- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number: 0-11258
-------------------------------
WorldCom, Inc.
(Exact name of registrant as specified in its charter)
-------------------------------
Georgia 58-1521612
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
515 East Amite Street, Jackson, Mississippi 39201-2702
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code : (601) 360-8600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
The number of outstanding shares of the registrant's Common Stock, par
value $.01 per share, was 1,071,304,490 on July 31, 1998.
- --------------------------------------------------------------------------------
<PAGE>
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
June 30, 1998 and December 31, 1997......................... 3
Consolidated Statements of Operations
for the three and six months ended June 30, 1998
and June 30, 1997........................................... 4
Consolidated Statements of Cash Flows for
the six months ended June 30, 1998 and
June 30, 1997............................................... 5
Notes to Consolidated Financial Statements.................. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............... 15
Item 3. Quantitative and Qualitative Disclosure About Market Risk .. 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 26
Item 2. Changes in Securities and Use of Proceeds................... 26
Item 3. Defaults Upon Senior Securities............................. 26
Item 4. Submission of Matters to a Vote
of Securities Holders....................................... 26
Item 5. Other Information........................................... 27
Item 6. Exhibits and Reports on Form 8-K............................ 27
Signature .................................................................. 29
Exhibit Index .............................................................. 30
Page 2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
WORLDCOM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars, Except Per Share Data)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 84,153 $ 154,591
Marketable securities 347 53,516
Accounts receivable, net of allowance for bad debts of $234,110 in 1998
and $203,076 in 1997 1,789,144 1,240,731
Income taxes receivable 5,343 5,422
Other current assets 514,539 419,727
------------ ------------
Total current assets 2,393,526 1,873,987
------------ ------------
Property and equipment:
Transmission equipment 5,685,688 4,156,319
Communications equipment 2,847,533 2,493,363
Furniture, fixtures and other 1,189,099 919,687
------------ ------------
9,722,320 7,569,369
Less - accumulated depreciation (1,183,999) (855,168)
------------ ------------
8,538,321 6,714,201
------------ ------------
Goodwill and other intangible assets 14,824,341 13,881,505
Deferred tax asset 410,766 404,864
Other assets 914,857 721,229
------------ ------------
$ 27,081,811 $ 23,595,786
============ ============
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current liabilities:
Short-term debt and current maturities of long-term debt $ 4,537 $ 10,779
Accounts payable 448,853 470,389
Accrued line costs 1,096,982 867,588
Accrued interest 129,159 119,262
Deferred tax liability 20,262 59,442
Other current liabilities 792,106 546,175
------------ ------------
Total current liabilities 2,491,899 2,073,635
------------ ------------
Long-term liabilities, less current portion:
Long-term debt 8,971,132 7,413,333
Other liabilities 500,274 307,906
------------ ------------
Total long-term liabilities 9,471,406 7,721,239
------------ ------------
Commitments and contingencies
Shareholders' investment:
Series A preferred stock, par value $.01 per share; authorized, issued and
outstanding: none in 1998 and 94,992 shares in 1997 (variable liquidation preference) -- 1
Series B preferred stock, par value $.01 per share; authorized, issued and
outstanding: 12,049,247 shares in 1998 and 12,421,858 in 1997 (liquidation
preference of $1.00 per share plus unpaid dividends) 120 124
Preferred stock, par value $.01 per share; authorized: 34,905,008 shares
in 1998 and 1997; none issued -- --
Common stock, par value $.01 per share; authorized: 2,500,000,000 shares; issued
and outstanding: 1,069,105,049 shares in 1998 and 981,615,661 shares in 1997 10,691 9,816
Additional paid-in capital 17,061,223 15,530,551
Unrealized holding gain on marketable equity securities 14,747 33,883
Retained earnings (deficit) (1,968,275) (1,773,463)
------------ ------------
Total shareholders' investment 15,118,506 13,800,912
------------ ------------
$ 27,081,811 $ 23,595,786
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
Page 3
<PAGE>
WORLDCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 2,610,477 $ 1,796,862 $ 4,960,444 $ 3,493,656
----------- ----------- ----------- -----------
Operating expenses:
Line costs 1,260,020 937,237 2,406,969 1,858,714
Selling, general and administrative 523,769 401,290 1,001,900 789,489
Depreciation and amortization 331,848 240,060 630,428 471,699
Brooks Fiber merger costs -- -- 69,490 --
Charge for in-process research and development -- -- 429,000 --
----------- ----------- ----------- -----------
Total 2,115,637 1,578,587 4,537,787 3,119,902
----------- ----------- ----------- -----------
Operating income 494,840 218,275 422,657 373,754
Other income (expense):
Interest expense (107,746) (95,949) (209,994) (186,109)
Miscellaneous 9,945 7,313 22,192 20,794
----------- ----------- ----------- -----------
Income before income taxes and extraordinary items 397,039 129,639 234,855 208,439
Provision for income taxes 169,535 85,158 287,735 138,960
----------- ----------- ----------- -----------
Net income (loss) before extraordinary items 227,504 44,481 (52,880) 69,479
Extraordinary item (net of income taxes of $77,568 in 1998 and $0 in 1997) -- (2,857) (128,731) (2,857)
Preferred dividend requirement 6,598 6,611 13,200 13,221
----------- ----------- ----------- -----------
Net income (loss) applicable to common shareholders $ 220,906 $ 35,013 $ (194,811) $ 53,401
=========== =========== =========== ===========
Earnings (loss) per common share:
Net income (loss) applicable to common shareholders before
extraordinary items:
Basic $ 0.21 $ 0.04 $ (0.06) $ 0.06
=========== =========== =========== ===========
Diluted $ 0.21 $ 0.04 $ (0.06) $ 0.06
=========== =========== =========== ===========
Extraordinary item $ -- $ (0.00) $ (0.13) $ (0.00)
=========== =========== =========== ===========
Net income (loss) applicable to common shareholders :
Basic $ 0.21 $ 0.04 $ (0.19) $ 0.06
=========== =========== =========== ===========
Diluted $ 0.21 $ 0.04 $ (0.19) $ 0.06
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
Page 4
<PAGE>
WORLDCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (181,611) $ 66,622
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary item 128,731 2,857
Brooks Fiber merger costs 69,490 --
Charge for in-process research and development 429,000 --
Depreciation and amortization 630,428 471,699
Provision for losses on accounts receivable 52,508 44,406
Provision for deferred income taxes 270,264 108,395
Accreted interest on debt 15,462 87,746
Change in assets and liabilities, net of effect of
business combinations:
Accounts receivable (675,649) (201,051)
Income taxes, net 79 18,149
Other current assets (109,075) (68,444)
Accrued line costs 113,697 22,952
Accounts payable and other current liabilities (57,246) (68,233)
Other (66,604) (5,257)
----------- -----------
Net cash provided by operating activities 619,474 479,841
----------- -----------
Cash flows from investing activities:
Capital expenditures (1,930,782) (1,332,379)
Sale of short-term investments, net 53,169 784,225
Acquisitions and related costs (194,969) (411,311)
Increase in intangible assets (87,337) (57,136)
Proceeds from disposition of long-term assets 104,855 23,417
Increase in other assets (158,378) (124,013)
Decrease in other liabilities (11,810) (19,715)
----------- -----------
Net cash used in investing activities (2,225,252) (1,136,912)
----------- -----------
Cash flows from financing activities:
Principal borrowings on debt, net 1,354,454 385,178
Common stock issuance 194,086 111,971
Dividends paid on preferred stock (13,200) (13,221)
Other -- 2,563
----------- -----------
Net cash provided by financing activities 1,535,340 486,491
----------- -----------
Net decrease in cash and cash equivalents (70,438) (170,580)
Cash and cash equivalents at beginning of period 154,591 484,609
----------- -----------
Cash and cash equivalents at end of period $ 84,153 $ 314,029
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
Page 5
<PAGE>
WORLDCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(A) General
The financial statements of WorldCom, Inc. (the "Company" or "WorldCom")
included herein, are unaudited and have been prepared in accordance with
generally accepted accounting principles for interim financial reporting and
Securities and Exchange Commission regulations. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of management, the
financial statements reflect all adjustments (of a normal and recurring nature)
which are necessary to present fairly the financial position, results of
operations and cash flows for the interim periods. These financial statements
should be read in conjunction with the Company's restated financial statements
contained in its Current Report on Form 8-K dated May 28, 1998 (filed May 28,
1998). The results for the six month period ended June 30, 1998, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998.
