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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A-2
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): November 9, 1997
WORLDCOM, INC.
(Exact Name of Registrant as Specified in its Charter)
Georgia 0-11258 58-1521612
(State or Other (Commission File (IRS Employer
Jurisdiction of Number) Identification Number)
Incorporation)
515 East Amite Street
Jackson, Mississippi 39201-2702
(Address of Principal Executive Office)
Registrant's telephone number, including area code: (601) 360-8600
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ITEM 5. OTHER EVENTS.
On October 1, 1997, WorldCom Inc. ("WorldCom") announced its intention
to commence an exchange offer to acquire all of the outstanding shares of MCI
Communications Corporation ("MCI") common stock, par value $.10 per share ("MCI
Common Stock"), for $41.50 of WorldCom common stock, par value $.01 per share
(the "WorldCom Common Stock"), subject to adjustment in certain circumstances as
set forth in materials filed by WorldCom with the Securities and Exchange
Commission (the "MCI Offer"). On November 9, 1997, WorldCom entered into an
Agreement and Plan of Merger (the "MCI/WorldCom Merger Agreement") with 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 outstanding immediately prior to the effective time of
the MCI/WorldCom Merger (the "MCI/WorldCom Effective Time") 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) (the "MCI Common Stock Merger
Consideration"), and each share of MCI Class A common stock, par value $.10 per
share ("MCI Class A Common Stock" and, together with the MCI Common Stock, the
"MCI Capital 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 Class A Common Stock Merger Consideration"
and, collectively with the MCI Common Stock Merger Consideration, the
"MCI/WorldCom Merger Consideration"). 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 (the "MCI Measurement Period");
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 MCI Common Stock outstanding as of
January 20, 1998 and assumed MCI Exchange Ratios of 1.2439 and 1.7586,
approximately 710,554,160 shares and 1,004,566,722 shares, respectively, of
WorldCom Common Stock would be issued in the MCI/WorldCom Merger. In addition,
outstanding rights and options to purchase shares of MCI Common Stock would be
converted in the MCI/WorldCom Merger to rights and options to acquire an
aggregate of approximately 86,491,688 shares and 122,280,154 shares,
respectively, of WorldCom Common Stock, and the exercise price would be adjusted
to reflect the MCI Exchange Ratio, so that on exercise, the holders would
receive, in the aggregate, the same number of shares of WorldCom Common Stock as
they would have received had they exercised prior to the MCI/WorldCom Merger, at
the same exercise price.
The MCI/WorldCom Merger is subject to the approvals of the MCI
stockholders and the WorldCom shareholders as well as approvals from the Federal
Communications Commission, the Department of Justice and various state
government bodies. In addition, the MCI/WorldCom Merger is subject to review by
the Commission of the European Communities. WorldCom anticipates that the
MCI/WorldCom Merger will close by late Spring or early Summer of 1998.
Termination of the MCI/WorldCom Merger Agreement by MCI or WorldCom
under certain conditions, including the failure to receive the approval of MCI's
stockholders of the MCI/WorldCom Merger or the MCI/WorldCom Merger Agreement
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,
including the failure to receive the approval of WorldCom's shareholders of the
issuance of shares pursuant to the MCI/WorldCom Agreement, will require WorldCom
to pay MCI $1.635 billion as a termination fee.
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Pursuant to an agreement (the "BT Agreement") among MCI, WorldCom and
BT, the prior merger agreement between BT and MCI (the "BT/MCI Merger
Agreement") was terminated, and WorldCom agreed to pay BT an alternative
transaction fee of $450 million and expenses of $15 million payable to BT in
accordance with the BT/MCI Merger Agreement. These fees were paid on November
12, 1997. WorldCom also agreed to pay 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. In addition, pursuant to
the BT Agreement, BT agreed to vote (or cause to be voted) its shares of MCI
Class A Common Stock in favor of the MCI/WorldCom Merger Agreement, the adoption
by MCI of the MCI/WorldCom Merger Agreement and the approval of the other
transactions contemplated by the MCI/WorldCom Merger Agreement.
The foregoing description of the MCI/WorldCom Merger Agreement and the
BT Agreement and the transactions contemplated thereby do not purport to be
complete and are qualified in their entirety by reference to such agreements,
copies of which are incorporated as exhibits to this Current Report on Form 8-K
and incorporated herein by reference.
INFORMATION ABOUT MCI
THE FOLLOWING INFORMATION RELATED TO MCI WAS PREVIOUSLY REPORTED IN
MCI'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996(THE
"MCI FORM 10-K") AND HAS NOT BEEN UPDATED TO REFLECT CHANGES SINCE DECEMBER 31,
1996. TO THE EXTENT THAT ANY OF THE FOLLOWING INFORMATION DIFFERS FROM
INFORMATION REPORTED IN MCI'S FORM 10-K, THE MCI FORM 10-K SHALL CONTROL.
Forward-looking Statements May Prove Inaccurate
MCI has made certain forward-looking statements in its Annual Report on
Form 10-K that are subject to risks and uncertainties. Forward-looking
statements include information concerning the possible future results of
operations of the company, its long-distance telecommunication services
business, its investments in ventures and developing markets ("VDM")
businesses, the possible future results of operations of the company and
Concert after the Merger and statements of information preceded by, followed by
or that include the words "believes", "expects", "anticipates", or similar
expressions. For those statements, the company claims the protection of
safe-harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995. The reader is cautioned that important factors
such as the following, in addition to those contained elsewhere in the MCI Form
10-K, could affect the future results of the company, its long distance
telecommunication services and VDM businesses and the company and Concert after
the Merger and could cause those results to differ materially from those
expressed in the forward-looking statements: material adverse changes in the
economic conditions in the markets served by the company and Concert; a
significant delay in the expected closing of the Merger; future regulatory
actions and conditions in MCI's and Concert's operating areas, including the
ability of the company to obtain local facilities at competitive rates; and
competition from others in the U.S. and international long-distance markets,
including the entry of the RBOC's and other companies into the long-distance
markets in the U.S.
Capitalized terms not otherwise defined above shall have the meanings
ascribed to them in the MCI Form 10-K.
Business
GENERAL
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MCI* is one of the world's leading providers of communication services.
It is the second largest carrier of long-distance telecommunication services in
the United States ("U.S.") and the third largest carrier of international
long-distance telecommunication services in the world.
MCI provides a broad range of communication services, including
long-distance telecommunication services, local and wireless services,
Internet/intranet services and information technology and outsourcing services.
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*MCI conducts its business primarily through its subsidiaries. Unless the
context otherwise requires, "MCI" or "company" means MCI Communications
Corporation, a Delaware corporation organized in August 1968, and its
subsidiaries on a consolidated basis. MCI is a registered service mark of MCI
Communications Corporation. MCI has its principal executive offices at 1801
Pennsylvania Avenue, N.W., Washington, D.C. 20006 (telephone number (202)
872-1600).
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The provision of long-distance telecommunication services is MCI's core
business. Long-distance telecommunication services comprise a wide spectrum of
domestic and international voice and data services, including long-distance
telephone services, data communication services, teleconferencing services and
electronic messaging services. During each of the last three years, more than
90% of MCI's operating revenues and operating income were derived from its core
business.
The communication services industry continues to change both
domestically and internationally. The enactment of the Telecommunications Act of
1996 (the "Telecommunications Act") and the recent agreement of member countries
of the World Trade Organization to open their telecommunication markets to
competition reflect and further this change. The Telecommunications Act is
expected to have a significant impact on MCI's business by opening the U.S.
local service markets to competition and allowing the incumbent local exchange
carriers ("ILECs") to compete in the long-distance market. These developments
should increase the momentum of change and provide significant opportunities and
risks to the participants in these markets.
The changes in the communication services industry reflect, and are
driven by, providers of telecommunication services that are entering, or trying
to enter, new markets, both domestically and internationally, and are facing
competition from new entrants in their present markets. This convergence of the
international, domestic long-distance and local telecommunication services
markets into one global market is being facilitated by evolving technology and
by the regulatory developments described above and is partially in response to
the desire of customers to have most or all of their communication requirements
fulfilled by one supplier. As a result and because of this convergence,
companies, including MCI, which previously offered services primarily in one
part of the communication services market, are offering, either directly or
through alliances with others, new services to complement their primary service
offerings. These companies are also aligning with entities that provide services
that complement their own, such as MCI's announcement in November 1996 of an
agreement providing for the merger (the "Merger") with British
Telecommunications plc ("BT") and the pending mergers of several Regional Bell
Operating Companies ("RBOCs"). See "The Merger" below for a further discussion
of the Merger.
MCI's continuing investments in ventures and developing markets will
enable it to expand its offering of a variety of wireless, Internet/intranet,
information technology outsourcing and multimedia services that, along with
local services, complement its long-distance telecommunication services. These
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services, combined with the continued growth and strength of MCI's core
business, should enable MCI to participate in all communication service markets.
See "VENTURES AND DEVELOPING MARKETS BUSINESS" and "CORE BUSINESS" below.
MCI anticipates that continued substantial capital expenditures will be
required to compete effectively in the long-distance and local telecommunication
service markets. Competition from the RBOCs and any others that seek to enter
the long-distance telecommunication services market, some of which have
significant financial and other resources, will be intense. Due to the rapidly
changing nature of these markets, the timing of the consummation of the Merger
and the other factors summarized above, MCI cannot predict the level of its
future success, but the company believes that it can and will compete
effectively in providing its services.
The Merger
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On November 3, 1996, MCI announced an agreement to merge with BT to
create the first truly global communications company. The combined company will
be named Concert plc ("Concert") and will operate under the BT and MCI brand
names in the United Kingdom and the U.S., respectively. Concert** will deliver
premier integrated services to customers worldwide and take advantage of
opportunities of a global communications market.
Consummation of the Merger is subject to certain conditions, including
the approval of the Merger by the stockholders of MCI and BT and receipt of
required regulatory approvals. See MCI's Proxy Statement for its 1997 Annual
Meeting for a full description of the Merger and the risks and benefits of the
Merger, which description is incorporated herein by reference.
MCI believes the Merger will increase its financial strength and enable
it to expand into new markets, offer new services and compete earlier and more
effectively in the local services market than it had anticipated. The local
services market, currently dominated by the RBOCs, is in the process of opening
to competition as a result of the Telecommunications Act. The Telecommunications
Act will facilitate MCI's and others' entry into the local services market
although it will permit the RBOCs to enter the long distance market outside
their regions immediately and within their regions eventually. See "CORE
BUSINESS - COMPETITION" and "CORE BUSINESS - TELECOMMUNICATIONS ACT" below for a
further discussion of the Telecommunications Act and its anticipated impact on
competition.
As of December 31, 1996, MCI had approximately 55,000 full-time
employees.
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** Concert is a mark of Concert Communications Company, a business venture
between MCI and BT, and is used under license.
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CORE BUSINESS
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Services
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MCI provides a wide range of long-distance telecommunication services,
including: basic long-distance telephone service; voice and data services over
software-defined virtual private networks; private line services; collect
calling, operator assistance and calling card services, including prepaid
calling cards; toll free or 800 services; 900 services; switched and dedicated
Internet access services; and Internet backbone services. The company offers
these services individually and in combinations. Through combined offerings, MCI
provides customers with benefits such as single billing, unified services for
multi-location companies and customized calling plans.
MCI markets domestic and international long-distance telecommunication,
domestic data telecommunication and electronic messaging services to business,
government and residential customers primarily through the sales organization of
its long-distance telecommunication subsidiary, MCI Telecommunications
Corporation ("MCIT"). International data telecommunication and electronic
messaging services are marketed through MCI International, Inc., a wholly-owned
subsidiary of MCI. To a lesser extent, MCI also markets its voice and data
communication services domestically and internationally through arrangements
with third parties.
System
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Domestic long-distance services are provided primarily over MCI's own
optical fiber and terrestrial digital microwave communication systems and, to a
lesser extent, over transmission facilities leased from other common carriers,
utilizing MCI's digital switches. International communication services are
provided by submarine cable systems in which MCI holds investment positions,
satellites and facilities of other domestic and foreign carriers.
MCI continues to expand and upgrade its digital transmission and
switching facilities and capabilities to meet the requirements of its customers
for additional and enhanced domestic and international services, to add
redundancy to its network and to enhance network intelligence. Network
intelligence enables MCI to utilize its transmission resources more effectively
and provide enhanced services. This requires substantial capital expenditures.
Total capital expenditures were approximately $3.3 billion in 1996 and
$2.9 billion in both 1995 and 1994. Approximately $637 million of MCI's capital
expenditures in 1996 were for its ventures and developing markets business
units. See "VENTURES AND DEVELOPING MARKETS BUSINESS - LOCAL SERVICES" below.
MCI anticipates that its core business and its ventures and developing markets
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business units will require total capital expenditures of approximately $3.9
billion in 1997.
Local Access
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MCI provides customers that utilize large volumes of long-distance
telecommunication services with direct access to its long-distance network. Most
customers access MCI's services through local interconnection facilities
provided by the ILECs, the largest of which are subsidiaries of the RBOCs, and
competitive local exchange carriers ("CLECs"). To a much lesser extent, local
access is provided by MCImetro, Inc. ("MCImetro"), an MCI subsidiary providing
local telephone and competitive access services. The costs of these local
interconnection facilities are a significant component of MCI's operating
expenses.
MCI believes that the anticipated increase in competition in the local
services market due to the Telecommunications Act will lower access and
interconnection costs. MCImetro*** expects that the requirements of the
Telecommunications Act that allow it to purchase both services and network
elements from ILECs will enable it to offer a wider variety of services,
increase its revenues and utilize the most economical local service delivery
methods. However, the extent to which MCI and MCImetro will benefit cannot be
quantified and will be partially dependent upon the prices at which services and
network elements become and are available. In addition, MCI believes the
temporary stay granted by the United States Court of Appeals for the Eighth
Circuit (the "Eighth Circuit") of certain key provisions of the Federal
Communications Commission ("FCC") Interconnection Order (the "Interconnection
Order") implementing the Telecommunications Act may hinder its ability to obtain
ILEC services and facilities on an economic basis and could delay national
competition in the local services market. See "TELECOMMUNICATIONS ACT" below for
a discussion of the Telecommunications Act and the FCC Interconnection Order and
"VENTURES AND DEVELOPING MARKETS BUSINESS - LOCAL SERVICES" below for discussion
of the benefits MCImetro and MCI anticipate from the Telecommunications Act.
Competition
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MCI's primary and most vigorous competitor in the domestic and
international long-distance telecommunication services market continues to be
AT&T Corp. ("AT&T"), which is substantially larger than MCI. In general, MCI's
long-distance telecommunication services are priced lower than AT&T's comparable
services. Although price is a factor in customer choice, innovation in and
quality of services, diversity of services, the ability to offer a combination
of services, marketing strategy, customer service and other non-price elements
are also important competitive factors.
The Telecommunications Act now allows the RBOCs to provide
long-distance telecommunication services internationally and domestically in
territories outside of their respective local service regions. The RBOCs may
also provide long-distance telecommunication services that are incidental to
certain other services (e.g., wireless and video services) in their local
regions. The
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*** MCImetro is a service mark of MCI.
