial of an Ameritech
application, the FCC provided detailed guidance to
Page 9
<PAGE> 10
applicants regarding the obligations of the applicants, the format of the
application, the content of the application, and the review standards that it
will apply in evaluating the application. The National Association of Regulatory
Utility Commissioners and several state regulatory commissions have appealed
jurisdictional aspects of that Ameritech application denial to the United States
Court of Appeals for the Eighth Circuit. The Company cannot predict either the
outcome of these appeals, or the BOCs' willingness to abide by these FCC
guidelines, or the timing or outcome of future applications submitted to the
FCC. Additionally, the FCC is presently considering a BellSouth application for
authority to provide interLATA service in South Carolina and Louisiana. The
Company cannot predict the outcome of that proceeding.
On May 7, 1997, the FCC announced that it will issue a series of orders that
will reform Universal Service Subsidy allocations and adopted various reforms to
the existing rate structure for interstate access services provided by the ILECs
that are designed to reduce access charges, over time, to more economically
efficient levels and rate structures. It also affirmed that information service
providers (including, among others, Internet service providers) ("ISPs") should
not be subject to existing access charges ("ISP Exemption"). Petitions for
reconsideration of, among other things, the access service and ISP Exemption
related actions were filed before the FCC and appeals taken to various United
States Courts of Appeals. On reconsideration, the FCC in significant part
affirmed the access service and ISP Exemption actions, and the court appeals
have been consolidated before the Eighth Circuit. Access charges are a principal
component of the Company's line cost expense. Additionally, modification of the
ISP Exemption could have an adverse effect on the Company's Internet-related
services business. The Company cannot predict either the outcome of these
appeals or whether or not the result(s) will have a material impact upon its
consolidated financial position or results of operations.
The FCC issued on December 24, 1996, a Notice of Inquiry to seek comment on
whether it should consider actions relating to interstate information services
and the Internet. 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 technologies. 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 consolidated
financial position or results of operations.
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 are subject to
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.
(F) MERGER AGREEMENTS
On September 7, 1997, WorldCom entered into an Agreement and Plan of Merger (the
"CompuServe Merger Agreement"), with H&R Block, Inc. ("H&R Block"), H&R Block
Group, Inc. ("Block Group"), CompuServe Corporation ("CompuServe") and a
wholly-owned acquisition subsidiary of WorldCom, providing for the merger (the
"CompuServe Merger") of the wholly-owned acquisition subsidiary of WorldCom into
CompuServe. In the CompuServe Merger, each share of CompuServe common stock will
be converted into a fraction of a share of WorldCom Common Stock equal to the
CompuServe exchange ratio ("CompuServe Exchange Ratio"), which will be
determined as follows: (i) if the average trading price (generally based on the
average reported closing prices for a specified twenty-day period prior to
closing) of a share of WorldCom Common Stock is greater than or equal to
$29.54, the CompuServe Exchange Ratio will be 0.40625; (ii) if such average
trading price is greater than or equal to $24.00 but less than $29.54, the
CompuServe Exchange Ratio will equal a fraction determined by dividing $12.00
by such average trading price; and (iii) if such average trading price is less
than $24.00, the CompuServe Exchange Ratio will be 0.5, provided that
CompuServe has the right to terminate the CompuServe Merger Agreement if such
average trading price is less than $24.00. Based on (i) the number of shares
of CompuServe common stock outstanding as of September 30, 1997 (without
adjustment for stock options) and (ii) assumed CompuServe Exchange Ratios of
0.40625 and 0.5, 37,618,750 shares and 46,300,000 shares, respectively, of
WorldCom Common Stock will be issued in the CompuServe Merger. Consummation of
the CompuServe Merger is subject to certain conditions, including
Page 10
<PAGE> 11
the approval of the stockholders of CompuServe. The applicable waiting period
with respect to the CompuServe Merger under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "Hart-Scott-Rodino Act"), has
expired. The CompuServe Merger Agreement may be terminated if it has not
occurred on or before March 1, 1998 and under certain other circumstances.
Termination of the CompuServe Merger Agreement by WorldCom or CompuServe under
certain circumstances, including failure to receive the approval of
CompuServe's stockholders, will require one party to make a $15 million payment
to the other party as a termination fee. H&R Block has agreed to vote all of
the CompuServe shares directly or indirectly owned by it (the "Block Shares,"
which as of September 30, 1997, represented approximately 80.1% of the
outstanding CompuServe shares) in favor of the CompuServe Merger, which number
of shares is sufficient for such approval. In addition, H&R Block and Block
Group have irrevocably appointed WorldCom or its nominee as proxy to vote the
Block Shares at any stockholder meeting or otherwise as described in the
preceding sentence, and have granted WorldCom an option to purchase the Block
Shares under certain circumstances. The closing of the CompuServe Merger, which
will be accounted for as a purchase, is expected to occur as soon as
practicable after satisfaction of all the conditions set forth in the
CompuServe Merger Agreement.