(B) Business Combinations
On January 31, 1998, WorldCom acquired CompuServe Corporation, a Delaware
corporation ("CompuServe"), pursuant to the merger (the "CompuServe 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 WorldCom common shares 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 Communications, Inc., a Delaware
corporation ("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 (collectively, the "AOL Transaction"). 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
CompuServe Network Services ("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 Brooks Fiber Properties, Inc., a Delaware
corporation ("BFP"), pursuant to the merger (the "BFP 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"), Internet Service Providers ("ISPs"),
wireless carriers and business, government and institutional end
Page 6
<PAGE>
users with an alternative to the incumbent local exchange carriers ("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 Common Stock or approximately 72.6 million
WorldCom common shares 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.
On November 9, 1997, WorldCom entered into an Agreement and Plan of Merger (the
"MCI/WorldCom Merger Agreement") with MCI Communications Corporation ("MCI") and
a wholly owned acquisition subsidiary of WorldCom ("MCI Merger Sub"), providing
for the merger (the "MCI/WorldCom Merger") of MCI with and into MCI Merger Sub,
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, par value $0.10 per share ("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 MCI
Merger Sub 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, par value $0.10 per
share ("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 prices 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
aggregate 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, as described below. In addition, the MCI/WorldCom Merger is
also subject to approvals from the Federal Communications Commission ("FCC") and
certain state government bodies. WorldCom anticipates that the MCI/WorldCom
Merger will close in the third quarter of 1998.
In May 1998, 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 MCI/WorldCom Merger on the grounds that it violates U.S.
antitrust laws. At a scheduling conference in July 1998, the District Court set
a trial date for May 10, 1999. WorldCom believes that the complaint is without
merit, although there can be no assurance as to the ultimate result of the suit.
Page 7
<PAGE>
Termination of the MCI/WorldCom Merger Agreement by MCI or WorldCom under
certain conditions will 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 British Telecommunications plc ("BT").
Further, termination of the MCI/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 paid to BT an alternative transaction fee of $450
million and expenses of $15 million payable to BT in accordance with the BT/MCI
Merger Agreement. 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 Private Securities Litigation Reform Act
of 1995 (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 the introductory paragraph to Item 2 "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The Company and MCI have certain interconnection or other service agreements
between the companies at prevailing market rates in the ordinary course of their
businesses. For the six months ended June 30, 1998, the Company recognized
revenue of approximately $34 million for services provided by the Company under
such agreements. In addition, cost of services during the same period for
services provided by MCI was approximately $402 million under such agreements.
As of June 30, 1998, amounts payable to MCI, which were included in accrued line
costs in the accompanying consolidated balance sheet, totaled approximately $225
million.
Divestiture of MCI's Internet Services Business. On July 15, 1998, MCI announced
that it had entered into an 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 the final
regulatory approval of the MCI/WorldCom Merger. The agreement with Cable &
Wireless will terminate if such approvals are not received by December 31, 1998.
Page 8
<PAGE>
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 agreement with Cable & Wireless, MCI WorldCom will
offer a full suite of Internet services upon completion of the MCI/WorldCom
Merger.
(C) Earnings Per Share
Earnings per share are calculated in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 128 "Earnings Per Share." The following is a
reconciliation of the numerators and the denominators of the basic and diluted
per share computations (in thousands, except per share data):
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------ -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic
Net income (loss) before extraordinary items $ 227,504 $ 44,481 $ (52,880) $ 69,479
Preferred stock dividends 6,598 6,611 13,200 13,221
----------- ----------- ----------- -----------
Net income (loss) applicable to common shareholders
before extraordinary items $ 220,906 $ 37,870 $ (66,080) $ 56,258
=========== =========== =========== ===========
Weighted average shares outstanding 1,044,838 962,448 1,028,250 955,105
=========== =========== =========== ===========
Basic earnings (loss) per share
before extraordinary items $ 0.21 $ 0.04 $ (0.06) $ 0.06
=========== =========== =========== ===========
Diluted
Net income (loss) applicable to common shareholders
before extraordinary items $ 220,906 $ 37,870 $ (66,080) $ 56,258
Add back:
Preferred stock dividends 6,598 6,611 -- 493
----------- ----------- ----------- -----------
Net income (loss) applicable to common shareholders $ 227,504 $ 44,481 $ (66,080) $ 56,751
=========== =========== =========== ===========
Weighted average shares outstanding 1,044,838 962,448 1,028,250 955,105
Common stock equivalents 34,279 26,560 -- 28,364
Common stock issuable upon conversion of preferred stock 21,800 33,949 -- 1,242
----------- ----------- ----------- -----------
Diluted shares outstanding 1,100,917 1,022,957 1,028,250 984,711
=========== =========== =========== ===========
Diluted earnings (loss) per share before extraordinary items $ 0.21 $ 0.04 $ (0.06) $ 0.06
=========== =========== =========== ===========
</TABLE>
(D) Supplemental Disclosure of Cash Flow Information
Interest paid by the Company during the six months ended June 30, 1998 and 1997
amounted to $316.0 million and $107.4 million, respectively. Income taxes paid
during the six months ended June 30, 1998 and 1997 were $6.8 million and $13.2
million, respectively. In conjunction with business combinations during the six
months ended June 30, 1998 and 1997, assumed assets and liabilities were as
follows (in thousands):
For the Six Months
Ended June 30,
-------------------------
1998 1997
---- ----
Fair value of assets acquired $ 334,415 $ 60,568
Excess of cost over net tangible
assets acquired 1,541,960 350,960
Liabilities paid (assumed) (383,787) 97,490
Common stock issued (1,297,619) (97,707)
----------- -----------
$ 194,969 $ 411,311
=========== ===========
Page 9
<PAGE>
(E) Brooks Fiber Merger Costs
In the first quarter of 1998, the Company recorded a one-time charge for
employee severance, alignment charges and direct merger costs associated with
the BFP Merger. The following table reflects the components of the significant
items shown as Brooks Fiber merger costs for the six months ended June 30, 1998
(in thousands):
Direct merger costs $17,217
Severance costs 8,349
Alignment charges 43,924
-------
$69,490
=======
(F) Long-Term Debt
In connection with the BFP Merger, the Company announced on February 27, 1998
that it had commenced an offer (the "Tender Offers") to purchase for cash each
of the following series of debt: the 10-7/8% Senior Discount Notes of BFP due
2006, the 11-7/8% Senior Discount Notes of BFP due 2006 and the 10% Senior Notes
of BFP due 2007 (collectively, the "BFP Notes"). WorldCom offered to pay each
registered holder of the BFP Notes, in the case of the 10-7/8% Senior Discount
Notes, 118.586% of their accreted value as of the date of the purchase, in the
case of the 11-7/8% Senior Discount Notes, 127.104% of their accreted value as
of the date of purchase, and in the case of the 10% Senior Notes, 117.615% of
their principal amount, plus accrued interest to the date of purchase. The
accreted value per $1,000 principal amount at stated maturity as of the tender
purchase date of March 27, 1998, was $733.42 for the 10-7/8% Senior Discount
Notes and $660.57 for the 11-7/8% Senior Discount Notes. The accrued interest of
the 10% Senior Notes per $1,000 principal amount at stated maturity to such date
was $32.22. Concurrently with the Tender Offers, WorldCom obtained the requisite
consents to eliminate certain restrictive covenants and amend certain other
provisions of the respective indentures of the BFP Notes.
