<PAGE>
Filed Pursuant to Rule 424(b)(5)
Registration No. 333-45067
(Pursuant to Rule 429, also
Registration No. 333-20911 and
Pursuant to Rule 462(b),
also Registration No. 333-60859)
PROSPECTUS SUPPLEMENT
[LOGO]
(TO PROSPECTUS DATED AUGUST 7, 1998)
$6,100,000,000
WORLDCOM, INC.
$1,500,000,000 6.125% NOTES DUE 2001
$600,000,000 6.250% NOTES DUE 2003
$2,250,000,000 6.400% NOTES DUE 2005
$1,750,000,000 6.950% NOTES DUE 2028
---------
The 6.125% Notes Due 2001 (the "Notes Due 2001"), which will mature on
August 15, 2001, the 6.250% Notes Due 2003 (the "Notes Due 2003"), which will
mature on August 15, 2003, the 6.400% Notes Due 2005 (the "Notes Due 2005"),
which will mature on August 15, 2005, and the 6.950% Notes Due 2028 (the "Notes
Due 2028"), which will mature on August 15, 2028 (collectively, with the Notes
Due 2001, the Notes Due 2003 and the Notes Due 2005, the "Notes"), are being
offered by WorldCom, Inc. ("WorldCom" or the "Company"). Interest on the Notes
will be payable semiannually in arrears on February 15 and August 15 of each
year, commencing February 15, 1999.
The Notes Due 2001, the Notes Due 2003, the Notes Due 2005 and the Notes Due
2028 will be redeemable, as a whole or in part, at the option of the Company, at
any time or from time to time, 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
herein) discounted at the Treasury Rate (as defined herein) plus (a) 10 basis
points for the Notes Due 2001, (b) 15 basis points for the Notes Due 2003, (c)
15 basis points for the Notes Due 2005, or (d) 20 basis points for the Notes Due
2028, plus in the case of each of clause (i) and (ii) accrued interest to the
date of redemption. See "Description of the Notes--Optional Redemption."
Each of the Notes Due 2001, the Notes Due 2003, the Notes Due 2005 and the
Notes Due 2028 will be represented by one or more Global Securities (as defined
herein) registered in the name of a nominee of The Depository Trust Company
("DTC"), as Depository. Beneficial interests in such certificates will be shown
on, and transfers thereof will be effected only through, records maintained by
DTC's participants. Owners of beneficial interests in the certificates
representing the Notes will be entitled to physical delivery of Notes in
certificated form in the amount of their respective beneficial interests only
under the limited circumstances described in the accompanying Prospectus. See
"Description of the Notes--Delivery and Form" and "--Same-Day Settlement and
Payment."
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE NOTES
SEE "RISK FACTORS" BEGINNING ON PAGE S-4.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT (2) COMPANY(3)
<S> <C> <C> <C>
Per Note Due
2001 99.896% .400% 99.496%
Total $1,498,440,000 $6,000,000 $1,492,440,000
Per Note Due
2003 99.978% .600% 99.378%
Total $599,868,000 $3,600,000 $596,268,000
Per Note Due
2005 99.798% .625% 99.173%
Total $2,245,455,000 $14,062,500 $2,231,392,500
Per Note Due
2028 99.065% .875% 98.190%
Total $1,733,637,500 $15,312,500 $1,718,325,000
</TABLE>
(1) Plus accrued interest, if any, from August 11, 1998 to date of delivery.
(2) For information regarding indemnification of the Underwriters, see
"Underwriting."
(3) Before deducting expenses payable by the Company estimated at
$2,000,000.
------------------
The Notes are offered subject to receipt and acceptance by the Underwriters,
to prior sale and to the Underwriters' right to reject any order in whole or in
part and to withdraw, cancel or modify the offer without notice. It is expected
that delivery of the Notes will be made in book-entry form through the
facilities of DTC on or about August 11, 1998.
--------------
SALOMON SMITH BARNEY
CREDIT SUISSE FIRST BOSTON
LEHMAN BROTHERS
CHASE SECURITIES INC.
J.P. MORGAN & CO.
NATIONSBANC MONTGOMERY SECURITIES LLC
UTENDAHL CAPITAL PARTNERS, L.P.
August 7, 1998
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NOTES, INCLUDING
PURCHASES OF THE NOTES TO STABILIZE THEIR MARKET PRICE AND PURCHASES OF THE
NOTES TO COVER SOME OR ALL OF A SHORT POSITION IN THE NOTES MAINTAINED BY THE
UNDERWRITERS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus Supplement and the accompanying Prospectus may be deemed to
include or incorporate by reference forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 (the "PSLRA")
that involve risk and uncertainty, including, without limitation, statements
contained under "Risk Factors," "The MCI/WorldCom Merger" and "Pro Forma
Condensed Combined Financial Statements." Such statements may include, but are
not limited to, the following:
(i) certain statements, including possible or assumed results of operations
of WorldCom or MCI Communications Corporation ("MCI") and the combined companies
("MCI/WorldCom"), forecasts, projections and descriptions of anticipated cost
savings or other synergies, possible charges related to the allocation of a
portion of the purchase price for MCI to in-process research and development
projects of MCI or to certain exit costs relating to integrating the operations
of MCI, the markets for WorldCom's or MCI's services and products, anticipated
capital expenditures, regulatory developments, competition or the effects of the
pending MCI/WorldCom merger (the "MCI/WorldCom Merger"), or the recently
completed acquisitions by WorldCom of CompuServe Corporation (the "CompuServe
Merger") and Brooks Fiber Properties, Inc. (the "BFP Merger") and the
transactions with America Online, Inc. (the "AOL Transaction"), as well as
assumptions regarding the foregoing;
(ii) any statements preceded by, followed by or that include the words
"intend," "expect," "project," "estimate," "predict," "anticipate," "should,"
"believe" and similar expressions; and
(iii) other statements contained or incorporated by reference herein
regarding matters that are not historical facts.
Because such statements are subject to risks and uncertainties, future
events and actual results, performance and achievements could differ materially
from those set forth in, contemplated by or underlying the forward-looking
statements. Important factors that could cause actual results to differ
materially from those in the forward-looking statements herein include, without
limitation, the factors set forth under the caption "Risk Factors" herein.
Investors are cautioned not to place undue reliance on such statements, which
speak only as of the date thereof.
The independent public accountants have not examined or compiled any such
forward-looking statements or any forecasts or other projections referred to
herein and, accordingly, do not provide any assurance with respect to such
statements.
The cautionary statements contained or referred to in this section should be
considered in connection with any subsequent written or oral forward-looking
statements that may be issued by WorldCom or persons acting on its behalf. 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.
S-2
<PAGE>
THE COMPANY
GENERAL
WorldCom is one of the largest telecommunications companies in the United
States, serving local, long distance, and Internet customers domestically and
internationally. WorldCom provides telecommunications services to business,
government, telecommunications companies and consumer customers, through its
network of fiber optic cables, digital microwave, and fixed and transportable
satellite earth stations.
WorldCom is one of the first major facilities-based telecommunications
companies with the capability to provide businesses with high quality local,
long distance, Internet, data and international communications services over its
global networks. With service to points throughout the nation and the world,
WorldCom provides telecommunications products and services including: switched
and dedicated long distance and local products, dedicated and dial-up Internet
access, resale cellular services, 800 services, calling cards, domestic and
international private lines, broadband data services, debit cards, conference
calling, advanced billing systems, enhanced fax and data connections, high speed
data communications, facilities management, local access to long distance
companies, local access to asynchronous transfer mode ("ATM")-based backbone
service, web server hosting and integration services and interconnection via
Network Access Points ("NAPs") to Internet service providers ("ISPs").
The Company serves as a holding company for its subsidiaries, the operations
of which are organized along the Company's business lines. References herein to
the Company include the Company and its subsidiaries, unless the context
otherwise requires. WorldCom's principal executive offices are located at 515
East Amite Street, Jackson, Mississippi 39201-2702, and its telephone number is
(601) 360-8600.
RECENT EVENTS
SECOND QUARTER EARNINGS. On July 23, 1998, WorldCom reported revenues for
the three months ended June 30, 1998 of $2.6 billion, a 45 percent increase over
revenues of $1.8 billion for the same period in 1997. Net income for the three
months ended June 30, 1998 was $227.5 million, a 411 percent increase over net
income before extraordinary items of $44.5 million for the same period in 1997.
Prior year results have been restated to include the effects of subsequent
business combinations accounted for as pooling-of-interest transactions. On July
30, 1998, MCI reported certain financial results for the three months ended June
30, 1998. Certain portions of the MCI press release containing such information
are incorporated herein by reference to WorldCom's Current Report on Form 8-K
dated August 4, 1998 (filed August 4, 1998).
BANK FACILITY. On August 6, 1998, WorldCom replaced its existing $3.75
billion and $1.25 billion revolving credit facilities (the "Old Credit
Facilities") with $12.0 billion in credit facilities consisting of a $3.75
billion Amended and Restated Facility A Revolving Credit Agreement ("Facility A
Loans"), a $1.25 billion Amended and Restated Facility B Term Loan Agreement
("Facility B Loans") and a new $7 billion 364-Day Revolving Credit and Term Loan
Agreement (the "Facility C Loans") (the Facility C Loans together with the
Facility A Loans and Facility B Loans, the "New Credit Facilities"), provided,
however, that if, on or before October 5, 1998, either (i) the MCI/WorldCom
Merger has not been consummated and all necessary and material consents and
approvals have not been obtained with respect thereto, or (ii) the Company has
not delivered written confirmation of the consummation of the MCI/WorldCom
Merger, a copy of the Certificate of Merger filed with respect thereto and an
opinion of counsel satisfactory to the lenders under the Facility C Loans, the
$7 billion commitment with respect to the Facility C Loans will be automatically
reduced to $3 billion and the Company is required to make any necessary
prepayments as a result thereof. The Facility A Loans and the Facility B Loans
mature on June 30, 2002. The Facility C 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 51 percent of the committed amounts consent.
Additionally, effective as of the end of such
S-3
<PAGE>
364 day term, the Company may elect to convert up to $4 billion of the principal
debt outstanding under, or in the case of a reduction in the commitment as
contemplated herein, $1.714 billion, of the Facility C Loans from revolving
loans to term loans with a maturity date no later than one year after the
conversion. The New Credit Facilities bear interest payable in varying periods,
depending on the interest period, not to exceed six months, or with respect to
any Eurodollar Rate borrowing, 12 months if available to all lenders, at rates
selected by the Company under the terms of the New Credit Facilities, including
a Base Rate or Eurodollar Rate, plus the applicable margin. The applicable
margin for the Eurodollar Rate borrowing varies from 0.35% to 0.75% as to
Facility A Loans and Facility B Loans and from 0.225% to 0.450% as to Facility C
Loans, in each case based upon the better of certain debt ratings. 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 a financial covenant based on the ratio of
total debt to total capitalization, calculated on a consolidated basis. The New
Credit Facilities require compliance with certain operating covenants which
limit, among other things, the incurrence of additional indebtedness by the
Company and its subsidiaries, sales of assets and mergers and dissolutions,
which covenants are generally less restrictive than those contained in the Old
Credit Facilities and which do not restrict distributions to shareholders,
provided the Company is not in default under the New Credit Facilities. The
Facility A Loans and the Facility C Loans are subject to annual commitment fees
not to exceed 0.25% and 0.12%, respectively, of any unborrowed portion of the
facilities.
RISK FACTORS
PROSPECTIVE PURCHASERS OF THE NOTES SHOULD CAREFULLY CONSIDER ALL OF THE
INFORMATION CONTAINED AND INCORPORATED BY REFERENCE IN THIS PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS, INCLUDING THE FOLLOWING FACTORS, IN
EVALUATING WORLDCOM AND ITS BUSINESS. IN PARTICULAR, PROSPECTIVE INVESTORS
SHOULD NOTE THAT THIS PROSPECTUS SUPPLEMENT, THE PROSPECTUS AND THE DOCUMENTS
INCORPORATED BY REFERENCE HEREIN AND THEREIN CONTAIN OR INCORPORATE BY REFERENCE
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PSLRA AND THAT ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH STATEMENTS. SEE
"CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS." THE FACTORS LISTED
BELOW REPRESENT CERTAIN IMPORTANT FACTORS THE COMPANY BELIEVES COULD CAUSE SUCH
RESULTS TO DIFFER. THESE FACTORS ARE NOT INTENDED TO REPRESENT A COMPLETE LIST
OF THE GENERAL OR SPECIFIC RISKS THAT MAY AFFECT THE COMPANY. IT SHOULD BE
RECOGNIZED THAT OTHER RISKS MAY BE SIGNIFICANT, PRESENTLY OR IN THE FUTURE, AND
THE RISKS SET FORTH BELOW MAY AFFECT THE COMPANY TO A GREATER EXTENT THAN
INDICATED.
RISKS RELATED TO THE MCI/WORLDCOM MERGER AND OTHER ACQUISITIONS
UNCERTAINTIES IN INTEGRATING THE ACQUIRED COMPANIES AND ACHIEVING COST
SAVINGS
WorldCom entered into the MCI/WorldCom Merger Agreement (as defined herein),
and recently completed the BFP Merger, the CompuServe Merger and the AOL
Transaction, in each case with the expectation that the transactions will result
in certain benefits, including, without limitation, cost savings, operating
efficiencies, revenue enhancements and other synergies. See "The Company --
Recent Business Combinations" and "The MCI/WorldCom Merger." Achieving the
benefits of the MCI/WorldCom Merger (which would be significantly larger than
previous acquisitions completed by WorldCom), the BFP Merger, the CompuServe
Merger and the AOL Transaction will depend in part upon the integration of the
businesses of WorldCom with those of MCI, Brooks Fiber Properties, Inc. ("BFP"),
CompuServe Network Services, Incorporated ("CNS") and ANS Communications, Inc.
("ANS") in an efficient manner, and there can be no assurance that this will
occur. The consolidation of operations will require substantial attention from
management. The diversion of management attention and any difficulties
encountered in the transition and integration processes could have a material
adverse effect on the revenues, levels of expenses and operating results of
MCI/WorldCom. There can be no assurance that MCI/WorldCom will realize any of
the anticipated benefits, including achievement of any synergies anticipated by
WorldCom,
S-4
<PAGE>
or that the Company will successfully retain the MCI management personnel it
expects to play important roles in facilitating the integration process.
RISK OF FAILURE OF THE MCI/WORLDCOM MERGER TO CLOSE; RISKS ASSOCIATED WITH
FAILURE TO OBTAIN APPROVALS OF CERTAIN GOVERNMENTAL AUTHORITIES
The consummation of the MCI/WorldCom Merger is conditioned upon the
expiration or termination of the applicable waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"Hart-Scott-Rodino Act"), and confirmation from the Commission of the European
Communities (the "European Commission") by way of a decision under Council
Regulation 4064/89 (the "Merger Control Regulation") that the MCI/WorldCom
Merger does not create or strengthen a dominant position as a result of which
competition would be significantly impeded in the European common market.
Although the waiting period under the Hart-Scott-Rodino Act expired on March 31,
1998 and the conditional approvals of the U.S. Department of Justice and the
European Commission have been obtained -- subject to the divestiture of MCI's
Internet services business (see "The MCI/WorldCom Merger -- Divestiture of MCI's
Internet Services Business") -- the approvals of various domestic governmental
agencies, including the Federal Communications Commission (the "FCC") and
certain state public utility or service commissions ("PUCs"), must be received
prior to consummation of the MCI/ WorldCom Merger. There can be no assurance
that such authorizations and approvals will be granted, or, if granted, will not
contain certain material conditions or restrictions in addition to those already
imposed, that an injunction will not be issued by a court of competent
jurisdiction enjoining the consummation of the MCI/WorldCom Merger or that a
challenge to the MCI/WorldCom Merger on the grounds that it violates U.S.
antitrust laws or is not compatible with the European common market will not be
made, or if a challenge is made, what the result will be. GTE Corporation
("GTE") and three of its subsidiaries filed suit in the U.S. District Court for
the District of Columbia against WorldCom and MCI seeking to enjoin the pending
merger on the grounds that it violates U.S. antitrust laws. WorldCom believes
that the complaint is without merit, although there can be no assurance as to
the ultimate result of the suit. In the event that the MCI/WorldCom Merger is
not consummated, the ratings assigned to the Notes by the several nationally
recognized rating agencies could be lower than would be the case for debt issued
by MCI/WorldCom. WorldCom would be required to pay MCI $1.635 billion in the
event the MCI/WorldCom Merger Agreement is terminated under certain
circumstances. In addition, pursuant to the BT Agreement (as defined herein),
WorldCom would be obligated to pay to BT $250 million in such event. See "The
MCI/WorldCom Merger".
Consummation of the MCI/WorldCom Merger is subject to additional approvals
from certain governmental authorities. If such approvals have not been received
at such time as all other material conditions to the MCI/WorldCom Merger have
been satisfied or waived, MCI and WorldCom may nonetheless determine to
consummate the MCI/WorldCom Merger. Although MCI and WorldCom are seeking such
approvals, it is uncertain whether such approvals will be received in a timely
fashion from, among others, every jurisdiction in which MCI and WorldCom are
authorized to do business. If MCI and WorldCom determine to consummate the
MCI/WorldCom Merger without having received all such approvals, no assurance can
be given that any resulting loss of business would not have a material adverse
effect on the businesses, prospects, financial condition or results of
operations of MCI/WorldCom.
RISKS RELATING TO THE BUSINESSES AND OPERATIONS OF WORLDCOM
Investors should be aware that business and other risks described herein as
applicable to WorldCom are generally also applicable to MCI.
DEBT SERVICE, INTEREST RATE FLUCTUATIONS, OTHER RESTRICTIVE COVENANTS AND
CAPITAL SPENDING
In connection with the MCI/WorldCom Merger, WorldCom has agreed to pay BT
$51.00 in cash without interest for each share of Class A common stock ("MCI
Class A Common Stock") of MCI it owns,
S-5
<PAGE>
or $6.94 billion in the aggregate. WorldCom expects to fund this commitment
through a combination of commercial bank and public debt financings. The
MCI/WorldCom Merger is expected to close during the third quarter of 1998, when
funding of this commitment will occur. Increases in interest rates on WorldCom's
debt would have an adverse effect upon WorldCom's reported net income and cash
flow. WorldCom believes that the combined operations of WorldCom, CNS, ANS, and,
upon consummation of the MCI/WorldCom Merger, MCI, would generate sufficient
cash flow to service WorldCom's debt and capital requirements; 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 may
reduce its ability to fund internal growth, additional acquisitions and capital
improvements.
The development of the businesses of MCI/WorldCom and the installation and
expansion of their domestic and international networks would continue to require
significant capital expenditures. Failure to have access to sufficient funds for
capital expenditures on acceptable terms or the failure to achieve capital
expenditure synergies may require MCI/WorldCom to delay or abandon some of its
plans, which could have a material adverse effect on the success of
MCI/WorldCom. The Company has historically utilized a combination of cash flow
from operations and debt 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 expansion and merger-related expenses
as noted above and believes that funding needs in excess of internally generated
cash flow and the Company's existing credit facilities will be met by accessing
the debt markets. No assurance can be given that any public financing will be
available on terms acceptable to the Company.
ACQUISITION INTEGRATION
A major portion of WorldCom's growth in recent years has resulted from
acquisitions, which involve certain operational and financial risks. Operational
risks include the possibility that an acquisition does not ultimately provide
the benefits originally anticipated by WorldCom's management, while WorldCom
continues to incur operating expenses to provide the services formerly provided
by the acquired company. Financial risks involve the incurrence of indebtedness
as a result of the acquisition and the consequent need to service that
indebtedness. In carrying out its acquisition strategy, WorldCom attempts to
minimize the risk of unexpected liabilities and contingencies associated with
acquired businesses through planning, investigation and negotiation, but there
can be no assurance that it will be successful in doing so. In addition, there
can be no assurance that WorldCom will be successful in identifying attractive
acquisition candidates or completing additional acquisitions on favorable terms.
RISKS OF INTERNATIONAL BUSINESS
The Company derives substantial revenues from providing international
communications services to United States commercial and carrier customers. Such
operations are subject to certain risks such as changes in United States or
foreign government regulatory policies, disruption, suspension or termination of
operating agreements, and currency fluctuations. In particular, the Company's
revenues and costs of sales are sensitive to changes in international settlement
rates and international traffic routing patterns. The rates that the Company can
charge its customers for international services may decrease in the future due
to the entry of new carriers with substantial resources, aggressiveness on the
part of new or existing carriers, the widespread resale of international private
lines to provide switched voice services, the provision of international
services via non-traditional means including the Internet, the consummation of
mergers, joint ventures and alliances among large international carriers that
facilitate targeted pricing and cost reductions, and the rapid growth of
international circuit capacity due to the deployment of new undersea fiber optic
cables and new high capacity satellite systems in the Atlantic, Pacific and
Indian Ocean regions.
S-6
<PAGE>
RISKS OF OVERSEAS BUSINESS OPERATIONS
The Company derives substantial revenues from providing services to
customers in overseas locations, particularly the United Kingdom and Germany.
Such operations are subject to certain risks such as unfavorable legal and
regulatory policies of the foreign jurisdiction, local political and economic
developments, currency fluctuations, exchange controls, royalty and tax
increases, retroactive tax claims, expropriation, and import and export
regulations and other laws and policies of the United States affecting foreign
trade, investment and taxation. In addition, in the event of any dispute arising
from foreign operations, the Company may be subject to the exclusive
jurisdiction of foreign courts and may not be successful in subjecting foreign
persons or entities to the jurisdiction of the courts in the United States.
WorldCom may also be hindered or prevented from enforcing its rights with
respect to foreign governments because of the doctrine of sovereign immunity.
There can be no assurance that the laws, regulations or administrative practices
of foreign countries relating to WorldCom's ability to do business in that
country will not change. Any such change could have a material adverse effect on
WorldCom's financial condition and results of operations.