On September 7, 1997, WorldCom also entered into a Purchase and Sale Agreement
(the "AOL Agreement") with America Online, Inc. ("AOL"), under which WorldCom
agreed to (a) transfer to AOL the online services businesses of CompuServe and
Sprynet, a CompuServe subsidiary, which WorldCom will acquire as a result of the
CompuServe Merger, and (b) acquire all outstanding shares of ANS Communications,
Inc. ("ANS"), a wholly-owned subsidiary of AOL which provides Internet and other
networking services to AOL and other customers. In addition to the transfer of
the CompuServe online services businesses and Sprynet, WorldCom will pay AOL
$175 million in cash, subject to certain adjustments specified in the AOL
Agreement. The closing of the transactions contemplated by the AOL Agreement
(collectively, the "AOL Transaction"), which will be accounted for as a
purchase, is conditioned on, and is expected to occur immediately after, the
closing of the CompuServe Merger. The applicable waiting period under the
Hart-Scott-Rodino Act with respect to the AOL Transaction has expired.
WorldCom entered into an Amended and Restated Agreement and Plan of Merger dated
as of October 1, 1997 (the "BFP Merger Agreement"), with Brooks Fiber
Properties, Inc. ("BFP") and a wholly-owned acquisition subsidiary of WorldCom,
providing for the merger (the "BFP Merger") of the wholly-owned acquisition
subsidiary of WorldCom into BFP. In the BFP Merger, each share of BFP common
stock will be converted into a fraction of a share of WorldCom Common Stock
equal to the BFP exchange ratio (the "BFP Exchange Ratio"). The BFP Exchange
Ratio will be determined as follows: (i) if the average trading price (generally
based on the average reported closing prices for a specified twenty-day period
prior to closing) of a share of WorldCom Common Stock is greater than or equal
to $35.15, the BFP Exchange Ratio will equal 1.65; (ii) if such average trading
price is greater than or equal to $31.35 but less than $35.15, the BFP Exchange
Ratio will equal a fraction determined by dividing $58.00 by such average
trading price; and (iii) if such average trading price is less than $31.35, the
BFP Exchange Ratio will equal 1.85. Based on BFP common stock outstanding as of
September 30, 1997, and assumed BFP Exchange Ratios of 1.65 and 1.85,
approximately 63,993,503 shares and 71,750,291 shares, respectively, of WorldCom
Common Stock will be issued in the BFP Merger. In addition, outstanding warrants
and options to purchase shares of BFP common stock would be converted in the BFP
Merger to warrants and options to acquire an aggregate of approximately
5,633,607 and 6,316,468 shares, respectively, of WorldCom Common Stock, and the
exercise price would be adjusted to reflect the BFP Exchange Ratio, so that, on
exercise, the holders would receive, in the aggregate, the same number of shares
of WorldCom Common Stock as they would have received had they exercised prior to
the BFP Merger, at the same aggregate exercise price. The BFP Merger has been
structured to qualify as a pooling of interests. Consummation of the BFP Merger
is subject to the fulfillment of a number of conditions, including the
expiration or termination of any applicable waiting periods under the
Hart-Scott-Rodino Act, the receipt of other required regulatory approvals and
the absence of certain material adverse changes. Consummation of the BFP Merger
is also subject to the approval and adoption of the BFP Merger Agreement by the
stockholders of BFP. The BFP Merger Agreement may be terminated if the effective
time has not occurred on or before March 31, 1998 and under certain other
circumstances. Termination of the BFP Merger Agreement by WorldCom or BFP under
certain circumstances will require one party to make a $40 million payment to
the other party. The closing of the BFP Merger is expected to occur as soon as
practicable after satisfaction of all the conditions set forth in the BFP Merger
Agreement, but not before January 2, 1998.
Page 11
<PAGE> 12
On October 1, 1997, WorldCom also announced its intention to offer to acquire
all of the outstanding shares of MCI Communications Corporation ("MCI") for
$41.50 of WorldCom Common Stock (subject to adjustment in certain
circumstances), for each outstanding share of common stock, par value $0.10 per
share, of MCI (the "MCI Common Stock") and on the same day filed a registration
statement with the SEC in connection therewith.