On March 27, 1998, the Company accepted all BFP Notes validly tendered. As of
the expiration of the offers at 11:59 p.m., New York City time, March 26, 1998,
WorldCom had received valid tenders and consents from holders of approximately
$424.9 million of principal amount at stated maturity of 10-7/8% Senior Discount
Notes due 2006 of BFP (or approximately 99.96% of total outstanding), from
holders of $400.0 million of principal amount at stated maturity of 11-7/8%
Senior Discount Notes due 2006 of BFP (or 100% of total outstanding), and from
holders of approximately $241.0 million of principal amount at stated maturity
of 10% Senior Notes due 2007 of BFP (or approximately 96.4% of total
outstanding).
The funds required to pay all amounts required under the Tender Offers were
obtained by WorldCom from available working capital and lines of credit. In
connection with the Tender Offers and related refinancings, WorldCom recorded an
extraordinary accounting item of $128.7 million, net of income tax benefit of
$77.6 million in the first quarter of 1998.
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, hereinafter referred to as 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
Page 10
<PAGE>
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 New Credit Facilities will provide liquidity support for the
Company's commercial paper program and will be used for other general corporate
purposes. 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 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.
The Company has approved the issuance of commercial paper notes in the aggregate
principal amount not to exceed $10.0 billion, which notes will have a maturity
not to exceed 364 days from the date of issuance. The Company is required to
maintain unused credit facilities equal to 100% of the commercial paper notes
outstanding.
On August 11, 1998, the Company completed a public debt offering of $6.1 billion
principal amount of debt securities. The net proceeds of $6.04 billion were used
to pay down commercial bank debt and for general corporate purposes.
The public debt offering consisted of $1.5 billion principal amount of 6.125%
Notes Due 2001 (the "Notes Due 2001"), which mature August 15, 2001, $600
million principal amount of 6.25% Notes Due 2003 (the "Notes Due 2003"), which
will mature on August 15, 2003, $2.25 billion principal amount of 6.40% Notes
Due 2005 (the "Notes Due 2005"), which will mature August 15, 2005 and $1.75
billion principal amount of 6.95% Notes Due 2028 (the "Notes Due 2028"), which
will mature August 15, 2028 (collectively, with the Notes Due 2001, the Notes
Due 2003 and the Notes Due 2005, the "Notes"), bear interest payable
semiannually in arrears on February 15 and August 15 and of each year,
commencing February 15, 1999.
The Notes are 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
therein) 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.
The following table sets forth the long-term debt of the Company as of June 30,
1998, and as adjusted to give effect to the public debt offering and the related
repayment of bank credit facilities (in thousands):
Page 11
<PAGE>
June 30, 1998
------------------------
Actual As Adjusted
----------- -----------
Credit facilities $ 5,576,250 $ 1,250,000
6.125% Notes Due 2001 -- 1,500,000
6.25% Notes Due 2003 -- 600,000
6.40% Notes Due 2005 -- 2,250,000
6.95% Notes Due 2028 -- 1,750,000
7.55% Senior Notes Due 2004 600,000 600,000
7.75% Senior Notes Due 2007 1,100,000 1,100,000
7.75% Senior Notes Due 2027 300,000 300,000
9.375% Senior Notes Due 2004 680,115 680,115
8.875% Senior Notes Due 2006 666,723 666,723
Other debt (maturing through 2006) 52,581 52,581
----------- -----------
8,975,669 10,749,419
Less: Short-term debt and current maturities 4,537 4,537
----------- -----------
$ 8,971,132 $10,744,882
=========== ===========
(G) Preferred Stock
In May 1998, the Company exercised its option to redeem all of the outstanding
Series A 8% Cumulative Convertible Preferred Stock (the "Series A Preferred
Stock") and related Depositary Shares. Prior to the redemption date,
substantially all of the holders of Series A Preferred Stock elected to convert
the preferred stock into Common Stock, resulting in the issuance of
approximately 32.7 million shares of Common Stock.
(H) Charge For In-Process Research and Development
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 AOL
Transaction. The charge is 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.
(I) Comprehensive Income
Effective January 1, 1998, WorldCom adopted SFAS No. 130 "Reporting
Comprehensive Income." This statement requires the reporting of comprehensive
income in addition to net income from operations. Comprehensive income is a more
inclusive financial reporting methodology that includes disclosure of certain
financial information that historically has not been recognized in the
calculation of net income.
The following table reflects the calculation of comprehensive income (loss) for
WorldCom for the three and six months ended June 30, 1998 and 1997 (in
thousands):
Page 12
<PAGE>
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income (loss) applicable to common shareholders $ 220,906 $ 35,013 $(194,811) $ 53,401
--------- --------- --------- ---------
Other comprehensive income (loss):
Foreign currency translation gains (losses) (548) (3,987) (9,410) (20,926)
Unrealized holding gains (losses):
Unrealized holding gains (losses) during the period (43,979) 23,860 (17,625) 9,041
Reclassification adjustment for gains
included in net income (12,981) -- (12,981) --
--------- --------- --------- ---------
Other comprehensive income (loss) before tax (57,508) 19,873 (40,016) (11,885)
Income tax expense 21,379 (8,971) 11,470 (3,399)
--------- --------- --------- ---------
Other comprehensive income (loss) (36,129) 10,902 (28,546) (15,284)
--------- --------- --------- ---------
Comprehensive income (loss) applicable to common shareholders $ 184,777 $ 45,915 $ 223,357 $ 38,117
========= ========= ========= =========
</TABLE>
(J) Contingencies
Federal Regulation. 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 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 Public Utility Commissions ("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, US WEST Communications
Group, and Bell Atlantic Corporation. 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., MCI, the 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 applications 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
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, the FCC issued a
Notice of Proposed Rulemaking seeking to allow the
Page 13
<PAGE>
RBOCs to establish separate subsidiaries to provide enhanced data services.
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 that
will reform Universal Service Subsidy allocations and adopted various reforms to
the existing rate structure for interstate access services provided by the ILECs
that are designed to reduce access charges, over time, to more economically
efficient levels and rate structures. It also affirmed that information service
providers (including, among others, 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 the Notice of Inquiry, the Telecom Act or any future legislation,
regulation or regulatory changes may have on its consolidated financial position
or results of operations.
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
("alternative traffic routing"). In August 1998, the FCC proposed to modify its
rules to make it even easier for U.S. international carriers to engage in
alternative traffic routing. 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 alternative traffic routing. 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
Page 14
<PAGE>
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, in court and at the FCC, the FCC's order
adopting mandatory settlement rate benchmarks. If the FCC's settlement rate
benchmark order was 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.
The Company is involved in other legal and regulatory proceedings generally
incidental to its business. In some instances, rulings by regulatory authorities
in some states may result in increased operating costs to the Company. While the
results of these various legal and regulatory matters contain an element of
uncertainty, the Company believes that the probable outcome of these matters
should not have a material adverse effect on the Company's consolidated results
of operations or financial position.