RAPID TECHNOLOGICAL CHANGE; DEPENDENCE UPON PRODUCT DEVELOPMENT
The telecommunications industry is subject to rapid and significant changes
in technology. While WorldCom does not believe that, for the foreseeable future,
these changes will either materially or adversely affect the continued use of
fiber optic cable or materially hinder its ability to acquire necessary
technologies, the effect of technological changes, including changes relating to
emerging wireline and wireless transmission and switching technologies, on the
businesses of WorldCom cannot be predicted.
The data communications products and services of UUNET Technologies, Inc., a
wholly-owned subsidiary of WorldCom ("UUNET"), CNS and ANS, including Internet
access and related products and services, are subject to rapidly changing
technology, evolving industry standards, emerging competition and frequent new
product and service introductions. There can be no assurance that the Company
will successfully identify new product and service opportunities and develop and
bring new products and services to market in a timely manner. The Company also
will be at risk from fundamental changes in the way data communications,
including Internet access, services are marketed and delivered. The Company's
Internet service strategy assumes that the Transmission Control
Protocol/Internet Protocol, utilizing fiber optic or copper-based
telecommunications infrastructures, will continue to be the primary protocol and
transport infrastructure for Internet-related services. Emerging transport
alternatives include wireless cable modems and satellite delivery of Internet
information; alternative open protocol and proprietary protocol standards have
been or are being developed. WorldCom's pursuit of necessary technological
advances may require substantial time and expense, and there can be no assurance
that WorldCom will succeed in adapting its data communications services business
to alternate access devices, conduits and protocols.
REGULATION RISKS
WorldCom's operating subsidiaries are subject to varying degrees of federal,
state, local and international regulation. In the United States, WorldCom's
subsidiaries are most heavily regulated by the states, especially for the
provision of local exchange services. Each such subsidiary must be separately
certified in each state to offer local exchange and intrastate long distance
services. No state, however, subjects WorldCom to price cap or rate of return
regulation, nor is WorldCom currently required to obtain FCC authorization for
installation or operation of its network facilities used for domestic services,
other than licenses for specific terrestrial microwave and satellite earth
station facilities which utilize radio frequency spectrum. FCC approval is
required, however, for the installation and operation of international
facilities and services. WorldCom is subject to varying degrees of regulation in
the foreign jurisdictions in which it conducts business including the
requirement to obtain authorization for the installation and operation of
network facilities. Although the trend in federal, state, local and
international regulation appears to favor
S-7
<PAGE>
increased competition, no assurance can be given that changes in current or
future regulations adopted by the FCC, state or foreign regulators or
legislative initiatives in the United States and abroad would not have a
material adverse effect on WorldCom.
GENERAL. In implementing the Telecommunications Act of 1996 (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 ILECs' retail services,
and use of individual and combinations of unbundled network elements. These
rules set the groundwork for the statutory criteria governing entry of the Bell
Operating Companies (the "BOCs") into the long distance market. Appeals of the
FCC order adopting these rules were consolidated before the United States Court
of Appeals for the Eighth Circuit (the "Eighth Circuit"). The Eighth Circuit
found constitutional challenges to certain practices implementing cost
provisions of the Telecom Act that were ordered by certain PUCs to be premature,
but vacated significant portions of the FCC's nationwide pricing rules, and
vacated an FCC rule requiring that unbundled network elements be provided on a
combined basis. In response to requests by the Solicitor General, on behalf of
the FCC, and certain other parties, including WorldCom, the United States
Supreme Court has agreed to review the decision of the Eighth Circuit. Certain
BOCs have also raised constitutional challenges to provisions of the Telecom Act
restricting BOC provision of long distance services, manufacturing of
telecommunications equipment, electronic publishing and alarm monitoring
services. On December 31, 1997, the United States District Court for the
Northern District of Texas (the "Texas District Court") ruled that these
restrictions violate the Bill of Attainder Clause of the U.S. Constitution.
Currently, this decision only applies to SBC Corporation ("SBC"), US WEST
Communications Group ("US WEST"), and Bell Atlantic Corporation ("Bell
Atlantic"). At the request of various parties, on February 11, 1998 the Texas
District Court issued a stay of its decision pending appeal. AT&T Corp.
("AT&T"), MCI, the U.S. Department of Justice, the FCC and other parties have
appealed the decision to the United States Court of Appeals for the Fifth
Circuit. BellSouth Corporation ("BellSouth") raised the Bill of Attainder issue
in its appeal before the United States Court of Appeals for the Fifth Circuit of
the electronic publishing restrictions imposed under the Telecom Act. The Fifth
Circuit held that the Telecom Act did not constitute a Bill of Attainder in
respect to BellSouth's activities in the electronic publishing business.
WorldCom cannot predict either the ultimate outcome of these or future
challenges to the Telecom Act, any related appeals of regulatory or court
decisions, or the eventual effect on its businesses or the industry in general.
The FCC has denied each application filed by a Regional Bell Operating
Company ("RBOC") seeking authority to provide inter-local access transport area
("interLATA") long distance service. In its denial of an Ameritech Corporation
("Ameritech") application and a BellSouth application, the FCC provided detailed
guidance to applicants regarding the obligations of the applicants, the format
of future applications, the content of future applications, and the review
standards that it will apply in evaluating any future applications. The National
Association of Regulatory Utility Commissioners and several state regulatory
commissions have appealed jurisdictional aspects of that Ameritech application
denial to the Eighth Circuit. WorldCom 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,
several RBOCs have filed petitions requesting that the FCC forbear from imposing
the line of business restrictions upon their data service offerings and their
data network deployment. Other RBOCs have filed or announced their intention to
file applications at the FCC for authority to provide interLATA services.
Additionally, the FCC and several PUCs are considering a proposal that would
allow BOCs electing to create separate wholesale network and retail
organizations to enter the long distance market on an accelerated basis.
WorldCom cannot predict the outcome of these proceedings or whether the outcome
will have a material impact upon its consolidated financial position or results
of operations.
On May 7, 1997, the FCC announced that it would issue a series of orders to
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
S-8
<PAGE>
efficient levels and rate structures. It also affirmed that information service
providers (including, among others, 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 charge and ISP
Exemption actions and the court appeals have been consolidated before the Eighth
Circuit. Also, several state agencies have started proceedings to address the
reallocation of implicit subsidies contained in the access rates and retail
service rates to state universal service funds. Access charges are a principal
component of WorldCom's telecommunication expense. Additionally, modification of
the ISP Exemption could have an adverse effect on the Company's Internet-related
services business. WorldCom 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 various 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 circuit switched telecommunications
services and technologies. Based upon this and other proceedings, the FCC may
permit telecommunications companies, BOCs, or others to increase the scope or
reduce the cost of their Internet access services. WorldCom cannot predict the
effect that such 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.
INTERNATIONAL. In December 1996, the FCC adopted a new policy that makes it
easier for United States international carriers to obtain authority to route
international public switched voice traffic to and from the United States
outside of the traditional settlement rate and proportionate return regimes. In
February 1997, the United States entered into a World Trade Organization
Agreement (the "WTO Agreement") that should have the effect of liberalizing the
provision of switched voice telephone and other telecommunications services in
scores of foreign countries over the next several years. The WTO Agreement
became effective in February 1998. In order to comply with United States
commitments to the WTO Agreement, the FCC implemented new rules in February 1998
that liberalize existing policies regarding (i) the services that may be
provided by foreign affiliated United States international common carriers,
including carriers controlled or more than 25 percent owned by foreign carriers
that have market power in their home markets, and (ii) the provision of
international switched voice services outside of the traditional settlement rate
and proportionate return regimes. The new rules make it much easier for foreign
affiliated carriers to enter the United States market for the provision of
international services.
In August 1997, the FCC adopted mandatory settlement rate benchmarks. These
benchmarks are intended to reduce the rates that United States carriers pay
foreign carriers to terminate traffic in their home countries. The FCC will also
prohibit a United States carrier affiliated with a foreign carrier from
providing facilities-based service to the foreign carrier's home market until
and unless the foreign carrier has implemented a settlement rate within the
benchmark. The FCC also adopted new rules that will liberalize the provision of
switched services over private lines to World Trade Organization member
countries, by allowing such services on routes where 50% or more of United
States billed traffic is being terminated in the foreign country at or below the
applicable settlement rate benchmark or where the foreign country's rules
concerning provision of international switched services over private lines are
deemed equivalent to United States rules.
Although the FCC's new policies and implementation of the WTO Agreement may
result in lower costs to WorldCom to terminate international traffic, there is a
risk that the revenues that WorldCom will receive from inbound international
traffic may decrease to an even greater degree. The implementation of the WTO
Agreement may also make it easier for foreign carriers with market power in
their home markets to offer United States and foreign customers end-to-end
services to the disadvantage of WorldCom, which may continue to face substantial
obstacles in obtaining from foreign governments and foreign carriers the
authority and facilities to provide such end-to-end services. Further, many
foreign carriers have challenged,
S-9
<PAGE>
in court and at the FCC, the FCC's order adopting mandatory settlement rate
benchmarks. If the FCC's settlement rate benchmark order is overturned, it could
accelerate the full-fledged entry of foreign carriers into the United States,
and make it more advantageous for foreign carriers to route international
traffic into the United States at low, cost-based termination rates, while
United States carriers would continue to have little choice but to route
international traffic into most foreign countries at much higher, above cost,
settlement rates.
COMPETITION
Virtually every aspect of the telecommunications industry is extremely
competitive, and WorldCom expects that competition will intensify in the future.
WorldCom (including UUNET, CNS, ANS and BFP) faces significant competition from
carriers and other companies with greater market share and financial resources.
WorldCom competes domestically with incumbent providers, which have historically
dominated local telecommunications, and with long distance carriers, for the
provision of long distance services. Sometimes the incumbent provider offers
both local and long distance services. The ILECs presently have numerous
advantages as a result of their historic monopoly control over local exchanges.
A continuing trend toward business combinations and alliances in the
telecommunications industry may create significant new competitors to WorldCom.
Many of WorldCom's existing and potential competitors have financial, personnel
and other resources significantly greater than those of WorldCom. WorldCom also
faces competition from one or more competitors in every area of its business,
including competitive access providers operating fiber optic networks, in some
cases in conjunction with the local cable television operator. Several
competitors have announced the deployment of nationwide fiber networks using
advanced state-of-the-art technologies. AT&T and Sprint Corporation ("Sprint")
have indicated their intention to offer local telecommunications services in
major United States markets using their own facilities, including, in AT&T's
case, the announced acquisition of the facilities and business of Teleport
Communications Group, Inc. and Tele-Communications, Inc., or by resale of the
local exchange carriers' or other providers' services. In addition, WorldCom
competes with equipment vendors and installers and telecommunications management
companies with respect to certain portions of their businesses.
Overseas, WorldCom competes with incumbent providers, some of which still
have special regulatory status and the exclusive rights to provide certain
services, and virtually all of which have historically dominated their local,
domestic long distance and international services business. These incumbent
providers have numerous advantages, including existing facilities, customer
loyalty and substantial financial resources. WorldCom also competes with other
service providers, many of which are affiliated with incumbent providers in
other countries. Typically, WorldCom must devote extensive resources to
obtaining regulatory approvals necessary to operate overseas, and then to
obtaining access to and interconnection with the incumbent's network on a
non-discriminatory basis.
WorldCom may also be subject to additional competition due to the
development of new technologies and increased availability of domestic and
international transmission capacity. For example, even though fiber optic
networks, such as that of WorldCom, are now widely used for long distance
transmission, it is possible that the desirability of such networks could be
adversely affected by changing technology. The telecommunications industry is in
a period of rapid technological evolution, marked by the introduction of new
product and service offerings and increasing satellite and fiber optic
transmission capacity for services similar to those provided by WorldCom.
WorldCom cannot predict which of many possible future product and service
offerings will be important to maintain its competitive position or what
expenditures will be required to develop and provide such products and services.
For most of the Company's communications services, the factors critical to
consumers' choice of a service provider are cost, ease of use, speed of
installation, quality, reputation, and in some cases geography and network size.
Under the Telecom Act and ensuing federal and state regulatory initiatives,
barriers to local exchange competition are being removed. The introduction of
such competition, however, also establishes, in part, the predicate for the BOCs
to provide in-region interexchange long distance services if the
constitutionality
S-10
<PAGE>
of the Telecom Act is upheld. The BOCs are currently allowed to offer certain
"incidental" long distance service in-region and to offer out-of-region long
distance services. Once the BOCs are allowed to offer in-region long distance
services, they could be in a position to offer single source local and long
distance service similar to that being offered by WorldCom. WorldCom expects
that the increased competition made possible by regulatory reform will result in
certain additional pricing and margin pressures in the domestic
telecommunications services business. Such of the additional pressures as may
result from BOC provision of in-region interexchange long distance services may
be accelerated if the ruling of the Texas District Court on the
constitutionality of the Telecom Act's restrictions is ultimately upheld on
appeal.
WorldCom also competes in offering data communications services, including
Internet access and related services. This is also an extremely competitive
business, and WorldCom expects that competition will intensify in the future.
WorldCom believes that the ability to compete successfully in this arena depends
on a number of factors, including: industry presence; the ability to execute a
rapid expansion strategy; the capacity, reliability and security of its network
infrastructure; ease of access to and navigation on the Internet; the pricing
policies of its competitors and suppliers; the timing of the introduction of new
products and services by WorldCom and its competitors; the Company's ability to
support industry standards; and industry and general economic trends. The
success of WorldCom will depend heavily upon its ability to provide high quality
data communication services, including Internet connectivity and value-added
Internet services, at competitive prices.
Major telecommunications companies have expanded their current services to
compete fully in offering data communication services, including Internet access
and value-added and data communications services, and WorldCom expects
additional telecommunications companies to continue to compete in this arena.
WorldCom believes that new competitors, including large computer hardware,
software, media and other technology and communications companies, will also
offer data communications services, resulting in even greater competition for
the Company. Certain companies, including AT&T, GTE, Intermedia Communications,
Inc., Teleport Communications Group, Inc., Qwest Communications, PSINet, Inc.,
IXC Communications, Inc. and Williams Communications, have obtained or expanded
their Internet access products and services as a result of network deployment,
acquisitions and strategic investments. Such acquisitions may permit WorldCom's
competitors to devote greater resources to the development and marketing of new
competitive products and services and the marketing of existing competitive
products and services. WorldCom expects these acquisitions and strategic
investments to increase, thus creating significant new competitors to the
Company. In addition, WorldCom expects new companies, such as Level 3, to enter
this arena and provide additional competition for the Company's service
offerings.
As the Company continues to expand voice and data communications operations
outside of the United States, the Company will be forced to compete with and buy
services from incumbent providers, some of which are government-owned and/or
still have special regulatory status and the exclusive rights to provide certain
essential services. The Company will also encounter competition from companies
whose operating styles are substantially different from those that they usually
encounter. For example, in Europe, WorldCom's subsidiaries compete directly
with: (1) telecommunications companies, such as BT, Deutsche Telekom AG and
others; (2) global telecommunications alliances such as Global One (Deutsche
Telekom AG, France Telecom and Sprint), Unisource/Uniworld (AT&T, Telia AB of
Sweden, PTT Telecom Netherlands, and Swisscom) and others; and (3) other
Internet access providers, such as Demon Internet Limited. Foreign competitors
may also possess a better understanding of their local areas and may have better
working relationships with, or control of, local telecommunications companies.
There can be no assurance that the Company can obtain similar levels of local
knowledge, and failure to obtain that knowledge could place the Company at a
serious competitive disadvantage.
S-11
<PAGE>
RECENT BUSINESS COMBINATIONS
On January 31, 1998, WorldCom acquired CompuServe Corporation
("CompuServe"), pursuant to the merger of a wholly-owned subsidiary of WorldCom
with and into CompuServe. Upon consummation of the CompuServe Merger, CompuServe
became a wholly-owned subsidiary of WorldCom.
As a result of the CompuServe Merger, each share of CompuServe common stock
was converted into the right to receive 0.40625 shares of WorldCom common stock,
par value $.01 per share (the "Common Stock" or "WorldCom Common Stock") or
approximately 37.6 million shares of WorldCom Common Stock in the aggregate.
Prior to the CompuServe Merger, CompuServe operated primarily through two
divisions: Interactive Services and Network Services. Interactive Services
offered worldwide online and Internet access services for consumers, while
Network Services provided worldwide network access, management and applications,
and Internet service to businesses. The CompuServe Merger was accounted for as a
purchase; accordingly, operating results for CompuServe have been included from
the date of acquisition.
On January 31, 1998, WorldCom also acquired ANS from America Online, Inc.
("AOL") and has entered into five year contracts with AOL under which WorldCom
and its subsidiaries will provide network services to AOL. As part of the AOL
Transaction, AOL acquired CompuServe's Interactive Services division and
received a $175 million cash payment from WorldCom. WorldCom retained the CNS
division. ANS provides Internet access to AOL and AOL's subscribers in the
United States, Canada, the United Kingdom, Sweden and Japan, and also designs,
develops and operates high performance wide-area networks for business,
research, education and governmental organizations. The AOL Transaction was
accounted for as a purchase; accordingly, operating results for ANS have been
included from the date of acquisition.
On January 29, 1998, WorldCom acquired BFP, pursuant to the merger of a
wholly-owned subsidiary of WorldCom with and into BFP. Upon consummation of the
BFP Merger, BFP became a wholly-owned subsidiary of WorldCom. BFP is a leading
facilities-based provider of competitive local telecommunications services,
commonly referred to as a competitive local exchange carrier, in selected cities
within the United States. BFP acquires and constructs its own state-of-the-art
fiber optic networks and facilities and leases network capacity from others to
provide long distance carriers ("IXCs"), ISPs, wireless carriers and business,
government and institutional end users with an alternative to the ILECs for a
broad array of high quality voice, data, video transport and other
telecommunications services.
As a result of the BFP Merger, each share of BFP common stock was converted
into the right to receive 1.85 shares of WorldCom Common Stock or approximately
72.6 million shares of WorldCom Common Stock in the aggregate. The BFP Merger
was accounted for as a pooling-of-interests and, accordingly, the Company's
financial statements for periods prior to the BFP Merger have been restated to
include the results of BFP for all periods presented.
S-12
<PAGE>
THE MCI/WORLDCOM MERGER
GENERAL
On October 1, 1997, WorldCom announced its intention to commence an exchange
offer to acquire all of the outstanding shares of MCI common stock, par value
$.10 per share ("MCI Common Stock"), for $41.50 of WorldCom Common Stock,
subject to adjustment in certain circumstances as set forth in materials filed
by WorldCom with the Securities and Exchange Commission (the "Commission"). On
November 9, 1997, WorldCom entered into an Agreement and Plan of Merger (the
"MCI/WorldCom Merger Agreement") with MCI and MCI Merger Sub, providing for the
MCI/WorldCom Merger, with MCI Merger Sub surviving as a wholly-owned subsidiary
of WorldCom. As a result of the MCI/WorldCom Merger, the separate corporate
existence of MCI will cease, and MCI Merger Sub (which will be renamed "MCI
Communications Corporation") will succeed to all the rights and be responsible
for all the obligations of MCI in accordance with the Delaware General
Corporation Law. Subject to the terms and conditions of the MCI/WorldCom Merger
Agreement, each share of MCI Common Stock outstanding immediately prior to the
effective time of the MCI/WorldCom Merger (the "MCI/WorldCom Effective Time"),
other than shares owned by WorldCom or held by MCI, will be converted into the
right to receive that number of shares of WorldCom Common Stock equal to the MCI
Exchange Ratio (as defined below), and each share of MCI Class A Common Stock
outstanding immediately prior to the MCI/WorldCom Effective Time will be
converted into the right to receive $51.00 in cash, without interest thereon.
The "MCI Exchange Ratio" means the quotient (rounded to the nearest 1/10,000)
determined by dividing $51.00 by the average of the high and low sales prices of
WorldCom Common Stock (the "MCI/WorldCom Average Price") as reported on The
Nasdaq National Market on each of the 20 consecutive trading days ending with
the third trading day immediately preceding the MCI/WorldCom Effective Time;
provided, however, that the MCI Exchange Ratio will not be less than 1.2439 or
greater than 1.7586. Cash will be paid in lieu of the issuance of any fractional
share of WorldCom Common Stock in the MCI/WorldCom Merger.
Based on the number of shares of MCI Common Stock outstanding as of March
31, 1998 and assumed MCI Exchange Ratios of 1.2439 and 1.7586, approximately
731,890,172 shares and 1,034,731,133 shares, respectively, of WorldCom Common
Stock would be issued in the MCI/WorldCom Merger. In addition, as of March 31,
1998, outstanding options to purchase shares of MCI Common Stock would be
converted in the MCI/ WorldCom Merger to options to acquire an aggregate of
approximately 103,019,687 shares and 145,647,095 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/WorldCom Merger, at the same
exercise price.
The MCI/WorldCom Merger was approved by the MCI stockholders and the
WorldCom shareholders at separate meetings held on March 11, 1998. The
MCI/WorldCom Merger was subsequently conditionally approved by the U.S.
Department of Justice and the European Commission, subject to the divestiture of
MCI's Internet services business. See "-- Divestiture of MCI's Internet Services
Business". In addition, the MCI/WorldCom Merger is also subject to approvals
from the FCC and certain state government bodies. WorldCom anticipates that the
MCI/WorldCom Merger will close in the third quarter of 1998.
GTE and three of its subsidiaries filed suit in the U.S. District Court for
the District of Columbia against WorldCom and MCI seeking to enjoin the
MCI/WorldCom Merger on the grounds that it violates U.S. antitrust laws.
WorldCom believes that the complaint is without merit, although there can be no
assurance as to the ultimate result of the suit.
Termination of the MCI/WorldCom Merger Agreement by MCI or WorldCom under
certain conditions would require MCI to pay WorldCom $750 million as a
termination fee and to reimburse WorldCom the $450 million alternative
transaction fee paid by WorldCom to BT. Further, termination of the MCI/
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<PAGE>
WorldCom Merger Agreement by MCI or WorldCom under certain conditions would
require WorldCom to pay MCI $1.635 billion as a termination fee.