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authority to provide long-distance telecommunication services originating
outside of an RBOC's local service region does not include the authority to
provide services, such as private line services, 800 services or any equivalent
service, that terminate in its local service region and allow the called party
to choose the interLATA (see definition of LATA below) carrier. The RBOCs are
prohibited from providing a full range of long-distance telecommunication
services in their local service regions until certain important conditions are
met (see "TELECOMMUNICATIONS ACT" below). The RBOCs own extensive facilities in
their local service regions and have long-standing customer relationships and
very substantial capital and other financial resources. MCI believes that the
RBOCs will eventually become substantial competitors of MCI for long-distance
telecommunication services, especially in their local regions.
In addition to AT&T and the RBOCs, MCI competes with Sprint Corporation
("Sprint"), other facilities-based domestic telecommunication common carriers
and numerous resellers of long-distance telecommunication services. MCI also
competes with the ILECs that provide long-distance telecommunication services
within local access transport areas ("LATA").
Regulation
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The Telecommunications Act preserves the FCC's extensive authority to
regulate interstate services and local access facilities and services provided
by common carriers, including the right to review the interstate rates charged
by common carriers, as well as the authority to implement policies that promote
competition for all telecommunication services. The Telecommunications Act
broadened the scope of authority of the FCC by granting the FCC, in consultation
with the Attorney General of the United States (the "Attorney General") the
authority to determine when the RBOCs may provide long-distance
telecommunication services in their local regions. The FCC was also given
authority to preempt state and local action that is inconsistent with the
Telecommunications Act. See "TELECOMMUNICATIONS ACT" below for a summary of
portions of the Telecommunications Act.
In addition, the Telecommunications Act authorized the FCC to
discontinue regulation in situations where it could find, based on evidence,
that regulation is unnecessary to further the interest of consumers and
competition. In October 1996, the FCC applied this new authorization and
concluded that non-dominant common carriers, including MCI, should no longer be
required to file tariffs for their domestic service offerings. It mandated that
such carriers cease tariffing all their domestic service offerings by September
23, 1997. MCI and others appealed this FCC action, and on February 13, 1997, the
United States Court of Appeals for the District of Columbia Circuit stayed the
FCC's ruling pending the appeal. The issues to be decided are: (1) whether the
FCC has the authority to mandate detariffing (or whether it only has the
authority to permit carriers, at their election, not to tariff); and (2)
assuming that the FCC has the authority to require detariffing, whether the
record is sufficient to support that action. MCI expects a decision in early
1998.
Under the Telecommunications Act, the states retain their authority to
regulate rates for intrastate services and advance universal telecommunication
service, to protect the public safety and welfare, to ensure continued quality
of telecommunication services and to safeguard the rights of consumers, subject
to FCC authority to preempt state and local action that violates or is
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inconsistent with the Telecommunications Act. MCI is subject to extensive
regulation by state regulatory commissions to the extent it provides intrastate
long-distance telecommunication services and local services.
Rates of international communication carriers for traffic from the
United States to foreign countries are regulated by the FCC. Revenues from
traffic between the foreign country and the U.S. (with the exception of leased
channel services) are generally collected by the originating carrier and shared
with the terminating carrier through agreements that are subject to the approval
of the FCC and the appropriate overseas agency. In addition to regulation of
rates and agreements, the FCC has jurisdiction over international communication
facilities located in the U.S. The provision of long-distance telecommunication
services to a foreign country is subject to the approval of the FCC and the
appropriate foreign governmental agencies.
Telecommunications Act
----------------------
The Telecommunications Act, among other things, allows the RBOCs to
offer long-distance telecommunication services outside of their respective local
service regions. In order for an RBOC to offer such services in a state within
its local service region, the FCC must determine, on a state by state basis,
that: (i) the RBOC has entered into one or more approved interconnection
agreements in the applicable state; (ii) the RBOC is actually offering to
competitors all items on the competitive checklist (the "Competitive Checklist")
set forth in the Telecommunications Act; (iii) there is a competitor offering
services to residential and business customers in the applicable state over its
own facilities; and (iv) the grant of authority to the RBOC to provide
long-distance telecommunication services in the applicable state is in the
public interest. Alternatively, if no competitor has demanded interconnection,
an RBOC may apply for in-region entry based on the availability of a "Statement
of Generally Available Terms" as provided for in the Telecommunications Act.
The Competitive Checklist includes requirements that:(i)
interconnection be at any technically feasible point and of equal quality as
that provided to the RBOC or to other carriers; (ii) access to the RBOC's
facilities and equipment, and their features, functions and capabilities, be
provided on an unbundled, non-discriminatory basis; (iii) any telecommunication
service the RBOC provides at retail to subscribers who are not carriers be
offered to carriers for resale, at wholesale rates; (iv) access to poles, ducts,
conduits and rights-of-way owned or controlled by the RBOC be provided on a
non-discriminatory basis; (v) local loop transmission from the central office to
the customer's premises be provided unbundled from local switching or other
services; (vi) local transport be provided from the trunk side of a wireline
switch unbundled from switching or other services; (vii) local switching be
provided unbundled from transport, local loop
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transmission or other services; (viii) access be provided on a
non-discriminatory basis to 911 and Enhanced 911 services, directory assistance
services and operator call completion services; (ix) white pages directory
listings for customers of the other carrier's telephone exchange service be
provided; (x) access to telephone numbers for assignment to the other carrier's
telephone exchange service customers be provided on a non-discriminatory basis
until telecommunications numbering administration guidelines are established by
the FCC and thereafter be provided in accordance with such guidelines; (xi)
access to data bases and associated signaling necessary for call routing and
completion be provided on a non-discriminatory basis; (xii) interim number
portability be provided through remote call forwarding, direct inward dialing
trunks or other comparable arrangements until the FCC supersedes such interim
arrangements by issuing its number portability rules; (xiii) access to such
services or information as are necessary to allow the requesting carrier to
implement local dialing parity be provided on a non-discriminatory basis; and
(xiv) reciprocal compensation arrangements be implemented for the origination
and termination of telecommunications so as to provide the recovery by each
carrier of costs based on a reasonable approximation of the additional costs of
terminating calls.
In determining whether to grant an RBOC authority to offer
long-distance telecommunication services in a state in its local service region,
the FCC must consult with the Attorney General and give substantial weight to
the Attorney General's recommendations. The FCC must also consult with the
applicable state regulatory authority. MCI will vigorously seek to ensure that
the Telecommunications Act requirement of meaningful facilities-based
competition in the local services market is fully enforced before any RBOC is
allowed to provide long-distance telecommunication services in a state in its
local service region. Currently, no RBOC applications to provide in-region
long-distance telecommunication services are pending before the FCC, the one
previous application having been withdrawn. Several of the RBOCs have indicated
publicly their intent to file such applications in the second quarter of 1997.
Upon the grant of authority to provide long-distance service in its
region, an RBOC is required to provide immediately intraLATA toll dialing parity
throughout the applicable state. In general, states cannot require such dialing
parity until the date that the RBOC is granted in-region interLATA authority or
February 8, 1999, whichever is earlier. Importantly, the following categories of
states may mandate such dialing parity sooner: (i) the ten single LATA states,
and (ii) the 15 states (of which two are single LATA states) that issued dialing
parity orders by December 19, 1995.
The Telecommunications Act also provides that until the date that an
RBOC is authorized to provide long-distance telecommunication services within a
state in the RBOC's local services region or February 8, 1999, whichever is
earlier, a carrier, such as MCI, serving more than 5% of the U.S.'s
pre-subscribed access lines, may not market within a state resold telephone
exchange service obtained from the RBOC jointly with interLATA services offered
by that carrier. However, this restriction would not preclude MCI from marketing
local services provided by MCImetro or another non-RBOC local service provider
over its own facilities with MCI's long-distance telecommunication services. The
Telecommunications Act also provides that an RBOC is restricted from marketing
its local services within any of the states in its region jointly with an
affiliate's interLATA services until the RBOC is authorized to offer interLATA
services in such state.
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Pursuant to the Telecommunications Act, the FCC released the
Interconnection Order on August 8, 1996. The Interconnection Order (i)
established national rules regarding the duty of the ILECs to negotiate in good
faith; (ii) established rules and methods by which the ILECs must provide
interconnection between the networks of the ILECs and other telecommunication
common carriers; (iii) established rules and methods by which the ILECs must
provide to other telecommunication common carriers access to the ILECs' network
elements on an unbundled basis; (iv) contained a pricing methodology which the
various state commissions could use to establish the rates at which
interconnection and network elements will be sold by the ILECs to other
telecommunication common carriers; and (v) contained a range for discounts from
the ILECs' retail prices for their telecommunication facilities and services
which the ILECs should offer new entrants. Most state regulatory commissions
have set interim prices for interconnection that are consistent with the rate
levels and discount levels set forth in the Interconnection Order. While several
states have set permanent rates, most states are scheduled to set permanent
rates in proceedings that are expected to conclude later this year. MCI has
completed arbitration of the interconnection terms and conditions in most states
and is in the process of filing interconnection agreements with state public
utility commissions for approval.
VENTURES AND DEVELOPING MARKETS BUSINESS
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MCI has diversified the communication services it offers through
investments in ventures and developing markets businesses. This diversification
enables MCI to meet more of the communications needs of its customers and to
take advantage of developing opportunities in the communication services market.
In 1996 and 1995, MCI had revenues of $1,953 million and $365 million,
respectively, from the ventures and developing markets businesses. MCI invested
$1,939 million in 1996 and anticipates investing, an estimated $200 million in
1997, in addition to capital expenditures, in existing ventures and developing
markets businesses. The 1996 amount included the purchase of a high-power direct
satellite ("DBS") services license for $682 million and an additional investment
of $350 million pursuant to the investment agreement with The News Corporation
Limited. See "Management's Discussion and Analysis" included elsewhere herein
and "VENTURES AND DEVELOPING MARKETS BUSINESS - MULTIMEDIA SERVICES" below.
Local Services
--------------
MCImetro was created to enter the local services market and compete
with the ILECs and CLECs in that market. In 1996 and 1995, MCImetro had revenues
of $178 million and $108 million, respectively, substantially all of which were
from sales of services to MCI. Also in 1996 and 1995, MCImetro had capital
expenditures of approximately $390 million and $265 million, respectively.
MCImetro provides businesses and governments with high quality
dedicated access to the MCI network or to the networks of other long-distance
telecommunications providers. The access services are provided either on
MCImetro's own local city networks or through arrangements with the ILECs and
CLECs for special access and switched access services. As of March 24, 1997,
MCImetro had been granted authority to offer a full range of local switched
services in 30 states and had applications pending for such services in eight
other states. MCImetro has 67 local city networks and 27 Class 5 local switches
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<PAGE> 12
installed. MCImetro currently offers local exchange services such as local
telephone service, business lines, private branch exchange (PBX) trunks, access
services and enhanced services in 21 major U.S. cities and intends to offer such
local exchange services in over 30 major U.S. cities by the end of 1997. To a
lesser extent, MCImetro resells local services to customers in several states in
the U.S.
If or when MCImetro will be able to offer a full range of local
services in competition with the ILECs in all states is unknown. Although the
Telecommunications Act establishes a timetable for an ILEC to sell separately
its local services and provide them to other carriers on a non-discriminatory
basis prior to receiving authority to provide long-distance service in its local
service region, MCI does not know if the timetable will be met. This uncertainty
is increased due to the stay of the Interconnection Order. See "CORE BUSINESS -
TELECOMMUNICATIONS ACT" above. The pace at which all local services are sold
separately, the prices at which MCImetro can purchase such services from the
ILEC and the amount of capital available to MCImetro to expand its facilities
will affect the types of services MCImetro can offer and its ability to compete
with the ILECs in providing local telecommunications services.
The ILECs have very substantial capital and other resources, long
standing customer relationships and extensive existing facilities and network
rights-of-way and will be MCImetro's primary competitors in the local services
market. In addition, it is anticipated that a number of long-distance
telecommunication, wireless and cable service providers will enter the local
services market in competition with MCImetro. Some of these potential
competitors have substantial financial and other resources. MCImetro will also
compete in the local services market with a number of CLECs, a few of which have
existing local networks and significant financial resources.
To the extent MCImetro and others provide intrastate local services,
they are also subject to regulation by state regulatory commissions, which have
extensive authority to regulate the provision of local services. MCImetro will
be required to file tariffs as a competitive local exchange carrier. Those
filing requirements may be less restrictive than those imposed on the ILECs.
Wireless Services
-----------------
Through the acquisition in September 1995 of Nationwide Cellular
Service, Inc. ("Nationwide"), a reseller of cellular phone services and a
retailer of cellular phone equipment, and as a result of the execution of resale
agreements with facilities-based cellular phone service providers, MCI has the
capability to offer cellular phone services obtained from facilities based
providers to approximately 55% of the U.S. population.
12
<PAGE> 13
MCI markets these services to both business and residential customers
through the former Nationwide's sales organization and stores and MCIT's sales
organization. Revenues for the years ended December 31, 1996 and 1995 from these
services were $347 million and $93 million, respectively. Revenues are expected
to increase in 1997 as MCI increases the number of cities in which it offers
cellular phone and paging services and combines these service offerings with
MCI's core business service offerings to meet its customers' needs. At December
31, 1996, MCI had approximately 429,000 cellular phone service subscribers.
In addition, MCI has signed an agreement with NextWave Telecom Inc.
("NextWave") to purchase at least 10 billion Personal Communication System
("PCS") minutes over 10 years. The agreement will permit MCI to utilize the
features of its intelligent network with NextWave's planned national system. PCS
technology is a digital, wireless technology that enables new and more advanced
wireless services, such as greater security, short messaging service,
single-number service, integrated voice and paging and enhanced wireless data
communications. PCS technology may provide MCI with an alternate means of
providing local communication services.
NextWave was granted, or was the winning bidder for, 95 PCS spectrum
licenses in the recent C, D, E, and F block PCS spectrum auctions held by the
FCC. If NextWave obtains the necessary financing to build, and does build, its
PCS network, MCI will be able to offer PCS service to more than 163 million
individuals in the 95 markets where NextWave has PCS licenses. MCI's
arrangements with NextWave will enable MCI to provide PCS services without
building or owning wireless facilities. MCI will market PCS service under the
MCI brand name and integrate it with MCI's other communication services. MCI may
also obtain and resell PCS services from other carriers.
MCI's primary competitors in the wireless market are AT&T Wireless
Services, Airtouch Communications, Inc., Ameritech Corporation, Bell Atlantic
NYNEX Mobile, Southwestern Bell and Sprint, all of which provide wireless
services over their own facilities. As MCI is not a facilities based wireless
operator, its ability to be competitive will depend on the terms and conditions
under which it obtains services and its ability to renew on satisfactory terms
its resale agreements. Competition is expected to intensify as the winning
bidders in the PCS spectrum auctions begin to offer competing services.
As a reseller, MCI is not subject to any tariffing or licensing
requirements by the FCC or state regulatory agencies.