(K) Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. This statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires a company to formally document,
designate and assess the effectiveness of transactions that receive hedge
accounting. This statement is effective for fiscal years beginning after June
15, 1999, but may be implemented as of the beginning of any fiscal quarter after
issuance (that is, fiscal quarters beginning June 16, 1998 and thereafter). This
statement cannot be applied retroactively. SFAS No. 133 must be applied to (a)
derivative instruments and (b) certain derivative instruments embedded in hybrid
contracts that were issued, acquired, or substantively modified after December
31, 1997 (and, at the Company's election, before January 1, 1998).
The Company has not yet quantified the effects of adopting SFAS No. 133 on the
financial statements and has not determined the timing of or method of our
adoption of this statement. However, this statement could increase volatility in
earnings and other comprehensive income.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Management's Discussion and Analysis of Financial Condition and Results of
Operations may be deemed to include forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, that involve risk and
uncertainty, including financial, regulatory environment and trend projections
and statements regarding possible future charges or allocations, as well as any
statements preceded by, followed by, or that include the words "intends,"
"estimates," "believes," "expects," "anticipates," "should," "could" or similar
expressions, and other statements contained herein regarding matters that are
not historical facts. Although the Company believes that its expectations are
based on reasonable assumptions, it can give no assurance that its expectations
will be achieved. The important
Page 15
<PAGE>
factors that could cause actual results to differ materially from those in the
forward-looking statements herein (the "Cautionary Statements") include, without
limitation, the Company's degree of financial leverage, risks associated with
debt service requirements and interest rate fluctuations, risks associated with
acquisitions and the integration thereof, risks of international business,
dependence on availability of transmission facilities, regulation risks
including the impact of the Telecom Act, contingent liabilities, and the impact
of competitive services and pricing, as well as other risks referenced from time
to time in the Company's filings with the SEC, including the Company's Form 10-K
for the year ended December 31, 1997 (the "Form 10-K"). All subsequent written
and oral forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by the Cautionary
Statements. The Company does not undertake any obligation to release publicly
any revisions to such forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
The following discussion and analysis relates to the financial condition and
results of operations of the Company for the three and six month periods ended
June 30, 1998 and 1997 after giving effect to the BFP Merger, which was
accounted for as a pooling-of-interests. The information should be read in
conjunction with the restated consolidated financial statements and notes
thereto contained herein and in the Company's Current Report on Form 8-K dated
May 28, 1998 (filed May 28, 1998) and with Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contained in the Form
10-K.
Unless otherwise defined, capitalized terms used herein have the meanings
assigned to them in the Notes to Consolidated Financial Statements contained
herein.
General
The Company is one of the largest telecommunications companies in the United
States, serving local, long distance and Internet customers domestically and
internationally. The Company's operations have grown significantly in each year
of its operations as a result of internal growth, the selective acquisition of
smaller telecommunications companies with limited geographic service areas and
market shares, the consolidation of certain third tier long distance carriers
with larger market shares, and international expansion.
On January 31, 1998, WorldCom, through a wholly owned subsidiary, merged with
CompuServe. 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, or approximately 37.6 million WorldCom common shares 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 AOL, and has entered into
five year contracts with AOL under which WorldCom and its subsidiaries will
provide network services to AOL (collectively, the "AOL Transaction"). 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, through a wholly owned subsidiary, merged with
BFP. 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 IXCs, ISPs, wireless
Page 16
<PAGE>
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 Common Stock or approximately 72.6 million
WorldCom common shares 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.
On November 9, 1997, WorldCom entered into the MCI/WorldCom Merger Agreement
with MCI and MCI Merger Sub, providing for the MCI/WorldCom Merger, pursuant to
which MCI would merge with and into MCI Merger Sub, with MCI Merger Sub
surviving as a wholly owned subsidiary of WorldCom. Subject to the terms and
conditions of the MCI/WorldCom Merger Agreement, each share of MCI Common Stock
outstanding immediately prior to the MCI/WorldCom Effective Time other than
shares owned by WorldCom or MCI Merger Sub 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, 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 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 prices 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
aggregate 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 as described below. 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.
In May 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. At
a scheduling conference in July 1998, the District Court set a trial date for
May 10, 1999. 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 will 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/WorldCom
Merger Agreement by MCI or WorldCom under certain conditions, would require
WorldCom to pay MCI $1.635 billion as a termination fee.
Page 17
<PAGE>
Pursuant to the BT Agreement among MCI, WorldCom and BT, the prior BT/MCI Merger
Agreement was terminated, and WorldCom paid BT an alternative transaction fee of
$450 million and expenses of $15 million payable to BT in accordance with the
BT/MCI Merger Agreement. 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 the introductory paragraph to this Item 2.
On July 15, 1998, MCI announced that it had entered into an agreement with Cable
& Wireless to sell its Internet backbone facilities and wholesale and retail
Internet 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 the final
regulatory approval of the MCI/WorldCom Merger. The agreement with Cable &
Wireless 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 agreement with Cable & Wireless,
MCI/WorldCom will offer a full suite of Internet services upon completion of the
MCI/WorldCom Merger.
The Company's strategy is to become a fully integrated communications company
that would be well positioned to take advantage of growth opportunities in
global telecommunications. Consistent with this strategy, the Company believes
that transactions such as the CompuServe Merger, the AOL Transaction and, if
consummated, the MCI/WorldCom Merger enhance the combined entity's opportunities
for future growth, create a stronger competitor in the changing
telecommunications industry, allow provision of end-to-end bundled service over
global networks, and provide the opportunity for significant cost savings and
operating efficiencies for the combined organization.
The Company's profitability is dependent upon, among other things, its ability
to achieve line costs that are less than its revenues. The principal components
of line costs are access charges and transport charges and the most significant
portion of the Company's line costs is access charges, which are highly
regulated. The FCC revised its rules regarding access charges in a manner that
will, over time, revamp the access rate element structure and, over the near
term, reduce the overall access revenues collected by the ILECs. The FCC's rate
element restructuring is intended to align costs with the manner in which they
are incurred by the ILECs. As a result, the usage based system has been replaced
with a system composed of a combination of flat rate charges and usage based
charges. The FCC has also implemented subsidy systems for local telephone
services and services to
Page 18
<PAGE>
schools, libraries, and hospitals. The subsidy systems will result in additional
charges being placed on all telecommunications providers, which charges may be
directly recovered from the end users. In addition, various state regulatory
agencies are considering adoption of subsidy systems that could cause rate
adjustments to the access services obtained by the Company and to retail rates.
The Company cannot predict what effect continued regulation and increased
competition between LECs and other IXCs will have on future access charges or
the Company's business. However, the Company believes that it will be able to
continue to reduce transport costs through effective utilization of its network,
favorable contracts with carriers and network efficiencies made possible as a
result of expansion of the Company's customer base by acquisitions and internal
growth.
Results of Operations
The following table sets forth for the periods indicated the Company's statement
of operations as a percentage of its operating revenues.
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
---------------- ----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues ............................................. 100% 100% 100% 100%
Line costs ........................................... 48.3 52.2 48.5 53.2
Selling, general and administrative .................. 20.0 22.3 20.2 22.6
Depreciation and amortization ........................ 12.7 13.4 12.7 13.5
Brooks Fiber merger costs ............................ -- -- 1.4 --
Charge for in-process research and development ....... -- -- 8.7 --
------ ------ ------ ------
Operating income ..................................... 19.0 12.1 8.5 10.7
Other income (expense):
Interest expense ................................. (4.1) (5.3) (4.2) (5.3)
Miscellaneous .................................... 0.3 0.4 0.4 0.6
------ ------ ------ ------
Income before income taxes and extraordinary items ... 15.2 7.2 4.7 6.0
Provision for income taxes ........................... 6.5 4.7 5.8 4.0
------ ------ ------ ------
Net income (loss) before extraordinary items ......... 8.7 2.5 (1.1) 2.0
Extraordinary item ................................... -- (0.2) (2.5) (0.1)
Preferred dividend requirement ....................... 0.2 0.4 0.3 0.4
------ ------ ------ ------
Net income (loss) applicable to common shareholders .. 8.5% 1.9% (3.9)% 1.5%
====== ====== ====== ======
</TABLE>
Three and Six Months Ended June 30, 1998 vs.