Pursuant to an agreement (the "BT Agreement") among MCI, WorldCom and BT,
the prior merger agreement between BT and MCI (the "BT/MCI Merger Agreement")
was terminated, and WorldCom agreed to pay BT an alternative transaction fee of
$450 million and expenses of $15 million payable to BT in accordance with the
BT/MCI Merger Agreement. These fees were paid on November 12, 1997. WorldCom
also agreed to pay to BT an additional payment of $250 million in the event that
WorldCom is required to make the $1.635 billion payment to MCI in accordance
with the MCI/WorldCom Merger Agreement.
WorldCom is in the process of developing its plan to integrate the
operations of MCI which may include certain exit and restructuring costs. As a
result of this plan, a charge, which may be material but which cannot now be
quantified, is expected to be recognized in the period in which such a
restructuring occurs. In addition, WorldCom is conducting asset valuation
studies of MCI's tangible and identifiable intangible assets, including
in-process research and development projects, for the purpose of allocating the
purchase price to the net assets acquired. A preliminary estimate of the
one-time charge for purchased in-process research and development projects of
MCI is between $6 and $7 billion. This discussion of possible future charges or
allocations contains "forward looking statements" within the meaning of the
PSLRA. Important factors that could cause actual results to differ materially
from such statements include, without limitation, the preliminary nature of such
estimates and the need to complete asset valuation studies. See "Cautionary
Statement Regarding Forward-Looking Statements" and "Risk Factors" above.
The foregoing description of the MCI/WorldCom Merger Agreement and the BT
Agreement and the transactions contemplated thereby does not purport to be
complete and is qualified in its entirety by reference to such agreements,
copies of which are incorporated by reference as exhibits to the WorldCom Annual
Report on Form 10-K for the year ended December 31, 1997, which is incorporated
by reference herein. Additional information regarding such agreements and the
transactions contemplated thereby is also contained under the caption "The
MCI/WorldCom Merger" contained in the Company's Current Report on Form 8-K/A-1
dated November 9, 1997 (filed January 27, 1998), which is incorporated by
reference herein. Additional information regarding MCI is contained in the
Company's Current Report on Form 8-K/A-3 dated November 9, 1997 (filed May 28,
1998), which is incorporated by reference herein.
DIVESTITURE OF MCI'S INTERNET SERVICES BUSINESS
On July 15, 1998, MCI announced that it had entered into a letter agreement
(the "Letter Agreement") with Cable and Wireless plc ("Cable & Wireless") to
sell its Internet backbone facilities and wholesale and retail Internet business
(the "iMCI Business") for $1.75 billion in cash.
The sale of the iMCI Business includes all associated traffic, revenue and
backbone facilities. Cable & Wireless will acquire the following Internet
assets: MCI's U.S. nationwide Internet backbone, MCI's dedicated access
customers, MCI's ISP customers, MCI's dial-up business and MCI's web hosting and
managed firewall services.
In connection with the transaction, MCI has agreed to provide Cable &
Wireless underlying transport services for Cable & Wireless's Internet backbone
for up to five years. MCI and Cable & Wireless have also agreed to
non-competition agreements for transitioning accounts of 24 and 18 months for
wholesale and dedicated access retail customers, respectively. In addition,
approximately 1,000 MCI employees -- in engineering, sales, customer service,
marketing, operations and administrative support -- may be transferred to Cable
& Wireless.
The sale of the iMCI Business to Cable & Wireless is contingent upon receipt
of U.S. Department of Justice and European Commission approval of the sale and
the final regulatory approval of the MCI/
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<PAGE>
WorldCom Merger. The Letter Agreement will terminate if such governmental
approvals are not received by December 31, 1998.
MCI's agreement with Cable & Wireless has no immediate impact on MCI's
Internet customers. They will continue to receive Internet service from MCI
until the close of the MCI/WorldCom Merger when the agreement with Cable &
Wireless becomes effective. At that time, they will become Cable & Wireless
Internet customers.
Subject to the terms of the Letter Agreement, MCI/WorldCom will offer a full
suite of Internet services upon completion of the MCI/WorldCom Merger.
ACQUISITION OF INTEREST IN EMBRATEL
On July 29, 1998 MCI announced that through its wholly owned Brazilian
subsidiary, Startel Participacoes Ltda ("Startel"), it had won the tender for
51.79 percent of the voting shares of Embratel Participacoes S.A. ("Embratel"),
the long distance company of Brazil. Certain portions of the press release
related to this transaction are included in WorldCom's Form 8-K dated August 6,
1998 (filed August 6, 1998) and are incorporated herein by reference.
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<PAGE>
USE OF PROCEEDS
The net proceeds of the offering are estimated to be $6,036,425,500. The
Company intends to use the net proceeds of the offering to repay existing
indebtedness under the Company's existing credit facilities and for general
corporate purposes. At June 30, 1998, the weighted average interest rates under
the Company's credit facilities were 6.04% per annum. See Note 4 of the Notes to
Consolidated Financial Statements contained in the Company's Current Report on
Form 8-K dated May 28, 1998 (filed May 28, 1998) and Note F of the Notes to
Consolidated Financial Statements contained in the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998, which are incorporated by
reference herein, for additional information regarding the credit facilities.
The proceeds of the borrowings under the existing credit facilities were used by
the Company for general corporate purposes as well as certain payments to BT in
connection with the MCI/WorldCom Merger.
The Company expects the MCI/WorldCom Merger to close after the consummation
of this offering. In connection with the MCI/WorldCom Merger, the Company has
agreed to pay BT $51.00 in cash for each share of MCI Class A Common Stock it
owns, or $6.94 billion in the aggregate. WorldCom expects to fund this
commitment through a combination of commercial paper issuance, proceeds from
this debt offering and bank credit facilities.
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<PAGE>
CAPITALIZATION
The following table sets forth the consolidated short-term debt and
capitalization of the Company as of March 31, 1998, and as adjusted to give
effect to the sale by the Company of the Notes offered hereby (as if such sale
occurred on such date). The table does not reflect the funding of the Company's
obligations in the MCI/WorldCom Merger. See "Use of Proceeds."
<TABLE>
<CAPTION>
MARCH 31, 1998
-----------------------------
<S> <C> <C>
ACTUAL AS ADJUSTED
------------- --------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Short-term debt:
Current maturities of long-term debt.......................................... $ 6,318 $ 6,318
------------- --------------
------------- --------------
Long-term debt:
6.125% Notes Due 2001......................................................... -- 1,500,000
6.250% Notes Due 2003......................................................... -- 600,000
6.400% Notes Due 2005......................................................... -- 2,250,000
6.950% Notes Due 2028......................................................... -- 1,750,000
Senior Notes Due 1999--2027................................................... 3,346,838 3,346,838
Credit facilities............................................................. 4,936,250 1,250,000
Other long-term debt, less current portion........................................ 48,448 48,448
------------- --------------
Total long-term debt.................................................... $ 8,331,536 $ 10,745,286
------------- --------------
Shareholders' investment:
Series A Preferred Stock, par value $.01 per share; 94,992 shares authorized,
issued and outstanding...................................................... 1 1
Series B Preferred Stock, par value $.01 per share; 12,237,025 shares
authorized; 12,237,025 shares issued and outstanding........................ 122 122
Preferred Stock, par value $.01 per share; 34,905,008 shares authorized; none
issued and outstanding...................................................... -- --
Common Stock, par value $.01 per share; 2,500,000,000 shares authorized;
1,028,976,222 shares issued and outstanding................................. 10,290 10,290
Additional paid-in capital.................................................... 16,950,898 16,950,898
Unrealized holding gain on marketable equity securities....................... 50,328 50,328
Retained earnings (deficit)................................................... (2,189,180) (2,189,180)
------------- --------------
Total shareholders' investment.......................................... 14,822,459 14,822,459
------------- --------------
Total capitalization.................................................. $ 23,160,313 $ 25,574,063
------------- --------------
------------- --------------
</TABLE>
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SELECTED HISTORICAL FINANCIAL DATA OF WORLDCOM
The consolidated selected historical financial data of WorldCom set forth
below are derived from financial statements of WorldCom as they appeared in
WorldCom's Current Report on Form 8-K dated May 28, 1998 (filed with Commission
on May 28, 1998) for each of the three fiscal years in the period ended December
31, 1997 and WorldCom's Quarterly Report on Form 10-Q filed with the Commission
for the period ending March 31, 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED AND AT DECEMBER 31,
AND AT MARCH 31,
------------------------------- --------------------
1997 1996 1995 1998 1997
--------- --------- --------- --------- ---------
(IN MILLIONS, EXCEPT PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C>
Revenues:
Domestic switched.................................................... $ 4,062 $ 3,067 $ 2,710 $ 1,162 $ 963
Domestic private line................................................ 1,618 956 738 496 360
International........................................................ 819 303 -- 260 164
Internet............................................................. 566 -- -- 392 111
--------- --------- --------- --------- ---------
Core revenues........................................................ 7,065 4,326 3,448 2,310 1,598
--------- --------- --------- --------- ---------
Other................................................................ 411 201 259 40 99
--------- --------- --------- --------- ---------
Total revenues....................................................... 7,476 4,527 3,707 2,350 1,697
Operating expenses:
Line costs......................................................... 3,857 2,475 2,034 1,147 921
Selling, general and administrative................................ 1,626 867 689 478 388
Depreciation and amortization...................................... 976 320 317 299 232
Provision to reduce carrying value of certain assets............... -- 402 -- -- --
Restructuring and other charges.................................... -- 198 -- 69 --
Charge for in-process research and development..................... -- 2,140 -- 429 --
--------- --------- --------- --------- ---------
Total.......................................................... 6,459 6,402 3,040 2,422 1,541
--------- --------- --------- --------- ---------
Operating income (loss).............................................. 1,017 (1,875) 667 (72) 156
Other income (expense):
Interest expense................................................... (395) (253) (253) (102) (90)
Miscellaneous...................................................... 41 25 14 12 13
--------- --------- --------- --------- ---------
Income (loss) before income taxes and extraordinary item............. 663 (2,103) 428 (162) 79
Provision for income taxes........................................... 416 130 171 118 54
--------- --------- --------- --------- ---------
Net income (loss) before extraordinary item.......................... 247 (2,233) 257 (280) 25
Extraordinary item (net of income taxes of $16 in 1996 and $78 in the
first quarter of 1998)............................................. (3) (24) -- (129) --
--------- --------- --------- --------- ---------
Net income (loss).................................................... 244 (2,257) 257 (409) 25
Preferred dividend requirement....................................... 26 1 18 7 7
Special dividend payment to Series 1 preferred shareholder........... -- -- 15 -- --
--------- --------- --------- --------- ---------
Net income (loss) applicable to common shareholders.................. $ 218 $ (2,258) $ 224 $ (416) $ 18
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Income (loss) from continuing operations (after preferred dividend
requirement):
Total.............................................................. $ 221 $ (2,234) $ 224 $ (287) $ 18
Per common share:
Basic............................................................ .23 (5.02) .58 (.28) .02
Diluted.......................................................... .22 (5.02) .56 (.28) .02
Dividends per common share........................................... -- -- -- -- --
Total assets......................................................... 23,596 20,843 6,803 25,915 20,518
Long-term debt....................................................... 7,413 5,356 2,324 8,332 5,184
Shareholders' investment............................................. 13,801 13,252 2,281 14,822 13,328
Adjusted EBITDA...................................................... 1,993 1,185 984 725 388
EBITDA............................................................... 1,993 (1,555) 984 227 388
Ratio of earnings to fixed charges................................... 2.09:1 N/A 2.53:1 N/A 1.57:1
Deficiency of earnings to fixed charges.............................. $ -- $ 2,113 $ -- $ 213 $ --
</TABLE>
S-18
<PAGE>
- ------------------------------
(1) Results for 1996 include a $2.14 billion charge for in-process research and
development related to the merger with MFS Communications Company, Inc.
("MFS") on December 31, 1996. The charge is based upon a valuation analysis
of the technologies of MFS' worldwide information system, the Internet
network expansion system of UUNET, and certain other identified research and
development projects purchased in the MFS merger. The expense includes $1.6
billion associated with UUNET and $0.54 billion related to MFS.
Additionally, 1996 results include other after-tax charges of $121 million
for employee severance, employee compensation charges, alignment charges,
and costs to exit unfavorable telecommunications contracts and $344 million
after-tax write-down of operating assets within the Company's non-core
businesses. On a pre-tax basis, these charges totaled $600.1 million.
(2) In 1995, Metromedia Company ("Metromedia") converted its Series 1 Preferred
Stock into WorldCom Common Stock, exercised warrants to acquire WorldCom
Common Stock and immediately sold its position of 61.7 million shares of
WorldCom Common Stock in a public offering. In connection with the preferred
stock conversion, WorldCom made a non-recurring payment of $15 million to
Metromedia, representing a discount to the minimum nominal dividends that
would have been payable on the Series 1 Preferred Stock prior to the
September 15, 1996, optional call date of approximately $26.6 million (which
amount included an annual dividend requirement of $24.5 million plus accrued
dividends to such call date).
(3) In connection with certain debt refinancing, the Company recognized in the
three months ended March 31, 1998 and in the years ended December 31, 1996
extraordinary items of approximately $128.7 and $4.2 million, respectively,
net of taxes, consisting of unamortized debt discount, unamortized issuance
cost and prepayment fees. Additionally, in 1996 the Company recorded an
extraordinary item of $20.2 million, net of taxes, related to a write-off of
deferred international costs.
(4) In the first quarter of 1998, the Company recorded a one-time pre-tax charge
of $69 million for employee severance, alignment charges and direct merger
costs associated with the BFP Merger. On an after-tax basis, this charge was
$47.1 million and is reflected in operating loss for the three months ended
March 31, 1998.
Also in the first quarter of 1998, the Company recorded a $429 million
charge for in-process research and development related to the CompuServe
Merger and the AOL Transaction. The charge was based on a valuation analysis
of CNS and ANS technologies including the companies' virtual private data
networks, application hosting products, security systems, next generation
network architectures, and certain other identified research and development
projects purchased in the CompuServe Merger and AOL Transaction. At the date
of the CompuServe Merger and AOL Transaction, the technological feasibility
of the acquired technology had not yet been established and the technology
had no future alternative uses.
(5) For the purpose of computing the ratio of earnings to fixed charges,
earnings consist of income (loss) from continuing operations, and fixed
charges consist of pretax interest (including capitalized interest) on all
indebtedness, amortization of debt discount and expense, and that portion of
rental expense which the Company believes to be representative of interest.
For the historical years ended December 31, 1996, and for the three months
ended March 31, 1998, earnings were inadequate to cover fixed charges by the
amounts shown.
(6) EBITDA, as defined herein, is operating income (loss) plus depreciation and
amortization. EBITDA is presented because such data is used by certain
investors to evaluate the Company's ability to service its debt, fund
capital expenditures and expand its business. Adjusted EBITDA, as defined by
management, is operating income (loss) plus depreciation and amortization,
provisions to reduce the carrying value of certain assets, restructuring and
other charges and charges for in-process research and development. Such
information should not be considered an alternative to net income, operating
income, income from continuing operations or any other operating or
liquidity performance measure prescribed by generally accepted accounting
principles ("GAAP"). Cash expenditures (including nondiscretionary
expenditures) for various long-term assets, debt service and income taxes
have been, and will be, incurred which are not reflected in the EBITDA or
Adjusted EBITDA presentation, and therefore EBITDA and Adjusted EBITDA do
not represent funds available for management's discretionary use. EBITDA and
Adjusted EBITDA presented by the Company may not be comparable to EBITDA
defined and presented by other companies.
S-19
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF MCI
The consolidated selected historical financial data of MCI set forth below
are derived from the financial statements of MCI as they appeared in MCI's
Annual Reports on Form 10-K filed with the Commission for each of the three
fiscal years in the period ended December 31, 1997 and MCI's Quarterly Report on
Form 10-Q filed with the Commission for the period ending March 31, 1998.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED AND AT DECEMBER 31, ENDED AND AT
MARCH 31,
------------------------------- --------------------
1997 1996 1995 1998 1997
--------- --------- --------- --------- ---------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Total revenues..................................................... $ 19,653 $ 18,494 $ 15,265 $ 5,288 $ 4,883
Operating expenses:
Cost of services................................................. 10,956 9,489 7,893 2,883 2,525
Sales, operations and general.................................... 5,940 5,028 4,426 1,504 1,319
Depreciation including asset write-downs......................... 2,082 1,664 1,828 690 453
--------- --------- --------- --------- ---------
Total........................................................ 18,978 16,181 14,147 5,077 4,297
--------- --------- --------- --------- ---------
Income from operations............................................. 675 2,313 1,118 211 586
Other income (expense):
Interest expense................................................. (235) (196) (149) (52) (58)
Interest income.................................................. 18 34 147 4 6
Equity in income (losses) of affiliated companies................ (144) (156) (187) (24) (37)
Other expense, net............................................... (15) (5) (32) 39 (3)
--------- --------- --------- --------- ---------
Income before income taxes......................................... 299 1,990 897 178 494
Income tax provision............................................... 90 753 349 62 184
Distributions on subsidiary Trust mandatorily redeemable preferred
securities....................................................... 60 35 -- 15 15
--------- --------- --------- --------- ---------
Net income......................................................... $ 149 $ 1,202 $ 548 $ 101 $ 295
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Income from continuing operations (after preferred dividend
requirement):
Total............................................................ $ 149 $ 1,202 $ 548 $ 101 $ 295
Per common share:
Basic.......................................................... 0.22 1.75 0.81 0.14 0.43
Diluted........................................................ 0.21 1.73 0.80 0.14 0.42
Dividends per common share......................................... 0.05 0.05 0.05 -- --
Total assets....................................................... 25,510 22,978 19,301 25,465 23,607
Long-term debt..................................................... 3,276 4,798 3,444 3,615 4,984
Stockholders' equity............................................... 11,311 10,661 9,602 11,762 10,939
</TABLE>
- ------------------------
(1) In May 1996, MCI Capital I, a wholly-owned Delaware statutory business
trust, issued $750 million aggregate principal amount of 8% Cumulative
Quarterly Income Preferred Securities, Series A due June 30, 2026,
guaranteed, on a subordinated basis, by MCI. MCI Capital I exists for the
sole purpose of issuing the preferred securities and investing the proceeds
in MCI's 8% Junior Subordinated Deferrable Interest Debentures, Series A due
June 30, 2026.
(2) In September and November 1995, MCI acquired all of the outstanding shares
of common stock of Nationwide Cellular Service, Inc. and SHL Systemhouse
Inc., respectively. These acquisitions were accounted for as purchases;
accordingly, the net assets and results of operations of the acquired
companies are included in the information above since their respective
acquisition dates.
Additionally, 1995 selling, general and administrative expenses include $216
million related to the consolidation of the MCI's core business operations
and the centralization of major administrative functions.
S-20
<PAGE>
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited Pro Forma Condensed Combined Balance Sheet as of
March 31, 1998 and unaudited Pro Forma Condensed Combined Statement of
Operations for the three months ended March 31, 1998, and for the year ended
December 31, 1997, illustrate the effect of the MCI/WorldCom Merger as if the
MCI/WorldCom Merger had occurred on March 31, 1998, for the Pro Forma Condensed
Combined Balance Sheet and as of the earliest date presented for the Pro Forma
Condensed Combined Statement of Operations. No adjustment has been included in
the pro forma amounts for any anticipated cost savings or other synergies, or
for the sale of the iMCI Business to Cable & Wireless pursuant to the Letter
Agreement or for MCI's purchase of an investment in Embratel. See "The
MCI/WorldCom Merger--Divestiture of MCI's Internet Services Business" and
"--Acquisition of Interest in Embratel."
Pursuant to the terms of the MCI/WorldCom Merger Agreement, 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 holder of
MCI Class A Common Stock will be entitled to receive $51.00 per share in cash
for each of the MCI Class A Common Stock shares it owns, or approximately $7
billion in the aggregate. The Pro Forma Condensed Combined Financial Statements
have been prepared assuming the MCI/WorldCom Average Price to be $33.13,
resulting in an assumed MCI Exchange Ratio of 1.5396. The actual MCI Exchange
Ratio may vary as described herein. See "The MCI/WorldCom Merger--General." The
MCI/WorldCom Merger will be accounted for as a purchase under generally accepted
accounting principles.
These Pro Forma Condensed Combined Financial Statements should be read in
conjunction with the historical financial statements of WorldCom and MCI. The
historical financial statements of WorldCom and related notes as of December 31,
1997 and for each of the years in the three-year period ended December 31, 1997
are contained in WorldCom's Current Report on Form 8-K dated May 28, 1998 and
the historical financial statements of WorldCom and related notes as of March
31, 1998 and for the three months ended March 31, 1998 and 1997 are contained in
WorldCom's Quarterly Report on Form 10-Q for the three months ended March 31,
1998, which reports are incorporated by reference herein. The historical
financial statements of MCI and related notes as of December 31, 1997 and March
31, 1998 and for each of the years in the three-year period ended December 31,
1997 and for the three months ended March 31, 1998 and 1997 are contained in
WorldCom's Current Report on Form 8-K/A-3 filed May 28, 1998, which is
incorporated by reference herein.
The Pro Forma Condensed Combined Financial Statements are presented for
comparative purposes only and are not intended to be indicative of actual
results had the transactions occurred as of the dates indicated above nor do
they purport to indicate results which may be attained in the future.