On November 10, 1997, WorldCom announced that it had entered into a definitive
merger agreement with MCI pursuant to which MCI will be merged with and into a
wholly owned subsidiary of WorldCom (the "MCI Merger"). In the MCI Merger, each
share of MCI Common Stock will be converted into the right to receive that
number of shares of WorldCom Common Stock equal to the MCI exchange ratio (the
"MCI Exchange Ratio"). The MCI Exchange Ratio will be determined as follows:
(i) if the average trading price (generally based on the average of the
reported high and low sales prices for WorldCom Common Stock for a specified
twenty- day period prior to closing) of WorldCom Common Stock is greater than
or equal to $41.00, the MCI Exchange Ratio will be 1.2439; (ii) if such average
trading price is greater than or equal to $29.00, but less than $41.00, the MCI
Exchange Ratio will equal a fraction determined by dividing $51.00 by such
average trading price; and (iii) if such average trading price is less than
$29.00, the MCI Exchange Ratio will equal 1.7586. Also, in the MCI Merger, each
share of Class A Common Stock, par value $0.10 per Share of MCI (the "MCI Class
A Stock"), all of which shares are owned by British Telecommunications plc
("BT"), would be converted into the right to receive $51.00 per share in cash
without interest at closing. The MCI Merger will be accounted for as a purchase
and will be tax-free to MCI stockholders. Based on MCI Common Stock outstanding
as of October 31, 1997, and assumed MCI Exchange Ratios of 1.2439 and 1.7586,
approximately 703,178,763 shares and 994,139,540 shares, respectively, of
WorldCom Common Stock will be issued in the MCI Merger. In addition,
outstanding warrants and options to purchase shares of MCI Common Stock would
be converted in the MCI Merger to warrants and options to acquire an aggregate
of approximately 100,263,626 shares and 141,750,634 shares, respectively, of
WorldCom Common Stock, and the exercise price would be adjusted to reflect the
MCI Exchange Ratio, so that, on exercise, the holders would receive, in the
aggregate, the same number of shares of WorldCom Common Stock as they would
have received had they exercised prior to the MCI Merger, at the same exercise
price.
The MCI Merger is subject to the approvals of MCI and WorldCom shareholders as
well as approvals from the FCC, the Justice Department and various state
government bodies. In addition, the MCI Merger is subject to review by the
European Commission. WorldCom anticipates that the MCI Merger will close within
six to nine months.
In connection with the MCI Merger, WorldCom, MCI and BT have entered into an
agreement dated as of November 9, 1997 pursuant to which, among other things, BT
consented to and agreed to support the MCI Merger and other transactions
contemplated by the merger agreement and has agreed to vote against any
alternative transactions.
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 Company does not undertake any
obligation to release publicly any revisions to such forward-looking statements
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events. The following discussion and analysis
relates to the
Page 12
<PAGE> 13
financial condition and results of operations of the Company for the three and
nine month periods ended September 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.
On December 31, 1996, WorldCom, through a wholly owned subsidiary merged with
MFS. See Note (B) of Notes to Consolidated Financial Statements contained
elsewhere herein for a description of the MFS Merger.
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 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. In addition, various state
regulatory agencies are considering adoption of subsidy systems that could cause
rate adjustments to the access services obtained by the Company and to retail
rates. 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.
On September 7, 1997, WorldCom entered into the CompuServe Merger Agreement and
the AOL Agreement. On October 1, 1997, WorldCom entered into the BFP Merger
Agreement. On November 9, 1997, WorldCom entered into the MCI Merger agreement
and the related BT agreement. See Note (F) of Notes to Consolidated Financial
Statements contained elsewhere herein for a description of such agreements.
Page 13
<PAGE> 14
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.