Information Technology Services
-------------------------------
MCI's information technology ("IT") services primarily consist of
outsourcing, IT consulting, systems integration, private network management,
technology deployment and applications and systems development. IT services
generally involve the use of technology, know-how and methodologies to gather,
collate, analyze, record, characterize, categorize, process, generate,
distribute and/or store information for end-users or others.
In addition to IT services, MCI offers call center services which
include technical help desk services, customer services, telesales, call center
consulting and implementation, call center network integration services, and
software/database application development. IT and call center service revenues
13
<PAGE> 14
for the years ended December 31, 1996 and 1995 were $1,401 million and $135
million, respectively. The majority of these revenues were from SHL Systemhouse
Inc. ("MCI Systemhouse") businesses acquired by MCI in November 1995.
MCI Systemhouse**** is one of the world's largest providers of IT
outsourcing services to commercial and government enterprises. The acquisition
of MCI Systemhouse provides MCI with the ability to address the growing demands
of its business customers for IT outsourcing services, which include the design,
development and implementation of IT systems with an emphasis on client/server
technologies; the management, operation and maintenance of client IT functions
as part of outsourcing arrangements; and the delivery and installation of IT
hardware and software.
MCI serves its IT clients by (i) working with a client to analyze its
IT needs and, based on this analysis, designing, developing and implementing an
integrated client/server IT system; (ii) providing systems operations and
management services for a broad range of computing platforms, including
mainframe, mid-range computers, personal computer and network environments, such
as local-area networks and wide-area networks; and (iii) assessing a client's
computing platform and network requirements and then configuring, delivering,
installing and testing the needed hardware and software products to meet such
requirements. MCI also offers service for IT products and training and education
of client IT users.
Competitors in the IT business include Andersen Consulting, Computer
Sciences Corporation, Electronic Data Systems Corporation and Integrated Systems
Solutions Corp., a wholly-owned subsidiary of International Business Machines
Corporation, all of which have substantial financial and other resources. MCI
derives a material amount of its IT revenues from a small number of customers.
In addition, MCI faces competition in the IT industry not only for contracts,
but also for personnel. There is a shortage of skilled employees and a high
turnover rate among skilled employees in the client/server portion of the IT
business. On the other hand, MCI is not dependent on any single employee or
group in providing these services.
International Services
----------------------
MCI continues to develop global alliances to expand the use and reach
of its services and to meet the global needs of its customers.
Concert Communications Company ("Concert JV"), is a business venture
between MCI and BT in which MCI owns a 24.9% equity interest. Concert JV
provides global enhanced and value-added telecommunication services, such as
packet data, virtual network, frame relay and managed bandwidth services. MCI is
the exclusive distributor of Concert JV services in North, Central and South
America, and BT is the exclusive distributor of Concert JV services in the rest
of the world. Since July 1994, MCI has invested approximately $170 million in
- -----------------------
**** MCI Systemhouse is a service mark of MCI.
14
<PAGE> 15
Concert JV. For the years ended December 31, 1996 and 1995, Concert JV's
distributors had approximately $570 million and $300 million, respectively, in
revenue from the sale of Concert JV's products.
AT&T and Sprint have each formed global alliances that will compete
with Concert JV. AT&T's WorldPartners is an association of member companies
formed in 1993 to provide a family of telecommunication services (private line,
frame relay and virtual network services) to multinational customers. Members of
the association include AT&T, KDD of Japan, Singapore Telecom, Telstra of
Australia, Telecom New Zealand, Hong Kong Telecom, Unitel of Canada, Korea
Telecom and the members of Unisource (which include Telefonica de Espana, SA,
Royal PTT Netherlands NV, Telia AB and Schweizerische PTT - Betriebe). Sprint,
France Telecom ("FT") and Deutsche Telekom ("DT") have formed Global One, a
global partnership which offers an array of international telecommunication
services to multinational business customers. As part of the transaction, FT and
DT each acquired 10% of Sprint's common stock.
AVANTEL S.A. de C.V. ("AVANTEL") is a business venture between Grupo
Financiero Banamex-Accival, Mexico's largest financial group, and MCI, in which
MCI owns a 44.5% equity interest. AVANTEL built Mexico's first all-digital
fiber-optic network. In 1996, AVANTEL became the first company to provide
alternative long-distance telecommunication service in Mexico in competition
with Telefonos de Mexico ("TelMex"). As of December 31, 1996, MCI had invested
$495 million in AVANTEL. AVANTEL is a supplier of Concert JV services in Mexico
and is a sub-distributor to MCI of Concert JV services in Mexico. TelMex, the
monopoly telecommunications provider, is AVANTEL's primary competitor. TelMex's
financial and other resources are substantially greater than AVANTEL's, and it
has an extensive existing customer base.
In 1992, MCI entered into a strategic alliance with Stentor, an
alliance of major Canadian telephone companies, to develop a fully integrated
intelligent network linking the U.S. and Canada. In 1995, Stentor entered into
an agreement with MCI to become the exclusive distributor of Concert JV services
in Canada. The Stentor alliance and the AVANTEL joint venture will facilitate
the development of a fully integrated, seamless North American network capable
of providing services with identical features to customers throughout the U.S.,
Canada and Mexico.
In addition, MCI owns minority equity interests in telecommunication
service providers in New Zealand and Belize and is exploring opportunities in
Central and South America and other areas of the world.
Multimedia Services
-------------------
In August 1995, MCI invested $1 billion in The News Corporation Limited
("News Corp."). In addition, MCI received a five year option to invest in News
Corp. from time to time up to an additional $1 billion in the aggregate. Under
certain circumstances, News Corp. has the right from time to time to cause MCI
to exercise this option and make additional investments up to $1 billion in the
aggregate. At the request of News Corp., MCI invested an additional $350 million
in News Corp. in May of 1996.
15
<PAGE> 16
MCI and News Corp. are currently discussing the formation of a venture,
of which MCI would own less than a 20% interest, to provide DBS services to
consumers in the U.S. DBS service is a point-to-multipoint service that uses
high-powered KU band satellites which are placed in a geosynchronous orbit. DBS
service is capable of delivering a wide range of services, such as subscription
television, pay-per-view services, such as movies, concerts and sporting events,
and digitized content, such as magazines. As part of these ongoing discussions,
MCI is renegotiating its investment agreement with News Corp. which may result
in the purchase by MCI of mandatory redeemable preferred securities of News
Corp. and the termination of MCI's remaining investment obligation and News
Corp.'s rights relating thereto.
The proposed venture with News Corp. would provide DBS services by
utilizing satellites which will operate under a license awarded by the FCC to
MCI in an auction in December 1996 for $682.5 million. The license grants MCI
the right to use 28 of 32 channels in the satellite slot located at 110 degrees
west longitude, which provides coverage to all fifty states in the U.S. and
Puerto Rico. MCI has entered into an agreement to purchase two satellites, one
of which is scheduled for launch in late 1997. MCI anticipates the proposed
venture will provide DBS services by late 1997, assuming the first of its
satellites is successfully launched according to plan. The joint venture will
pay MCI a fee to utilize the capacity represented by the license under a
right-to-use for a limited term.
In February 1997, News Corp. announced that it would purchase 50% of
EchoStar Communications Corp. ("EchoStar") for $1 billion. It is anticipated
that the proposed MCI/News Corp. DBS venture would own the interest in EchoStar.
The acquisition, if completed, would result in the proposed venture having the
right to use additional DBS channels. The acquisition is subject to EchoStar
shareholder and various regulatory approvals.
Competition in the DBS service market will arise from three sources:
existing and future DBS service providers; medium-power satellite video service
providers; and cable companies that operate land based facilities. These
competitors have substantial financial resources, existing customer bases and
experienced marketing organizations. In addition, it is anticipated that certain
long-distance telecommunication service providers and the RBOCs may seek to form
alliances with DBS service or other multimedia service providers and compete in
this market.
Except for routine FCC licensing of earth station (uplink) facilities
to be used in conjunction with the satellites and the satellite license itself,
including certain restrictions on use of the spectrum, neither MCI nor the
proposed venture with News Corp. will be subject to extensive regulation by the
FCC. At the state level, the venture will be subject to standard zoning
requirements for the placement of uplink facilities. Zoning restrictions by
localities on the placement of receive dishes is largely preempted by federal
law.
16
<PAGE> 17
Properties.
- -----------
MCI leases, under long-term leases, portions of railroad, utility and
other rights-of-way for its fiber-optic transmission system. MCI also has
numerous tower sites, generally in rural areas, to serve as repeater stations in
its domestic microwave transmission system. Most of these sites are leased,
although MCI does own many of those which are at an intersection of two or more
routes of MCI's transmission system. Generally, MCI owns the buildings that
serve as switch facilities for the transmission system. In metropolitan areas,
MCI leases facilities to serve as operations facilities for its transmission
systems.
MCI also leases, under long-term leases, office space to serve as sales
office and/or administrative facilities. Some of these facilities are located
jointly with operations facilities. In addition, MCI owns its headquarters
building in Washington, D.C. and two buildings in a suburb of Washington, D.C.,
as well as administrative facilities in Cary, North Carolina; Cedar Rapids,
Iowa; Colorado Springs, Colorado; Piscataway, New Jersey; and Richardson, Texas.
MCImetro operates a fiber optic transmission network consisting of
owned fibers located in conduits, which are either owned or leased under
long-term leases, and dark (not currently used) fibers leased under long-term
leases. MCImetro supplements its network with transmission capacity leased from
other carriers under long-term leases. MCImetro leases, under long-term leases,
the buildings that house its Class 5 switches and other network and
administrative office space. MCImetro also sub-leases administrative and sales
office and operation facility space from MCI.
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17
<PAGE> 18
Legal Proceedings.
- ------------------
Information regarding contingencies and legal proceedings is included
in Note 15 of MCI's Notes to Consolidated Financial Statements included
elsewhere herein.
With respect to the actions relating to AT&T patents identified in Note
15, on March 6, 1997 a Stipulation and Order dismissing the actions in the U.S.
with prejudice was entered in the United States District Court for the District
of Columbia and a Consent Judgement dismissing the matter with prejudice in
Canada was entered on February 28, 1997.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.]
18
<PAGE> 19
Directors and Executive Officers of MCI.*
- ------------------------------------------
The table below sets forth certain information with respect to the
fourteen directors of MCI as of December 31, 1996.
<TABLE>
<CAPTION>
Name, Age (as of December 31, 1996) Director
and Principal Occupation Since
- ----------------------------------- --------
<S> <C>
Clifford L. Alexander, Jr. (63)(A)(C)............ 1982
President of Alexander & Associates, Inc.,
management consultants, since 1981; a
director of Dreyfus 3rd Century Fund,
Dreyfus General Family of Funds, Mutual of
America Life Insurance Company, Dun &
Bradstreet Corporation, American Home
Products Corporation, Cognizant Corporation
and TLC Holdings, Inc.
Richard M. Jones (70)(B)......................... 1988
A director of Applied Power Inc., Illinois Tool
Works Inc., Baker-Fentress & Company and
Guaranty Federal Savings Bank.
K. Rupert Murdoch (65)........................... 1995
Chairman and Chief Executive of The News
Corporation Limited, a diversified international
communications company for more than 5 years; a
director of The Phillip Morris Companies and
British Sky Broadcasting Group plc.
John R. Worthington (66)(A)...................... 1968
General Counsel of MCI from 1971 to 1995;
Senior Vice President of MCI from 1979 to
March 1996; a consultant since March 1996.
Sir Peter L. Bonfield (52)....................... 1996
Chief Executive of BT, a worldwide
telecommunications company, since January
1996; Chairman and Chief Executive of ICL
plc from 1985 to 1995; non-executive Chairman
of ICL plc until December 1996; Non-Executive
Deputy Chairman of ICL plc since January 1997;
non-executive Director of ZENECA Group PLC.
Sir Colin M. Marshall (63)....................... 1996
Deputy Chairman of BT since 1996; Non-
Executive Director of BT since 1995; Chairman
of British Airways PLC, an international
airline, since 1993; Deputy Chairman of
British Airways PLC from 1989 to 1993;
Chief Executive of British Airways PLC
from 1983 to 1996; Non-Executive director
of Inchcape plc since 1995, becoming
Chairman of Inchcape plc in 1996; President of
the Confederation of British Industry since
1996; Non-Executive Director of British
Industry since 1996; Non-Executive
Director of British Caledonian Group plc
since 1988; Non-Executive Director of
HSBC Holdings plc since 1993; and Non-
Executive director of New York Stock
Exchange, Inc. since 1994.
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
Name, Age (as of December 31, 1996) Director
and Principal Occupation Since
- ---------------------------------------------------------------
<S> <C>
J. Keith Oates (54) . . . . . . . . . . . . . . 1996
Non-Executive Director of BT since 1994;
Deputy Chairman and Managing Director of
Marks & Spencer plc, a retailer, since
1994 and Joint Managing Director of Marks
& Spencer plc from 1991 to 1994; Governor
of the BBC from 1988 to 1993; Non-
Executive Director of Guinness plc since
June 1995.
Michael H. Bader (67)(A) . . . . . . . . . . . . 1968
Member of the law firm of Haley Bader &
Potts P.L.C.; Chairman of radio stations
WGLL and WCBG from 1983 to 1993; Chairman
of radio station WTHU from 1988 to 1993;
Vice President of Bach 'n Roll Radio of
Brandon, Inc. since 1989.
Gordon S. Macklin (68)(B) . . . . . . . . . . . . 1988
Chairman of White River Corporation, an
information services company, since 1993;
a director of Fund American Enterprises
Holdings, Inc., MedImmune Inc., CCC
Information Services Group, Inc., Shoppers
Express, Spacehab, Inc. and Source One
Mortgage Services Corporation; and director,
trustee or managing general partner of 53 of
the investment companies in the Franklin and
Templeton Groups of Funds. Formerly, Chairman
Hambrecht and Quist Group; Director, H&Q
Healthcare Investors; and President, National
Association of Securities Dealers, Inc.
Bert C. Roberts, Jr. (54)(C) . . . . . . . . . . . 1985
Chairman of the Board of MCI since 1992;
Chief Executive Officer of MCI from 1991 to
November 1996; President and Chief Operating
Officer of MCI from 1985 to 1992; a non-
executive director of BT since 1994 and a
non-executive director of The News Corporation
Limited since 1995.
Richard B. Sayford (66)(B) . . . . . . . . . . . . 1980
President and Chief Executive Officer of
Strategic Enterprises, Inc., a management
consulting firm, since 1986; a director of
Laser Technologies, Inc. and Visx, Inc.
Judith Areen (52)(A)(C) . . . . . . . . . . . . . 1992
Executive Vice President for Law Center
Affairs and Dean of the Law Center, Georgetown
University, since 1989; Professor of Law, Law
Center, Georgetown University, since 1976.