S-21
<PAGE>
WORLDCOM PRO FORMA CONDENSED COMBINED BALANCE SHEET (1)
AS OF MARCH 31, 1998
(IN MILLIONS)
<TABLE>
<CAPTION>
MCI WORLDCOM
WORLDCOM MCI PRO FORMA PRO FORMA
HISTORICAL(2) HISTORICAL(2) ADJUSTMENTS COMBINED
------------ ------------ ----------- ---------------
<S> <C> <C> <C> <C>
Current assets...................................... $ 2,183 $ 5,128 $ 6,936(4) $ 7,311
(6,936)(3)
Property, plant and equipment, net.................. 7,732 13,944 (2,700)(3) 18,976
Goodwill and other intangibles, net................. 14,718 2,327 28,366(3) 45,411
Other assets........................................ 1,282 4,066 (77)(5) 5,271
------------ ------------ ----------- -------
Total assets.................................... $ 25,915 $ 25,465 $ 25,589 $ 76,969
------------ ------------ ----------- -------
------------ ------------ ----------- -------
Current liabilities................................. $ 2,310 $ 7,237 $ -- $ 9,547
Long-term debt...................................... 8,332 3,615 6,936(4) 18,883
Other liabilities................................... 451 2,101 (1,015)(3) 1,537
Mandatorily redeemable preferred stock.............. -- 750 -- 750
Shareholders' equity:
Class A common stock.............................. -- 14 (14)(5) --
Common stock...................................... 10 60 (60)(5) 20
10(6)
Paid in capital................................... 16,951 6,350 (6,350)(5) 48,371
31,420(6)
Retained earnings (deficit)....................... (2,189) 5,446 (5,446)(5) (2,189)
Other............................................. 50 (108) 108(5) 50
------------ ------------ ----------- -------
Total shareholders' equity...................... 14,822 11,762 19,668 46,252
------------ ------------ ----------- -------
Total liabilities and shareholders' equity...... $ 25,915 $ 25,465 $ 25,589 $ 76,969
------------ ------------ ----------- -------
------------ ------------ ----------- -------
</TABLE>
The accompanying notes are an integral part of this statement.
S-22
<PAGE>
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (1)
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MCI WORLDCOM
WORLDCOM MCI PRO FORMA PRO FORMA
HISTORICAL(2) HISTORICAL(2) ADJUSTMENTS COMBINED
------------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues...................... $2,350 $5,288 $(204)(7) $7,434
Operating expenses:
Line costs.................. 1,147 2,883 (204)(7) 3,826
Selling, general and
administrative............ 478 1,504 -- 1,982
Depreciation and
amortization.............. 299 690 181(8) 1,032
(138)(9)
Brooks Fiber merger costs... 69 -- -- 69
Charge for in-process
research and
development............... 429 -- -- 429
------ ------ ----- ------
Operating income (loss)....... (72) 211 (43) 96
Other income (expense):
Interest expense............ (102) (52) (114)(10) (268)
Other....................... 12 19 -- 31
------ ------ ----- ------
Income (loss) before income
taxes....................... (162) 178 (157) (141)
Provision for income taxes.... 118 62 9(11) 189
------ ------ ----- ------
Income (loss) from continuing
operations.................. (280) 116 (166) (330)
Preferred dividend
requirements................ 7 15 -- 22
------ ------ ----- ------
Net income (loss) applicable
to common shareholders...... $ (287) $ 101 $(166) $ (352)
------ ------ ----- ------
------ ------ ----- ------
Number of shares issued and
outstanding:
Basic....................... 1,012 715 1,903
------ ------ ------
------ ------ ------
Diluted..................... 1,012 732 1,903
------ ------ ------
------ ------ ------
Earnings per share (12)
Basic....................... $(0.28) $ 0.14 $(0.18)
Diluted..................... $(0.28) $ 0.14 $(0.18)
</TABLE>
The accompanying notes are an integral part of this statement.
S-23
<PAGE>
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (1)
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MCI WORLDCOM
WORLDCOM MCI PRO FORMA PRO FORMA
HISTORICAL(2) HISTORICAL(2) ADJUSTMENTS COMBINED
------------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues...................... $7,476 $19,653 $(380)(7) $26,749
Operating expenses:
Line costs.................. 3,857 10,956 (380)(7) 14,433
Selling, general and
administrative............ 1,626 5,940 -- 7,566
Depreciation and
amortization.............. 976 2,082 722(8) 3,230
(550)(9)
------ ------------- ----- ------------
Operating income.............. 1,017 675 (172) 1,520
Other income (expense):
Interest expense............ (395) (235) (454)(10) (1,084)
Other....................... 41 (141) -- (100)
------ ------------- ----- ------------
Income (loss) before income
taxes....................... 663 299 (626) 336
Provision for income taxes.... 416 90 36(11) 542
------ ------------- ----- ------------
Income (loss) from continuing
operations.................. 247 209 (662) (206)
Preferred dividend
requirements................ 26 60 -- 86
------ ------------- ----- ------------
Net income (loss) applicable
to common shareholders...... $ 221 $ 149 $(662) $ (292)
------ ------------- ----- ------------
------ ------------- ----- ------------
Number of shares issued and
outstanding:
Basic....................... 966 693 1,824
------ ------------- ------------
------ ------------- ------------
Diluted..................... 997 707 1,824
------ ------------- ------------
------ ------------- ------------
Earnings per share (12)
Basic....................... $ 0.23 $ 0.22 $ (0.16)
Diluted..................... $ 0.22 $ 0.21 $ (0.16)
</TABLE>
The accompanying notes are an integral part of this statement.
S-24
<PAGE>
NOTES TO PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
1. The unaudited pro forma financial data do not give effect to any
restructuring costs, nor any potential cost savings or other synergies that
could result from the MCI/WorldCom Merger or for the sale of the iMCI Business
or MCI's purchase of an investment in Embratel. WorldCom is in the process of
developing its plan to integrate the operations of MCI which may include certain
exit and restructuring costs. As a result of this plan, a charge, which may be
material but which cannot now be quantified, is expected to be recognized in the
period in which such a restructuring occurs. Furthermore, the pro forma
financial data do not reflect any expense of intangible assets attributable to
the value of any in-process research and development projects of MCI at the time
of the MCI/WorldCom Merger. However, WorldCom is conducting asset valuation
studies of MCI's tangible and identifiable intangible assets, including
in-process research and development projects, for the purpose of allocating the
purchase price to the net assets acquired. A preliminary estimate of the
one-time charge for purchased in-process research and development projects of
MCI is between $6 and $7 billion. The pro forma data are not necessarily
indicative of the operating results or financial position that would have
occurred had the MCI/WorldCom Merger been consummated at the dates indicated,
nor necessarily indicative of future operating results or financial position.
This Note contains "forward-looking statements" within the meaning of the PSLRA.
Important factors that could cause actual results to differ materially from such
statements include, without limitation, the preliminary nature of such estimates
and the need to complete asset valuation studies. See "Cautionary Statement
Regarding Forward-Looking Statements" and "Risk Factors" above.
2. These columns represent historical results of operations and financial
position.
3. This adjustment reflects the excess of consideration over net assets
acquired. The following is a calculation (in millions except per share data):
<TABLE>
<S> <C>
MCI Common Stock outstanding at March 31, 1998.................... 588
Shares issuable (treasury stock method) upon exercise of MCI
options......................................................... 30
---------
MCI Common Stock assumed outstanding at March 31, 1998............ 618
MCI Exchange Ratio per share...................................... 1.5396
---------
WorldCom Common Stock assumed to be issuable...................... 951
WorldCom per share closing price on November 7, 1997.............. $ 33.13
---------
Sub-total......................................................... $ 31,507
Payment to MCI Class A Common Stockholder......................... 6,936
Inducement fee and other estimated transaction costs.............. 510
---------
Total consideration............................................... 38,953
Preliminary purchase accounting adjustments:
Fair value adjustment to property, plant and equipment............ 2,700
Deferred tax impact of fair value adjustment...................... (1,015)
---------
40,638
Historical net book value of MCI net assets acquired.............. (11,762)
---------
Excess of consideration over net assets acquired.................. 28,876
Inducement fee and other transaction costs reflected in WorldCom
historical...................................................... (510)
---------
$ 28,366
---------
---------
</TABLE>
The total consideration will be allocated to the assets and liabilities of
MCI based on their estimated fair value. A preliminary allocation of the
purchase price has been presented in the pro forma condensed combined financial
statements in which the historical MCI property, plant and equipment has been
S-25
<PAGE>
adjusted to its estimated fair value based upon its depreciated replacement
cost. The impact of this fair value adjustment has also been reflected in pro
forma deferred tax balances. The excess of consideration over the historical
book value of MCI net assets acquired has been preliminarily allocated to
goodwill and other intangible assets. A final allocation of the purchase price
to the MCI assets acquired and liabilities assumed is dependent upon certain
valuations and studies that have not progressed to a stage where there is
sufficient information to make such an allocation in the accompanying pro forma
financial information. These valuations are expected to be completed around the
effective time of the MCI/WorldCom Merger. WorldCom's management believes the
consideration in excess of the historical book value of MCI's net assets
acquired primarily comprises goodwill, certain in-process research and
development projects and other intangible assets. In-process research and
development projects may include projects for which technological feasibility
has not been established and the technology has no future alternative use. To
the extent that a portion of the purchase price is allocated to such in-process
research and development projects, a charge, which, based upon preliminary
estimates, may approximate $6 to $7 billion, would be recognized as an expense
in the period in which the MCI/WorldCom Merger occurs (See Note 1). Such a
charge would reduce goodwill by a similar amount. The effect of such a charge on
the Pro Forma Condensed Combined Statement of Operations would be a reduction of
amortization expense, with a corresponding increase to earnings, of
approximately $150 million to $175 million on an annual basis. A change of $500
million in the allocation of the purchase price to in-process research and
development projects of MCI would affect amortization expense by $12.5 million
annually. This Note contains "forward-looking statements" within the meaning of
the PSLRA. Important factors that could cause actual results to differ
materially from such statements include, without limitation, the preliminary
nature of such estimates and the need to complete asset valuation studies. See
"Cautionary Statement Regarding Forward-Looking Statements" and "Risk Factors"
above.
4. This adjustment represents additional borrowings of $6.9 billion for the
purpose of financing the cash payment to the holder of the MCI Class A Common
Stock. Estimated transaction costs of $510 million (which includes a $465
million inducement fee paid to BT) were paid in 1997 and are reflected in the
WorldCom historical column.
5. These adjustments represent the elimination of MCI's stockholders' equity
accounts and investment in WorldCom Common Stock.
6. These adjustments represent the issuance of approximately 951 million
shares of WorldCom Common Stock in connection with the MCI/WorldCom Merger at an
assumed MCI Exchange Ratio of 1.5396 shares of WorldCom Common Stock for each
share of MCI Common Stock outstanding. The actual MCI Exchange Ratio may vary as
described herein.
7. These estimated adjustments eliminate the revenues and corresponding line
costs attributable to the intercompany transactions between WorldCom and MCI.
8. This entry reflects the adjustment to amortization for the effect of the
excess of consideration over net assets acquired in the MCI/WorldCom Merger. For
purposes of the Pro Forma Condensed Combined Financial Statements, the excess
consideration has been amortized over an estimated life of 40 years. WorldCom
management expects that amounts allocated to goodwill and trade names will be
amortized over 40 years while other intangible assets may be amortized over
shorter periods consequently reducing net income reported by MCI WorldCom. A
final determination of the lives attributable to the intangible assets has not
yet been made (See Note 1). As discussed in Note 3, a portion of the excess
consideration may be allocated to certain in-process research and development
projects. To the extent amounts are allocated to certain in-process research and
development projects, goodwill and pro forma amortization expense would be
ratably reduced.
9. This entry reflects the adjustment to depreciation expense for the effect
of the fair value adjustment of MCI's property, plant and equipment based on a
preliminary evaluation of depreciated replacement cost (See Note 3).
S-26
<PAGE>
10. These adjustments represent the recognition of interest expense on the
additional borrowings of WorldCom to finance the cash payment to the holder of
the MCI Class A Common Stock and transaction costs (see Note 4). The interest
expense was calculated based on WorldCom's incremental borrowing rate of 6.1%. A
change of 1/8% in the incremental rate would affect interest expense by $2.3
million and $9.3 million for the three months ended March 31, 1998 and for the
year ended December 31, 1997, respectively.
11. These entries represent the tax effect of the pro forma adjustments.
12. Pro forma per share data are based on the number of WorldCom common and
common equivalent shares that would have been outstanding had the MCI/WorldCom
Merger occurred on the earliest date presented.
DESCRIPTION OF THE NOTES
The following description of the particular terms of the Notes supplements
and, to the extent inconsistent therewith, replaces the description of the
general terms and provisions of the Debt Securities set forth in the
accompanying Prospectus under "Description of Debt Securities" to which
reference is hereby made.
CERTAIN TERMS OF THE NOTES DUE 2001
The Notes Due 2001 are a series of Debt Securities described in the
accompanying Prospectus, which will be senior Debt Securities, will be limited
to $1,500 million aggregate principal amount and will mature on August 15, 2001.
Reference should be made to the accompanying Prospectus for a detailed summary
of additional provisions of the Notes Due 2001 and of the Indenture dated as of
March 1, 1997 (the "Indenture") between the Company and The Chase Manhattan
Bank, as successor to Mellon Bank, N.A., as trustee (the "Trustee"), under which
the Notes Due 2001 will be issued.
The Notes Due 2001 will bear interest at the rate of 6.125% per annum from
August 11, 1998, payable semiannually in arrears on February 15 and August 15 of
each year, commencing February 15, 1999, to the persons in whose names the Notes
Due 2001 are registered at the close of business on the preceding February 1 or
August 1, each a record date, as the case may be. Principal of and interest on
the Notes Due 2001 will be payable (and the Notes Due 2001 may be presented for
repayment) at the office or agency of the Company maintained for such purposes
in New York, New York. Interest will be computed on the basis of a 360-day year
consisting of twelve 30-day months.
The Notes Due 2001 will not be subject to any sinking fund.
CERTAIN TERMS OF THE NOTES DUE 2003
The Notes Due 2003 are a series of Debt Securities described in the
accompanying Prospectus, which will be senior Debt Securities, will be limited
to $600 million aggregate principal amount and will mature on August 15, 2003.
Reference should be made to the accompanying Prospectus for a detailed summary
of additional provisions of the Notes Due 2003 and of the Indenture under which
the Notes Due 2003 will be issued.
The Notes Due 2003 will bear interest at the rate of 6.250% per annum from
August 11, 1998, payable semiannually in arrears on February 15 and August 15 of
each year, commencing February 15, 1999, to the persons in whose names the Notes
Due 2003 are registered at the close of business on the preceding February 1 or
August 1, each a record date, as the case may be. Principal of and interest on
the Notes Due 2003 will be payable (and the Notes Due 2003 may be presented for
repayment) at the office or agency of the Company maintained for such purposes
in New York, New York. Interest will be computed on the basis of a 360-day year
consisting of twelve 30-day months.
S-27
<PAGE>
The Notes Due 2003 will not be subject to any sinking fund.
CERTAIN TERMS OF THE NOTES DUE 2005
The Notes Due 2005 are a series of Debt Securities described in the
accompanying Prospectus, which will be senior Debt Securities, will be limited
to $2,250 million aggregate principal amount and will mature on August 15, 2005.
Reference should be made to the accompanying Prospectus for a detailed summary
of additional provisions of the Notes Due 2005 and of the Indenture under which
the Notes Due 2005 will be issued.
The Notes Due 2005 will bear interest at the rate of 6.400% per annum from
August 11, 1998, payable semiannually in arrears on February 15 and August 15 of
each year, commencing February 15, 1999, to the persons in whose names the Notes
Due 2005 are registered at the close of business on the preceding February 1 or
August 1, each a record date, as the case may be. Principal of and interest on
the Notes Due 2005 will be payable (and the Notes Due 2005 may be presented for
repayment) at the office or agency of the Company maintained for such purposes
in New York, New York. Interest will be computed on the basis of a 360-day year
consisting of twelve 30-day months.
The Notes Due 2005 will not be subject to any sinking fund.
CERTAIN TERMS OF THE NOTES DUE 2028
The Notes Due 2028 are a series of Debt Securities described in the
accompanying Prospectus, which will be senior Debt Securities, will be limited
to $1,750 million aggregate principal amount and will mature on August 15, 2028.
Reference should be made to the accompanying Prospectus for a detailed summary
of additional provisions of the Notes Due 2028 and of the Indenture under which
the Notes Due 2028 will be issued.
The Notes Due 2028 will bear interest at the rate of 6.950% per annum from
August 11, 1998, payable semiannually in arrears on February 15 and August 15 of
each year, commencing February 15, 1999, to the persons in whose names the Notes
Due 2028 are registered at the close of business on the preceding February 1 or
August 1, each a record date, as the case may be. Principal of and interest on
the Notes Due 2028 will be payable (and the Notes Due 2028 may be presented for
repayment) at the office or agency of the Company maintained for such purposes
in New York, New York. Interest will be computed on the basis of a 360-day year
consisting of twelve 30-day months.
The Notes Due 2028 will not be subject to any sinking fund.
RANKING
The Notes will be senior unsecured obligations of the Company and will rank
PARI PASSU (equally and ratably) with all other senior unsecured and
unsubordinated indebtedness of the Company from time to time outstanding.
The Notes will be effectively subordinated to any secured indebtedness of
the Company to the extent of the value of the assets securing such indebtedness.
The Indenture permits the Company and its Restricted Subsidiaries to incur or
permit to be outstanding secured indebtedness in an aggregate amount not
exceeding 10% of the total assets of the Company and its Subsidiaries, in
addition to Permitted Liens, all as described under "Description of Debt
Securities -- Limitation on Liens" in the accompanying Prospectus. The Company's
assets consist principally of the stock of and advances to its subsidiaries.
Almost all of the operating assets of the Company and its consolidated
subsidiaries are owned by such subsidiaries and the Company relies primarily on
interest and dividends from such subsidiaries to meet its obligations for
payment of principal and interest on its outstanding debt obligations and
corporate expenses. The Notes will be structurally subordinated to all
obligations, including trade payables, of the Company's subsidiaries, to the
extent of the assets of such subsidiaries available to satisfy such obligations.
S-28
<PAGE>
Upon consummation of the MCI/WorldCom Merger, MCI would be a subsidiary of the
Company, and the Notes would be structurally subordinated to all obligations of
MCI. See "Selected Historical Financial Data of MCI" herein and the unaudited
financial statements of MCI for the quarter ended March 31, 1998 and the related
Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in pages F-34 through F-52 appearing in the Company's
Current Report on Form 8-K/A-3 dated November 9, 1997 (filed on May 28, 1998),
which are incorporated by reference herein. On July 30, 1998, MCI reported
certain financial results for the three months ended June 30, 1998. Certain
portions of the MCI press release containing such information are incorporated
herein by reference to WorldCom's Current Report on Form 8-K dated August 4,
1998 (filed August 4, 1998).
As described in the accompanying Prospectus, certain provisions of the
Indenture which are applicable to the Notes are less restrictive than
corresponding provisions which are applicable to the 1997 Senior Securities (as
defined therein) issued under the Indenture. See "Description of Debt Securities
- -- Limitation on Liens" and "--Events of Default, Notices and Waivers" in the
Prospectus. If the Company should fail to comply with the more restrictive
provisions applicable to the 1997 Senior Securities, the 1997 Senior Securities
may be declared to be due and payable at a time when the Notes would not be so
declared to be due and payable, and such acceleration in respect of the 1997
Senior Securities may adversely affect the ability of the Company to make
required payments in respect of the Notes.
OPTIONAL REDEMPTION
The Notes Due 2001, the Notes Due 2003, the Notes Due 2005 and the Notes Due
2028 will be redeemable, as a whole or in part, at the option of the Company, at
any time or from time to time, on at least 30 days, but not more than 60 days,
prior notice mailed to the registered address of each holder of Notes, 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 below) discounted, on a semiannual
basis (assuming a 360-day year consisting of twelve 30-day months), at the
Treasury Rate (as defined below) plus (a) 10 basis points for the Notes Due
2001, (b) 15 basis points for the Notes Due 2003, (c) 15 basis points for the
Notes Due 2005, or (d) 20 basis points for the Notes Due 2028, plus in the case
of each of clause (i) and (ii) accrued interest to the date of redemption.
"Treasury Rate" means, with respect to any Redemption Date, the rate per
annum equal to the semiannual equivalent yield to maturity (computed as of the
second business day immediately preceding such Redemption Date) of the
Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue
(expressed as a percentage of its principal amount) equal to the Comparable
Treasury Price for such Redemption Date.
"Comparable Treasury Issue" means the United States Treasury security
selected by an Independent Investment Banker as having a maturity comparable to
the remaining term of the Notes Due 2001, the Notes Due 2003, the Notes Due 2005
or the Notes Due 2028, as the case may be, to be redeemed that would be
utilized, at the time of selection and in accordance with customary financial
practice, in pricing new issues of corporate debt securities of comparable
maturity to the remaining term of such Notes.
"Independent Investment Banker" means one of the Reference Treasury Dealers
appointed by the Company.
"Comparable Treasury Price" means, with respect to any Redemption Date, (i)
the average of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) on the third
business day preceding such Redemption Date, as set forth in the daily
statistical release (or any successor release) published by the Federal Reserve
Bank of New York and designated "Composite 3:30 p.m. Quotations for U.S.
Government Securities" or (ii) if such release (or any successor release) is not
published or does not contain such prices on such business day, (A) the average
of the Reference Treasury Dealer Quotations for such Redemption Date, after
excluding the highest and lowest
S-29
<PAGE>
of such Reference Treasury Dealer Quotations, or (B) if the Trustee obtains
fewer than four such Reference Treasury Dealer Quotations, the average of all
such quotations. "Reference Treasury Dealer Quotations" means, with respect to
each Reference Treasury Dealer and any Redemption Date, the average, as
determined by the Trustee, of the bid and asked prices for the Comparable
Treasury Issue (expressed in each case as a percentage of its principal amount)
quoted in writing to the Trustee by such Reference Treasury Dealer at 3:30 p.m.,
New York City time on the third business day preceding such Redemption Date.
"Reference Treasury Dealer" means each of Salomon Brothers Inc, Credit
Suisse First Boston Corporation, Lehman Brothers, Inc., Chase Securities Inc.,
J.P. Morgan Securities Inc., and NationsBanc Montgomery Securities LLC, and
their respective successors; provided, however, that if any of the foregoing
shall cease to be a primary U.S. Government securities dealer (a "Primary
Treasury Dealer"), the Company shall substitute therefor another nationally
recognized investment banking firm that is a Primary Treasury Dealer.