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 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 51.1% 54.7% 55.4% 52.5% 54.5% 54.7%
Selling, general and
administrative 20.4% 18.6% 24.5% 21.3% 18.5% 24.8%
Depreciation and
amortization 12.2% 6.4% 14.7% 12.8% 7.0% 15.5%
Provision to reduce carrying
value of certain assets -- -- -- -- 12.4% 10.0%
-------- -------- -------- -------- -------- --------
Operating income (loss) 16.3% 20.3% 5.4% 13.5% 7.5% -4.9%
Other income (expense):
Interest expense -4.3% -4.8% -5.8% -4.4% -5.2% -6.2%
Miscellaneous 0.3% 0.2% 1.5% 0.3% 0.2% 0.9%
-------- -------- -------- -------- -------- --------
Income (loss) before income
taxes and extraordinary items 12.3% 15.7% 1.2% 9.4% 2.5% -10.2%
Income tax expense 6.4% 6.1% 4.8% 4.9% 4.0% 3.2%
-------- -------- -------- -------- -------- --------
Net income (loss) 5.9% 9.6% -3.6% 4.5% -1.5% -13.4%
Extraordinary items -- -- -- -- -0.8% -0.6%
Preferred dividend requirement 0.3% -- 0.5% 0.4% -- 0.6%
-------- -------- -------- -------- -------- --------
Net income (loss) applicable to
common shareholders 5.6% 9.6% -4.2% 4.1% -2.2% -14.6%
======== ======== ======== ======== ======== ========
</TABLE>
Revenues for the three months ended September 30, 1997 increased 66.3% to $1.90
billion on 9.70 billion revenue minutes as compared to $1.14 billion on 6.18
billion revenue minutes for the three months ended September 30, 1996. For the
nine months ended September 30, 1997, revenues increased 64.5% to $5.35 billion
on 27.15 billion revenue minutes versus $3.25 billion on 17.49 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. The Company has successfully integrated MFS into its operations.
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 third quarter of
1997 increased 31% and 38%, respectively, compared with pro forma revenues of
$1.45 billion on 7.03 billion revenue minutes for the third quarter of 1996. For
the nine month period ended September 30, 1997, revenues and traffic increased
33% and 37%, respectively, versus pro forma revenues of $4.03 billion on 19.83
billion revenue minutes for the same period of the prior year. The pro forma
increases reflect the internal growth of the Company in all core communications
services. In spite of the continuing impact of competitive pricing and access
charge pass throughs, the Company posted strong gains across all product lines
due to increased usage and greater demand for high speed data and Internet
related growth.
The following table highlights the source of WorldCom's internal growth by major
line of business. The pro forma and actual revenue increases for the three and
nine month periods ended September 30, 1997 and 1996 reflect the following
increases by category (dollars in millions):
Page 14
<PAGE> 15
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
---------------------------------------- ----------------------------------------
Actual Pro forma Actual Pro forma
1997 1996 Change 1997 1996 Change
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Domestic switched $ 1,009.4 $ 842.6 20% $ 2,928.1 $ 2,410.7 22%
Domestic private line 406.3 299.4 36% 1,130.7 838.9 35%
International 219.9 121.6 81% 580.7 316.3 84%
Internet 147.1 69.7 111% 384.1 162.7 136%
---------- ---------- ---------- ---------- ---------- ----------
CORE REVENUES $ 1,782.7 $ 1,333.3 34% $ 5,023.6 $ 3,728.6 35%
Other revenues 118.5 121.6 -3% 324.9 304.5 7%
---------- ---------- ---------- ---------- ---------- ----------
TOTAL REVENUES $ 1,901.2 $ 1,454.9 31% $ 5,348.5 $ 4,033.1 33%
========== ========== ========== ========== ========== ==========
Businesses sold:
Operator Services -17.4 -27.8 -37% -69.5 -84.8 -18%
Broadcast Operations -11.5 -16.1 -28% -40.2 -48.0 -16%
---------- ---------- ---------- ---------- ---------- ----------
RECASTED REVENUES $ 1,872.3 $ 1,411.0 33% $ 5,238.8 $ 3,900.3 34%
========== ========== ========== ========== ========== ==========
</TABLE>
The following discusses the results of operations for the three and nine month
periods ended September 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 third quarter experienced a 20% pro forma
year-over-year increase driven by strong volume gains in both retail and
wholesale businesses. For the nine month period ended September 30, 1997,
domestic switched revenues increased 22% over the prior year pro forma amount on
a 33% increase in traffic. The Company's revenue and minute gaps continue to be
driven by strong wholesale revenues, international settlement reduction pass
throughs, third quarter 1997 access charge pass throughs, and product mix.
Domestic switched revenues includes both long distance and increasingly local
switched revenues. While the Company continues to show significant percentage
gains in switched local, it is still a relatively small component of total
Company revenues. However, the Company expects that due to its local initiatives
and pending acquisitions, revenue attributable to local switched services will
grow rapidly in 1998 and beyond. As of September 30, 1997, the Company has 42
active local switches. The BFP Merger would add another 28 installed switches
for a combined company total of 70 local switches. This number is expected to
continue to increase as a result of local initiatives and pending acquisitions.