Three and Six Months Ended June 30, 1997
Revenues for the three months ended June 30, 1998 increased 45% to $2.61 billion
on 12.56 billion revenue minutes as compared to $1.80 billion on 9.0 billion
revenue minutes for the three months ended June 30, 1997. For the six months
ended June 30, 1998, revenues increased 42% to $4.96 billion on 24.36 billion
revenue minutes versus $3.49 billion on 17.59 billion revenue minutes for the
same period of the prior year. The increase in total revenues and minutes is
primarily attributable to the internal growth of the Company, the CompuServe
Merger and the AOL Transaction as outlined below. Prior year results have been
restated to reflect the BFP Merger, which was accounted for as a
pooling-of-interests.
The following table highlights the source of WorldCom's internal growth by major
line of business. The pro forma and actual revenue increases for the three and
six months ended June 30, 1998 and 1997 reflect the following increases by
category (dollars in millions):
Page 19
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------- -------------------------------
Actual Pro Forma Actual Pro Forma
1998 1997 Change 1998 1997 Change
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Revenues
Domestic switched $1,207.8 $ 981.0 23% $2,369.7 $1,943.8 22%
Domestic private line 536.3 381.5 41% 1,032.7 741.0 39%
International 299.1 197.0 52% 558.8 360.8 55%
Internet 525.5 303.4 73% 999.2 574.7 74%
-------- -------- -------- --------
Core revenues 2,568.7 1,862.9 38% 4,960.4 3,620.3 37%
-------- -------- -------- --------
Other 41.8 111.6 (63%) 81.6 211.1 (61%)
-------- -------- -------- --------
Total revenues $2,610.5 $1,974.5 32% $5,042.0 $3,831.4 32%
======== ======== ======== ========
</TABLE>
The following discusses the results of operations for the three and six month
periods ended June 30, 1998 as compared to pro forma results for the comparable
prior year periods. The pro forma results assume that the CompuServe Merger and
the AOL Transaction occurred at the beginning of 1997. Changes in actual results
of operations are shown in the Consolidated Statements of Operations and the
foregoing tables and, as noted above, primarily reflect the CompuServe Merger,
AOL Transaction and the internal growth of the Company.
Domestic switched revenues for the second quarter experienced a 23% pro forma
year-over-year increase driven by a gain of 35% in traffic. For the six month
period ended June 30, 1998, domestic switched revenues increased 22% over the
prior year pro forma amount on a 34% increase in traffic. Strong long distance
volume gains in all domestic sales channels, combined with an increasing mix of
local services, were the primary contributors to this increase. The strong
volume growth was offset partially by competitive international pricing and
access charge reform pass throughs. Domestic switched revenues include both long
distance and local switched revenues. While the Company continues to show
significant percentage gains in switched local, it is still a relatively small
component of total Company revenues. However, the Company expects that due to
its local initiatives, and, if consummated, the MCI/WorldCom Merger, revenues
attributable to local switched services will grow rapidly during the remainder
of 1998 and beyond.
Domestic private line revenues for the three and six month periods ended June
30, 1998 increased 41% and 39%, respectively. The revenue growth for private
line and frame relay services continues to be driven by significant commercial
end-user demand for high-speed data and by Internet-related growth on both a
local and long-haul basis. This growth is not only being fueled by connectivity
demands, but applications are becoming increasingly complex, and bandwidth
consumption is driving an acceleration in growth for higher capacity circuits.
Domestic private line includes both long distance and local dedicated bandwidth
sales. As of June 30, 1998, the Company had approximately 13.6 million domestic
local voice grade equivalents and over 35,000 connected buildings. Local route
miles of connected fiber are in excess of 6,500 and domestic long distance route
miles are in excess of 20,000. The combination of MCI and WorldCom's operations
is expected to enhance WorldCom's domestic local and long distance presence.
International revenues - those revenues originating outside of the United States
- - for the second quarter of 1998 were $299 million, an increase of 52% as
compared with $197 million for the same period of the prior year. For the six
month period ended June 30, 1998, international revenues increased 55% to $559
million versus $361 million for the same period of the prior year. In July 1998,
the pan-European network was commissioned for service and now provides WorldCom
the capability to connect from end-to-end over 5,000 buildings in Europe with
over 30,000 buildings in the U.S. - all over its own high-capacity circuits. In
Europe, the Company has over 400 route miles of local fiber and over 1,600 long
distance route miles.
Page 20
<PAGE>
Internet revenues for the three and six month periods ended June 30, 1998
increased 73% and 74%, respectively, over the prior year pro forma amounts.
Growth is being driven by both dial up and dedicated connectivity to the
Internet as more and more business customers migrate their data networks and
applications to Internet-based technologies.
Other revenues for the second quarter of 1998 were $42 million, down 63% as
compared with the second quarter 1997. For the six month period ended June 30,
1998, other revenues decreased 61% to $82 million versus $211 million for the
same period of the prior year. Other revenues for the three month period ended
June 30, 1998 include MFS Network Technologies of $32 million and systems and
consulting sales of $10 million. For the six month period ended June 30, 1998,
other revenues included MFS Network Technologies of $64 million and consulting
sales of $18 million. Operator services and broadcast operations were sold in
the third quarter of 1997. On a recast basis, excluding the results of the
operator services and broadcast operations divisions in both periods, other
revenues were down 42% for the second quarter of 1998 due to timing of
transportation construction contracts within the MFS Network Technologies group.
MFS Network Technologies was sold in July 1998.
Line costs as a percentage of revenues for the second quarter of 1998 were 48.3%
as compared to 52.2% reported for the same period of the prior year. On a
year-to-date basis, line costs as a percentage of revenues decreased to 48.5% as
compared to 53.2% reported for the same period of the prior year. These
decreases are attributable to changes in the product mix and synergies and
economies of scale resulting from network efficiencies achieved from the
assimilation of CNS and ANS into the Company's operations and were offset in
part by universal service fund costs recorded for the first six months of 1998.
Additionally, access charge reductions beginning in July 1997 reduced total line
cost expense by approximately $55.8 million for the first six months in 1998.
While access charge reductions were primarily passed through to the customer,
line costs as a percentage of revenues was positively affected by more than half
a percentage point.
Selling, general and administrative expenses for the second quarter of 1998 were
$523.8 million or 20.0% of revenues as compared to $401.3 million or 22.3% of
revenues as reported for the same period of the prior year. On a year-to-date
basis, these expenses increased to $1.0 billion or 20.2% of revenues from $789
million or 22.6% of revenues reported for the six months ended June 30, 1997.
The decrease in selling, general and administrative expenses as a percentage of
revenues for the three and six month periods ended June 30, 1998 results from
the assimilation of recent acquisitions into the Company's strategy of cost
control.
Depreciation and amortization expense for the second quarter of 1998 increased
to $331.8 million or 12.7% of revenues from $240.1 million or 13.4% of revenues
for the second quarter of 1997. On a year-to-date basis, this expense increased
to $630.4 million or 12.7% of revenues from $471.7 million or 13.5% of revenues
for the comparable 1997 period. These increases reflect increased amortization
associated with the CompuServe Merger and AOL Transaction and additional
depreciation related to capital expenditures. As a percentage of revenues, these
costs decreased due to the higher revenue base.
In the first quarter of 1998, the Company recorded a $69.5 million pre-tax
charge 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 six months ended June 30,
1998.