"Remaining Scheduled Payments" means, with respect to each Note to be
redeemed, the remaining scheduled payments of the principal thereof and interest
thereon that would be due after the related Redemption Date but for such
redemption; provided, however, that, if such Redemption Date is not an interest
payment date with respect to such Note, the amount of the next succeeding
scheduled interest payment thereon will be reduced by the amount of interest
accrued thereon to such Redemption Date.
On and after the Redemption Date, interest will cease to accrue on the Notes
or any portion thereof called for redemption (unless the Company defaults in the
payment of the Redemption Price and accrued interest). On or before the
Redemption Date, the Company shall deposit with a paying agent (or the Trustee)
money sufficient to pay the redemption price of and accrued interest on the
Notes to be redeemed on such date. If less than all of the Notes Due 2001, the
Notes Due 2003, the Notes Due 2005 or the Notes Due 2028 are to be redeemed, the
Notes to be redeemed shall be selected by the Trustee by such method as the
Trustee shall deem fair and appropriate.
DELIVERY AND FORM
The Notes Due 2001, the Notes Due 2003, the Notes Due 2005 and the Notes Due
2028 initially will be represented by one or more global securities ("Global
Securities") deposited with DTC and registered in the name of the nominee of
DTC, except as set forth below. Each of the Notes will be available for purchase
in denominations of $1,000 and integral multiples thereof, in book-entry form
only. Unless and until certificated Notes are issued under the limited
circumstances described in the accompanying Prospectus under "Description of
Debt Securities--Book-Entry Debt Securities," no Beneficial Owner of a Note
shall be entitled to receive a definitive certificate representing a Note. So
long as DTC or any successor depository (collectively, the "Depository") or its
nominee is the registered holder of the Global Securities, the Depository, or
such nominee, as the case may be, will be considered to be the sole owner or
holder of the applicable Notes for all purposes of the Indenture. Investors'
interests in the Global Securities will be represented through financial
institutions acting on their behalf as Direct and Indirect Participants in the
Depository. Such Participants may include Morgan Guaranty Trust Company of New
York, Brussels office, as operator of the Euroclear System ("Euroclear") or
Cedel Bank societe anonyme.
A further description of the Depository's procedures with respect to the
Global Securities representing the Notes is set forth in the accompanying
Prospectus under "Description of Debt Securities--Book-Entry Debt Securities."
SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the Notes will be made by the Underwriters in immediately
available funds. So long as the Notes are represented by the Global Securities,
all payments of principal and interest will be made by the Company in
immediately available funds.
S-30
<PAGE>
The Notes will trade in DTC's Same-Day Funds Settlement System until
maturity, and secondary market trading activity in the Notes will therefore be
required by DTC to settle in immediately available funds. No assurance can be
given as to the effect, if any, of settlement in immediately available funds on
trading activity in the Notes.
REGARDING THE TRUSTEE
An affiliate of the Trustee is one of the Underwriters. See "Underwriting"
herein and "Description of Debt Securities -- Regarding the Trustee" in the
accompanying Prospectus for additional information regarding the Trustee.
S-31
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
(the "Underwriting Agreement"), the Company has agreed to sell to each of the
Underwriters named below, and each of the Underwriters has severally agreed to
purchase, the principal amount of Notes set forth opposite its name below.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT PRINCIPAL AMOUNT PRINCIPAL AMOUNT PRINCIPAL AMOUNT
OF NOTES DUE OF NOTES DUE OF NOTES DUE OF NOTES DUE
UNDERWRITERS 2001 2003 2005 2028
- ---------------------------------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Salomon Brothers Inc.................... $ 630,000,000 $ 252,000,000 $ 945,000,000 $ 735,000,000
Credit Suisse First Boston
Corporation........................... 225,000,000 90,000,000 337,500,000 262,500,000
Lehman Brothers, Inc.................... 225,000,000 90,000,000 337,500,000 262,500,000
Chase Securities Inc.................... 135,000,000 54,000,000 202,500,000 157,500,000
J.P. Morgan Securities Inc.............. 135,000,000 54,000,000 202,500,000 157,500,000
NationsBanc Montgomery Securities LLC... 135,000,000 54,000,000 202,500,000 157,500,000
Utendahl Capital Partners, L.P.......... 15,000,000 6,000,000 22,500,000 17,500,000
---------------- ---------------- ---------------- ----------------
Total............................... $ 1,500,000,000 $ 600,000,000 $ 2,250,000,000 $ 1,750,000,000
---------------- ---------------- ---------------- ----------------
---------------- ---------------- ---------------- ----------------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
to pay for and accept delivery of the Notes are subject to certain conditions
precedent, that the Underwriting Agreement may be terminated under certain
circumstances, and that the Underwriters will be obligated to purchase all of
the Notes if any are purchased.
The Company has been advised by the Underwriters that the Underwriters
propose initially to offer the Notes to the public at the public offering prices
set forth on the cover page of this Prospectus Supplement and to certain dealers
at such prices less concessions not in excess of .250%, in the case of the Notes
Due 2001, not in excess of .350%, in the case of the Notes Due 2003, not in
excess of .375%, in the case of the Notes Due 2005 and not in excess of .500%,
in the case of the Notes Due 2028, of the principal amount thereof. The
Underwriters may allow, and such dealers may reallow, concessions not in excess
of .250% of the principal amount thereof on sales of the Notes to certain other
dealers. After the initial public offering, the public offering prices and such
concessions may be changed.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or contribute to payments the Underwriters
may be required to make in respect thereof.
The Notes are new issues of securities with no established trading market.
The Company does not intend to apply for listing of the Notes on a national
securities exchange, but has been advised by the Underwriters that certain of
the Underwriters presently intend to make a market in the Notes, as permitted by
applicable laws and regulations. The Underwriters are not obligated, however, to
make a market in the Notes, and any such market making may be discontinued at
any time at the sole discretion of the Underwriters. Accordingly, no assurance
can be given as to the liquidity of, or the trading market for, the Notes.
Salomon Brothers Inc, on behalf of the Underwriters, may engage in
stabilizing transactions, syndicate covering transactions and penalty bids in
accordance with Rule 104 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). Stabilizing transactions permit bids to purchase the
underlying security so long as the stabilizing bids do not exceed a specified
maximum. Syndicate covering transactions involve purchases of the Notes in the
open market after the distribution has been completed in order to cover
syndicate short positions. Penalty bids permit the Underwriters to reclaim a
selling concession from a syndicate member when the Notes originally sold by
such syndicate member are purchased in a syndicate
S-32
<PAGE>
covering transaction to cover syndicate short positions. Such stabilizing
transactions, syndicate covering transactions and penalty bids may cause the
price of the Notes to be higher than it would otherwise be in the absence of
such transactions. These transactions, if commenced, may be discontinued at any
time.
Under Rule 2710(c)(8) of the Conduct Rules of the National Association of
Securities Dealers, Inc. (the "NASD"), special considerations apply to a public
offering of debt securities where more than 10% of the net proceeds thereof will
be paid to members of the NASD that are participating in the offering, or
persons affiliated or associated therewith. Because the Company expects that
more than 10% of the proceeds of the offering will be used to repay money lent
to the Company under the Company's existing credit facilities by Credit Suisse
First Boston, The Chase Manhattan Bank, Morgan Guaranty Trust Company of New
York and NationsBank of Texas, N.A., which are affiliates of Credit Suisse First
Boston Corporation, Chase Securities Inc., J.P. Morgan Securities Inc. and
NationsBanc Montgomery Securities LLC, respectively, this offering will be
conducted in conformity with Rule 2710(c)(8).
The Underwriters and certain of their affiliates and associates may be
customers of, have lending relationships with, engage in transactions with,
and/or perform services, including investment banking and commercial banking
services, for, the Company and its affiliates in the ordinary course of
business. Salomon Brothers Inc has acted as financial advisor to WorldCom in
connection with the MCI/WorldCom Merger, for which it has received certain fees
and for which it expects to receive additional fees upon the closing of the
MCI/WorldCom Merger. Additionally, Salomon Brothers Holding Company Inc, Credit
Suisse First Boston, Lehman Commercial Paper Inc., The Chase Manhattan Bank,
Morgan Guaranty Trust Company of New York, and NationsBank of Texas, N.A.,
affiliates of Salomon Brothers Inc, Credit Suisse First Boston Corporation,
Lehman Brothers, Inc., Chase Securities Inc., J.P. Morgan Securities Inc., and
NationsBanc Montgomery Securities LLC, respectively, are lenders under the New
Credit Facilities. In addition, Salomon Brothers Inc will receive a financial
advisory fee.
INFORMATION INCORPORATED BY REFERENCE
As described in the Prospectus, the Company is subject to the informational
requirements of the Exchange Act, and, in accordance therewith, files reports,
proxy statements and other information with the Commission. Such documents filed
by the Company with the Commission now may be accessed electronically by means
of the Commission's home page on the world wide web on the Internet at
"http://www.sec.gov." The Company's Annual Report on Form 10-K for the year
ended December 31, 1997, Quarterly Report on Form 10-Q for the three months
ended March 31, 1998 and Current Reports on Form 8-K dated August 25, 1996
(filed August 26, 1996, and as amended on Forms 8-K/A filed November 4, 1996,
November 20, 1996, and December 19, 1997), November 9, 1997 (filed November 12,
1997, and as amended on Forms 8-K/A-1 filed on January 27, 1998, on Form 8-K/A-2
filed on January 28, 1998 and on Form 8-K/A-3 filed on May 28, 1998), January
29, 1998 (filed February 12, 1998), May 28, 1998 (filed May 28, 1998), July 23,
1998 (filed July 24, 1998), August 4, 1998 (filed August 4, 1998), August 6,
1998 (filed August 6, 1998) and August 6, 1998 (filed August 7, 1998), are
incorporated into the Prospectus and this Prospectus Supplement by reference.
All documents and reports filed by the Company pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date hereof and prior to the
termination of any offering of securities made by the Prospectus and this
Prospectus Supplement shall be deemed to be incorporated by reference into the
Prospectus and this Prospectus Supplement and to be a part of the Prospectus and
this Prospectus Supplement from the date of filing of such document. Any
statement contained in the Prospectus or herein, or in a document all or a
portion of which is incorporated or deemed to be incorporated by reference in
the Prospectus or herein, shall be deemed to be modified or superseded for
purposes of the Prospectus and this Prospectus Supplement to the extent that a
statement contained herein or in any subsequently filed document which also is
or is deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of the Prospectus and
this Prospectus Supplement.
S-33
<PAGE>
The Company will provide without charge to any person to whom the Prospectus
and this Prospectus Supplement is delivered, on the written or oral request of
such person, a copy of any or all of the documents incorporated by reference
herein (other than exhibits not specifically incorporated by reference into the
texts of such documents). Requests for such documents should be directed to:
WorldCom, Inc.
515 East Amite Street
Jackson, MS 39201-2702
Telephone: (601) 360-8600
Attention: Stephanie Q. Scott,
Director of Financial Reporting
LEGAL MATTERS
Bryan Cave LLP, St. Louis, Missouri, has represented the Company in
connection with the offering contemplated herein and the Underwriters have been
represented by Cravath, Swaine & Moore, New York, New York. Cravath, Swaine &
Moore is representing WorldCom in connection with the MCI/ WorldCom Merger and
may represent WorldCom in connection with other matters from time to time.
S-34
<PAGE>
[LOGO]
PROSPECTUS
WORLDCOM, INC.
DEBT SECURITIES
WorldCom, Inc. (the "Company" or "WorldCom") may offer from time to time, in
one or more series, debentures, notes, bonds, or other obligations ("Debt
Securities"), all having an aggregate initial public offering price not to
exceed U.S. $6,100,000,000 or the equivalent thereof in one or more foreign
currencies, foreign currency units, or composite currencies, including European
Currency Units. The Debt Securities may be offered separately or as units with
other securities, in separate series in amounts, at prices, and on terms to be
determined at or prior to the time of sale. The Debt Securities will be direct
unsecured obligations of the Company.
The specific terms of the Debt Securities with respect to which this
Prospectus is being delivered will be set forth in a supplement to this
Prospectus (a "Prospectus Supplement"), together with the terms of the offering
and sale of the Debt Securities and the initial offering price and the net
proceeds to the Company from the sale thereof. The Prospectus Supplement will
include, among other things: the specific designation; aggregate principal
amount; ranking; authorized denomination; maturity; rate or method of
calculation of interest and dates for payment thereof; any index or formula for
determining the amount of any principal, premium, or interest payment; any
exchange, redemption, prepayment, or sinking fund provisions; the currency or
currency unit in which principal, premium, or interest is payable; whether the
securities are issuable in registered form or in the form of global securities;
and the designation of the trustee acting under the applicable indenture. The
Prospectus Supplement will also contain information, where applicable, about
material United States federal income tax considerations relating to, and any
listings on a securities exchange of, the Debt Securities covered by such
Prospectus Supplement.
The Company may sell the Debt Securities directly to purchasers, through
agents designated from time to time, or through underwriters or dealers, on
terms determined by market conditions at the time of sale. If any agents,
underwriters, or dealers are involved in the sale of the Debt Securities, the
names of such agents, underwriters, or dealers and any applicable commissions or
discounts and the net proceeds to the Company from such sale will be set forth
in the applicable Prospectus Supplement.
THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES OF DEBT SECURITIES
UNLESS ACCOMPANIED BY A PROSPECTUS SUPPLEMENT.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is August 7, 1998.
<PAGE>
NO DEALER, SALESPERSON, OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS OR ANY ACCOMPANYING PROSPECTUS
SUPPLEMENT AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER,
AGENT, OR DEALER. NEITHER THE DELIVERY OF THIS PROSPECTUS OR ANY PROSPECTUS
SUPPLEMENT NOR ANY SALE MADE THEREUNDER SHALL, UNDER ANY CIRCUMSTANCE, CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THEREOF. THIS PROSPECTUS AND ANY RELATED PROSPECTUS
SUPPLEMENT DO NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION.
TABLE OF CONTENTS
<TABLE>
<S> <C>
Available Information................. 2
Incorporation Of Certain Documents By
Reference........................... 3
The Company........................... 4
Use Of Proceeds....................... 4
Ratio Of Earnings To Fixed Charges.... 5
Description of Debt Securities........ 6
Plan Of Distribution.................. 18
Global Clearance and Settlement
Procedures.......................... 20
Certain United States Federal Income
Tax Documentation Requirements...... 24
Experts............................... 26
</TABLE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements, and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements, and other information filed by the Company can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's Regional Offices at Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, Suite 1300,
New York, New York 10048. Copies of such materials can also be obtained at
prescribed rates from the Public Reference Section of the Commission, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission maintains
an Internet Web site (http://www.sec.gov) that contains reports, proxy and
information statements, and other materials that are filed electronically
through the Commission's Electronic Data Gathering, Analysis, and Retrieval
(EDGAR) system. In addition, material filed by the Company can be inspected at
the offices of the National Association of Securities Dealers, Inc. (the
"NASD"), at 1735 K Street, N.W., Washington, DC 20006.
This Prospectus constitutes a part of a registration statement on Form S-3
(together with all amendments and exhibits thereto, the "Registration
Statement") filed by the Company under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the Debt Securities offered hereby. This
Prospectus does not contain all the information set forth in the Registration
Statement, certain portions of which have been omitted as permitted by the rules
and regulations of the Commission. Any statements contained in this Prospectus
and the accompanying Prospectus Supplement as to the contents of any contract or
other document are not necessarily complete, and in each instance reference is
made to the copy of such contract or other document filed or incorporated by
reference as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference and the
2
<PAGE>
exhibits and the schedules thereto. For further information pertaining to the
Company and the Debt Securities offered hereby, reference is made to the
Registration Statement and such exhibits and schedules thereto, which may be
inspected without charge at, and copies thereof may be obtained at prescribed
rates from, the Public Reference Branch of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549.
"WorldCom" is a service mark of the Company.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by the Company under File
No. 0-11258 pursuant to the Exchange Act are incorporated herein by reference
and shall be deemed to be a part hereof:
(1) WorldCom's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 (the "WorldCom 1997 Form 10-K");
(2) WorldCom's Quarterly Report on Form 10-Q for the three months ended
March 31, 1998; and
(3) WorldCom's Current Reports on Form 8-K dated August 25, 1996 (filed
August 26, 1996, and as amended on Forms 8-K/A filed November 4, 1996,
November 20, 1996, and December 19, 1997), November 9, 1997 (filed November
12, 1997, and as amended on Forms 8-K/A-1 filed on January 27, 1998, on Form
8-K/A-2 filed on January 28, 1998 and on Form 8-K/A-3 filed on May 28,
1998), January 29, 1998 (filed February 12, 1998), May 28, 1998 (filed May
28, 1998), July 23, 1998 (filed July 24, 1998), August 4, 1998 (filed August
4, 1998), August 6, 1998 (filed August 6, 1998) and August 6, 1998 (filed
August 7, 1998).
All documents filed by the Company with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act on or after the date of this
Prospectus and prior to the termination of the offering of the Debt Securities
offered hereby shall be deemed to be incorporated by reference herein and to be
a part hereof from the date of filing of such documents. See "Available
Information." Any statement contained herein or in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any subsequently filed document which also is or is
deemed to be incorporated by reference herein or in any Prospectus Supplement
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
References in this Prospectus to the "Company" include WorldCom and/or its
direct and indirect subsidiaries.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN AND MAY NOT BE DELIVERED HEREWITH, AS INDICATED ABOVE. THE COMPANY WILL
PROVIDE WITHOUT CHARGE TO EACH PERSON TO WHOM A COPY OF THIS PROSPECTUS HAS BEEN
DELIVERED, ON THE WRITTEN OR ORAL REQUEST OF SUCH PERSON, A COPY OF ANY OR ALL
OF THE DOCUMENTS REFERRED TO ABOVE WHICH ARE INCORPORATED HEREIN BY REFERENCE
(OTHER THAN EXHIBITS TO SUCH DOCUMENTS UNLESS THEY ARE SPECIFICALLY INCORPORATED
BY REFERENCE INTO SUCH DOCUMENTS). REQUESTS FOR SUCH COPIES SHOULD BE DIRECTED
TO STEPHANIE Q. SCOTT, DIRECTOR OF FINANCIAL REPORTING, WORLDCOM, INC., 515 EAST
AMITE STREET, JACKSON, MISSISSIPPI 39201-2702; TELEPHONE NUMBER (601) 360-8600.
3
<PAGE>
THE COMPANY
WorldCom, Inc. is one of the largest telecommunications companies in the
United States, serving local, long distance and Internet customers, domestically
and internationally. The Company provides telecommunications services to
business, government, telecommunications companies and consumer customers,
through its network of fiber optic cables, digital microwave, and fixed and
transportable satellite earth stations.
WorldCom is one of the first major facilities-based telecommunications
companies with the capability to provide businesses with high quality local,
long distance, Internet, data, and international communications services over
its global networks. With service to points throughout the nation and the world,
WorldCom provides telecommunications products and services including: switched
and dedicated long distance and local products, dedicated and dial-up Internet
access, resale cellular services, 800 services, calling cards, domestic and
international private lines, broadband data services, debit cards, conference
calling, advanced billing systems, enhanced fax and data connections, high speed
data communications, facilities management, local access to long distance
companies, local access to asynchronous transfer mode ("ATM") - based backbone
service, and interconnection via Network Access Points to Internet Service
Providers ("ISPs"). In addition, WorldCom's subsidiary, UUNET, is an
international ISP.
WorldCom's principal executive offices are located at 515 East Amite Street,
Jackson, Mississippi 39201-2702, and its telephone number is (601) 360-8600.
USE OF PROCEEDS
Unless otherwise specified in the applicable Prospectus Supplement, WorldCom
will use the net proceeds from the sale of the Debt Securities for general
corporate purposes, which may include the repayment of indebtedness,
acquisitions, additions to working capital, and capital expenditures.
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RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratio of earnings to fixed charges for
each of the five years ended December 31, 1997, and for the three months ended
March 31, 1997 and 1998, which ratios are based on the historical consolidated
financial statements of WorldCom. The table does not include pro forma
information reflecting the pending merger of MCI with and into a wholly-owned
subsidiary of WorldCom or the other transactions referred to herein, because
such information is not required to be presented herein.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------------- ---------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- ------------ --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges................ 5.10:1 0.15:1 2.53:1 N/A 2.09:1 1.57:1 N/A
Deficiency of earnings to fixed charges (in
thousands)...................................... -- $ 52,597 -- $ 2,112,834 -- -- $ 213,209
--------- ------------ ----------
--------- ------------ ----------
</TABLE>
NOTES TO COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(1) For the purpose of computing the ratio of earnings to fixed charges,
earnings consist of income (loss) from continuing operations, and fixed charges
consist of pretax interest (including capitalized interest) on all indebtedness,
amortization of debt discount and expense, and that portion of rental expense
which the Company believes to be representative of interest. For the historical
years ended December 31, 1994 and 1996, and for the three months ended March 31,
1998, earnings were inadequate to cover fixed charges by the amounts shown.
(2) In the first quarter of 1998, the Company recorded a $429 million charge
for in-process research and development related to the recently completed merger
of a wholly-owned subsidiary of WorldCom with and into CompuServe Corporation
(the "CompuServe Merger") and the recently completed transactions contemplated
by the Purchase and Sale Agreement entered into by WorldCom with America Online,
Inc. (the "AOL Transaction"). The charge was based on a valuation analysis of
certain technologies of CompuServe Network Services and ANS Communications, Inc.
acquired in these transactions, including the companies' virtual private data
networks, application hosting products, security systems, next generation
network architectures, and certain other identified research and development
projects purchased in the CompuServe Merger and AOL Transaction. At the date of
the CompuServe Merger and AOL Transaction, the technological feasibility of the
acquired technology had not yet been established and the technology had no
future alternative uses.
In addition, the Company recorded a one-time pre-tax charge of $69 million
for employee severance, alignment charges and direct merger costs associated
with the recently completed merger of a wholly-owned acquisition subsidiary of
WorldCom with and into Brooks Fiber Properties, Inc. (the "BFP Merger"). On an
after-tax basis, this charge was $47.1 million and is reflected in operating
loss for the three months ended March 31, 1998.
(3) Results for 1996 include a $2.14 billion charge for in-process research
and development related to the merger with MFS Communications Company, Inc.