Domestic private line revenues for the three and nine month periods ended
September 30, 1997 increased 36% and 35%, respectively, over the pro forma prior
year amounts. These increases are due primarily to increased demand for high
speed data and by Internet related growth. Domestic private line includes both
long distance and local bandwidth sales. The Company currently has eight million
voice grade equivalents, and over 20,000 connected buildings. Route miles of
connected fiber are in excess of 325,000. The combinations of BFP and MCI into
WorldCom's operations are expected to enhance WorldCom's local presence.
International revenues -- those revenues originating outside of the United
States -- for the third quarter of 1997 were $219.9 million, an increase of 81%,
as compared with $121.6 million for the pro forma prior year third quarter. For
the nine month period ended September 30, 1997, international revenues increased
84% to $580.7 million versus $316.3 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 for both switched
services and increasingly high speed data services.
Page 15
<PAGE> 16
Internet revenues for the three and nine month periods ended September 30, 1997
increased 111% and 136%, respectively, over the prior year pro forma amounts.
The provisioning constraints experienced in the second quarter were
significantly overcome in the latter part of the third quarter, and the strong
demand for both dedicated and dial-up access contributed to the resumption of
strong sequential gains.
Other revenues for the third quarter of 1997 were $118.5 million, a decrease of
3%, as compared with $121.6 million for the pro forma prior year third quarter.
For the nine month period ended September 30, 1997, other revenues increased 7%
to $324.9 million versus $304.5 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.
WorldCom completed the sale of its operator services and broadcast divisions in
the third quarter of 1997. On a recast basis, excluding the results of the
operator services and broadcast operations divisions in both periods, other
revenues increased approximately 15% for the third quarter of 1997 and 25%
year-to-date, to $89.6 million and $215.2 million, respectively.
Line costs as a percentage of revenues for the third quarter of 1997 were 51.1%
as compared to 54.7% reported for the same period of the prior year and 55.4%
pro forma for the third quarter of 1996. On a year-to-date basis, line costs as
a percentage of revenues decreased to 52.5% as compared to 54.5% reported for
the same period of the prior year and 54.7% pro forma for the nine month period
ended September 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 third quarter of 1997
increased to $387.8 million or 20.4% of revenues as compared to $212.5 million
or 18.6% of revenues as reported for the third quarter of 1996. On a
year-to-date basis, these expenses increased to $1.14 billion or 21.3% of
revenues from $602.9 million or 18.5% of revenues reported for the nine months
ended September 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 nine month periods ended September 30, 1997, as compared to 24.5%
and 24.8% of revenues, respectively, for the same pro forma periods of the prior
year, results from the assimilation of MFS into the Company's strategy of cost
control.
Depreciation and amortization expense for the third quarter of 1997 increased to
$231.5 million or 12.2% of revenues from $73.4 million or 6.4% of revenues for
the third quarter of 1996. On a year-to-date basis, this expense increased to
$682.2 million or 12.8% of revenues versus $229 million or 7.0% 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 third quarter of 1997 was $81.8 million or 4.3% of
revenues, as compared to $55.1 million or 4.8% of revenues reported in the third
quarter of 1996. For the nine months ended September 30, 1997, interest expense
was $234.9 million or 4.4% of revenues, as compared to $168.0 million or 5.2% of
revenues for the first nine 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.
Page 16
<PAGE> 17
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 September 30, 1997, net income, taking into account the
increased amortization for intangibles related to the MFS Merger, was $105.8
million, or $0.12 per common share, compared with net income of $109.3 million,
or $0.27 per common share as reported for the third quarter of 1996.
For the nine months ended September 30, 1997, net income was $220.9 million or
$0.25 per share compared with $295.1 million, or $0.73 per share, before
non-cash charges, for the nine months ended September 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997, the Company's total debt was $5.36 billion, an
increase of $533.7 million from December 31, 1996 as a result of the increased
capital expenditures offset by the application of available cash and marketable
securities to repay 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
five-year term 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 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 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 September 30, 1997, the Company had available liquidity of $1.86 billion
under its New Credit Facilities and from available cash and marketable
securities. Certain regulatory approvals were received on or before November 1,
1997, thereby satisfying the condition to the availability of the Facility B
Loans. As a result, the Company gained access to an additional $1.25 billion
under its New Credit Facilities, or $3.11 billion in the aggregate.
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 included $600 million principal amount of 7.55% Senior Notes due 2004,
$1.1 billion principal amount of 7.75% Senior
Page 17
<PAGE> 18
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, which payments commenced 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 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. 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 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 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").
In August of 1997, the Company exercised its option to accept all MFS notes
validly tendered in its on-going Exchange Offers and Consent Solicitations. The
Company received requisite consents from holders of notes of MFS 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. As of August 22, 1997, the Company exchanged
approximately $680.1 million and $666.7 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 19, 1997.