In the first quarter of 1998, the Company also recorded a $429 million charge
for in-process research and development related to the CompuServe Merger and AOL
Transaction. The charge is 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.
Page 21
<PAGE>
Interest expense in the second quarter of 1998 was $107.7 million or 4.1% of
revenues, as compared to $95.9 million or 5.3% of revenues reported in the
second quarter of 1997. For the six months ended June 30, 1998, interest expense
was $210.0 million or 4.2% of revenues, as compared to $186.1 million or 5.3% of
revenues for the first six months of 1997. The increase in interest expense is
attributable to higher debt levels as the result of higher capital expenditures
and the 1997 fixed rate debt financings, offset by lower interest rates in
effect on the Company's variable rate long-term debt. For the six months ended
June 30, 1998 and 1997, weighted average annual interest rates on the Company?s
total long-term debt were 7.10% and 7.62%, respectively, while weighted average
annual levels of borrowing were $8.27 billion, and $5.41 billion, respectively.
In the first quarter of 1998, the Company recorded an extraordinary item
totaling $128.7 million, net of income tax benefit of $77.6 million. The charge
was recorded in connection with the tender offers and related refinancings of
outstanding debt of BFP discussed below. In the second quarter of 1997 the
Company recognized an extraordinary loss of $2.9 million related to the early
extinguishment of secured indebtedness.
For the quarter ended June 30, 1998, net income increased to $220.9 million as
compared to net income before extraordinary items of $37.9 million reported in
the second quarter of 1997. Diluted earnings per common share increased to $0.21
per share versus $0.04 per share for the comparable 1997 period.
For the six months ended June 30, 1998, net income, before non-recurring charges
was $407.0 million or $.39 per share compared to net income before extraordinary
items of $56.3 million or $0.06 per share. Including the non-recurring,
after-tax charges, the Company reported a net loss of $194.8 million or $0.19
per share for the six month period ended June 30, 1998.
Liquidity and Capital Resources
As of June 30, 1998, the Company's total debt was $8.98 billion, an increase of
$1.55 billion from December 31, 1997 primarily due to increased capital
expenditures.
In connection with the BFP Merger, the Company announced on February 27, 1998
that it had commenced the Tender Offers to purchase for cash the BFP Notes.
WorldCom offered to pay each registered holder of the BFP Notes, in the case of
the 10-7/8% Senior Discount Notes, 118.586% of their accreted value as of the
date of the purchase, in the case of the 11-7/8% Senior Discount Notes, 127.104%
of their accreted value as of the date of purchase, and in the case of the 10%
Senior Notes, 117.615% of their principal amount, plus accrued interest to the
date of purchase. The accreted value per $1,000 principal amount at stated
maturity as of the tender purchase date of March 27, 1998, was $733.42 for the
10-7/8% Senior Discount Notes and $660.57 for the 11-7/8% Senior Discount Notes.
The accrued interest of the 10% Senior Notes per $1,000 principal amount at
stated maturity to such date was $32.22. Concurrently with the Tender Offers,
WorldCom obtained consents to eliminate certain restrictive covenants and amend
certain other provisions of the respective indentures of the BFP Notes.
On March 27, 1998, the Company accepted all BFP Notes validly tendered. As of
the expiration of the offers at 11:59 p.m., New York City time, March 26, 1998,
WorldCom had received valid tenders and consents from holders of approximately
$424.9 million of principal amount at stated maturity of 10-7/8% Senior Discount
Notes due 2006 of BFP (or approximately 99.96% of total outstanding), from
holders of $400.0 million of principal amount at stated maturity of 11-7/8%
Senior Discount Notes due 2006 of BFP (or 100% of total outstanding), and from
holders of approximately $241.0 million of principal amount at stated maturity
of 10% Senior Notes due 2007 of BFP (or approximately 96.4% of total
outstanding).
The funds required to pay all amounts required under the Tender Offers were
obtained by WorldCom from available working capital and lines of credit. In
connection with the Tender Offers and related refinancings, WorldCom recorded an
extraordinary accounting item of $128.7 million, net of income tax benefit of
$77.6 million in the first quarter of 1998.
Page 22
<PAGE>
On August 6, 1998, WorldCom replaced its 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, hereinafter referred to 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 New Credit Facilities will provide liquidity support for the
Company's commercial paper program and will be used for other general corporate
purposes. 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 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.
The Company has approved the issuance of commercial paper notes in the aggregate
principal amount not to exceed $10.0 billion, which notes will have a maturity
not to exceed 364 days from the date of issuance. The Company is required to
maintain unused credit facilities equal to 100% of the commercial paper notes
outstanding.
On August 11, 1998, the Company completed a public debt offering of $6.1 billion
principal amount of debt securities. The net proceeds of $6.04 billion were used
to pay down commercial bank debt and for general corporate purposes.
The public debt offering consisted of $1.5 billion principal amount of 6.125%
Notes Due 2001 (the "Notes Due 2001"), which mature August 15, 2001, $600
million principal amount of 6.25% Notes Due 2003 (the "Notes Due 2003"), which
will mature on August 15, 2003, $2.25 billion principal amount of 6.40% Notes
Due 2005 (the "Notes Due 2005"), which will mature August 15, 2005 and $1.75
billion principal amount of 6.95% Notes Due 2028 (the "Notes Due 2028"), which
will mature August 15, 2028 (collectively, with the Notes Due 2001, the Notes
Due 2003 and the Notes Due 2005, the "Notes"), bear interest payable
semiannually in arrears on February 15 and August 15 of each year, commencing
February 15, 1999.
Page 23
<PAGE>
The Notes are 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
therein) 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.
For the six months ended June 30, 1998, the Company's cash flow from operations
was $619.5 million, increasing 29% from $479.8 million in the comparable period
for 1997. The increase in cash flow from operations was primarily attributable
to internal growth and synergies and economies of scale resulting from network
efficiencies and selling, general and administrative cost savings achieved from
the assimilation of recent acquisitions into the Company's operations.
In 1998, the Company's existing receivables purchase agreement generated
additional proceeds of $83.2 million, bringing the total amount outstanding to
$500.0 million. The Company used these proceeds to reduce outstanding debt under
the Company's existing credit facilities. As of June 30, 1998, the purchaser
owned an undivided interest in a $1.15 billion pool of receivables which
includes the $500.0 million sold.
Cash used in investing activities for the six months ended June 30, 1998 totaled
$2.22 billion and included capital expenditures of $1.93 billion and acquisition
and related costs of $195.0 million. Primary capital expenditures include
purchases of switching, transmission, communication and other equipment. At
least $3.5 billion is currently anticipated for transmission and communications
equipment, construction and other capital expenditures in 1998 without regard to
pending or other possible future acquisitions. Acquisition and related costs
includes the costs associated with the CompuServe Merger and AOL Transaction.
Included in cash flows from financing activities are payments of $12.7 million
for the Series A Preferred Stock dividend and $0.5 million for the Series B
preferred dividend requirements. The Company has never paid cash dividends on
its Common Stock. Dividends on the Series B Convertible Preferred Stock of
WorldCom ("WorldCom Series B Preferred Stock") accrue at the rate per share of
$0.0775 per annum and are payable in cash. Dividends will be paid only when, as
and if declared by the Board of Directors of the Company. The Company
anticipates that dividends on the WorldCom Series B Preferred Stock will not be
declared but will continue to accrue. Upon conversion, accrued but unpaid
dividends are payable in cash or shares of WorldCom Common Stock at the
Company's election.
In May 1998, the Company exercised its option to redeem all of the outstanding
Series A Preferred Stock and related Depositary Shares. Prior to the redemption
date, substantially all of the holders of Series A Preferred Stock elected to
convert the preferred stock into Common Stock, resulting in the issuance of
approximately 32.7 million shares of Common Stock.