</TABLE>
<TABLE>
<CAPTION>
Name, Age (as of December 31, 1996) Director
and Principal Occupation Since
- ----------------------------------- --------
<S> <C>
Gerald H. Taylor (55).................................................. 1994
Chief Executive Officer of MCI since November 1996; Vice
Chairman of MCI Telecommunications Corporation ("MCIT")
since July 1995; President and Chief Operating Officer of MCI
from July 1994 to November 1996; President and Chief
Operating Officer of MCIT from April 1994 to July 1995;
Executive Vice President and Group Executive of MCIT from
1993 to April 1994; Executive Vice President of MCIT from
1990 to 1993; a non-executive director of BT since November
1996.
Judith Whittaker (58) (B).............................................. 1985
Vice President, General Counsel and Secretary of Hallmark
Cards, Incorporated, a greeting card and gift manufacturing
company, since January 1, 1997; Vice President, Legal of
Hallmark Cards, Incorporated since 1992; Associate General
Counsel of Hallmark Cards, Incorporated, for more than five
years prior thereto; Vice President and General Counsel of
Univision Holdings, Inc., a subsidiary of Hallmark Cards,
Incorporated, from 1988 to 1992; a director of Harmon
Industries, Inc.
</TABLE>
(A) Member of the Audit Committee.
(B) Member of the Compensation Committee.
(C) Member of the Nominating Committee.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MCI, since its inception, has retained the law firm of Haley Bader & Potts
P.L.C., in which firm Michael H. Bader is a partner, as special counsel for
communications law matters. Legal fees and expenses paid by MCI to this law
firm for the year ended December 31, 1996, totaled approximately $126,653. It
is anticipated that MCI will pay Haley Bader & Potts P.L.C. an amount in excess
of $60,000 in 1997 in respect of services rendered and to be rendered to MCI
and its subsidiaries during that year.
BOARD OF DIRECTORS' COMMITTEES, MEETINGS AND FEES
To assist the MCI Board in managing MCI's business and affairs, MCI's Board
of Directors has constituted from among its members a number of committees,
including an Audit Committee, a Compensation Committee and a Nominating
Committee. The functions of the Audit Committee include review, with the
independent accountants and the internal auditors, of the audit plan and results
of their audit, review of any significant consulting services provided by the
independent accountants, consideration of the range of audit and non-audit fees
and review of the adequacy of MCI's system of internal accounting controls. The
functions of the Compensation Committee include determination of the salary and
incentive compensation of the Chairman, Chief Executive Officer and the Chief
Operating Officer, review of MCI's executive compensation and administration of
MCI's Stock Option Plans, Executive Incentive Compensation Plan, 1990 Stock
Purchase Plan and the Senior Executive Incentive Compensation Plan. The
Nominating Committee considers potential nominees for election to the board of
directors and administers the 1988 Directors' Stock Option Plan and the Board of
Directors' Deferred Compensation Plan. The Nominating Committee will consider
recommendations by stockholders for nominees for election as directors at the
1998 annual meeting submitted by October 30, 1997, unless the Merger is
consummated as expected, in which case there will be no 1998 annual meeting.
Recommendations should be sent to MCI's Secretary at MCI's headquarters,
identifying the nominee by name and providing pertinent information concerning
the nominee's background, experience and qualifications.
During the year ended December 31, 1996, the MCI Board had nine meetings.
The Audit Committee met two times, the Compensation Committee met five times
and the Nominating Committee did not meet during the year. Except as set
forth in the next sentence, each of MCI's directors attended at least 75% of
the total of (1) the number of meetings of the MCI Board during the period for
which such director was a director and (2) the number of meetings held by all
committees of the MCI Board on which such director served during the period for
which such director was a member of such committee(s). Messrs. Marshall and
Oates, each of whom was elected to the MCI Board in November 1996, did not
attend the MCI Board meeting held in December 1996 due to scheduling conflicts.
During 1996, directors of MCI who were not officers were entitled to
receive a retainer of $2,250 per month and an additional $1,500 for each
meeting of the MCI Board which they attended and for each meeting of the Audit
or Compensation Committee they attended that was not held on a day or the
preceding day on which a meeting of the MCI Board was held. In addition, the
Chairman of each of the Audit and Compensation Committees received an
additional retainer of $300 per month, and each member of the Audit and
Compensation Committees who attended an Audit or Compensation Committee meeting
on the same or preceding day on which a board of directors meeting was held was
paid an additional $700 for each such meeting attended. Directors also were
reimbursed for actual out-of-pocket travel expenses incurred in connection with
attendance at board and/or committee meetings. MCI's Board of Directors has in
effect a deferred compensation plan which allows non-employee directors to
elect to defer receipt of monthly retainer and meeting fees that would
otherwise be paid to them. Deferred amounts are invested in mutual funds in
accordance with each participating director's preference. When the elected
deferral period expires, the director receives the deferred amount adjusted for
investment performance. At this time, only two directors have made deferral
elections.
In 1989, MCI's stockholders approved the 1988 Directors' Stock Option Plan
(the "Directors' Plan") and reserved 1,000,000 MCI Shares for issuance pursuant
to such plan. In 1996, MCI's stockholders approved the reservation of an
additional 1,000,000 MCI Shares for issuance under the Directors' Plan. Under
the Directors' Plan, each non-employee director is automatically granted, upon
election to the board, a five-year option to purchase 40,000 MCI Shares at the
closing price of the MCI Shares on the date of grant. Options become
exercisable after the first anniversary of the date of grant in cumulative
installments of 25% for each year outstanding. The option price is payable upon
exercise of the option either in cash, by surrender of MCI Shares having a fair
market value on the date of receipt by MCI equal to the option price or by such
other means as the Nominating Committee may prescribe. The Directors' Plan
provides for automatic grants of similar options to all new non-employee
directors elected to the board. Upon the fifth anniversary of the date of grant
of options, any unexercised portion of the grant is canceled, and a new option
for 40,000 shares is automatically granted.
Neither the MCI Board nor the Nominating Committee has authority to change
the number of shares granted to directors, change the pricing formula or vesting
schedule or selectively determine which non-employee directors shall receive
options pursuant to the Directors' Plan. Options are transferable only by will
or under the laws of descent and distribution. With certain exceptions, each
option may be exercised only by the optionees and only if the optionee is a
director of MCI.
As of December 31, 1996, options to purchase 960,000 MCI Shares have been
granted pursuant to the Directors' Plan, which options have an average per
share exercise price of $19.08. During the year ended December 31, 1996, no
options were exercised by participating directors other than resigning
directors. Pursuant to the Merger Agreement, options held by directors of MCI
will vest immediately prior to the Effective Time of the Merger.
The executive officers of MCI, including its subsidiaries, are elected
annually and serve at the pleasure of the respective board of directors. They
are:
Name Age* Position**
Bert C. Roberts, Jr. 54 Chairman of the Board,
Director
Gerald H. Taylor 55 Chief Executive Officer, Director
Timothy F. Price 43 President and
Chief Operating Officer
Seth D. Blumenfeld 56 President,
MCI International, Inc.
John W. Gerdelman 44 Executive Vice President,
MCI Telecommunications Corporation
Douglas L. Maine 48 Executive Vice President and
Chief Financial Officer
Scott B. Ross 45 Director, SHL Systemhouse Inc.,
Director, President and Chief
Operating Officer, MCI Systemhouse
Corp.
Michael J. Rowny 46 Executive Vice President
Michael H. Salsbury 47 Executive Vice President and
General Counsel
David M. Case 41 Vice President and Controller
- ---------------------
* As of March 1, 1997.
** Unless otherwise indicated, the position is with MCI
Communications Corporation.
19
<PAGE> 20
Mr. Roberts has been Chairman of the Board of MCI since June 1992. He
was Chief Executive Officer of MCI from December 1991 to November 1996. He was
President and Chief Operating Officer of MCI from October 1985 to June 1992 and
President of MCI Telecommunications Corporation ("MCIT") from May 1983 to June
1992. Mr. Roberts has been a director of MCI since 1985; a non-executive
director of British Telecommunications plc ("BT"), a global telecommunications
provider which has an approximate 20% equity interest in MCI, since October
1994; and a non-executive director of The News Corporation Limited, a global
multi-media company located in Australia, since November 1995.
Mr. Taylor has been Chief Executive Officer of MCI since November 1996.
He has been Vice Chairman of MCIT since July 1995. He was President and Chief
Operating Officer of MCI from July 1994 to November 1996 and President and Chief
Operating Officer of MCIT from April 1994 to July 1995. He was an Executive Vice
President and Group Executive of MCIT from September 1993 to April 1994. He was
an Executive Vice President of MCIT, serving as President, Consumer Markets,
from November 1990 to September 1993. Mr. Taylor has been a director of MCI
since September 1994 and a non-executive director of BT since November 1996.
Mr. Price has been President and Chief Operating Officer of MCI since
November 1996. He has been President and Chief Operating Officer of MCIT since
July 1995. He was an Executive Vice President and Group President of MCIT,
serving as Group President, Communication Services, from December 1994 to July
1995. He was an Executive Vice President of MCIT, serving as President, Business
Markets, from June 1993 to December 1994. He was a Senior Vice President of MCIT
from November 1990 to June 1993, serving as President, Business Services, from
July 1992 to June 1993 and as Senior Vice President, Consumer Markets, from
November 1990 to July 1992.
Mr. Blumenfeld was President of MCI International, Inc., from August
1983 to July 1993. He was Executive Vice President and Group Executive of MCIT
from July 1993 to September 1994 and has been President of MCI International,
Inc. since September 1994.
Mr. Gerdelman has been an Executive Vice President of MCIT, serving as
President, networkMCI Services, since October 1994. He was a Senior Vice
President of MCIT from August 1992 to October 1994. From July 1991 to August
1992, he was President and Chief Executive Officer of MCI Services Marketing,
Inc., a company that provided telemarketing services to, and in which a 51%
equity interest was held by, MCIT. Since July 1994, Mr. Gerdelman has been a
director of General Communication, Inc. ("GCI"), a telecommunications provider
in Alaska, of which MCIT owns approximately 22% of the outstanding shares of
Class A Common Stock and approximately 31% of the outstanding shares of Class B
Common Stock.
Mr. Maine has been an Executive Vice President of MCI since April 1994.
Mr. Maine has been Chief Financial Officer of MCI since February 1992. He was a
Senior Vice President of MCI from September 1988 to April 1994. From November
1990 to February 1992, he was a Senior Vice President of MCIT, serving as
President of the Southern Division.
Mr. Ross has been President and Chief Operating Officer of MCI
Systemhouse Corp. since September 1995. He was Executive Vice President of MCIT,
serving as President, Finance and Business Operations, from August 1995 to March
1996 and
20
<PAGE> 21
as President, Business Markets, from December 1994 to August 1995. He was Senior
Vice President of MCIT from September 1993 to December 1994 and a Vice President
of MCIT for more that 5 years prior thereto.
Mr. Rowny has been an Executive Vice President of MCI since April 1995
and an Executive Vice President of MCIT since June 1994, serving as Executive
Vice President, Ventures and Alliances. He was President of MJR Enterprises, a
consulting company, from April 1994 to June 1994; Executive Vice President and
Chief Financial Officer and a director of ICF Kaiser International, Inc., an
environmental and engineering services company, from April 1992 to April 1994;
and Chairman and Chief Executive Officer of Ransohoff Company, a manufacturer of
environmental and industrial equipment, from November 1989 to April 1992.
Mr. Salsbury has been Executive Vice President and General Counsel of
MCI since November 1995. He was a partner in the law firm of Jenner & Block for
more than five years prior thereto.
Mr. Case has been Vice President and Controller of MCI since September
1995 and a Vice President of MCIT since October 1993. For more than five years
prior thereto, he served MCIT in various management capacities.
21
<PAGE> 22
REMUNERATION OF MCI EXECUTIVE OFFICERS
Reference is made to "Item 5. Other Events -- The MCI/WorldCom Merger --
Interests of Certain Persons in the MCI/WorldCom Merger" contained in WorldCom's
Current Report on Form 8-K/A-1 filed January 27, 1998 for information regarding
certain interests of MCI directors and executive officers in the MCI/WorldCom
Merger.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Restricted Securities
Other Annual Stock Underlying All Other
Salary Bonus Compensation Award(s) Options Compensation
Name and Principal Position Year ($) ($)(1) ($)(2) ($)(3,4) (#)(4) ($)(5)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Bert C. Roberts, Jr. 1996 960,000 0 0 7,205,000 180,000 6,030
Chairman 1995 890,000 1,300,000 231,703 0 150,000 6,030
1994 850,000 900,000 69,460 896,000 180,000 49,011
Gerald H. Taylor 1996 565,000 0 0 5,185,000 130,000 6,030
Chief Executive Officer 1995 525,000 800,000 76,914 0 100,000 6,030
1994 457,885 500,000 12,387 560,000 112,000 36,480
Timothy F. Price 1996 460,000 150,000 0 3,352,500 115,000 6,030
President and Chief 1995 400,000 600,000 28,607 0 115,000 136,849
Operating Officer 1994 330,385 270,250 6,181 560,000 110,000 21,991
Michael J. Rowny 1996 310,000 0 0 1,072,500 80,000 11,679
Executive Vice President 1995 270,000 300,000 0 597,500 70,000 8,788
1994 134,615 94,675 0 560,000 80,000 1,024
Douglas L. Maine 1996 290,000 0 0 895,500 70,000 4,123
Executive Vice President 1995 260,000 265,000 26,077 478,000 70,000 6,030
and Chief Financial 1994 245,000 182,000 4,132 0 67,000 25,320
Officer
=================================================================================================================================
</TABLE>
- ---------------
(1) The amounts listed as paid in this column do not include the amount of bonus
(otherwise payable currently in cash) invested at the election of the
executive in incentive stock units ("ISUs"). Such amounts are reported under
the Restricted Stock Awards column.
(2) Represents the annuity premium and taxes paid on behalf of the executive as
the result of the purchase of an annuity to discharge the Supplemental
Pension Plan's obligation to the executive. These amounts reduce dollar for
dollar the actual amount of pension to be paid to the executive upon
retirement.
(3) Amounts listed for 1996 represent the fair market value of restricted shares
and ISUs at 100% of the fair market value of MCI Shares on the grant or
bonus date (without discount attributable to the restrictions on such
units). ISUs vest generally in one-third increments annually over three
years, except for units that represent elections by executives to invest all
or a portion of their bonuses (otherwise payable currently in cash) in ISUs
which are fully vested. Pursuant to the Stock Option Plan, the Compensation
Committee has authorized executives to elect to invest all or a portion of
their bonuses (otherwise payable currently in cash) in ISUs. The amount of
cash bonus deferred and invested in ISUs for each of the executive officers
was: Mr. Roberts, $1,300,000, invested in 35,862 ISUs; Mr. Taylor, $800,000,
invested in 22,069 ISUs; Mr. Price, $450,000, invested in 12,414 ISUs; Mr.
Rowny, $300,000, invested in 8,276 ISUs; and Mr. Maine, $270,000, invested
in 7,449 ISUs. The number of ISUs was determined by dividing the amount of
bonus deferred by the fair market value of a share of MCI Common Stock on
the date of the bonus award ($36.25). In order to encourage executives to
invest a portion of their bonus awards in ISUs, the Committee awarded
additional ISUs to deferring executives equal to 25% of the amount deferred.