For the nine months ended September 30, 1997, the Company's cash flow from
operations was $973.9 million, increasing from $496.0 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 net
proceeds of $12.0 million, bringing the total amount outstanding to $402.8
million. The Company used these proceeds to reduce outstanding debt under the
Company's New Credit Facilities. As of September 30, 1997, the purchaser owned
an undivided interest in a $942.2 million pool of receivables which includes the
$402.8 million sold.
Cash used in investing activities for the nine months ended September 30, 1997
totaled $1.76 billion. The sale of marketable securities provided $766.6 million
of proceeds which were used to fund a portion of capital expenditures of $1.93
billion and
Page 18
<PAGE> 19
acquisition and related costs of $441.7 million primarily from the MFS Merger.
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 pending or other possible future acquisitions.
Included in cash flows from financing activities are payments of $19.8 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 for February 28, 1997, May 31, 1997, and August 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.
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. Without regard to pending or any possible future acquisitions, the
Company expects that funding needs in excess of internally generated cash flow
will be met by utilization of the Company's New Credit Facilities.
The Company believes that the CompuServe Merger and the AOL Transaction would
generate sufficient cash flow to adequately fund the capital requirements of
these businesses. Additionally, management believes that the BFP Merger would
accelerate WorldCom's local city development plans by one to two years.
Therefore, the BFP Merger is expected to result in a reduction in WorldCom's
expected capital spending for local city development. As a result of the
CompuServe Merger, the AOL Transaction, the BFP Merger and the MCI Merger, the
Company believes that the operating and capital synergies from the integration
of these acquisitions into WorldCom's operations, would further enhance the cash
flow contribution for the Company.
Absent significant capital requirements for other acquisitions, the Company
believes that cash flow from operations and available liquidity, including
$3.11 billion under ts New Credit Facilities, will be more than adequate to
meet the Company's capital needs for the remainder of 1997.
In connection with the MCI Merger, WorldCom has agreed to pay BT $51.00 in cash
without interest for each of the Class A Shares of MCI Stock it owns, or $6.94
billion in the aggregate. Additionally, WorldCom has paid BT a fee of $465
million to induce BT to terminate the previously signed BT/MCI merger agreement
and to enter into an agreement with the Company and MCI dated November 9, 1997.
WorldCom expects to fund this commitment through a combination of bank and bond
financing. The MCI Merger is expected to close within six to nine months and
therefore funding of this commitment is not expected to occur until the second
half of 1998. Borrowings under the bank portion of this proposed commitment
would bear interest at rates that fluctuate with prevailing short-term interest
rates. Increases in interest rates on the Company's debt would have an adverse
effect upon WorldCom's reported net income and cash flow. WorldCom believes that
the combined operations of WorldCom, MCI, CompuServe, and BFP would generate
sufficient cash flow to service WorldCom's debt and capital requirements upon
consummation of the proposed MCI Merger, CompuServe Merger, AOL Transaction and
the BFP Merger; however, economic downturns, increased interest rates and other
adverse developments, including factors beyond WorldCom's control, could impair
its ability to service its indebtedness. In addition, the cash flow required to
service WorldCom's debt would reduce its liquidity, which in turn may reduce its
ability to fund internal growth, additional acquisitions and capital
improvements.
Page 19
<PAGE> 20
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the FASB issued SFAS 128 "Earnings Per Share." This statement
establishes new standards for computing and presenting earnings per share
("EPS"). 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 reported
earnings per share.
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 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 June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
This statement establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general purpose financial statements. This statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. The statement is effective
for fiscal years beginning 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 condition.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." This statement establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
This statement is effective for financial statements for periods beginning 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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities and Use of Proceeds.
On August 19, 1997, in connection with its acquisition of the
outstanding shares of McCourt Fiber Network, Inc., which was the
holder of the shares of Metropolitan Fiber Systems - McCourt, Inc.
not already owned by the Company, the Company issued to shareholders
of McCourt Fiber Network, Inc. 846,154 shares of WorldCom Common
Stock which total included 812,308 shares issued to David C. McCourt,
a member of the WorldCom Board of Directors. In connection with this
transaction, the Company relied on an exemption from registration
contained in Section 4(2) of the Securities Act of 1933, as amended
(the "Securities Act") and Regulation D promulgated thereunder.