("MFS") on December 31, 1996. The charge is based upon a valuation analysis of
the technologies of MFS' worldwide information system, the Internet network
expansion system of UUNET, and certain other identified research and development
projects purchased in the MFS merger. The expense includes $1.6 billion
associated with UUNET and $0.54 billion related to MFS.
Additionally, 1996 results include other after-tax charges of $121 million
for employee severance, employee compensation charges, alignment charges, and
costs to exit unfavorable telecommunications contracts and a $344 million
after-tax write-down of operating assets within the Company's non-core
businesses. On a pretax basis, these charges totaled $600.1 million.
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DESCRIPTION OF DEBT SECURITIES
The following description of the Debt Securities sets forth certain general
terms and provisions of the Indenture under which the Debt Securities are to be
issued. The particular terms of each issue of Debt Securities, as well as any
modifications or additions to such general terms that may apply in the case of
such Debt Securities, will be described in the Prospectus Supplement relating to
such Debt Securities. Accordingly, for a description of the terms of a
particular issue of Debt Securities, reference must be made to both the
Prospectus Supplement relating thereto and to the following description.
THE INDENTURE
The Debt Securities will be issued under the Indenture, dated as of March 1,
1997, between the Company and The Chase Manhattan Bank, as successor to Mellon
Bank, N.A. as trustee, or under another indenture between the Company and one or
more other trustees to be selected by the Company (collectively, the "Indenture"
and the "Trustee").
The Indenture has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part. Any amendments or modifications of the
Indenture will be filed by the Company with the Commission on a Current Report
on Form 8-K. The Indenture will be available for inspection at the offices of
the Trustee. The following description of the Indenture and summaries of certain
provisions thereof do not purport to be complete and are subject to, and are
qualified in their entirety by reference to, all provisions of the Indenture and
the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"),
including the definitions of certain terms in the Indenture and those terms made
a part of the Indenture by reference to the Trust Indenture Act as in effect on
the date of the Indenture. The Indenture is by its terms subject to and governed
by the Trust Indenture Act. Unless otherwise indicated, references under this
caption to sections are references to the Indenture. Whenever particular
sections or defined terms are referred to, it is intended that such sections or
defined terms shall be incorporated herein by reference. A copy of the Indenture
may be obtained from the Company.
The description of certain provisions of the Indenture described below
reflect the terms of the Indenture as they are proposed to be modified in
respect of the Debt Securities pursuant to the Board Resolutions, Officers'
Certificates and/or supplemental indentures to be delivered to the Trustee in
connection with the issuance of the several series of Debt Securities (the
"Authorizing Resolutions").
GENERAL TERMS OF DEBT SECURITIES
The Indenture provides that the Debt Securities issued thereunder may be
issued without limit as to aggregate principal amount, in one or more series, in
each case as established from time to time in or pursuant to authority granted
by a resolution of the Board of Directors of the Company or as established in
one or more supplemental indentures (Section 301 of the Indenture). The
Indenture also provides that there may be more than one Trustee thereunder, each
with respect to one or more series of Debt Securities (Section 101 of the
Indenture). Any Trustee may resign or be removed with respect to one or more
series of Debt Securities issued under the Indenture, and a successor Trustee
may be appointed to act with respect to such series (Section 608 of the
Indenture).
In the event that two or more persons are acting as Trustee with respect to
different series of Debt Securities issued under the Indenture, each such
Trustee shall be a Trustee of a trust under the Indenture separate and apart
from the trust administered by any other such Trustee (Section 609 of the
Indenture), and, except as otherwise indicated herein, any action described
herein to be taken by the Trustee may be taken by each such Trustee with respect
to, and only with respect to, the one or more series of Debt Securities for
which it is Trustee under the Indenture.
Reference is made to the Prospectus Supplement relating to the series of
Debt Securities to be offered for the following terms thereof: (1) the title of
such Debt Securities; (2) any limit on the aggregate
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principal amount of such Debt Securities; (3) the purchase price of such Debt
Securities (expressed as a percentage of the principal amount); (4) the date or
dates, or the method for determining such date or dates, on which the principal
(and premium, if any) of such Debt Securities will be payable; (5) the rate or
rates (which may be fixed or variable), or the method for determining such rate
or rates, at which such Debt Securities will bear interest, if any; (6) the date
or dates from which any such interest will accrue, the Interest Payment Dates on
which any such interest will be payable, the Regular Record Dates for the
interest payable on any registered Debt Security on such Interest Payment Dates,
and the basis upon which interest shall be calculated if other than that of a
360 day year of twelve 30-day months; (7) the place or places where the
principal of (and premium, if any) and interest, if any, on such Debt Securities
will be payable and such Debt Securities may be surrendered for registration of
transfer or exchange; (8) the period or periods within which, the price or
prices at which, and the terms and conditions upon which such Debt Securities
may be redeemed, as a whole or in part, at the option of the Company, if the
Company is to have such an option; (9) the obligation, if any, of the Company to
redeem or purchase such Debt Securities pursuant to any sinking fund or
analogous provision or at the option of a Holder thereof and the period or
periods within which, the price or prices at which, and the terms and conditions
upon which such Debt Securities will be redeemed or purchased, as a whole or in
part, pursuant to such obligation; (10) if other than U.S. dollars, the currency
or currencies in which such Debt Securities are denominated and payable, which
may be a foreign currency or units of two or more foreign currencies or a
composite currency or currencies, and the terms and conditions relating thereto;
(11) whether the amount of payments of principal of (and premium, if any) or
interest, if any, on such Debt Securities may be determined with reference to an
index, formula, or other method (which index, formula, or method may, but need
not be, based on a currency, currencies, currency unit or units or composite
currency or currencies) and the manner in which such amounts shall be
determined; (12) any additions, modifications, or deletions in the terms of such
Debt Securities with respect to the Events of Default set forth in the
Indenture; (13) any additions, modifications, or deletions in the terms of such
Debt Securities with respect to the other covenants set forth in the Indenture;
(14) whether such Debt Securities will be issued in certificated or book-entry
form; (15) whether such Debt Securities will be in registered or bearer form
and, if in registered form, the denominations thereof if other than $1,000 or
any integral multiple thereof and, if in bearer form, the denominations thereof
if other than $5,000 or any integral multiple thereof; and (16) any other terms
of such Debt Securities not inconsistent with the provisions of the Indenture
(Section 301 of the Indenture).
Debt Securities may be issued under the Indenture as Original Issue Discount
Securities to be offered and sold at a substantial discount from the principal
amount thereof. Special U.S. federal income tax, accounting, and other
considerations applicable thereto will be described in the applicable Prospectus
Supplement.
Unless otherwise provided with respect to a series of Debt Securities, the
Debt Securities (other than those issued in global form) will be issued in
registered form without coupons in denominations of $1,000 and integral
multiples thereof or in bearer form in a denomination of $5,000 (Section 302 of
the Indenture).
No stockholder, employee, officer, director or incorporator as such, past,
present or future, of the Company shall have any personal liability in respect
of the obligations of the Company under the Indenture or the Debt Securities by
reasons of his, her or its status as such stockholder, employee, officer,
director or incorporator.
CERTIFICATED SECURITIES
Except as may be set forth in the applicable Prospectus Supplement, Debt
Securities will not be issued in certificated form. If, however, Debt Securities
are to be issued in certificated form, no service charge will be made for any
transfer or exchange of any Debt Securities, but the Company may require payment
of a
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sum sufficient to cover any tax or other governmental charge payable in
connection therewith (Section 305 of the Indenture).
BOOK-ENTRY DEBT SECURITIES
The Debt Securities of a series may be issued, in whole or in part, in the
form of one or more global securities (each, a "Global Security") that will be
deposited with, or on behalf of, a depository identified in the Prospectus
Supplement. Global Securities may be issued in either registered or bearer form
and in either temporary or permanent form. Unless otherwise provided in the
Prospectus Supplement, Debt Securities that are represented by a Global Security
will be issued in denominations of $1,000 and any integral multiple thereof, and
will be issued in registered form only, without coupons. Payments of principal
of, premium, if any, and interest on Debt Securities represented by a Global
Security will be made by the Company to the Trustee under the Indenture and
forwarded by the Trustee to the depository.
The Company anticipates that any Global Securities will be deposited with,
or on behalf of, The Depository Trust Company, New York, New York ("DTC"), that
such Global Securities will be registered in the name of DTC's nominee, and that
the following provisions will apply to the depository arrangements with respect
to any such Global Securities. Additional or differing terms of the depository
arrangements will be described in the Prospectus Supplement relating to a
particular series of Debt Securities issued in the form of Global Securities.
So long as DTC or any successor depository (collectively, the "Depository")
or its nominee is the registered owner of a Global Security, the Depository, or
such nominee, as the case may be, will be considered the sole Holder of the Debt
Securities represented by such Global Security for all purposes under the
applicable Indenture. Investors' interests in the Global Securities will be
represented through financial institutions acting on their behalf as direct and
indirect participants in the Depository. Such participants may include Morgan
Guaranty Trust Company of New York, Brussels, Belgium office or Cedel S.A.
Except as provided below, owners of beneficial interests in a Global Security
will not be entitled to have Debt Securities represented by such Global Security
registered in their names, will not receive or be entitled to receive physical
delivery of Debt Securities in certificated form, and will not be considered the
owners or Holders thereof under the applicable Indenture. The laws of some
states require that certain purchasers of securities take physical delivery of
such securities in certificated form; accordingly, such laws may limit the
transferability of beneficial interests in a Global Security. Accordingly, each
person owning a beneficial interest in a Global Security must rely on DTC's
procedures and, if such person is not a participant, on the procedures of the
participant through which such person owns its interest, to exercise any rights
of a Holder under the applicable Indenture. If the Company requests any action
of Holders or if an owner of a beneficial interest in a Global Security desires
to take any action that a Holder is entitled to take under the Indenture, DTC
will authorize the participants holding the relevant beneficial interests to
give or take such action, and such participants will otherwise act upon the
instructions of beneficial owners holding through them.
If DTC is at any time unwilling or unable to continue as depository or if at
any time DTC ceases to be a clearing agency registered under the Exchange Act,
if so required by applicable law or regulation, and, in either case, a successor
depository is not appointed by the Company within 90 days, the Company will
issue individual Debt Securities in certificated form in exchange for the Global
Securities. In addition, the Company may at any time, and in its sole
discretion, determine not to have any Debt Securities represented by one or more
Global Securities, and, in such event, will issue individual Debt Securities in
certificated form in exchange for the relevant Global Securities. In any such
instance, an owner of a beneficial interest in a Global Security will be
entitled to physical delivery of individual Debt Securities in certificated form
of like tenor and rank, equal in principal amount to such beneficial interest
and to have such Debt Securities in certificated form registered in its name.
Unless otherwise provided in the Prospectus Supplement, Debt Securities so
issued in certificated form will be issued in denominations of $1,000 or any
integral multiple thereof, and will be issued in registered form only, without
coupons.
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The following is based on information furnished by DTC:
DTC will act as securities depository for the Debt Securities. The Debt
Securities will be issued as fully registered securities registered in the
name of Cede & Co. (DTC's partnership nominee). One fully registered Debt
Security certificate is issued with respect to each $200 million of
principal amount of the Debt Securities of a series, and an additional
certificate is issued with respect to any remaining principal amount of such
series.
DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and
a "clearing agency" registered pursuant to the provisions of Section 17A of
the Exchange Act. DTC holds securities that its participants
("Participants") deposit with DTC. DTC also facilitates the settlement among
Participants of securities transactions, such as transfers and pledges, in
deposited securities through electronic computerized book-entry changes in
Participants' accounts, thereby eliminating the need for physical movement
of securities certificates. Direct Participants include securities brokers
and dealers, banks, trust companies, clearing corporations, and certain
other organizations ("Direct Participants"). DTC is owned by a number of its
Direct Participants and by the New York Stock Exchange, Inc., the American
Stock Exchange, Inc., and the NASD. Access to the DTC system is also
available to others, such as securities brokers and dealers, banks, and
trust companies that clear through or maintain a custodial relationship with
a Direct Participant, either directly or indirectly ("Indirect
Participants"). The rules applicable to DTC and its Participants are on file
with the Commission.
Purchases of Debt Securities under the DTC system must be made by or
through Direct Participants, which will receive a credit for the Debt
Securities on DTC's records. The ownership interest of each actual purchaser
of each Debt Security ("Beneficial Owner") is in turn recorded on the Direct
and Indirect Participants' records. A Beneficial Owner does not receive
written confirmation from DTC of its purchase, but such Beneficial Owner is
expected to receive a written confirmation providing details of the
transaction, as well as periodic statements of its holdings, from the Direct
or Indirect Participant through which such Beneficial Owner entered into the
transaction. Transfers of ownership interests in Debt Securities are
accomplished by entries made on the books of Participants acting on behalf
of Beneficial Owners. Beneficial Owners do not receive certificates
representing their ownership interests in Debt Securities, except in the
event that use of the book-entry system for the Debt Securities is
discontinued.
To facilitate subsequent transfers, the Debt Securities deposited by
Participants with DTC are registered in the name of DTC's partnership
nominee, Cede & Co. The deposit of the Debt Securities with DTC and their
registration in the name of Cede & Co. will effect no change in beneficial
ownership. DTC has no knowledge of the actual Beneficial Owners of the Debt
Securities; DTC records reflect only the identity of the Direct Participants
to whose accounts Debt Securities are credited, which may or may not be the
Beneficial Owners. The Participants remain responsible for keeping account
of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Beneficial Owners are governed by
arrangements among them, subject to any statutory or regulatory requirements
as may be in effect from time to time.
Redemption notices shall be sent to Cede & Co. If less than all of the
Debt Securities within an issue are being redeemed, DTC's practice is to
determine by lot the amount of interest of each Direct Participant in such
issue to be redeemed.
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Neither DTC nor Cede & Co. consents or votes with respect to the Debt
Securities. Under its usual procedures, DTC mails a proxy (an "Omnibus
Proxy") to the issuer as soon as possible after the record date. The Omnibus
Proxy assigns Cede & Co.'s consenting or voting rights to those Direct
Participants to whose accounts the Debt Securities are credited on the
record date (identified on a list attached to the Omnibus Proxy).
Principal, premium, if any, and interest payments on the Debt Securities
are made to DTC. DTC's practice is to credit Direct Participants' accounts
on the payable date in accordance with their respective holdings as shown on
DTC's records unless DTC has reason to believe that it will not receive
payment on the payable date. Payments by Participants to Beneficial Owners
are governed by standing instructions and customary practices, as is the
case with securities held for the accounts of customers in bearer form or
registered in "street name," and are the responsibility of such Participant
and not of DTC, the Trustee, or the Company, subject to any statutory or
regulatory requirements as may be in effect from time to time. Payment of
principal, premium, if any, and interest to DTC is the responsibility of the
Company or the Trustee. Disbursement of such payments to Direct Participants
is the responsibility of DTC, and disbursement of such payments to the
Beneficial Owners is the responsibility of Direct and Indirect Participants.
DTC may discontinue providing its services as securities depository with
respect to the Debt Securities at any time by giving reasonable notice to
the Company or the Trustee. Under such circumstances, in the event that a
successor securities depository is not appointed, Debt Security certificates
are required to be printed and delivered.
The Company may decide to discontinue use of the system of book-entry
transfers through DTC (or a successor securities depository). In that event,
Debt Security certificates will be printed and delivered.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources (including DTC) that the Company believes to be
reliable, but the Company takes no responsibility for the accuracy thereof.
Unless stated otherwise in the Prospectus Supplement, the underwriters or
agents with respect to a series of Debt Securities issued as Global Securities
will be Direct Participants in DTC.
None of the Company, any underwriter or agent, the Trustee, or any
applicable paying agent will have any responsibility or liability for any aspect
of the records relating to or payments made on account of beneficial interests
in a Global Security or for maintaining, supervising, or reviewing any records
relating to such beneficial interest.
MERGER
The Company may consolidate with, or sell, lease or convey all or
substantially all of its assets to, or merge with or into, any other
corporation, provided that (a) either (i) the Company shall be the continuing
corporation or (ii) the successor corporation (if other than the Company) formed
by or resulting from any such consolidation or merger or which shall have
received the transfer of such assets shall expressly assume payment of the
principal of (and premium, if any) and interest on all the Debt Securities and
the performance and observance of all the covenants and conditions of the
Indenture and (b) the Company or such successor corporation shall not
immediately thereafter be in default under the Indenture (Section 801 of the
Indenture). In the case of such a transaction, the successor corporation shall
succeed to and be substituted for the Company, with the same effect as if it had
been named in the Indenture as the party of the first part (Section 802 of the
Indenture).
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LIMITATION ON LIENS
The Company shall not, and shall not permit any Restricted Subsidiary to,
directly or indirectly, create, or suffer to be created or to exist, any Lien
(other than Permitted Liens) upon any of its Property or assets, whether now
owned or hereafter acquired, or any interest therein or any income or profits
therefrom, unless it has made or will make effective provision whereby the Debt
Securities will be secured by such Lien equally and ratably with (or prior to)
all other indebtedness of the Company or any Restricted Subsidiary secured by
such Lien for so long as any such other indebtedness of the Company or any
Restricted Subsidiary shall be so secured. Notwithstanding the foregoing, the
Company may, and may permit any Restricted Subsidiary to, issue, assume,
guarantee, or permit to exist indebtedness secured by Liens on Property that are
not Permitted Liens without equally and ratably securing the Debt Securities,
provided that the sum of all such indebtedness then being issued, assumed, or
guaranteed together with such indebtedness theretofore issued, assumed, or
guaranteed that remains outstanding (the "Additional Permitted Secured
Indebtedness") does not exceed 10% of the total assets of the Company and its
Subsidiaries prior to the time such indebtedness was issued, assumed, or
guaranteed, as reflected in the Company's then most recent balance sheet
prepared in accordance with GAAP (Section 1004 of the Indenture, as modified by
the Authorizing Resolutions). In respect of several series of securities (the
"1997 Senior Securities") issued by the Company in April and August, 1997 in
aggregate principal amount of approximately $3.35 billion, maturing from 2004
through 2027 (subject to prior redemption at the option of the Company), the
Indenture provides, in lieu of the exception set forth in the immediately
preceding sentence, for Additional Permitted Secured Indebtedness not exceeding
15% of Consolidated Net Tangible Assets prior to the time such indebtedness was
issued, assumed, or guaranteed. As long as both the Debt Securities and the 1997
Senior Securities remain outstanding, the Company will be required to comply
with both of the limitations on Liens referred to above.
Set forth below is a summary of certain of the defined terms used herein and
defined in Section 101 of the Indenture. Reference is made to the Indenture for
the full definitions of such terms, as well as any capitalized terms used herein
for which no definitions are provided.
"Capital Lease Obligations" means indebtedness represented by obligations
under a lease that is required to be capitalized for financial reporting
purposes in accordance with GAAP and the amount of such indebtedness shall be
the capitalized amount of such obligations determined in accordance with GAAP.
For purposes of the Indenture, a Capital Lease Obligation shall be deemed
secured by a Lien on the Property being leased.
"Capital Stock" means, with respect to any person, any and all shares or
other equivalents (however designated) of corporate stock, partnership interest
or any other participation, right, warrant, option or other interest in the
nature of an equity interest in such person, but excluding any debt security
convertible or exchangeable into such equity interest.
"Consolidated Net Tangible Assets" means the consolidated total assets of
the Company and its Subsidiaries as reflected in the Company's most recent
balance sheet prepared in accordance with GAAP, less (i) current liabilities
(excluding current maturities of long-term debt and Capital Lease Obligations)
and (ii) goodwill, trademarks, patents and minority interests of others.
"GAAP" means United States generally accepted accounting principles as in
effect as of the date of determination, unless stated otherwise.
"Lien" means, with respect to any Property of any person, any mortgage or
deed of trust, pledge, hypothecation, assignment, deposit arrangement, security
interest, lien, charge, easement or zoning restriction (other than any easement
or zoning restriction not materially impairing usefulness or marketability),
encumbrance, preference, priority or other security agreement or preferential
arrangement of any kind or nature whatsoever on or with respect to such Property
including any Capital Lease Obligation,
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conditional sale or other title retention agreement having substantially the
same economic effect as any of the foregoing or any Sale and Leaseback
Transaction.
"Permitted Liens" means (i) Liens existing on the date of the Indenture;
(ii) Liens on Property existing at the time of acquisition thereof or to secure
the payment of all or any part of the purchase price thereof or to secure any
indebtedness incurred prior to, at the time of or within 270 days after the
acquisition of such Property for the purpose of financing all or any part of the
purchase price thereof; (iii) Liens securing indebtedness owing by a Restricted
Subsidiary to the Company or any wholly-owned Subsidiary of the Company; (iv)
Liens on Property of any entity, or on the stock, indebtedness or other
obligations of such entity, existing at the time (a) such entity becomes a
Restricted Subsidiary, (b) such entity is merged into or consolidated with the
Company or a Restricted Subsidiary or (c) the Company or a Restricted Subsidiary
acquires all or substantially all of the assets of such entity; provided that no
such Lien extends to any other Property of the Company or any other Restricted
Subsidiary; (v) Liens on Property to secure any indebtedness incurred to provide
funds for all or any part of the cost of development of or improvements to such
Property; (vi) Liens on the Property of the Company or any of its Subsidiaries
securing (a) nondelinquent performance of bids or contracts (other than for
borrowed money, obtaining of advances or credit or the securing of debt), (b)
contingent obligations on surety and appeal bonds and (c) other nondelinquent
obligations of a like nature, in each case, incurred in the ordinary course of
business; (vii) Liens securing Capital Lease Obligations, provided that (a) any
such Lien attaches to the Property within 270 days after the acquisition thereof
and (b) such Lien attaches solely to the Property so acquired; (viii) Liens
arising solely by virtue of any statutory or common law provision relating to
banker's liens, rights of set-off or similar rights and remedies as to deposit
account or other funds, provided that such deposit account is not a dedicated
cash collateral account and is not subject to restrictions against access by the
Company in excess of those set forth by regulations promulgated by the Federal
Reserve Board and such deposit account is not intended by the Company or any
Subsidiary to provide collateral to the depository institution; (ix) pledges or
deposits under worker's compensation laws, unemployment insurance laws or
similar legislation; (x) statutory and tax Liens for sums not yet due or
delinquent or which are being contested or appealed in good faith by appropriate
proceedings; (xi) Liens arising solely by operation of law and in the ordinary
course of business, such as mechanics', materialmen's, warehousemen's and
carriers' Liens and Liens of landlords or of mortgages of landlords, on fixtures
and movable Property located on premises leased in the ordinary course of
business; (xii) Liens on personal Property, other than shares of stock or
indebtedness of any Restricted Subsidiary, to secure loans maturing not more
than one year from the date of the creation thereof and on accounts receivable
associated with a receivables financing program of the Company or any of its
Subsidiaries; and (xiii) any renewal, extension or replacement (in whole or in
part) for any Lien permitted pursuant to exceptions (i) through (xii) above or
of any indebtedness secured thereby, provided that such extension, renewal or
replacement Lien shall be limited to all or any part of the same Property that
secured the Lien extended, renewed or replaced (plus improvements on such
Property).