Such matching units are included in this column, vest one-third per year
over three years and are payable at the same time as elected by the
executive for his deferred award. The number of matching ISUs awarded and
the value of the matching units (based on the market price of an MCI Share
on the date of the bonus award) for each executive was: Mr. Roberts, 8,966
ISUs valued at $325,000; Mr. Taylor, 5,518 ISUs valued at $200,000; Mr.
Price, 3,104 ISUs valued at $112,500; Mr. Rowny, 2,069 ISUs valued at
$75,000; and Mr. Maine, 1,862 ISUs valued at $67,500.
Pursuant to the Merger Agreement between MCI and BT, executives were offered
the option to convert their restricted shares into ISUs in a 1-for-1
exchange. These ISUs vest on the same schedule as the underlying restricted
shares, but as provided in the Merger Agreement, no later than November 3,
1999. As of December 31, 1996, only Mr. Roberts declined to exercise this
option and continued to hold 322,536 restricted shares, valued at
$10,542,896, on December 31, 1996. The remaining executives elected to
convert their restricted shares into ISUs. As of December 31, 1996, these
executives held the following converted ISUs, valued based on the market
price on December 31, 1996; Mr. Taylor, 252,150 ISUs, valued at $8,242,153;
Mr. Price, 171,950 ISUs, valued at $5,620,616; Mr. Rowny, 75,000 ISUs,
valued at $2,451,563; and Mr. Maine, 50,100 ISUs, valued at $1,637,644.
Dividends on restricted shares are held by MCI until the restrictions are
removed. Dividend equivalents on ISUs will be paid to the holder or may be
deferred at the holder's election.
(4) Please see pages 77-80 of MCI's Proxy Statement for its 1997 Annual Meeting
for a discussion of vesting of awards of stock options, restricted shares
and incentive stock units, upon termination of an executive's employment
after the close of the Merger.
(5) Consists of the following: (a) contributions by the Company to the
executives' accounts under the MCI ESOP and 401(k); and for Mr. Rowny (b)
premiums paid by the Company for executive life insurance during the year.
The values of the applicable components for each executive officer are: Mr.
Roberts (a) $6,030; Mr. Taylor (a) $6,030; Mr. Price (a) $6,030; Mr. Rowny
(a) $5,486 and (b) $6,193; and Mr. Maine (a) $4,123.
22
<PAGE> 23
OPTION GRANTS IN LAST FISCAL YEAR(1)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Number of
Securities Potential Realizable Value at Assumed Annual
Underlying % of Total Options Rates of Stock
Options Granted to Exercise or Price Appreciation for Option Term(2)
Granted Employees in Base Price Expiration -----------------------------------------------
NAME (#)(3) Fiscal Year ($/Sh)(4) Date(5) 0% ($)(6) 5% ($) 10% ($)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Bert C. Roberts,
Jr. 180,000 0.809% 29.25 1/30/06 0 3,311,136 8,391,078
Gerald H. Taylor 130,000 0.584% 29.25 1/30/06 0 2,391,376 6,060,223
Timothy F. Price 115,000 0.517% 29.25 1/30/06 0 2,115,448 5,360,967
Michael J. Rowny 80,000 0.359% 29.25 1/30/06 0 1,471,616 3,729,368
Douglas L. Maine 70,000 0.314% 29.25 1/30/06 0 1,287,664 3,263,197
- ---------------------------------------------------------------------------------------------------------------------------------
All Optionees(7) 22,257,990 100.00% $29.1732 various 0 408,368,748 1,034,882,199
All Stockholders N/A N/A N/A N/A 0 14,087,280,403(8) 35,700,089,200(8)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) MCI did not grant any stock appreciation rights during the last or any
prior fiscal year.
(2) The potential realizable value uses the hypothetical rates specified by the
SEC and is not intended to forecast future appreciation, if any, of MCI's
stock price. MCI did not use an alternative formula for this valuation as
MCI is not aware of any formula which will determine with reasonable
accuracy a present value based on future unknown or volatile factors. In
fact, MCI disavows the ability of this or any other valuation model to
predict or estimate MCI's future stock price or to place a reasonably
accurate present value on the options because all models depend on
assumptions about the stock's future price movement, which is simply
unknown. The value indicated is a net amount, as the aggregate exercise
price has been deducted from the final appreciated value. An annual
appreciation of 5% and 10% from the exercise price of $29.25 would result
in per share prices of approximately $47.65 and $75.87, respectively, as of
January 30, 2006. The values set forth in this table do not reflect the
effect of the Merger.
(3) Grants become exercisable to the extent of one-third of the shares covered
thereby on each of the first, second and third anniversary of the grant.
Vesting may be accelerated upon a reorganization event or upon a tender
offer for 30% or more of MCI's voting stock by a third party in accordance
with plan provisions. Pursuant to the Merger Agreement, options granted
prior to November 3, 1996 become fully vested and exercisable immediately
prior to the Effective Time.
(4) The exercise price of the options is equal to the fair market value of the
underlying stock on the date of grant.
(5) All options granted in 1996 expire ten years from the date of grant.
(6) Unless the stock price increases, which will benefit all stockholders
commensurately, an optionee will realize no gain.
(7) Options were granted to 6,745 employees in 1996. The potential realizable
value uses a 10-year option term and base price of $29.25.
(8) Values were calculated using the total shares outstanding (including Class
A Common Stock which is convertible into MCI Shares) as of December 31,
1996 (685,278,933 shares) and using a base price of $32.6875. Appreciation
of 5% and 10% would result in per share prices of approximately $53.24 and
$84.78, respectively, at December 31, 2006. The values set forth in this
table also do not reflect the effect of the Merger.
23
<PAGE> 24
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money Options at
Acquired on Value Option at FY-End FY-End
Exercise Realized (#) ($)(1)
Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Bert C. Roberts,
Jr 0 0 1,048,300/341,700 16,986,494/2,412,881
Gerald H. Taylor 0 0 449,090/235,080 6,685,181/1,650,953
Timothy F. Price 24,080 284,010 130,970/229,450 1,305,632/1,793,678
Michael J. Rowny 0 0 75,900/154,100 848,719/1,213,156
Douglas L. Maine 0 0 294,320/139,680 4,601,358/1,063,330
===================================================================================================
</TABLE>
- ---------------
(1) Options are "in-the-money" if, on December 31, 1996, the market price of
the MCI Shares ($32.6875) exceeded the exercise price of such options. All
options, on December 31, 1996, were "in-the-money". The value of such
options is calculated by determining the difference between the aggregate
market price of the MCI Shares covered by the options on December 31, 1996
and the aggregate exercise price of such options.
LONG-TERM INCENTIVE PLANS -- AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Number of Shares, Performance or Other
Units or Other Period Until Maturation
Name Rights(#)(1) or Payout(2)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Bert C. Roberts, Jr. 210,000 based on date of Merger
Gerald H. Taylor 190,000 based on date of Merger
Timothy F. Price 180,000 based on date of Merger
Michael J. Rowny 90,000 based on date of Merger
Douglas L. Maine 90,000 based on date of Merger
===================================================================================================
</TABLE>
- ---------------
(1) Represents the number of incentive stock units granted to each named
executive by the board of directors on November 2, 1996.
(2) Pursuant to the Merger Agreement, these incentive stock units will vest
over three years: one-third upon the Effective Time of the Merger; and
one-third on each of the first two anniversaries of the Effective Time of
the Merger. Upon vesting, incentive stock units may be paid out in MCI
Common Stock or, at the election of the executive, further deferred into
MCI Common Stock or other investment vehicles. Dividend equivalents on
incentive stock units will be paid to the holder or may be deferred at the
holder's election. In the event the Merger is not consummated, the
incentive stock units will be forfeited.
PENSION PLANS
MCI sponsors a tax-qualified defined benefit plan ("Qualified Plan") and a
supplemental nonqualified defined benefit plan ("Supplemental Plan" and,
together with the Qualified Plan, the "Pension Plans"). The Qualified Plan
covers all employees of MCI, including executive officers, who work at least
1,000 hours in a year. The Supplemental Plan covers only MCI's key executives,
including the executive officers, who work at least 1,000 hours in a year. No
employee contributions are required for participation in the Pension Plans.
Retirement benefits are based upon the employee's compensation during the
employee's employment with MCI or a participating subsidiary.
Compensation used to calculate benefits includes bonuses (including bonuses
invested in ISUs) but does not include compensation related to fringe benefits,
stock options, other incentive stock units or restricted stock. During 1996,
compensation for the purposes of calculating pension benefits for the Qualified
Plan was limited by section 401(a)(17) of the Code, to $150,000. The
Supplemental Plan pays the incremental benefit attributable to that part of the
employee's compensation which exceeds the Code limitation in any plan year.
Employees are fully vested upon the earlier of five years of service or
upon reaching age 65 while employed by MCI or a participating subsidiary. There
is no partial vesting. Normal retirement age is 65, but an employee may elect to
receive an actuarially-reduced pension at or after age 55 with five years of
service with MCI or a participating
24
<PAGE> 25
subsidiary. In addition, the Supplemental Plan permits MCI to grant additional
service and additional pension amounts to selected employees.
For employees employed after January 1, 1989, the Pension Plans provide a
normal retirement benefit for each year of credited service equal to 1% of the
compensation earned by the employee during that year up to the Social Security
"covered compensation" level plus an additional 1.5% of compensation earned over
that level. However, employees employed on or before January 1, 1993 were
credited with an updated past service benefit which provides a benefit of 1% of
the employee's average annual compensation (for the years 1990, 1991 and 1992)
up to $21,000 and 1.5% of such compensation over $21,000 for such years
multiplied by the employee's service through December 31, 1992. For employees
employed on or after January 1, 1994, the Pension Plans provide a future service
benefit for each subsequent year of credited service equal to a flat 1.8% of the
employee's eligible compensation. Effective January 1, 1996, MCI adopted a Part
II to the Qualified Plan ("Part II") which changed the manner in which pension
benefits will be determined. Part II is a defined benefit pension plan. Under
Part II an initial account balance will be established for each participant
equal to the actuarial equivalent of the participant's prior accruals under the
Qualified Plan. Participants employed on or after January 1, 1996 receive
compensation credits and interest credits to their accounts. Compensation
credits are a designated percent of pay, based on the participant's age,
according to the following schedule: employees younger than age 25, 2.0%; age
25-29, 2.5%; age 30-34, 3.0%; age 35-39, 4.0%; age 40-44, 5.0%; age 45-54, 6.0%;
and age 55 or older, 6.5%. Part II guarantees a minimum interest credit of 4%
per year on the prior year's account balance. For 1997, the guaranteed interest
credit is 6.09%. Part II participants who are age 50 or older with five years of
service as of December 31, 1995 will receive accruals under Part I through the
Plan year ended December 31, 2000.
Benefits payable from tax qualified plans are further limited by section
415 of the Code; in 1996, the annual maximum benefit from the Qualified Plan was
limited to $155,000. When the pension formula would result in an executive
receiving a benefit above the applicable limit, the Supplemental Plan assumes an
obligation to pay the incremental portion above such limit.
As of December 31, 1996, Messrs. Roberts, Taylor, Price, Rowny and Maine,
upon normal retirement, would be entitled to annual retirement benefits from the
Pension Plans of approximately $645,694; $326,426; $256,169; $117,073 and
$145,751, respectively. Mr. Rowny will not vest under the plans until June 1998.
Should Mr. Rowny leave the employ of MCI before his benefits vest, he will
receive no pension benefit from MCI.
Security Ownership of Certain Beneficial Owners and Management
Reference is made to "Item 5. Other Events -- The MCI/WorldCom Merger --
Interests of Certain Persons in the MCI/WorldCom Merger" and "-- Business,
Management and Principal Stockholders of MCI" contained in WorldCom's Current
Report on Form 8-K/A-1 filed January 27, 1998 for information regarding the
security ownership of management and principal stockholders of MCI.
ITEM 7 FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statement of Business Acquired.
The financial statements of the business to be acquired, MCI,
(and related Management's Discussion and Analysis of Financial
Conditions and Results of Operations) required by this item are
contained in the financial statements and footnotes thereto
listed in the Index on page F-1 herein.
(b) Pro Forma Financial Information.
The pro forma financial information required by this item are
contained in the financial statements and footnotes thereto
listed in the Index on page F-1.
(c) Exhibits.
See Exhibit Index.
25
<PAGE> 26
INDEX TO FINANCIAL STATEMENTS AND OTHER INFORMATION
<TABLE>
<CAPTION>
Financial Statements Page Numbers
-------------------- ------------
<S> <C>
MCI Communications Corporation and Subsidiaries - for the fiscal years
ended December 31, 1994, 1995, and 1996:
Consolidated Income Statements F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Cash Flows F-4
Consolidated Statements of Stockholders' Equity F-5
Notes to Consolidated Financial Statements F-6
Report of Independent Accountants F-23
Management's Discussion and Analysis of Financial Condition F-24
and Results of Operations
Note: the above financial information related to MCI was previously
filed as Exhibit 13 to MCI's Current Report on Form 8-K filed
February 10, 1997 (the "MCI Form 8-K") and has not been updated to
reflect changes since December 31, 1996. To the extent the above
financial information differs from the financial information reported
in MCI's Form 8-K, the MCI Form 8-K shall control.