On July 1, 1997, in connection with its acquisition of the remaining
shares of Gridnet, Inc. that it did not already own, the Company
issued 466,000 shares of WorldCom Common Stock to certain minority
shareholders of Gridnet, Inc. In connection with this transaction,
the Company relied on an exemption from registration contained in
Section 4(2) of the Securities Act and Regulation D promulgated
thereunder.
Page 20
<PAGE> 21
Item 3. Defaults upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
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 August 5, 1997 (filed
August 5, 1997) reporting under Item 5, Other Events,
information related to the Company's announcement of the
amendment of the Exchange Offers and Consent Solicitations
for certain MFS Communications Company, Inc. Notes.
(ii) Current Report on Form 8-K dated August 8, 1997 (filed
August 11, 1997) reporting under Item 5, Other Events,
information relating to the Company's announcement of
the initial acceptance in Exchange Offers and Consent
Solicitations for certain MFS Communications Company,
Inc. Notes.
(iii) Current Report on Form 8-K dated August 22, 1997 (filed
August 25,1997) reporting under Item 5, Other Events,
information related to the successful completion of Exchange
Offers and Consent Solicitations for certain MFS
Communications Company, Inc. Notes.
(iv) Current Report on Form 8-K dated August 28, 1997 (filed
September 10, 1997) reporting under Item 9, Sales of
Securities Pursuant to Regulation S, information related to
the Company's issuance of a total of 988,781 shares of
WorldCom common stock pursuant to the acquisition agreement
among NLnet Holding B.V., a Netherlands corporation
("NLnet"), the shareholders of NLnet and the holders of
options to purchase shares in NLnet, and UUNET Technologies
Inc., a wholly owned subsidiary of the Company and WorldCom,
in exchange for all of the common stock and options of
NLnet, valued at approximately $33.1 million.
(v) Current Report on Form 8-K dated September 7, 1997 (filed
September 16, 1997) reporting under Item 5, Other Events,
information related to the Company's announcement that it
had entered into an Agreement and Plan of Merger to acquire
CompuServe Corporation, a Delaware corporation
("CompuServe") from H&R Block, Inc., a Missouri corporation;
and the Company's announcement that on September 7, 1997,
the Company also entered into a Purchase and Sale Agreement
(the "Agreement") with America Online, Inc. ("AOL") and ANS
Communications, Inc., a Delaware corporation and a wholly
owned subsidiary of AOL ("ANS").
Page 21
<PAGE> 22
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: November 14, 1997
Page 22
<PAGE> 23
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))
2.1 Agreement and Plan of Merger, dated as of September 7, 1997,
by and among H&R Block, Inc., H&R Block Group, Inc.,
CompuServe Corporation, WorldCom, Inc., and Walnut
Acquisition Company, L.L.C. (incorporated herein by
reference to Exhibit 2.1 to the Company's Current Report on
Form 8-K dated September 7, 1997(File No. 0-11258))*
2.2 Stockholders Agreement, dated as of September 7, 1997, by
and among H&R Block, Inc., a Missouri corporation, H&R Block
Group, Inc., a Delaware corporation, and WorldCom, Inc., a
Georgia corporation. (incorporated herein by reference to
Exhibit 2.2 to the Company's Current Report on Form 8-K
dated September 7, 1997(File No. 0-11258))
2.3 Standstill Agreement dated as of September 7, 1997, by and
among H&R Block, Inc., a Missouri corporation, H&R Block
Group, Inc., a Delaware corporation, and WorldCom, Inc., a
Georgia corporation (incorporated herein by reference to
Exhibit 2.3 to the Company's Current Report on Form 8-K
dated September 7, 1997(File No. 0-11258))
2.4 Purchase and Sale Agreement by and among America Online,
Inc., ANS Communications, Inc. and WorldCom, Inc., dated as
of September 7, 1997 (incorporated herein by reference to
Exhibit 2.4 to the Company's Current Report on Form 8-K
dated September 7, 1997(File No. 0-11258))*
2.5 Agreement and Plan of Merger dated as of October 1, 1997 by
and among WorldCom, Inc., BV Acquisition, Inc. and Brooks
Fiber Properties, Inc. ("BFP") (incorporated by reference to
Exhibit 2.1 to BFP's Current Report on Form 8-K dated
October 1, 1997 (filed October 6, 1997) (File No. 0-
28036))*
2.6 Agreement and Plan of Merger dated as of November 9, 1997
among WorldCom, Inc., TC Investments Corp. and MCI
Communications Corporation (incorporated by reference to
Exhibit 2.1 to the Company's Current Report on Form 8-K
dated November 9, 1997 (filed November 12, 1997))*
2.7 Agreement dated as of November 9, 1997 among British
Telecommunications plc, WorldCom, Inc. and MCI
Communications Corporation (incorporated by reference to
Exhibit 99.1 to the Company's Current Report on Form 8-K
dated November 9, 1997 (filed November 12, 1997))*
</TABLE>
Page 23
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
3.1 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))
3.2 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))
4.1 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))
4.2 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))
4.3 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))
4.4 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))
4.5 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 Amendment No. 2 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 (incorporated herein by reference to Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 1997 (File No. 0-11258))
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))
10.3 Facility B 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
</TABLE>
Page 24
<PAGE> 25
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
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 Statement Regarding 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 upon its
request.