"Property" means, with respect to any person, any interest of such person in
any kind of property or asset, whether real, personal or mixed, or tangible or
intangible, including, without limitation, Capital Stock in any other person
(but excluding Capital Stock or other securities issued by such first mentioned
person).
"Receivables Subsidiary" means a special purpose wholly-owned Subsidiary
created in connection with any transactions that may be entered into by the
Company or any of its Subsidiaries pursuant to which the Company or any of its
Subsidiaries may sell, convey, grant a security interest in or otherwise
transfer undivided percentage interests in its receivables.
"Restricted Subsidiary" means any Subsidiary of the Company if (i) such
Subsidiary has substantially all of its Property in the United States (other
than its territories and possessions) and (ii) at the end of the most recent
fiscal quarter of the Company, the aggregate amount, determined in accordance
with GAAP consistently applied, of securities of, loans and advances to, and
other investments in, such Subsidiary held
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by the Company and its other Subsidiaries exceeded 10% of the Company's
Consolidated Net Tangible Assets; provided, however, that the term Restricted
Subsidiary shall not include (a) any Subsidiary acquired by the Company
subsequent to the date of the Indenture unless and until such time as such
corporation is designated by the Company as a "Restricted Subsidiary" or
otherwise similarly treated under the Company's $12 billion bank credit facility
or any other agreement of the Company for indebtedness for borrowed money or (b)
any Receivables Subsidiary. (Section 101 of the Indenture as modified by the
Authorizing Resolutions). In respect of the 1997 Senior Securities, in lieu of
the exception described in clause (a) above, the Indenture excludes from the
definition of Restricted Subsidiary any of MFS or its Subsidiaries unless and
until such time as such corporation is designated by the Company as a
"Restricted Subsidiary" or otherwise similarly treated under the Company's $5
billion five-year revolving credit facility or any other agreement of the
Company for indebtedness for borrowed money. As long as both the Debt Securities
and the 1997 Senior Securities remain outstanding, the Company will be required
to comply with provisions relating to Restricted Subsidiaries as applicable for
purposes of both the Debt Securities and the 1997 Senior Securities.
"Sale and Leaseback Transaction" means, with respect to the Company or a
Restricted Subsidiary, any direct or indirect arrangement pursuant to which
Property is sold or transferred by such person or and is thereafter leased back
from the purchaser or transferee thereof by the Company or a Restricted
Subsidiary.
"Subsidiary" means a corporation a majority of the outstanding voting stock
of which is owned, directly or indirectly, by the Company or one or more other
Subsidiaries of the Company. For the purposes of this definition, "voting stock"
means stock having voting power for the election of directors, whether at all
times or only so long as no senior class of stock has such voting power by
reason of any contingency.
EVENTS OF DEFAULT, NOTICE AND WAIVERS
The Indenture provides that the following events are Events of Default with
respect to any series of Debt Securities issued thereunder: (a) default for 30
days in the payment of any installment of interest on any Debt Security of such
series; (b) default in the payment of the principal of (or premium, if any, on)
any Debt Security of such series at its Maturity; (c) default in making a
sinking fund payment required for any Debt Security of such series; (d) default
in the performance or breach of any covenant or warranty of the Company in the
Indenture (other than a covenant included in the Indenture solely for the
benefit of a series of Debt Securities issued thereunder other than such
series), continued for 90 days after written notice as provided in the Indenture
(which notice period is 60 days in respect of the 1997 Senior Securities); (e)
certain events of bankruptcy, insolvency, or reorganization, or court
appointment of a receiver, liquidator, or trustee of the Company or all or
substantially all of its property; and (f) any other Event of Default provided
with respect to a particular series of Debt Securities (Section 501 of the
Indenture, as modified by the Authorizing Resolutions). In respect of the 1997
Senior Securities, the Indenture also includes within the meaning of Events of
Default certain events of default resulting in the acceleration of the maturity
of indebtedness aggregating in excess of $50,000,000 under any mortgages,
indentures (including the Indenture), or instruments under which the Company may
have issued, or by which there may have been secured or evidenced, any other
indebtedness (including debt securities of any other series issued under the
Indenture) of the Company, but only if such indebtedness is not discharged or
such acceleration is not rescinded or annulled. Accordingly, if such events were
to occur, the principal amount of the 1997 Senior Securities may be declared to
be due and payable at a time when the Debt Securities would not be so declared
to be due and payable, and such acceleration in respect of the 1997 Senior
Securities may adversely affect the ability of the Company to make required
payments in respect of the Debt Securities.
Within 90 days after the occurrence of any default with respect to any
series of Debt Securities, the Trustee shall transmit notice of such default
(unless cured or waived) known to the Trustee to the Holders of such Debt
Securities; provided, that the Trustee may withhold notice to the Holders of any
series of
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Debt Securities of any default with respect to such series (except a default in
the payment of the principal of (or premium, if any) or interest on any Debt
Security of such series or in the payment of any sinking fund installment in
respect of any Debt Security of such series) if the Responsible Officers of the
Trustee consider such withholding to be in the interest of such Holders (Section
601 of the Indenture).
If an Event of Default under the Indenture with respect to Debt Securities
of any series issued thereunder at the time Outstanding occurs and is
continuing, then in every such case the Trustee or the Holders of not less than
25% in principal amount of the Outstanding Debt Securities of that series may
declare the principal amount (or, if the Debt Securities of that series are
Original Issue Discount Securities, such portion of the principal amount as may
be specified in the terms thereof) of all of the Debt Securities of that series
to be due and payable immediately by written notice thereof to the Company (and
to the Trustee if given by the Holders) (Section 502 of the Indenture). However,
at any time after such a declaration of acceleration with respect to Debt
Securities of such series has been made, but before a judgment or decree for
payment of the money due has been obtained by the Trustee prior to the Stated
Maturity thereof, the Holders of a majority in principal amount of Outstanding
Debt Securities of such series may, subject to certain conditions, rescind and
annul such acceleration if all Events of Default, other than the non-payment of
accelerated principal (or premium, if any) or interest on Debt Securities of
such series have been cured or waived as provided in the Indenture (Section 502
of the Indenture). The Indenture also provides that the Holders of not less than
a majority in principal amount of the Outstanding Debt Securities of any series
issued thereunder may waive certain past defaults with respect to such series
and its consequences (Section 513 of the Indenture). Reference is made to the
Prospectus Supplement relating to any series of Debt Securities issued under the
Indenture which are Original Issue Discount Securities for the particular
provisions relating to acceleration of a portion of the principal amount of such
Original Issue Discount Securities upon the occurrence of an Event of Default
and the continuation thereof. Within 120 days after the close of each fiscal
year, the Company must file with the Trustee a statement, signed by specified
officers, stating whether or not such officers have knowledge of any default
under the Indenture and, if so, specifying each such default and the nature and
status thereof (Section 1006 of the Indenture).
Subject to provisions in the Indenture relating to its duties in case of
default, the Trustee is under no obligation to exercise any of its rights or
powers under the Indenture at the request or direction of any Holders of any
series of Debt Securities then Outstanding under the Indenture, unless such
Holders shall have offered to the Trustee reasonable security or indemnity
(Section 602 of the Indenture). Subject to such provisions for indemnification
and certain limitations contained in the Indenture, the Holders of not less than
a majority in principal amount of the Outstanding Debt Securities of any series
issued thereunder shall have the right to direct the time, method, and place of
conducting any proceeding for any remedy available to the Trustee, or of
exercising any trust or power conferred upon the Trustee (Section 512 of the
Indenture).
MODIFICATION OF THE INDENTURE
The Indenture contains provisions permitting the Company and the Trustee to
enter into one or more indentures supplemental to the Indenture without the
consent of the holders of any Debt Securities for certain purposes, including
the following: (a) to evidence the succession of another entity to the Company
and the assumption by such entity of the covenants of the Company contained in
the Indenture, (b) to add to the covenants of the Company for the benefit of the
holders of all or any series of the Debt Securities (and if such covenants are
to be for the benefit of less than all series of Debt Securities, stating that
such covenants are expressly being included solely for the benefit of such
series) or to surrender any right or power conferred upon the Company in the
Indenture; (c) to add any additional Events of Default for the benefit of the
Holders of all or any series of the Debt Securities (and if such Events of
Default are to be for the benefit of less than all series of Debt Securities,
stating that such Events of Default are expressly being included solely for the
benefit of such series); provided, however, that in respect of any such
additional
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Events of Default such supplemental indenture may provide for a particular
period of grace after default or may provide for an immediate enforcement upon
such default or may limit the remedies available to the Trustee upon such
default or may limit the right of the Holders of a majority in aggregate
principal amount of that or those series of Debt Securities to which such
additional Events of Default apply to waive such default; (d) to add to or
change any of the provisions of the Indenture to permit or facilitate the
issuance of any series of the Debt Securities in uncertificated or bearer form;
(e) to change or eliminate any provisions of the Indenture, provided that any
such change or elimination shall become effective only when there are no
Outstanding Debt Securities of any series created prior to the execution of such
supplemental indenture which is entitled to the benefit of such provision; (f)
to provide security for the Debt Securities; (g) to establish the form or terms
of any series of Debt Securities and any related coupons in accordance with the
terms and conditions of the Indenture; (h) to evidence and provide for the
acceptance and appointment of a successor Trustee with respect to any series of
Debt Securities and to add to or change any of the provisions of the Indenture
to provide for or facilitate the administration of the trusts under the
Indenture by more than one Trustee; (i) to cure any ambiguity, to correct or
supplement any provision of the Indenture which may be defective or inconsistent
with any other provision, or to make any other provisions with respect to
matters or questions arising under the Indenture which shall not be inconsistent
with the provisions of the Indenture and which additional provisions shall not
adversely affect the interests of the Holders of any series of the Debt
Securities in any material respects; or (j) to supplement any of the provisions
of the Indenture to such extent as shall be necessary to permit or facilitate
the defeasance and discharge of any series of the Debt Securities in accordance
with terms and conditions of the Indenture provided that any such action shall
not adversely affect the interests of the holders of any series of the Debt
Securities in any material respect (Section 901 of the Indenture).
The Indenture also contains provisions permitting the Company and the
Trustee, with the consent of the Holders of not less than a majority in
principal amount of all the Outstanding Debt Securities under the Indenture
affected by the terms of any such supplemental indenture, to execute
supplemental indentures adding any provisions to or changing in any manner or
eliminating any of the provisions of the Indenture or of modifying in any manner
the rights of Holders of any series of Debt Securities, except that, without the
consent of the Holders of each such Debt Security affected thereby, no such
supplemental indenture shall (a) change the Stated Maturity of the principal of
(or premium, if any, on) or any installment of principal of or interest on any
such Debt Security; (b) reduce the principal amount of, or the rate or amount of
interest on, or any premium payable on redemption of, any such Debt Security, or
reduce the amount of principal of an Original Issue Discount Security that would
be due and payable upon declaration of acceleration of the Maturity thereof or
would be provable in bankruptcy, or adversely affect any right of repayment of
the Holder of any such Debt Security; (c) change any obligation of the Company
to pay additional amounts pursuant to Section 1007 of the Indenture (except as
otherwise contemplated by the Indenture); (d) adversely affect any right of
repayment at the option of the Holder such Debt Security; (e) change the place
of payment where, or the currency or currencies, currency unit or units or
composite currency or currencies in which such Debt Security or any premium or
interest thereon is payable; (f) impair the right to institute suit for the
enforcement of any payment on or after the stated maturity thereof (or in the
case of redemption or repayment at the option of the Holder of such Debt
Security, on or after the Redemption Date or the Repayment Date, as the case may
be) with respect to any such Debt Security; (g) reduce the percentage in
principal amount of the Outstanding Debt Securities of any series, the consent
of whose Holders is required for any such supplemental indenture, or the consent
of whose Holders is required for any waiver with respect to such series or
compliance with certain provisions of the Indenture or certain defaults
thereunder and their consequences; (h) reduce the quorum or voting requirements
as contained in the Indenture with respect to such Debt Securities; or (i)
modify any of the provisions of the Indenture relating to supplemental
indentures or waiver of past defaults with respect to such Debt Securities
except to increase any such percentage or to provide that certain other
provisions of the Indenture cannot be modified or waived with respect to such
Debt Securities without the consent of the Holders of each such Debt Security
(Section 902 of the Indenture).
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A supplemental indenture which changes or eliminates any covenant or other
provision of the Indenture which has expressly been included solely for the
benefit of one or more series of the Debt Securities, or which modifies the
rights of Holders of Debt Securities of such series with respect to such
covenant or other provision, shall be deemed not to affect the rights under the
Indenture of the Holders of Debt Securities of any other series, but shall
require the consent, in accordance with the provisions of the Indenture, of the
Holders of at least a majority of the Outstanding Debt Securities of such one or
more particular series. It is not necessary for the Holders of the Debt
Securities to approve the particular form of any proposed supplemental
indenture, but it is sufficient if such Holders approve the substance thereof
(Section 902 of the Indenture). Every supplemental indenture executed pursuant
to the Indenture will conform to the requirements of the Trust Indenture Act as
then in effect (Section 905 of the Indenture).
SATISFACTION AND DISCHARGE OF THE INDENTURE, COVENANT DEFEASANCE
The Company may, at its option, elect to have either or both of (a) the
defeasance provision of the Indenture or (b) the covenant defeasance provision
of the Indenture apply to a series of Debt Securities upon compliance with the
applicable conditions set forth in the Indenture (Section 1401 of the
Indenture). The Company shall be deemed to have been discharged from its
obligations with respect to a series of Debt Securities on the date the
conditions set forth below are satisfied (hereinafter, "defeasance"), except for
the following obligations which shall survive until otherwise terminated or
discharged pursuant to the Indenture: (i) the rights of holders of such Debt
Securities to receive, solely from the trust fund described in Section 1404 of
the Indenture, payments in respect of the principal of (and premium, if any) and
interest, if any, on such Debt Securities when such payments are due, (ii) the
Company's obligations with respect to such Debt Securities under Sections 305,
306, 1002 and 1003 of the Indenture and with respect to the payment of
additional amounts, if any, as contemplated by Section 1007 of the Indenture,
(iii) the rights, powers, trusts, duties and immunities of the Trustee under the
Indenture and (iv) the obligations contained in the article of the Indenture
relating to defeasance and covenant defeasance. The Company shall be released
from its obligations under any covenant with respect to such Debt Securities on
and after the date the conditions set forth below are satisfied (hereinafter,
"covenant defeasance") (Sections 1402 and 1403 of the Indenture).
The following are the conditions that must be satisfied prior to defeasance
or covenant defeasance: (a) the Company shall irrevocably have deposited or
caused to be deposited with the Trustee as trust funds in trust for the purpose
of making the following payments, money and/or Government Obligations
sufficient, in the opinion of a nationally recognized firm of independent public
accountants expressed in a written certification thereof delivered to the
Trustee, to pay and discharge, and which shall be applied by the Trustee (or
other qualifying trustee) to pay and discharge, (i) the principal of (and
premium, if any) and interest, if any, on the Debt Securities to be defeased on
the Stated Maturity of such principal or installment of principal or interest
and (ii) any mandatory sinking fund payments or analogous payments applicable to
such Debt Securities; (b) such defeasance or covenant defeasance shall not
result in a breach or violation of, or constitute a default under, the Indenture
or any other material agreement or instrument to which the Company is a party or
by which it is bound; (c) no Event of Default or event which with notice or
lapse of time or both would become an Event of Default with respect to such Debt
Securities shall have occurred and be continuing on the date of such deposit, or
if applicable, at any time during the period ending on the 91st day after the
date of such deposit; (d) the Company shall have delivered to the Trustee an
opinion of counsel to the effect that the holders of such Debt Securities will
not recognize income, gain or loss for Federal income tax purposes as a result
of such defeasance or covenant defeasance, as applicable, and will be subject to
Federal income tax on the same amounts, in the same manner and at the same times
as would have been the case if such defeasance or covenant defeasance, as
applicable, had not occurred; (e) the Company shall have delivered to the
Trustee an officers' certificate and an opinion of counsel, each stating that
all conditions precedent to the defeasance or the covenant defeasance (as the
case may be) have been complied with and an opinion of counsel to the effect
that either (i) as a result of a deposit pursuant to subsection (a) above,
registration is not required under the Investment Company Act
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of 1940, as amended, by the Company, with respect to the trust funds
representing such deposit or by the Trustee for such trust funds or (ii) all
necessary registrations under said Act have been effected; and (f) such
defeasance or covenant defeasance shall be effected in compliance with any
additional or substitute terms, conditions or limitations which may be imposed
on the Company in connection therewith pursuant to Section 301 of the Indenture
(Section 1404 of the Indenture).
"Government Obligations" means securities which are (i) direct obligations
of the United States of America or the government which issued the foreign
currency in which the Debt Securities of a particular series are payable, for
the payment of which its full faith and credit is pledged or (ii) obligations of
a Person controlled or supervised by and acting as an agency or instrumentality
of the United States of America or such government which issued the foreign
currency in which the Debt Securities of such series are payable, the payment of
which is unconditionally guaranteed as a full faith and credit obligation by the
United States of America or such other government, which, in either case, are
not callable or redeemable at the option of the issuer thereof, and shall also
include a depository receipt issued by a bank or trust company as custodian with
respect to any such Government Obligation or a specific payment of interest on
or principal of any such Government Obligation held by such custodian for the
account of the Holder of a depository receipt; provided that (except as required
by law) such custodian is not authorized to make any deduction from the amount
payable to the Holder of such depository receipt from any amount received by the
custodian in respect of the Government Obligation or the specific payment of
interest on or principal of the Government Obligation evidenced by such
depository receipt (Section 101 of the Indenture).
The Company may exercise its defeasance option with respect to such Debt
Securities notwithstanding its prior exercise of its covenant defeasance option.
In the event the Company effects covenant defeasance with respect to any
Debt Securities and such Debt Securities are declared due and payable because of
the occurrence of any Event of Default other than the Events of Default
described in clauses (d) and (f) under "Events of Default, Notice and Waiver",
the amount of money in which such Debt Securities are payable, and Government
Obligations on deposit with the relevant Trustee, will be sufficient to pay
amounts due on such Debt Securities at the time of their Stated Maturity but may
not be sufficient to pay amounts due on such Debt Securities at the time of the
acceleration resulting from such Event of Default. However, the Company would
remain liable to make payment of such amounts due at the time of acceleration.
The applicable Prospectus Supplement may further describe the provisions, if
any, permitting such defeasance or covenant defeasance, including any
modifications to the provisions described above, with respect to the Debt
Securities of or within a particular series and any related coupons.
REGARDING THE TRUSTEE
The Chase Manhattan Bank, Trustee under the Indenture, is a participant in
the Company's revolving credit and term loan agreements. In addition, the
trustee may from time to time enter into other lending transactions with the
Company in the ordinary course of business.
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PLAN OF DISTRIBUTION
The Company may sell the Debt Securities in or outside the United States to
or through underwriters, through or to dealers, directly to one or more
purchasers, or through agents. The Prospectus Supplement with respect to the
Debt Securities offered hereby will set forth the terms of the offering of the
Debt Securities, including the name or names of any underwriters, dealers, or
agents, the purchase price of the Debt Securities and the proceeds to the
Company from such sale, any delayed delivery arrangements, any underwriting
discounts and other items constituting underwriters' compensation, the initial
public offering price, any discounts or concessions allowed or re-allowed or
paid to dealers, and any securities exchanges on which the Debt Securities may
be listed.
If underwriters are used in the sale, the Debt Securities will be acquired
by the underwriters for their own account and may be resold from time to time in
one or more transactions, including negotiated transactions, at a fixed public
offering price, at market prices prevailing at the time of sale, at prices
related to such prevailing market prices, at negotiated prices or at varying
prices determined at the time of sale. The Debt Securities may be offered to the
public either through underwriting syndicates represented by one or more
managing underwriters or directly by one or more firms acting as underwriters or
agents. The underwriter or underwriters with respect to a particular
underwritten offering of Debt Securities will be named in the Prospectus
Supplement relating to such offering, and if an underwriting syndicate is used,
the managing underwriter or underwriters will be set forth on the cover of such
Prospectus Supplement. Unless otherwise set forth in the Prospectus Supplement
relating thereto, the obligations of the underwriters or agents to purchase the
Debt Securities will be subject to conditions precedent and the underwriters
will be obligated to purchase all the Debt Securities if any are purchased. The
initial public offering price and any discounts or concessions allowed or
re-allowed or paid to dealers may be changed from time to time.
If dealers are used in the sale of Debt Securities with respect to which
this Prospectus is delivered, the Company will sell such Debt Securities to the
dealers as principals. The dealers may then resell such Debt Securities to the
public at varying prices to be determined by such dealers at the time of resale.
The names of the dealers and the terms of the transaction will be set forth in
the Prospectus Supplement relating thereto.