MCI Communications Corporation Subsidiaries - for the nine month periods ended
September 30, 1996 and 1997 (unaudited):
Consolidated Statements of Operations F-35
Consolidated Balance Sheets F-36
Consolidated Statements of Cash Flows F-38
Consolidated Statements of Stockholders' Equity F-39
Notes to Interim Consolidated Financial Statements F-40
Management's Discussion and Analysis of Financial Condition F-44
and Results of Operations
Note: the above financial information related to MCI was previously
contained in MCI's Quarterly Report on Form 10-Q for the period ended
September 30, 1997 (the "MCI Form 10-Q") and has not been updated to reflect
changes since September 30, 1997. To the extent the above financial
information differs from the financial information reported in MCI's
Form 10-Q, the MCI Form 10-Q shall control
WorldCom,Inc. - for the nine month period ended September 30, 1997 and for the
fiscal years ended December 31, 1996:
Pro Forma Financial Information F-59
Pro Forma Condensed Combined Balance Sheet as of September 30, 1997 F-60
Pro Forma Condensed Combined Statement of Operations for the nine months
ended September 30, 1997 F-61
Pro Forma Condensed Combined Statement of Operations for the
fiscal year ended December 31, 1996 F-62
Notes to Pro Forma Financial Statements F-63
Additional Pro Forma Presentation F-65
</TABLE>
F-1
<PAGE> 27
INCOME STATEMENTS
MCI Communications Corporation and Subsidiaries
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------
(In millions, except per
share amounts)
<S> <C> <C> <C>
REVENUE $18,494 $15,265 $13,338
OPERATING EXPENSES
Cost of services 9,489 7,893 6,916
Sales, operations and general 5,028 4,426 3,790
Depreciation 1,664 1,308 1,176
Asset write-down - 520 -
------ ------ ------
TOTAL OPERATING EXPENSES 16,181 14,147 11,882
------ ------ ------
INCOME FROM OPERATIONS 2,313 1,118 1,456
Interest expense (196) (149) (153)
Interest income 34 147 50
Equity in income (losses) of
affiliated companies (156) (187) (4)
Other expense, net (5) (32) (69)
------ ------ ------
INCOME BEFORE INCOME TAXES 1,990 897 1,280
Income tax provision 753 349 485
Distributions on subsidiary Trust
mandatorily redeemable preferred
securities 35 - -
------ ------ ------
NET INCOME 1,202 548 795
Dividends on preferred stock - - 1
------ ------ ------
EARNINGS APPLICABLE TO
COMMON STOCKHOLDERS $ 1,202 $ 548 $ 794
====== ====== ======
EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE $ 1.73 $ .80 $ 1.32
====== ====== ======
Weighted average number of
common shares 695 687 604
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-2
<PAGE> 28
BALANCE SHEETS
MCI Communications Corporation and Subsidiaries
<TABLE>
<CAPTION>
December 31, 1996 1995
- -------------------------------------------------------------------------------
(In millions)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 187 $ 471
Marketable securities 161 373
Receivables, net of allowance for
uncollectibles of $273 and $260 million 3,480 2,912
Other current assets 888 749
------ ------
TOTAL CURRENT ASSETS 4,716 4,505
------ ------
PROPERTY AND EQUIPMENT
Communications system in service 14,005 11,318
Furniture, fixtures and equipment 2,848 2,432
Other property 519 493
------ ------
TOTAL PROPERTY AND EQUIPMENT 17,372 14,243
Accumulated depreciation (6,535) (5,238)
Construction in progress 1,337 1,304
------ ------
TOTAL PROPERTY AND EQUIPMENT, NET 12,174 10,309
OTHER ASSETS
Noncurrent marketable securities 58 -
Other assets and deferred charges, net 678 511
Investment in affiliates 690 495
Investment in Direct Broadcast Satellite 893 -
Investment in News Corp. 1,350 1,000
Goodwill, net 2,419 2,481
------ ------
TOTAL OTHER ASSETS 6,088 4,487
------ ------
TOTAL ASSETS $22,978 $19,301
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 992 $ 706
Accrued telecommunications expense 2,045 1,936
Other accrued liabilities 1,806 1,728
Long-term debt due within one year 203 500
------ ------
TOTAL CURRENT LIABILITIES 5,046 4,870
------ ------
NONCURRENT LIABILITIES
Long-term debt 4,798 3,444
Deferred taxes and other 1,723 1,385
------ ------
TOTAL NONCURRENT LIABILITIES 6,521 4,829
COMPANY OBLIGATED MANDATORILY REDEEMABLE
PREFERRED SECURITIES OF SUBSIDIARY TRUST
HOLDING SOLELY JUNIOR SUBORDINATED
DEFERRABLE INTEREST DEBENTURES OF THE
COMPANY 750 -
STOCKHOLDERS' EQUITY
Class A common stock, $.10 par value,
authorized 500 million shares, issued
136 million shares 14 14
Common stock, $.10 par value, authorized
2 billion shares, issued 593 million shares 60 60
Additional paid in capital 6,410 6,405
Retained earnings 5,231 4,063
Treasury stock, at cost, 44 and 43 million
shares (1,054) (940)
------ ------
TOTAL STOCKHOLDERS' EQUITY 10,661 9,602
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $22,978 $19,301
====== ======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE> 29
STATEMENTS OF CASH FLOWS
MCI Communications Corporation and Subsidiaries
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Receipts from customers $17,897 $14,786 $13,298
Payments to suppliers and
employees (13,830) (11,453) (10,472)
Taxes paid (810) (410) (393)
Interest paid (147) (113) (100)
Interest received 34 169 22
------ ------ ------
CASH FROM OPERATING ACTIVITIES 3,144 2,979 2,355
------ ------ ------
INVESTING ACTIVITIES
Capital expenditures for
property and equipment (3,347) (2,866) (2,897)
Purchases of marketable securities (487) (4,630) (4,096)
Proceeds from sales and maturities
of marketable securities 641 5,930 2,424
Acquisition of businesses, net of
cash acquired (40) (1,243) (110)
Investment in News Corp. (350) (1,000) -
Investment in Direct Broadcast
Satellite (853) - -
Investment in affiliates (306) (494) (174)
Other, net (40) 11 (64)
------ ------ ------
CASH USED FOR INVESTING ACTIVITIES (4,782) (4,292) (4,917)
------ ------ ------
NET CASH FLOW BEFORE FINANCING
ACTIVITIES (1,638) (1,313) (2,562)
------ ------ ------
FINANCING ACTIVITIES
Issuance of Senior Notes and other
debt 796 - 939
Payment of Senior Notes and other
debt (595) (305) (246)
Commercial paper and bank credit
facility activity, net 717 702 (239)
Issuance of subsidiary Trust
mandatorily redeemable preferred
securities, net 726 - -
Issuance of Class A common stock - - 3,510
Issuance of common stock for
employee plans 426 275 248
Payment of dividends on common
and preferred stock (34) (33) (32)
Distributions paid on subsidiary
Trust mandatorily redeemable
preferred securities (35) - -
Purchase of treasury stock (647) (284) (354)
------ ------ ------
CASH FROM FINANCING ACTIVITIES 1,354 355 3,826
------ ------ ------
Net (decrease) increase in cash
and cash equivalents (284) (958) 1,264
Cash and cash equivalents
at beginning of year 471 1,429 165
------ ------ ------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 187 $ 471 $ 1,429
====== ====== ======
Reconciliation of net income to cash
from operating activities:
Net income $ 1,202 $ 548 $ 795
Adjustments to net income:
Depreciation and amortization 1,722 1,367 1,230
Asset write-down - 520 -
Equity in (income) losses of
affiliated companies 156 187 4
Deferred income tax provision 298 144 269
Netchange in operating activity
accounts other than cash and
cash equivalents, net of effects
of acquisition of businesses:
Receivables (568) (442) (135)
Operating accounts payable 228 57 36
Other operating activity accounts 106 598 156
------ ------ ------
CASH FROM OPERATING ACTIVITIES $ 3,144 $ 2,979 $ 2,355
====== ====== ======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE> 30
STATEMENTS OF STOCKHOLDERS' EQUITY
MCI Communications Corporation and Subsidiaries
<TABLE>
<CAPTION>
Class A Additional Treasury Stock-
Preferred Common Common Paid in Retained Stock, holders'
Stock Stock Stock Capital Earnings at Cost Equity
- --------------------------------------------------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1993 $ 1 - $ 60 $ 2,493 $ 2,785 $ (626) $ 4,713
Class A common stock
issued (136 million
shares) and preferred
stock converted (1) $ 14 - 3,496 - - 3,509
Common stock issued for
employee stock and
benefit plans (18 million
shares) - - - 180 - 124 304
Tax benefit of common stock
transactions related to
employee benefit plans - - - 63 - - 63
Change in unrealized loss
on marketable securities - - - (5) - - (5)
Net income - - - - 795 - 795
Common and preferred stock
dividends - - - - (32) - (32)
Treasury stock purchased
(15 million shares) - - - - - (343) (343)
------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31,
1994 - 14 60 6,227 3,548 (845) 9,004
Common stock issued for
employee stock and
benefit plans (18 million
shares) - - - 132 - 189 321
Tax benefit of common stock
transactions related to
employee benefit plans - - - 25 - - 25
Acquisition of business
(.8 million shares) - - - 16 - - 16
Change in unrealized loss
on marketable securities - - - 5 - - 5
Net income - - - - 548 - 548
Common stock dividends - - - - (33) - (33)
Treasury stock purchased
(13 million shares) - - - - - (284) (284)
------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31,
1995 - 14 60 6,405 4,063 (940) 9,602
Common stock issued for
employee stock and
benefit plans (23 million
shares) - - - (56) - 533 477
Tax benefit of common stock
transactions related to
employee benefit plans - - - 61 - - 61
Net income - - - - 1,202 - 1,202
Common stock dividends - - - - (34) - (34)
Treasury stock purchased
(23 million shares) - - - - - (647) (647)
------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31,
1996 $ - $ 14 $ 60 $ 6,410 $ 5,231 $ (1,054) $ 10,661
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MCI Communications Corporation and Subsidiaries
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
The company operates predominantly in a single industry, the telecommunications
industry. The company provides a broad range of communication services,
including long distance, local and wireless telecommunication services and
information technology services. Long distance telecommunication services
comprise a wide spectrum of domestic and international voice and data services,
including long distance telephone, data communication, teleconferencing,
Internet and electronic messaging services.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Estimates are used when
accounting for revenue, allowances for uncollectible receivables,
telecommunications expense, depreciation and amortization, reorganization
accruals and asset write-downs, employee benefit plans and taxes.
Principles of Consolidation
The financial statements include the consolidated accounts of MCI Communications
Corporation and its majority-owned subsidiaries (collectively, the company) with
all significant intercompany transactions eliminated.
Revenue
The company records as revenue the amount of communication services furnished,
as measured primarily by the minutes of traffic processed, after deducting an
estimate of traffic which will be neither billed nor collected. Service
discounts and incentives are accounted for as a reduction of revenue when
granted or, where a service continuation contract exists, ratably over the
contract period. Revenue from information technology services is recognized,
depending on the service provided, on a percentage of completion basis or as
services and products are furnished or delivered.
Cash and Cash Equivalents
Cash equivalents consist primarily of certificates of deposit, securities of the
U.S. Government and its agencies and corporate debt securities all having
maturities of ninety days or less when purchased. The carrying amount reported
in the accompanying balance sheets for cash equivalents approximates fair value
due to the short-term maturity of these instruments. At December 31, 1996 and
1995, checks not yet presented for payment of $338 million and $248 million in
excess of cash balances, respectively, were included in current liabilities. The
company had sufficient funds available to cover these outstanding checks when
they were presented for payment.
Marketable Securities
Investments in marketable securities at December 31, 1996 and 1995 are
classified as available for sale and are reported at fair value in accordance
with Statement of Financial Accounting Standards No. 115 (SFAS No. 115),
"Accounting for Certain Investments in Debt and Equity Securities." The fair
values are based on quoted market prices, and any holding gains and losses are
excluded from earnings and reported as a net amount in additional paid in
capital until realized. Realized gains and losses are recorded in the income
statement and the cost assigned to securities sold is based on the specific
identification method.
Investments
The company uses the equity method to account for investments in entities in
which it has less than a majority interest but can exercise significant
influence. These investments are classified on the accompanying balance sheets
as investments in affiliates. Under the equity method, the investment,
originally recorded at cost, is adjusted to recognize the company's share of the
net earnings or losses of the affiliates as they occur, rather than as dividends
F-6
<PAGE> 32
or other distributions are received, limited to the extent of the company's
investment in, advances to and guarantees for the investee. The company's share
of net earnings or losses of affiliates includes amortization of purchase
adjustments. Other investments in which the ownership is less than 20% and the
company does not exercise significant influence are recorded at cost. The
company's investment in News Corp. is recorded under the cost method. The
company's investment in the Direct Broadcast Satellite (DBS) consists primarily
of the FCC license fee and satellite construction costs, all of which are
recorded at cost. The license expires 10 years from the date of grant; however,
FCC rules provide for renewal expectancy provisions. The company expects that
the license would be routinely renewed for successive 10 year terms subject to
compliance with such FCC rules. Accordingly, the license will be amortized using
the straight-line method over a period of 40 years at the time service provided
under the license commences, which is expected to begin in late 1997. Satellite
construction costs are capitalized in accordance with the company's accounting
policy for property and equipment.
Property and Equipment
The communications system in service is recorded at cost and includes material,
interest, labor and overhead. The costs of construction and equipment are
transferred to communications system in service as construction projects are
completed and/or equipment is placed in service. Depreciation is recorded
commencing with the first full month that the assets are in service and is
provided using the straight-line method over their estimated useful lives. A
majority of the company's communications system assets are grouped in like pools
for depreciation purposes. For these asset groups, the cost of equipment retired
in the ordinary course of business, less proceeds, is charged to accumulated
depreciation. The company periodically reviews and adjusts the useful lives
assigned to fixed assets to ensure that depreciation charges provide appropriate
recovery of capital costs over the estimated physical and technological lives of
the assets. The weighted average depreciable life of the assets comprising the
communications system in service approximates 10 years. Furniture, fixtures and
equipment are depreciated over a weighted average life of 6 years and includes
computer and data center equipment along with other administrative assets. Other
property includes land, buildings and leasehold improvements. Leasehold
improvements are depreciated over the shorter of the life of the equipment or
the life of the lease. Buildings are depreciated using lives of up to 35 years.
Maintenance and repairs are charged to expense as incurred.
Capital Leases
Certain of the company's lease obligations meet the criteria of a capital lease.
These obligations are recorded at the present value of the future lease
payments, including estimated bargain purchase options, discounted at the
approximate interest rate implicit in each lease. Amounts are depreciated over
the estimated useful lives of the equipment, which are generally longer than the
terms of the leases. Leases not capitalized are primarily for land on which
communications equipment is located and for administrative facilities, including
office buildings, vehicles, certain data processing equipment and office
equipment.
Other Assets and Deferred Charges
Included in other assets and deferred charges are unamortized customer discounts
and service incentives, right-of-way agreements with third parties, purchased
subscriber base, deferred advertising costs and debt issuance costs. Deferred
customer discounts and service incentives are amortized over the life of the
specific contract to which they relate; also included are amounts recoverable
under long-term customer service contracts, which are amortized over the
contract period. Right-of-way costs are amortized as the assets are placed in
service, over the lesser of the remaining term of the agreements or 25 years.
Purchased subscriber base is amortized over the period benefited. Debt issuance
costs are amortized over the life of the applicable debt.
F-7
<PAGE> 33
Goodwill
Goodwill represents the excess of the cost to acquire subsidiaries over the
estimated fair market value of the net assets acquired. These amounts are
amortized using the straight-line method over lives ranging from 10 to 40 years.
Accumulated amortization at December 31, 1996 and 1995 was $247 million and $172
million, respectively. The company periodically evaluates the realizability of
goodwill based upon projected undiscounted cash flows and operating income for
each subsidiary having a material goodwill balance. The company believes that no
impairment of goodwill existed at December 31, 1996.
Foreign Exchange Contracts and Interest Rate Swaps
The company enters into foreign exchange contracts and interest rate swap
agreements to hedge its foreign currency risks and reduce its interest rate
exposure (see Note 8). While the company does not engage in speculation, it is
exposed to market rate risk in the event of nonperformance by the other parties
to the agreements. The company manages credit risk by regularly monitoring and
evaluating the counterparties. At December 31, 1996, the fair values of and
potential risk of loss on these agreements were not material.
Income Taxes
The company files a consolidated federal income tax return on a March 31 fiscal
year end. Deferred income taxes are provided on transactions which are reported
in the financial statements in different periods than for income tax purposes.
Income tax benefits of tax deductions related to common stock transactions with
the company's employee benefit plans are recorded directly to additional paid in
capital. General business credits are accounted for by the flow-through method.