In connection with the MCI/WorldCom Merger, WorldCom has agreed to pay BT $51.00
in cash without interest for each of the shares of MCI Class A Common Stock it
owns, or $6.94 billion in the aggregate. Additionally, WorldCom paid BT a fee of
$465 million to induce BT to terminate the previously signed BT/MCI Merger
Agreement and to enter into the BT Agreement. WorldCom expects to fund the
remaining commitment through a combination of commercial paper issuances and
proceeds from the August 1998 public debt offering. Increases in interest rates
on WorldCom's variable rate 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, will 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.
Page 24
<PAGE>
The development of the businesses of MCI/WorldCom and the installation and
expansion of its 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 New Credit Facilities will be met by accessing the
debt markets.
The Company believes that the CompuServe Merger and the AOL Transaction will
generate sufficient cash flow to adequately fund the capital requirements of
these businesses. As a result of the CompuServe Merger, the AOL Transaction and,
if consummated, the MCI/WorldCom Merger, the Company believes that the operating
and capital synergies from the integration of these acquisitions into WorldCom's
operations will further enhance the cash flow contribution for the Company.
Absent significant capital requirements for other acquisitions, the Company
believes that cash flow from operations and available liquidity, including the
Company's commercial paper program and $6.04 billion in net proceeds from the
public debt offering, will be more than adequate to meet the Company's capital
needs for the remainder of 1998.
Recently Issued Accounting Standards and Year 2000 Issues
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. This statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires a company to formally document,
designate and assess the effectiveness of transactions that receive hedge
accounting. This statement is effective for fiscal years beginning after June
15, 1999, but may be implemented as of the beginning of any fiscal quarter after
issuance (that is, fiscal quarters beginning June 16, 1998 and thereafter). This
statement cannot be applied retroactively. SFAS No. 133 must be applied to (a)
derivative instruments and (b) certain derivative instruments embedded in hybrid
contracts that were issued, acquired, or substantively modified after December
31, 1997 (and, at the Company's election, before January 1, 1998).
The Company has not yet quantified the effects of adopting SFAS No. 133 on the
financial statements and has not determined the timing of or method of our
adoption of this statement. However, this statement could increase volatility in
earnings and other comprehensive income.
The Company is aware of the complexity and the significance of the "Year 2000"
issue. The Company continues to evaluate, upgrade, replace and retire its
computer systems and applications. The Company has targeted Year 2000 compliance
for all of its major systems by March 31, 1999. Many systems have already been
corrected or reprogrammed for year 2000 compliance.
The Company is using a mixture of internal and external resources to identify,
correct, and test its systems for year 2000 compliance. At this time the Company
believes that the cost of addressing Year 2000 issues is not material to its
future operating results or financial position.
Page 25
<PAGE>
The Company is also seeking confirmation from its primary vendors that they are
developing and implementing plans to become Year 2000 compliant. Information
received to date indicates that respondents are in the process of implementing
remediation procedures to ensure the systems, services and/or products are Year
2000 compliant. In some cases the Company has also tested and implemented these
Year 2000 compliant products. However, the Company cannot predict whether or not
all these programs will be successful. The vendors inability to meet their
critical completion dates will adversely impact the Company's March 31, 1999
completion date.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company believes its market risk exposure with regard to its marketable
equity securities is limited to changes in quoted market prices for such
securities. Based upon the composition of the Company's marketable equity
securities at June 30, 1998, the Company does not believe a hypothetical 10
percent adverse change in quoted market prices would be material to net income.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Securities Holders
On May 21, 1998, the Company held the 1998 Annual Meeting of Shareholders
for the purposes of:
1. Electing a Board of eleven (11) directors; and
2. Considering and acting upon a shareholder proposal on shareholder
rights plans.
The tabulation of the voting, which includes the WorldCom Series A and Series B
Preferred Stock, is as follows:
Page 26
<PAGE>
Election of Directors: Against or Abstentions and
For Withheld Broker Non-Votes
--- -------- ----------------
James C. Allen 855,486,175 12,878,839 0
Carl J. Aycock 855,510,794 12,854,220 0
Max E. Bobbitt 855,677,954 12,687,060 0
Stephen M. Case 855,177,843 13,187,171 0
Bernard J. Ebbers 855,627,721 12,737,293 0
Francesco Galesi 855,315,835 13,049,179 0
Stiles A. Kellett, Jr. 855,652,323 12,712,691 0
John A. Porter 855,486,054 12,878,960 0
John W. Sidgmore 855,498,613 12,866,401 0
Scott D. Sullivan 855,489,547 12,875,467 0
Lawrence C. Tucker 855,657,107 12,707,907 0
Shareholder Proposal on
Shareholder Rights Plan 344,968,270 372,177,594 151,219,150
Item 5. Other Information
The Company mailed its proxy statement for its 1998 Annual Meeting of
Shareholders on or about April 23, 1998. Accordingly, for purposes of new
Rule 14a-4(c)(1) under the Securities Exchange Act of 1934, the Company
shall have discretionary voting authority with respect to matters
presented at the 1999 Annual Meeting for which it does not receive notice
by at least March 9, 1999 in connection with proxies solicited by the
Company for such Annual Meeting.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
See Exhibit Index
B. Reports on Form 8-K
(i) Current Report on Form 8-K/A-3 dated November 9, 1997 (filed
May 28, 1998) reporting under Item 5, Other Events,
information relating to MCI and under Item 7(a), Financial
Statements of Businesses Acquired, the following financial
statements:
MCI Communications Corporation and Subsidiaries - for
the fiscal years ended December 31, 1995,
1996, and 1997:
Consolidated Income Statements
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholders' Equity
Notes to Consolidated Financial Statements
Report of Management
Report of Independent Accountants
Management's Discussion and Analysis of
Financial Condition and Results of
Operations
Page 27
<PAGE>
MCI Communications Corporation and Subsidiaries - for
the three month periods ended March 31,1997 and
1998 (unaudited):
Consolidated Income Statements
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholders' Equity
Notes to Interim Consolidated Financial Statements
Management's Discussion and Analysis of Financial
Condition and Results of Operations
WorldCom, Inc. - for the three months ended March 31,
1998 and for the fiscal year ended December 31,
1997:
WorldCom Pro Forma Condensed Combined Financial
Statements
Pro Forma Condensed Combined Balance Sheet as of
March 31, 1998
Pro Forma Condensed Combined Statement of
Operations for the three months ended March
31, 1998
Pro Forma Condensed Combined Statement of
Operations for the year ended December 31,
1997
Notes to Pro Forma Financial Statements
(ii) Current Report on Form 8-K dated May 28, 1998, (filed May 28,
1998) reporting the following supplemental consolidated
financial statements for WorldCom to reflect the business
combination between WorldCom and BFP effective January 29,
1998 and accounted for under the pooling-of-interests method.
Reports of independent public accountants
Consolidated financial statements
Consolidated balance sheets as of December
31, 1997 and 1996
Consolidated statements of operations for
the three years ended December 31,
1997
Consolidated statements of shareholders'
investment for the three years ended
December 31, 1997
Consolidated statements of cash flows for
the three years ended December 31,
1997
Notes to consolidated financial statements
Page 28
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report on Form 10-Q to be signed on its behalf
by Scott D. Sullivan, thereunto duly authorized to sign on behalf of the
registrant and as the principal financial officer thereof.
WorldCom, Inc.