Debt Securities may be sold directly by the Company or through agents
designated by the Company from time to time at fixed prices, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices, at negotiated prices or at varying prices determined at the time of
sale. Any agent involved in the offer or sale of the Debt Securities with
respect to which this Prospectus is delivered will be named, and any commissions
payable by the Company to such agent will be set forth, in the Prospectus
Supplement relating thereto. Unless otherwise indicated in the Prospectus
Supplement, any such agent will be acting on a best efforts basis for the period
of its appointment.
In connection with the sale of the Debt Securities, underwriters or agents
may receive compensation from the Company or from purchasers of Debt Securities
for whom they may act as agents in the form of discounts, concessions, or
commissions. Underwriters, agents, and dealers participating in the distribution
of the Debt Securities may be deemed to be underwriters, and any discounts or
commissions received by them from the Company and any profit on the resale of
the Debt Securities by them may be deemed to be underwriting discounts or
commissions under the Securities Act.
If so indicated in the Prospectus Supplement, the Company will authorize
agents, underwriters, or dealers to solicit offers from certain types of
institutions to purchase Debt Securities from the Company at the public offering
price set forth in the Prospectus Supplement pursuant to delayed delivery
contracts providing for payment and delivery on a specified date in the future.
Such contracts will be subject only to those conditions set forth in the
Prospectus Supplement, and the Prospectus Supplement will set forth the
commission payable for solicitation of such contracts.
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Agents, dealers, and underwriters may be entitled under agreements entered
into with the Company to indemnification by the Company against certain civil
liabilities, including liabilities under the Securities Act, or to contribution
with respect to payments that such agents, dealers, or underwriters may be
required to make with respect thereto. Agents, dealers, and underwriters may be
customers of, engage in transactions with, or perform services for the Company
in the ordinary course of business.
The Debt Securities may or may not be listed on a national securities
exchange. No assurances can be given that there will be a market for the Debt
Securities.
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GLOBAL CLEARANCE AND SETTLEMENT PROCEDURES
When so provided in the Prospectus Supplement, investors in the Global
Securities representing any of the Debt Securities issued hereunder may hold a
beneficial interest in such Global Securities through DTC, CEDEL, or Euroclear
(as defined below) or through participants. The Global Securities may be traded
as home market instruments in both the European and U.S. domestic markets.
Initial settlement and all secondary trades will settle as set forth in the
applicable Prospectus Supplement.
Cedel S.A. ("CEDEL") is incorporated under the laws of Luxembourg as a
professional depository. CEDEL holds securities for its participating
organizations and facilitates the clearance and settlement of securities
transactions between CEDEL participants through electronic book-entry changes in
accounts of CEDEL participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its participants,
among other things, services for safekeeping, administration, clearance, and
settlement of internationally traded securities and securities lending and
borrowing. CEDEL interfaces with domestic markets in several countries. As a
professional depository, CEDEL is subject to regulation by the Luxembourg
Monetary Institute. CEDEL participants are recognized financial institutions
around the world, including underwriters, securities brokers and dealers, banks,
trust companies, clearing corporations, and certain other organizations and may
include the underwriters named in any Prospectus Supplement. Indirect access to
CEDEL is also available to others, such as banks, brokers, dealers, and trust
companies that clear through or maintain a custodial relationship with a CEDEL
participant, either directly or indirectly.
The Euroclear System was created in 1968 to hold securities for participants
of the Euroclear System and to clear and settle transactions between Euroclear
participants through simultaneous electronic book-entry delivery against
payment, thereby eliminating the need for physical movement of certificates and
any risk from lack of simultaneous transfers of securities and cash.
Transactions may now be settled in any of 32 currencies, including United States
dollars. The Euroclear System includes various other services, including
securities lending and borrowing, and interfaces with domestic markets in
several countries generally similar to the arrangements for cross-market
transfers with DTC. The Euroclear System is operated by Morgan Guaranty Trust
Company of New York, Brussels, Belgium office (the "Euroclear Operator" or
"Euroclear"), under contract with Euroclear Clearance System S.C., a Belgian
cooperative corporation (the "Cooperative"). All operations are conducted by the
Euroclear Operator, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not the
Cooperative. The Cooperative establishes policy for the Euroclear System on
behalf of Euroclear participants. Euroclear participants include banks
(including central banks), securities brokers and dealers, and other
professional financial intermediaries and may include the underwriters. Indirect
access to the Euroclear System is also available to other firms that clear
through or maintain a custodial relationship with a Euroclear participant,
either directly or indirectly.
The Euroclear Operator is a member bank of the Federal Reserve System. As
such, it is regulated and examined by the Federal Reserve Board and the New York
State Banking Department, as well as the Belgian Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System, and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within the Euroclear System, withdrawals of
securities and cash from the Euroclear System, and receipts of payments with
respect to securities in the Euroclear System. All securities in the Euroclear
System are held on a fungible basis without attribution of specific certificates
to specific securities clearance accounts. The Euroclear Operator acts under the
Terms and Conditions only on behalf of Euroclear participants, and has no record
of or relationship with persons holding through Euroclear participants.
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Principal, premium, if any, and interest payments with respect to Debt
Securities held through CEDEL or Euroclear will be credited to the cash accounts
of CEDEL participants or Euroclear participants in accordance with the relevant
system's rules and procedures, to the extent received by its depository. Such
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations as described below. CEDEL or the
Euroclear Operator, as the case may be, will take any other action permitted to
be taken by a holder under the relevant Indenture on behalf of a CEDEL
participant or Euroclear participant only in accordance with its relevant rules
and procedures and subject to its depository's ability to effect such actions on
its behalf through the Depository.
INITIAL SETTLEMENT
All Global Securities will be registered in the name of Cede & Co. as
nominee of DTC. Investors' interests in the Global Securities will be
represented through financial institutions acting on their behalf as direct and
indirect participants in the Depository. As a result, CEDEL and Euroclear will
hold positions on behalf of their participants through their respective
depositories, Citibank, N.A. ("Citibank") and Morgan Guaranty Trust Company of
New York ("Morgan"), which in turn will hold such positions in accounts as
participants of DTC.
Global Securities held through DTC will follow the settlement practices
described above. Investor securities custody accounts will be credited with
their holdings against payment on the settlement date. Global Securities held
through CEDEL or Euroclear accounts will follow the settlement procedures
applicable to conventional eurobonds, except that there will be no temporary
global security and no "lock-up" or restricted period. Global Securities will be
credited to the securities custody accounts on the settlement date against
payment.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
participants will be settled using the procedures described above.
Trading between CEDEL and/or Euroclear Participants. Secondary market
trading between CEDEL participants and/or Euroclear participants will be settled
using the procedures applicable to conventional eurobonds.
Trading between DTC Seller and CEDEL or Euroclear Purchaser. When beneficial
interests in the Global Securities are to be transferred from the account of a
DTC participant to the account of a CEDEL participant or a Euroclear
participant, the purchaser will send instructions to CEDEL or Euroclear through
a participant at least one business day prior to settlement. CEDEL or Euroclear
will instruct Citibank or Morgan, respectively, as the case may be, to receive a
beneficial interest in the Global Securities against payment. Unless otherwise
set forth in the Prospectus Supplement, payment will include interest accrued on
the beneficial interest in the Global Securities so transferred from and
including the last coupon payment date to and excluding the settlement date, on
the basis on which interest is calculated on the Debt Securities. For
transactions settling on the 31st of the month, payment will include interest
accrued to and excluding the first day of the following month. Payment will then
be made by Citibank or Morgan to the DTC participant's account against delivery
of the beneficial interest in the Global Securities. After settlement has been
completed, the beneficial interest in the Global Securities will be credited to
the respective clearing system and by the clearing system, in accordance with
its usual procedures, to the CEDEL or Euroclear participant's account. The
securities credit will appear the next day (European time) and the cash debit
will be back-valued to, and the interest on the beneficial interest in Global
Securities will accrue from, the value date (which would be the preceding day
when settlement
21
<PAGE>
occurred in New York). If settlement is not completed on the intended value date
(that is, the trade fails), the CEDEL or Euroclear cash debit will be valued
instead as of the actual settlement date.
CEDEL participants and Euroclear participants will need to make available to
the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within CEDEL or Euroclear. Under this approach,
they may take on credit exposure to CEDEL or Euroclear until the Global
Securities are credited to their accounts one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit to
them, participants can elect not to preposition funds and allow that credit line
to be drawn upon to finance settlement. Under this procedure, CEDEL participants
or Euroclear participants purchasing beneficial interest in Global Securities
would incur overdraft charges for one day, assuming they cleared the overdraft
when the beneficial interests in the Global Securities were credited to their
accounts. However, interest on the beneficial interests in the Global Securities
would accrue from the value date. Therefore, in many cases the investment income
on the Global Securities earned during that one-day period may substantially
reduce or offset the amount of such overdraft charges, although this result will
depend on each participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
participants can employ their usual procedures for sending a beneficial interest
in Global Securities to Citibank or Morgan for the benefit of CEDEL participants
or Euroclear participants. The sale proceeds will be available to the DTC seller
on the settlement date. Thus, to the DTC participant a cross-market transaction
will settle no differently than a trade between two DTC participants.
Trading between CEDEL or Euroclear Seller and DTC Purchaser. Due to time
zone differences in their favor, CEDEL and Euroclear participants may employ
their customary procedures to transactions in which the beneficial interest in
the Global Securities is to be transferred by the respective clearing system,
through Citibank or Morgan, to a DTC participant. The seller will send
instructions to CEDEL or Euroclear through a participant at least one business
day prior to settlement. In these cases, CEDEL or Euroclear will instruct
Citibank or Morgan, as appropriate, to deliver the beneficial interest in the
Global Securities to the DTC participant's account against payment. Payment will
include interest accrued on the beneficial interests in the Global Securities
from and including the last coupon payment date to and excluding the settlement
date on the basis on which interest is calculated on the Global Securities. For
transactions settling on the 31st of the month, payment will include interest
accrued to and excluding the first day of the following month. The payment will
then be reflected in the account of the CEDEL or Euroclear participant the
following day, and receipt of the cash proceeds in the CEDEL or Euroclear
participant's account would be back-valued to the value date (which would be the
preceding day, when settlement occurred in New York). Should the CEDEL or
Euroclear participant have a line of credit with its respective clearing system
and elect to be in debit in anticipation of receipt of the sale proceeds in its
account, the back-valuation will extinguish any overdraft charges incurred over
that one-day period. If settlement is not completed on the intended value date
(that is, the trade fails), receipt of the cash proceeds in the CEDEL or
Euroclear participant's account would instead be valued as of the actual
settlement date.
Finally, day traders that use CEDEL or Euroclear and that purchase
beneficial interests in Global Securities from DTC participants for credit to
CEDEL participants or Euroclear participants should note that these trades would
automatically fail on the sale side unless affirmative action were taken. At
least three techniques should be readily available to eliminate this potential
problem:
(1) borrowing through CEDEL or Euroclear for one day (until the purchase
side of the day trade is reflected in their CEDEL or Euroclear accounts) in
accordance with the clearing system's customary procedures;
22
<PAGE>
(2) borrowing beneficial interests in the Global Securities in the
United States from a DTC participant no later than one day prior to
settlement, which would give beneficial interests in the Global Securities
sufficient time to be reflected in the appropriate CEDEL or Euroclear
account in order to settle the sale side of the trade; or
(3) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC participant is at least
one day prior to the value date for the sale to the CEDEL participant or
Euroclear participant.
Although the DTC, CEDEL, and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of beneficial interests in Global
Securities among participants of the DTC, CEDEL, and Euroclear, they are under
no obligation to perform or continue to perform such procedures and such
procedures may be discontinued at any time.
23
<PAGE>
CERTAIN UNITED STATES FEDERAL INCOME TAX
DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities, directly or
indirectly, through CEDEL or Euroclear (or through DTC if the Holder has an
address outside the United States) will be subject to the 30% United States
withholding tax that generally applies to payments of interest (including
original issue discount) on registered debt issued by United States persons,
unless (i) each clearing system, bank or other financial institution that holds
customers' securities in the ordinary course of its trade or business in the
chain of intermediaries between such beneficial owner and the United States
entity required to withhold tax complies with applicable certification
requirements, and (ii) such beneficial owner takes one of the following steps to
obtain an exemption or reduced tax rate:
EXEMPTION FOR NON-U.S. PERSONS (FORM W-8). Non-U.S. persons that are
beneficial owners (other than a beneficial owner that owns actually or
constructively 10% or more of the total combined voting power of all classes of
stock of the Company entitled to vote or a controlled foreign corporation that
is related to the Company through stock ownership) can obtain a complete
exemption from the withholding tax by filing a properly completed Form W-8
(Certificate of Foreign Status). If the information shown on Form W-8 changes, a
new Form W-8 must be filed within 30 days of such change.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM
4224). A non-U.S. person, including a non-U.S. corporation or bank with a
United States branch, that is a beneficial owner and for which the interest
income is effectively connected with its conduct of a trade or business in the
United States, can obtain an exemption from the withholding tax by filing a
properly completed Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY COUNTRIES
(FORM 1001). Non-U.S. persons that are beneficial owners that are entitled to
the benefits of an income tax treaty with the United States can obtain an
exemption or reduced tax rate (depending on the treaty terms) by filing a
properly completed Form 1001 (Ownership, Exemption or Reduced Rate Certificate).
If the treaty provides only for a reduced rate, withholding tax will be imposed
at that rate unless the filer alternatively files Form W-8. Form 1001 may be
filed by the beneficial owner or the beneficial owner's agent.
EXEMPTION FOR U.S. PERSONS (FORM W-9). United States persons can obtain a
complete exemption from the withholding tax by filing a properly completed Form
W-9 (Request for Taxpayer Identification Number and Certification).
Treasury Regulations, which will be applicable to payments made after 1999
(with certain transition rules), provide for the unification and simplification
of certain current certification procedures. Under these regulations, a Form W-8
will replace Forms 1001 and 4224 and become the only form necessary to obtain a
withholding exemption or reduction for non-U.S. Holders. Further, pursuant to
these new regulations, special rules permit the shifting of primary
responsibility for withholding to certain financial intermediaries acting on
behalf of beneficial owners. Although a beneficial owner will still be required
to submit a Form W-8 to such an intermediary, such intermediary generally will
not be required to forward a Form W-8 received from such beneficial owner to the
withholding agent. Both U.S. Holders and non-U.S. Holders are urged to consult
their own tax advisors with respect to these new regulations.
UNITED STATES FEDERAL INCOME TAX REPORTING PROCEDURE
The beneficial owner of the Global Security or, in the case of a Form 1001
or a Form 4224 filer, his agent, files by submitting the appropriate form to the
entity through whom it directly holds the Global Security. For example, if the
beneficial owner is listed directly on the books of Euroclear or CEDEL as the
Holder of the Debt Security, the Internal Revenue Service ("IRS") Form must be
provided to Euroclear or CEDEL, as the case may be. Each person through which a
Debt Security is held must submit, on behalf of
24
<PAGE>
the beneficial owner, the IRS Form (or in certain cases a copy thereof) under
applicable procedures to the person through which it holds the Debt Security,
until the IRS Form is received by the U.S. person who would otherwise be
required to withhold U.S. federal income tax from interest on the Debt Security.
For example, in the case of Debt Securities held through Euroclear or CEDEL, the
IRS Form (or a copy thereof) must be received by the U.S. depository of such
clearing agency. Applicable procedures include, if a beneficial owner of the
Debt Security provides an IRS Form W-8 to a securities clearing organization,
bank or other financial institution (a "financial institution") that holds the
Debt Security in the ordinary course of its trade or business on the owner's
behalf, that such financial institution certify to the person otherwise required
to withhold U.S. federal income tax from such interest, under penalties of
perjury, that such statement has been received from the beneficial owner by it
or by a financial institution between it and the beneficial owner and that it
furnish the payor with a copy thereof.
As used in this section on tax documentation requirements and the following
section ("Additional United States Federal Tax Considerations for Non-U.S.
Persons"), the term "U.S. person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws of the
United States or any State thereof, (iii) an estate, other than an estate the
income of which, from sources without the United States, is not effectively
connected with the conduct of a trade or business within the United States, or
(iv) a trust if (A) a court within the United States is able to exercise primary
supervision over the trust's administration and (B) one or more U.S. persons
have the authority to control all the trust's substantial decisions. The terms
"United States" and "U.S." mean the United States of America (including the
States and the District of Columbia).
ADDITIONAL UNITED STATES FEDERAL TAX CONSIDERATIONS FOR NON-U.S. PERSONS
Any capital gain realized on the sale, exchange, redemption, or other
disposition of Debt Securities by a non-U.S. person will not be subject to
United States federal income or withholding taxes unless, in the case of an
individual, such Holder is present in the United States for 183 days or more in
the taxable year of the sale, exchange, redemption, or other disposition or
receipt and certain other conditions are met, or the gain is effectively
connected with a United States trade or business of the non-U.S. person.
Payments made on Debt Securities and proceeds from the sale of Debt
Securities received by a non-U.S. person will not be subject to a backup
withholding tax of 31% or to information reporting requirements unless, in
general, the Holder fails to comply with certain reporting procedures or
otherwise fails to establish an exemption from such tax or reporting
requirements under applicable provisions of the Internal Revenue Code (see
"Certain U.S. Federal Income Tax Documentation Requirements").
Debt Securities will not be subject to United States federal estate tax as a
result of the death of a Holder who is not a citizen or resident of the United
States at the time of death, unless such Holder at the time of death actually or
constructively owns 10 percent or more of the combined voting power of all
classes of stock of the Company or, at the time of such Holder's death, payments
of interest on such Debt Securities are effectively connected with the conduct
by such Holder of a trade or business in the United States.
This summary does not deal with all aspects of U.S. income and withholding
taxes or the application of any U.S. income or estate tax treaty that may be
relevant to foreign beneficial owners of the Global Securities, including
special categories of foreign investors who may not be eligible for exemptions
from U.S. withholding tax. Investors are advised to consult their own tax
advisors for specific tax advice concerning their holding and disposing of
beneficial interests in the Global Securities. Any additional requirements, if
applicable, will be set forth in the Prospectus Supplement.
25
<PAGE>
EXPERTS
The consolidated financial statements of WorldCom as of December 31, 1997
and 1996, and for each of the years in the three-year period ended December 31,
1997, have been audited by Arthur Andersen LLP, independent public accountants,
as indicated in their report with respect thereto, and are included in
WorldCom's Current Report on Form 8-K dated May 28, 1998 (filed May 28, 1998),
and are incorporated herein by reference, in reliance upon the authority of such
firm as experts in accounting and auditing in giving said reports.
The consolidated financial statements and schedule of MFS as of December 31,
1996 and for the period then ended (see Note 1 to the MFS Consolidated Financial
Statements), and for the year ended December 31, 1996, included in WorldCom's
Current Report on Form 8-K/A dated August 25, 1996 (filed December 19, 1997) and
incorporated by reference into this registration statement, have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are incorporated herein by reference, in
reliance upon the authority of such firm as experts in accounting and auditing
in giving said reports.
The consolidated financial statements of MFS as of December 31, 1995 and
1994 and for each of the three and two years in the period ended December 31,
1995, included in WorldCom's Current Report on Form 8-K/A dated August 25, 1996
(filed November 4, 1996 and December 19, 1997) and incorporated by reference
into this registration statement, have been incorporated in reliance on the
reports of Coopers & Lybrand L.L.P., independent accountants, given upon the
authority of that firm as experts in accounting and auditing.
The consolidated financial statements of UUNET as of December 31, 1995 and
1994 and for each of the three years in the period ended December 31, 1995,
included in WorldCom's Current Report on Form 8-K/A dated August 25, 1996 (filed
November 4, 1996) and incorporated by reference into this registration
statement, have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto and are
incorporated herein by reference in reliance upon the authority of said firm as
experts in giving said reports.
The consolidated financial statements of MCI as of December 31, 1997 and
1996 and for each of the three years in the period ended December 31, 1997
incorporated in this Prospectus by reference to WorldCom's Current Report on
Form 8- K/A-3 dated November 9, 1997 (filed May 28, 1998) have been so
incorporated in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
26
<PAGE>
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NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS, IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS, AND, IF GIVEN OR MADE, ANY SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR ANY UNDERWRITER, DEALER OR AGENT. THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
PROSPECTUS SUPPLEMENT
Cautionary Statement Regarding Forward-Looking
Statements................................... S-2
The Company.................................... S-3
Risk Factors................................... S-4
Recent Business Combinations................... S-12
The MCI/WorldCom Merger........................ S-13
Use of Proceeds................................ S-16
Capitalization................................. S-17
Selected Historical Financial Data of
WorldCom..................................... S-18
Selected Historical Financial Data of MCI...... S-20
Pro Forma Condensed Combined Financial
Statements................................... S-21
Notes to Pro Forma Condensed Combined Financial
Statements................................... S-25
Description of the Notes....................... S-27
Underwriting................................... S-32
Information Incorporated by Reference.......... S-33
Legal Matters.................................. S-34
PROSPECTUS
Available Information.......................... 2
Incorporation of Certain Documents by
Reference.................................... 3
The Company.................................... 4
Use of Proceeds................................ 4
Ratio of Earnings to Fixed Charges............. 5
Description of Debt Securities................. 6
Plan of Distribution........................... 18
Global Clearance and Settlement Procedures..... 20
Certain United States Federal Income Tax
Documentation Requirements................... 24
Experts........................................ 26
</TABLE>
$6,100,000,000
WORLDCOM, INC.
$1,500,000,000
6.125% NOTES DUE 2001
$600,000,000
6.250% NOTES DUE 2003
$2,250,000,000
6.400% NOTES DUE 2005
$1,750,000,000
6.950% NOTES DUE 2028
[LOGO]
---------
P R O S P E C T U S S U P P L E M E N T
AUGUST 7, 1998
(INCLUDING PROSPECTUS
DATED AUGUST 7, 1998)
---------
SALOMON SMITH BARNEY
CREDIT SUISSE FIRST BOSTON
LEHMAN BROTHERS
CHASE SECURITIES INC.
J.P. MORGAN & CO.
NATIONSBANC MONTGOMERY SECURITIES LLC
UTENDAHL CAPITAL PARTNERS, L.P.
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