Earnings Per Common and Common Equivalent Share
Earnings per common and common equivalent share amounts are based on the
weighted average number of shares of common stock outstanding during each year,
adjusted for the effect of common stock equivalents arising from the assumed
exercise of stock options, if dilutive. Fully diluted earnings per share are not
materially different from primary earnings per share.
Reclassification
Certain prior year information has been reclassified to conform to the current
year presentation.
NOTE 2. MERGER AGREEMENT WITH BRITISH TELECOMMUNICATIONS PLC AND EXISTING
ALLIANCE
Merger Agreement
On November 3, 1996, the company entered into an Agreement and Plan of Merger
(the Merger Agreement) with British Telecommunications plc (BT), a public
limited company organized under the laws of England and Wales. As a result of
the proposed merger (the Merger), the stockholders of the company and BT will
become the owners of a combined company, renamed Concert plc (Concert). Under
the terms of the Merger, each outstanding share of the company's common stock
(other than treasury shares and shares owned by BT including the shares of Class
A common stock) will be converted into the right to receive (i) .54 American
Depository Share (ADS) of Concert, each ADS representing ten ordinary shares of
25 pence each of Concert (with cash being paid in lieu of fractional ADSs), and
(ii) $6.00 in cash.
Completion of the Merger is subject to certain conditions, including the
approval of the stockholders of the company and BT and receipt of required
regulatory approvals. The company expects to complete the Merger in the fall of
1997. The Merger will be accounted for under the purchase method of accounting
under both U.S. and United Kingdom (U.K.) generally accepted accounting
principles.
F-8
<PAGE> 34
Existing Alliance
On September 30, 1994, BT completed the purchase of 136 million shares of the
company's Class A common stock for $4.3 billion. As discussed further in Note
10, the purchase resulted in a 20% voting interest in the company. In
conjunction with this investment, the company purchased a 24.9% equity interest
in Concert Communications Company (Concert Communications), a business venture
launched by BT in July 1994, which provides global enhanced telecommunication
services for business customers. In addition, the company purchased from BT
substantially all of the operations of BT North America Inc. in January 1994 for
$108 million and divested its interest in AAP Telecommunications Pty. Ltd. in
October 1994.
The company and BT lease each others' access lines at prevailing market rates in
the ordinary course of business to process traffic in the U.S. and the U.K. The
company also conducts business with Concert Communications through the provision
and receipt of communication services at prevailing market rates. During 1996,
1995 and 1994, the amounts associated with these transactions were not material
to the company.
NOTE 3. BUSINESS ACQUISITIONS
In September 1995, the company acquired all of the outstanding shares of
Nationwide Cellular Service, Inc. for approximately $210 million. In November
1995, the company acquired all of the outstanding shares of SHL Systemhouse,
Inc. for approximately U.S. $1.13 billion. These acquisitions have been
accounted for as purchase business combinations and, accordingly, the net assets
and results of their operations have been included in the company's financial
statements since the acquisition dates. Acquisition costs have been allocated to
the fair value of assets acquired, including intangibles, and liabilities
assumed. The excess of the purchase price over the fair value of net assets for
these and other less significant 1995 acquisitions, of approximately $1.4
billion, is being amortized over periods of 20 to 40 years.
NOTE 4. MARKETABLE SECURITIES
At December 31, 1996 and 1995, all of the company's marketable securities were
classified as available-for-sale and stated at fair value. These securities were
included in the accompanying balance sheets as either cash and cash equivalents,
current marketable securities or noncurrent marketable securities. At December
31, 1996, the portfolio consisted of $40 million of certificates of deposit,
$143 million of U.S. Government agency securities and $67 million of corporate
debt securities. At December 31, 1995, the portfolio consisted of $70 million of
certificates of deposit, $385 million of U.S. Government agency securities and
$129 million of corporate debt securities.
At December 31, 1996 and 1995, amortized cost equaled fair market value. Sales
of available-for-sale marketable securities during 1996 and 1995 resulted in a
net realized gain of $0 and $13 million, respectively, which were included in
interest income.
The distribution of maturities of marketable securities is as follows:
<TABLE>
<CAPTION>
December 31, -------1996------- -------1995-------
Cost Fair Value Cost Fair Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In millions) Marketable securities:
Maturing within three months $ 31 $ 31 $211 $211
Maturing within one year 161 161 373 373
Maturing between one and five years 58 58 - -
- -------------------------------------------------------------------------------
Total marketable securities $250 $250 $584 $584
- -------------------------------------------------------------------------------
</TABLE>
F-9
<PAGE> 35
NOTE 5. INVESTMENT IN AFFILIATES
The company has various investments accounted for under the equity method, which
are reported in the accompanying balance sheets as investments in affiliates. At
December 31, 1996 and 1995, the net investment balance in affiliated companies
was $690 million and $495 million, respectively. Included in investment in
affiliates is Avantel, S.A. de C.V. (Avantel), a 44.5% owned business venture
with Grupo Financiero Banamex-Accival formed to provide competitive domestic and
international long distance telecommunications services in Mexico. At December
31, 1996 and 1995, the net investment balance for Avantel was $465 million and
$237 million, respectively. Also included is the company's 24.9% interest in
Concert Communications, which had a net investment balance of $53 million and
$58 million at December 31, 1996 and 1995, respectively. Until the merger with
BT is consummated, the company expects to continue making capital contributions
in Concert Communications to maintain its proportionate equity interest.
The summarized financial information for all affiliated companies accounted for
by the company under the equity method, as reported on their financial
statements as of and for the year ended December 31, 1995, is as follows:
current assets of $581 million, noncurrent assets of $759 million, current
liabilities of $396 million, noncurrent liabilities of $388 million, redeemable
preferred stock of $37 million, net sales of $590 million, gross profit of $100
million, net loss from continuing operations of $(437) million and net loss of
$(442) million. The company's share of net losses of affiliated companies in
1995 was $(187) million, which included a special charge discussed further in
Note 14, and represented, in the aggregate, more than 10% of the company's 1995
income before income taxes and such losses. Similar information about affiliated
companies for 1996 is not presented herein since the company's share of their
operating results was less than 10% of the company's 1996 income before income
taxes and such losses.
NOTE 6. INVESTMENTS IN NEWS CORP. AND DIRECT BROADCAST SATELLITE
In August 1995, the company made an initial investment of $1 billion in The News
Corporation Limited (News Corp.). The investment was comprised of (i) an
aggregate of 51 preferred shares of two U.S. subsidiaries of News Corp. with a
stated value and liquidation preference of $850 million and bearing a dividend
rate of 5.147%, and (ii) a four year warrant (purchase price of $150 million) to
acquire up to approximately 155 million News Corp. ordinary shares for $850
million. The exercise price of the warrant is payable, at the company's option,
in cash, through the surrender of the preferred shares or a combination of both.
The company has an option for five years to invest an additional $1 billion
under the same terms and for the same consideration as its initial investment.
During the five year period, News Corp. can require the company to invest the
additional $1 billion or a part thereof for News Corp.'s use to acquire assets
relating to its core business. In January 1996, News Corp. exercised a portion
of this right by requiring the company to invest $350 million, which investment
was made in May 1996. Should the company exercise its warrants and acquire
ordinary shares of News Corp., subject to certain exceptions, the company shall
vote in the same proportion as all other votes. For the years ended December 31,
1996 and 1995, the company recorded dividend income on its preferred stock
investment in News Corp. of $54 million and $18 million, respectively.
In December 1996, the Federal Communications Commission (FCC) issued the DBS
license awarded to the company in the January 1996 public auction. The DBS
spectrum slot, located at 110-degrees West Longitude, provides coverage of all
fifty states and Puerto Rico. DBS is a point-to-multipoint broadcast service
that uses high-powered Ku band satellites which are placed in geosynchronous
orbit. As of December 31, 1996, the company had capitalized $893 million related
to its investment in DBS, $682 million of which was for the payment of the
license and the remainder for the construction of satellites. As a result of
this alliance, the company and News Corp. have agreed to form a joint venture,
in which the company anticipates owning less than a 20% interest, to provide
digital satellite services to homes and businesses beginning in late 1997.
F-10
<PAGE> 36
NOTE 7. SUPPLEMENTARY BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
December 31, 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
(In millions) Other current assets:
Deferred income taxes $ 376 $ 317
Other receivables, net 191 173
Other 321 259
- -------------------------------------------------------------------------------
Total other current assets $ 888 $ 749
- -------------------------------------------------------------------------------
Other accrued liabilities:
Taxes, other than income $ 335 $ 399
Payroll and employee benefits 328 270
Reorganization costs 92 161
Other 1,051 898
- -------------------------------------------------------------------------------
Total other accrued liabilities $ 1,806 $ 1,728
- -------------------------------------------------------------------------------
Deferred taxes and other:
Deferred income taxes $ 1,697 $ 1,357
Other 26 28
- -------------------------------------------------------------------------------
Total deferred taxes and other $ 1,723 $ 1,385
- -------------------------------------------------------------------------------
</TABLE>
NOTE 8. DEBT AND LEASE OBLIGATIONS
Company debt consists of:
<TABLE>
<CAPTION>
December 31, 1996 1995
- -------------------------------------------------------------------------------
(In millions)
<S> <C> <C>
Senior Notes, net of unamortized discounts of
$1.5 million and $1 million at weighted average
interest rates of 6.9%, and with maturities
ranging from September 1997 to August 2006 $1,485 $1,486
Senior Debentures, net of unamortized discount
of $6.5 million and $6 million at a weighted
average interest rate of 7.6% and 7.9%, and with
maturities ranging from January 2023 to June 2027 1,384 884
Capital lease obligations at a weighted
average interest rate of 9.1% and 9.0% 504 589
Commercial paper and bank credit facility
borrowings at a weighted average interest
rate of 5.4% and 5.7% 1,422 705
Other debt at a weighted average interest
rate of 5% and 7.6% 206 280
- -------------------------------------------------------------------------------
Total debt 5,001 3,944
Debt due within one year (203) (500)
===============================================================================
Total long-term debt $4,798 $3,444
===============================================================================
</TABLE>
Annual maturities of long-term debt for the five years after December 31, 1996
are as follows: $203 million in 1997; $140 million in 1998; $582 million in
1999; $270 million in 2000 and $1,459 million in 2001.
Total interest costs were $314 million in 1996, $242 million in 1995 and $231
million in 1994, of which $118 million, $93 million and $78 million,
respectively, were capitalized.
F-11
<PAGE> 37
At December 31, 1996 and 1995, the estimated fair value of the company's
long-term debt, excluding capital lease obligations, is listed below. This
valuation represents either quoted market values, where available, or the
company's estimate based upon market prices of comparable debt instruments.
<TABLE>
<CAPTION>
December 31, 1996 1995
- -------------------------------------------------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
- -------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C> <C>
Senior Notes $1,485 $1,516 $1,486 $1,540
Senior Debentures 1,384 1,456 884 955
Commercial paper and bank
credit facility borrowings 1,422 1,422 705 705
Other debt 206 206 280 280
- -------------------------------------------------------------------------------
Total debt, excluding capital leases $4,497 $4,600 $3,355 $3,480
===============================================================================
</TABLE>
The excess in the estimated fair value versus the carrying amount of debt for
1996 and 1995 reflects the trend during the periods of market rates below the
company's fixed rate debt.
Senior Notes and Debentures
During 1996, the company issued two series of debt under its $1 billion shelf
registration. On June 24, 1996, the company issued $500 million aggregate
principal amount of 7 1/8% Senior Debentures due June 15, 2027 and on August 9,
1996, the company issued $300 million aggregate principal amount of 6.95% Senior
Notes due August 15, 2006. The proceeds of the issuances were used for general
corporate purposes, including the repayment of short-term borrowings under the
company's commercial paper program. In October 1996, the company effected a new
shelf registration, which combined the remaining $200 million available under
the former shelf registration, to enable the company to issue up to an
additional $1.2 billion aggregate principal amount of debt securities with a
range of maturities at either fixed or variable rates. The company has not
issued any securities under this new shelf registration at December 31, 1996.
During 1996 and 1995, the company repaid $300 million and $15 million of
maturing Senior Notes, leaving $2,869 million and $2,370 million of debt
securities outstanding at a weighted average annual interest rate of 7.21% and
7.25% at December 31, 1996 and 1995, respectively.
Commercial Paper and Bank Credit Facility Borrowings
On September 26, 1996, the company entered into a revolving credit loan
agreement with several parties under which the company may borrow up to $2
billion. This agreement expires in September 2001 and replaces the $2 billion
revolving credit loan agreement of July 1994. This credit facility supports the
company's commercial paper program and, in conjunction with this program, may be
used to fund fluctuations in working capital and other general corporate
requirements. There are no amounts outstanding under this credit facility at
December 31, 1996. During 1996, the company issued $9,089 million and repaid
$8,372 million of commercial paper borrowings leaving $1,422 million outstanding
under the commercial paper program at December 31, 1996. During 1995, the
company issued commercial paper and borrowed under the credit facility an
aggregate of $771 million and repaid an aggregate of $66 million leaving $705
million outstanding under the commercial paper program and credit facility.
Borrowings under the commercial paper program and credit facility are classified
as noncurrent as the remaining term of the credit facility agreement exceeds one
year.
F-12
<PAGE> 38
Lease Obligations
Future minimum rental commitments for capital leases are as follows: $131
million in 1997; $64 million in 1998; $54 million in 1999; $51 million in 2000;
$57 million in 2001; and $542 million thereafter. At December 31, 1996,
aggregate future minimum capital lease payments were $899 million including
interest of $395 million. The present value of future capital lease payments at
December 31, 1996 was $504 million. The gross and net book values of property
and equipment financed by capital leases were $497 million and $215 million,
respectively, at December 31, 1996 and $584 million and $274 million,
respectively, at December 31, 1995. Future minimum rental commitments for
noncancelable operating leases are as follows: $247 million in 1997; $211
million in 1998; $169 million in 1999; $129 million in 2000; $91 million in
2001; and $295 million thereafter. At December 31, 1996, aggregate future
minimum payments for noncancelable operating leases were $1,142 million. Total
rental expense for all operating leases was $332 million, $321 million and $262
million for the years ended December 31, 1996, 1995 and 1994, respectively.
NOTE 9. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEFERRABLE INTEREST
DEBENTURES OF THE COMPANY
On May 29, 1996, MCI Capital I, a wholly-owned Delaware statutory business trust
(Trust), issued $750 million aggregate principal amount of 8% Cumulative
Quarterly Income Preferred Securities, Series A (preferred securities) due June
30, 2026. The Trust exists for the sole purpose of issuing the preferred
securities and investing the proceeds in the company's 8% Junior Subordinated
Deferrable Interest Debentures, Series A (Subordinated Debt Securities) due June
30, 2026, the only assets of the Trust. The net proceeds from the issuance of
the Subordinated Debt Securities were used for general corporate purposes.
Holders of the preferred securities are entitled to receive preferential
cumulative cash distributions from the Trust, on a quarterly basis, provided the
company has not elected to defer the payment of interest due on the Subordinated
Debt Securities to the Trust. The company may elect this deferral from time to
time, provided that the period of each such deferral does not exceed five years.