By: /s/ Scott D. Sullivan
-----------------------------------
Scott D. Sullivan
Dated: August 14, 1998 Chief Financial Officer
Page 29
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
1.1 Underwriting Agreement dated August 6, 1998, between WorldCom, Inc.
("WorldCom") and Salomon Brothers Inc and the other firms named
therein, acting severally on behalf of themselves as Managers and
Underwriters and on behalf of the other several Underwriters, if
any, named in the Terms Agreement (incorporated herein by reference
to Exhibit 1.1 to the Company's Current Report on Form 8-K dated
August 6, 1998 (filed August 7, 1998) (File No. 0-11258))
1.2 Terms Agreement, dated August 6, 1998, between WorldCom, and Salomon
Brothers Inc and the other firms named therein, acting severally on
behalf of themselves as Managers and Underwriters and on behalf of
the other several Underwriters named therein (incorporated herein by
reference to Exhibit 1.2 to the Company's Current Report on Form 8-K
dated August 6, 1998 (filed August 7, 1998) (File No. 0-11258))
2.1 Agreement and Plan of Merger dated as of November 9, 1997 among
WorldCom, TC Investments Corp. and MCI Communications Corporation
(incorporated by reference to Exhibit 2.1 to the Company's Current
Report on Form 8-K dated November 9, 1997 (filed November 12, 1997)
(File No. 0-11258))*
2.2 Agreement dated as of November 9, 1997 among British
Telecommunications plc, WorldCom and MCI Communications Corporation
(incorporated by reference to Exhibit 99.1 to the Company's Current
Report on Form 8-K dated November 9, 1997 (filed November 12, 1997)
(File No. 0-11258))*
2.3 Agreement and Plan of Merger, dated as of September 7, 1997, by and
among H&R Block, Inc., H&R Block Group, Inc., CompuServe
Corporation, WorldCom, and Walnut Acquisition Company, L.L.C.
(incorporated herein by reference to Exhibit 2.1 to the Company's
Current Report on Form 8-K dated September 7, 1997 (File No.
0-11258))*
2.4 Purchase and Sale Agreement by and among America Online, Inc., ANS
Communications, Inc. and WorldCom, dated as of September 7, 1997
(incorporated herein by reference to Exhibit 2.4 to the Company's
Current Report on Form 8-K dated September 7, 1997 (File No.
0-11258))*
2.5 Amended and Restated Agreement and Plan of Merger dated as of
October 1, 1997 by and among WorldCom, BV Acquisition, Inc. and
Brooks Fiber Properties, Inc. (incorporated by reference to Exhibit
2.1 to WorldCom's Registration Statement on Form S-4 (File No.
333-43253))*
4.1 Second Amended and Restated Articles of Incorporation of WorldCom
(including preferred stock designations) as of December 31, 1996
(incorporated herein by reference to Exhibit 3.1 to the Company's
Current Report on Form 8-K dated December 31, 1996 (File No.
0-11258))
4.2 Restated Bylaws of WorldCom (incorporated by reference to Exhibit
4.2 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 (File No. 0-11258))
Page 30
<PAGE>
Exhibit No. Description
- ----------- -----------
4.3 Form of 6.125% Notes Due 2001 (incorporated herein by reference to
Exhibit 4.1 to the Company's Current Report on Form 8-K dated August
6, 1998 (filed August 7, 1998) (File No. 0-11258))
4.4 Form of 6.250% Notes Due 2003 (incorporated herein by reference to
Exhibit 4.2 to the Company's Current Report on Form 8-K dated August
6, 1998 (filed August 7, 1998) (File No. 0-11258))
4.5 Form of 6.400% Notes Due 2005 (incorporated herein by reference to
Exhibit 4.3 to the Company's Current Report on Form 8-K dated August
6, 1998 (filed August 7, 1998) (File No. 0-11258))
4.6 Form of 6.950% Notes Due 2028 (incorporated herein by reference to
Exhibit 4.4 to the Company's Current Report on Form 8-K dated August
6, 1998 (filed August 7, 1998) (File No. 0-11258))
4.7 Senior Indenture dated March 1, 1997 by and between WorldCom and The
Chase Manhattan Bank, as successor trustee to Mellon Bank N.A.
(incorporated herein by reference to Exhibit 4.6 to WorldCom's
Quarterly Report on Form 10-Q for the period ended March 31, 1997
(File No. 0-11258))
10.1 Amended and Restated Facility A Revolving Credit Agreement among
WorldCom (borrower), NationsBank, N.A. (Arranging Agent and
Administrative Agent), NationsBanc Montgomery Securities LLC (Lead
Arranger), Bank of America NT & SA, Barclays Bank PLC, The Chase
Manhattan Bank, Citibank, N.A., Morgan Guaranty Trust Company of New
York, and Royal Bank of Canada (Co-Syndication Agents) and the
lenders named therein dated as of August 6, 1998 (incorporated
herein by reference to Exhibit 10.1 to WorldCom's Current Report on
Form 8-K dated August 6, 1998 (filed August 7, 1998) (File No.
0-11258))
10.2 Amended and Restated Facility B Term Loan Agreement among WorldCom
(borrower), NationsBank, N.A. (Arranging Agent and Administrative
Agent), NationsBanc Montgomery Securities LLC (Lead Arranger), Bank
of America NT & SA, Barclays Bank PLC, The Chase Manhattan Bank,
Citibank, N.A., Morgan Guaranty Trust Company of New York, and Royal
Bank of Canada (Co-Syndication Agents) and the lenders named therein
dated as of August 6, 1998 (incorporated herein by reference to
Exhibit 10.2 to WorldCom's Current Report on Form 8-K dated August
6, 1998 (filed August 7, 1998) (File No. 0-11258))
10.3 364-Day Revolving Credit and Term Loan Agreement among WorldCom
(borrower), NationsBank, N.A. (Arranging Agent and Administrative
Agent), NationsBanc Montgomery Securities LLC (Lead Arranger), Bank
of America NT & SA, Barclays Bank PLC, The Chase Manhattan Bank,
Citibank, N.A., Morgan Guaranty Trust Company of New York, and Royal
Bank of Canada (Co-Syndication Agents) and the lenders named therein
dated as of August 6, 1998 (incorporated herein by reference to
Exhibit 10.3 to WorldCom's Current Report on Form 8-K dated August
6, 1998 (filed August 7, 1998) (File No. 0-11258))
27.1 Financial Data Schedule
*The registrant hereby agrees to furnish supplementally a copy of any omitted
schedules to this Agreement to the Securities and Exchange Commission.
Page 31
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from WorldCom,
Inc.'s Financial Statements for the six months ended June 30, 1998 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 84,153
<SECURITIES> 347
<RECEIVABLES> 2,023,254
<ALLOWANCES> 234,110
<INVENTORY> 0
<CURRENT-ASSETS> 2,393,526
<PP&E> 9,722,320
<DEPRECIATION> 1,183,999
<TOTAL-ASSETS> 27,081,811
<CURRENT-LIABILITIES> 2,491,899
<BONDS> 8,971,132
0
120
<COMMON> 10,691
<OTHER-SE> 15,107,695
<TOTAL-LIABILITY-AND-EQUITY> 27,081,811
<SALES> 0
<TOTAL-REVENUES> 4,960,444
<CGS> 2,406,969
<TOTAL-COSTS> 4,537,787
<OTHER-EXPENSES> (22,192)
<LOSS-PROVISION> 52,508
<INTEREST-EXPENSE> 209,994
<INCOME-PRETAX> 234,855
<INCOME-TAX> 287,735
<INCOME-CONTINUING> (52,880)
<DISCONTINUED> 0
<EXTRAORDINARY> (128,731)
<CHANGES> 0
<NET-INCOME> (194,811)
<EPS-PRIMARY> (0.19)
<EPS-DILUTED> (0.19)
</TABLE>