Page 25
<PAGE> 1
Exhibit 11.1
WORLDCOM, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
----------------------------- -----------------------------
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Primary:
Weighted average shares outstanding 903,356 402,881 895,688 393,869
Common stock equivalents 28,537 7,724 27,045 --
Common stock equivalents issuable upon conversion of:
Series A preferred stock 32,703 32,703 --
5% convertible notes -- 4,584 -- --
------------ ------------ ------------ ------------
964,596 415,189 955,436 393,869
============ ============ ============ ============
Net income (loss) applicable to common shareholders
before extraordinary items $ 105,839 $ 109,255 $ 220,889 $ (48,466)
Extraordinary items -- -- -- (24,434)
Add back:
Series A preferred dividend 6,364 -- 19,092 --
Interest paid on 5% convertible notes
conversions, net of taxes -- 1,489 -- --
------------ ------------ ------------ ------------
Net income (loss) applicable to common shareholders $ 112,203 $ 110,744 $ 239,981 $ (72,900)
============ ============ ============ ============
Primary earnings (loss) per share:
Applicable to common shareholders before extraordinary items $ 0.12 $ 0.27 $ 0.25 $ (0.12)
============ ============ ============ ============
Extraordinary items $ -- $ -- $ -- $ (0.06)
============ ============ ============ ============
Applicable to common shareholders $ 0.12 $ 0.27 $ 0.25 $ (0.18)
============ ============ ============ ============
Fully diluted:
Weighted average shares outstanding 903,356 402,881 895,688 393,869
Common stock equivalents 30,041 7,730 29,109 --
Common stock issuable upon conversion of:
Series A preferred stock 32,703 -- 32,703 --
Series B preferred stock 1,227 -- 1,230 --
5% convertible notes -- 4,584 -- --
------------ ------------ ------------ ------------
967,327 415,195 958,730 393,869
============ ============ ============ ============
Net income (loss) applicable to common shareholders
before extraordinary items $ 105,839 $ 109,255 $ 220,889 $ (48,466)
Extraordinary items -- -- -- (24,434)
Add back:
Series A preferred dividend 6,364 -- 19,092 --
Series B preferred dividend 242 -- 735 --
Interest on 5% convertible notes, net of taxes -- 1,489
------------ ------------ ------------ ------------
Net income (loss) applicable to common shareholders $ 112,445 $ 110,744 $ 240,716 $ (72,900)
============ ============ ============ ============
Fully diluted earnings (loss) per share:
Applicable to common shareholders before extraordinary items $ 0.12 $ 0.27 $ 0.25 $ (0.12)
============ ============ ============ ============
Extraordinary items $ -- $ -- $ -- $ (0.06)
============ ============ ============ ============
Applicable to common shareholders $ 0.12 $ 0.27 $ 0.25 $ (0.18)
============ ============ ============ ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM WORLDCOM,
INC.'S FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 59,190
<SECURITIES> 6,866
<RECEIVABLES> 1,303,688
<ALLOWANCES> 128,583
<INVENTORY> 0
<CURRENT-ASSETS> 1,625,380
<PP&E> 6,081,730
<DEPRECIATION> 662,909
<TOTAL-ASSETS> 20,813,368
<CURRENT-LIABILITIES> 1,870,285
<BONDS> 5,348,638
0
125
<COMMON> 9,072
<OTHER-SE> 13,356,803
<TOTAL-LIABILITY-AND-EQUITY> 20,813,368
<SALES> 0
<TOTAL-REVENUES> 5,348,522
<CGS> 2,805,807
<TOTAL-COSTS> 4,628,875
<OTHER-EXPENSES> 16,794
<LOSS-PROVISION> 76,246
<INTEREST-EXPENSE> 234,949
<INCOME-PRETAX> 501,492
<INCOME-TAX> 260,776
<INCOME-CONTINUING> 240,716
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 220,889
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.25
<FN>
</FN>
</TABLE>