The company made $35 million in Trust distributions during 1996. The preferred
securities are subject to mandatory redemption, in whole or in part, upon
repayment of the Subordinated Debt Securities at maturity or earlier in an
amount equal to the amount of Subordinated Debt Securities maturing or being
repaid. In addition, in the event the company terminates the Trust, the
Subordinated Debt Securities will be distributed to the then holders of the
preferred securities of the Trust.
In connection with the issuance of the preferred securities, the company
executed a Trust Agreement, an Indenture, a Guarantee Agreement and an Expense
Agreement. These agreements, taken together with the issuance of the
Subordinated Debt Securities, constitute a full, irrevocable and unconditional
guarantee by the company of all of the Trust's obligations under the preferred
securities (the Guarantee). The Guarantee Agreement covers payment of the
preferred securities' quarterly distributions and payments on maturity or
redemption of the preferred securities, but only in each case to the extent of
funds held by the Trust. If the company does not make interest payments on the
Subordinated Debt Securities held by the Trust, the Trust will have insufficient
funds to pay such distributions. The obligations of the company under the
Guarantee and the Subordinated Debt Securities are subordinate and junior in
right of payment to all senior debt of the company.
NOTE 10. STOCKHOLDERS' EQUITY
Preferred Stock Rights Plan
In September 1994, the company's board of directors adopted a stockholders'
rights plan (Rights Plan) and declared a dividend of one preferred share
F-13
<PAGE> 39
purchase right (Right) for each outstanding share of common stock and Class A
common stock (collectively, Common Shares). The Rights dividend was distributed
on October 11, 1994 to the holders of record on that date. The Rights have
attached and will continue to attach to certain future issuances of Common
Shares. Each Right entitles the registered holder to purchase from the company
one one-hundredth of a share of the company's Series E Junior Participating
Preferred Stock, par value $.10 per share (Series E Preferred Stock) for an
initial purchase price of $100, subject to adjustment. The Rights Plan was
amended on November 3, 1996 in connection with the Merger to avoid BT becoming
an "acquiring person" under the Rights Plan as a result of the approval,
execution or delivery of the Merger Agreement or the consummation of the Merger.
The Rights will become exercisable upon the occurrence of certain specified
events, including a public announcement that a person or group of affiliated or
associated persons (Acquiring Person) have acquired beneficial ownership of 10%
or more of the outstanding Common Shares (more than 20.1% in the case of share
acquisitions by BT unless such threshold is exceeded due solely to (i) the
approval, execution or delivery of the Merger Agreement or (ii) the consummation
of the Merger). In the event that any person or group of affiliated or
associated persons becomes an Acquiring Person, each holder of a Right (other
than Rights beneficially owned by the Acquiring Person, which will become void),
will thereafter have the right, subject to certain restrictions, to receive upon
exercise in lieu of Series E Preferred Stock that number of shares of the
company's common stock (or, at the option of the company, that number of one
one-hundredth of a share of Series E Preferred Stock) determined as set forth in
the Rights Plan.
For purposes of the Rights Plan, the company's board of directors has designated
10 million shares of Series E Preferred Stock which amount may be increased or
decreased by the board of directors. All Rights expire on September 30, 2004,
unless this date is extended or the Rights are earlier redeemed or exchanged by
the company in accordance with the Rights Plan.
Class A Common Stock
On September 30, 1994, BT completed the purchase of 136 million shares of the
company's Class A common stock for $4.3 billion, which resulted in a 20% voting
interest in the company. This purchase was achieved by the company's issuance of
108.5 million shares of Class A common stock to BT for a cash payment of $3.5
billion on September 30, 1994, and by BT's conversion of all the outstanding
13,736 shares of Series D convertible preferred stock (Series D), purchased for
$830 million in June 1993, into 27.5 million shares of Class A common stock. In
1996, 1995 and 1994, the company paid dividends of $.05, $.05 and $.025 per
share, respectively, on the Class A common stock. The company paid dividends of
$50 per share on the Series D in 1994.
At December 31, 1996, all of the Class A common stock was held by BT. The Class
A common stock is equivalent on a per share basis to the company's common stock,
except with respect to certain voting rights. BT is entitled to proportionate
representation on the company's board of directors, which currently equates to
three seats. In addition to board representation, BT is entitled to preemptive
rights with respect to the issuance of additional shares of common stock and to
investor protections with respect to certain corporate actions of the company.
Shares of Class A common stock automatically convert into common stock upon
transfer and in certain other events.
Common Stock Dividends
In 1996, 1995 and 1994, the company paid annual dividends of $.05 per share on
its common stock.
F-14
<PAGE> 40
NOTE 11. STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS
Employee Stock Option Plan
The current Employee Stock Option Plan (Stock Option Plan) provides for the
issuance of up to 128 million shares of common stock. On an annual basis,
pursuant to the Stock Option Plan, the board of directors may increase the
maximum number of shares available for issuance under the Stock Option Plan as
of each January 1, by up to 5% of the number of shares of common stock
outstanding at each such date. Options granted under the Stock Option Plan are
exercisable at such times and in such installments as determined by the
compensation committee of the board of directors. Options granted under the
Stock Option Plan may not have an option price less than the fair market value
of the common stock on the date of the grant.
Stock appreciation rights may be granted in combination with a stock option
either at the time of the grant or anytime thereafter. As of December 31, 1996,
no stock appreciation rights have been granted.
The compensation committee may also grant restricted stock awards and
performance share awards, subject to such conditions, restrictions and
requirements as the committee in its sole discretion may determine. During the
year ended December 31, 1996, approximately 1 million restricted shares were
granted. At December 31, 1996, there were approximately 1.8 million restricted
shares outstanding. No performance share awards had been issued at December 31,
1996.
The compensation committee may grant both incentive stock options and
non-qualified options under the Plan. All options granted in the last three
years have been non-qualified options. These non-qualified options expire after
ten years. Incentive stock options expire between five and ten years after
issuance. Both non-qualified and incentive stock options are exercisable ratably
over a three year period.
Under the Stock Option Plan, executives may be granted incentive stock units
(ISUs) which vest over a three year period and entitle the holder to receive
shares of the company's common stock. In addition, prior to the execution of the
Merger Agreement, the company awarded 3,035,000 senior retention ISUs entitling
the holders to receive up to 3,035,000 company shares in the aggregate. Such
senior retention ISUs are to vest one third upon the completion of the Merger
and one third on each of the first two anniversaries of the completion.
Directors' Stock Option Plan
The company also has a stock option plan for non-employee directors (Directors'
Plan) which provides for the issuance of up to 2 million shares of common stock.
Under the Directors' Plan, each non-employee director has been granted upon
commencement of service as a director a five-year option to purchase up to
40,000 shares of common stock at the closing price of the common stock on the
date of grant. Two directors declined such option. The options are exercisable
after the first anniversary of the date of grant, in cumulative installments of
25% per year. Similar options will be granted automatically to all new board
members who are not employees, including the nominee directors from BT. Upon the
fifth anniversary of the date of grant of options, the unexercised portion of
the grant shall be canceled and a new option for 40,000 shares shall be granted
automatically.
Both of the above option plans permit the holder of an option to pay the
purchase price for stock option exercises by surrendering shares of the
company's common stock having a fair market value equal to, or greater than, the
purchase price.
Employee Stock Purchase Plan
Under the current Employee Stock Purchase Plan (ESPP Plan), up to 56 million
shares of common stock may be purchased by eligible employees of the company
F-15
<PAGE> 41
through payroll deductions of up to 15% of their eligible compensation. The
purchase price is equal to the lesser of (a) 85% of the fair market value of the
stock on the date it is purchased or (b) 85% of the fair market value of the
stock on certain specified valuation dates. During 1996 and 1995, employees
purchased approximately 6.3 million and 6.5 million shares, respectively, under
the ESPP Plan.
Common Stock Reserved for Future Issuance
At December 31, 1996, 101 million shares of the company's authorized common
stock, including 75 million shares under option, were reserved for future
issuance under the Employee and Directors' Stock Option Plans and the ESPP Plan.
The company has opted to use treasury shares to fulfill the purchases made under
these plans during the three-year period ended December 31, 1996.
Accounting for Stock Issued to Employees
The company accounts for its stock option plans under APB Opinion No. 25
"Accounting for Stock Issued to Employees" under which no compensation expense
is recognized. In 1996, the company adopted Statement of Financial Accounting
Standards No. 123 "Accounting for Stock-Based Compensation" (SFAS No. 123) for
disclosure purposes; accordingly, no compensation expense has been recognized in
the results of operations for its stock option or ESPP plans as required by APB
Opinion No. 25.
For disclosure purposes the fair value of each stock option grant is estimated
on the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for stock options granted in 1996
and 1995, respectively: annual dividends of $0.05 for both years, expected
volatility of 24.7% and 33.2%, risk-free interest rate of 5.4% and 7.4% and
expected life of five years for all grants. The weighted-average fair value of
the stock options granted in 1996 and 1995 was $9.42 and $7.83, respectively.
The fair value of each stock purchase right under the ESPP Plan is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for stock purchase rights granted in
1996 and 1995, respectively: expected volatility of 30.7% and 30.2%, risk-free
interest rate of 5.1% and 5.7%, and expected life of one month for all grants.
The weighted-average fair value of the stock purchase rights granted in 1996 and
1995 was $4.87 and $3.99, respectively.
Under the above models, the total value of stock options granted in 1996 and
1995 was $195 million and $167 million, respectively, which would be amortized
ratably on a pro forma basis over the three-year option vesting period and the
total value of the stock purchase rights granted in 1996 and 1995 was $31
million and $26 million, respectively. Had the company determined compensation
cost for these plans in accordance with SFAS No. 123, the company's pro forma
net income and earnings per share would have been $1,105 million and $1.59 in
1996 and $498 million and $0.73 in 1995. The SFAS No. 123 method of accounting
does not apply to options granted prior to January 1, 1995, and accordingly, the
resulting pro forma compensation cost may not be representative of that to be
expected in future years.
F-16
<PAGE> 42
Stock option transactions are summarized as follows:
<TABLE>
<CAPTION>
Weighted-
Average
Number Exercise Price Exercise
of Shares Range Price
- --------------------------------------------------------------------------------
(In millions, except exercise price amounts)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Options outstanding, December 31, 1993 51.3 $ 3.44-28.75 $16.42
Options granted 22.3 18.88-26.88 26.33
Options exercised (8.1) 3.44-22.44 13.60
Options terminated (3.2) 3.81-28.75 23.41
- --------------------------------------------------------------------------------
Options outstanding, December 31, 1994 62.3 3.44-28.75 19.97
Options granted 25.2 18.38-26.50 19.13
Options exercised (9.8) 3.44-26.88 15.20
Options terminated (6.0) 5.38-28.25 22.37
- --------------------------------------------------------------------------------
Options outstanding, December 31, 1995 71.7 3.44-28.75 20.13
Options granted 22.4 25.13-30.25 29.18
Options exercised (13.6) 3.44-28.75 18.83
Options terminated (5.5) 9.94-30.06 25.04
- --------------------------------------------------------------------------------
Options outstanding, December 31, 1996 75.0 $ 9.94-30.25 $22.70
- --------------------------------------------------------------------------------
Options exercisable, December 31, 1995 31.1 3.44-28.75 18.17
Options exercisable, December 31, 1994 26.6 3.44-28.75 15.29
- --------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about the options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
--------Options Outstanding-------- ----Options Exercisable----
Weighted-
Average Weighted-
Number Remaining Average Number Weighted-
Range of Outstanding Contractual Exercise Outstanding Average
Exercise Prices (In millions) Life (Years) Price (In millions) Exercise Price
- --------------- ----------- ----------- ------ ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 9.94 - $14.88 5.1 3.6 $10.38 5.1 $10.38
$15.00 - $19.57 24.8 6.9 $18.05 12.7 $17.72
$20.06 - $24.13 9.5 6.2 $21.08 9.0 $21.01
$25.00 - $29.88 35.4 8.3 $28.15 9.6 $26.87
$30.06 - $30.25 0.2 7.3 $30.14 - -
------ ------ ------ ------ ------
75.0 36.4
</TABLE>
At December 31, 1996, the company had 9 million shares available for future
grant.
NOTE 12. EMPLOYEE BENEFIT PLANS
Pension Plans
The company maintains a noncontributory defined benefit pension plan (MCI Plan)
and a supplemental pension plan (Supplemental Plan). Western Union
International, Inc. (WUI), a subsidiary of the company, also has a defined
benefit pension plan (WUI Plan). Collectively, these plans cover substantially
all employees who work 1,000 hours in a year.
The MCI Plan and the Supplemental Plan provide pension benefits that are based
on the employee's compensation for each year of service prior to retirement. The
WUI Plan provides pension benefits based on the employee's compensation for each
year of service after 1990 and prior to retirement.
The company's policy is to fund the MCI Plan and the WUI Plan in accordance with
the funding requirements of the Employee Retirement Income Security Act of 1974
and within the limits of allowable tax deductions. The assets of the plans are
primarily invested in corporate equities, government securities and corporate
debt securities.
F-17
<PAGE> 43
Net periodic pension cost includes:
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C>
Service cost during the period $45 $40 $37
Interest cost on projected benefit obligation 29 25 21
Actual return on plan assets (54) (70) 3
Net amortization and deferral 22 48 (20)
===============================================================================
Net pension cost $42 $43 $41
===============================================================================
</TABLE>
The company's pension asset consists of:
<TABLE>
<CAPTION>
December 31, 1996 1995
- -------------------------------------------------------------------------------
(In millions)
<S> <C> <C>
Plan assets at fair value $453 $399
Accumulated benefit obligation including vested
benefits of $307 in 1996 and $305 in 1995 (347) (334)
===============================================================================
Plan assets in excess of accumulated
benefit obligation $ 106 $ 65
===============================================================================
Plan assets at fair value $453 $399
Projected benefit obligation for service
rendered to date (432) (401)
- -------------------------------------------------------------------------------
Plan assets in excess of (less than) projected
benefit obligation 21 (2)
Unrecognized net (gain) loss from past experience
different from that assumed (1) 42
Prior service cost not yet recognized in net
periodic pension cost 30 33
Unrecognized net asset at January 1, 1986
being recognized over 16 years (3) (4)
===============================================================================
Total prepaid pension asset $ 47 $ 69
===============================================================================
</TABLE>
The discount rate and rate of increase in future compensation levels used in
determining the actuarial present value of the projected benefit obligation at
December 31, 1996 was 7.75% for both plans and 5.75% and 5.00% for the MCI and
WUI Plans, respectively. At December 31, 1995, the discount rate used was 7.25%
and the rate of increase in future compensation levels was 5% for both plans.
The expected long-term rate of return on assets in 1996 and 1995 was 9% for the
MCI Plan and 8.5% for the WUI Plan.
Annual service cost is determined using the Projected Unit Credit actuarial
method and prior service cost is amortized on a straight-line basis over the
average remaining service period of employees.
Effective January 1, 1996, the company amended the MCI Plan. Retirement benefits
are calculated by first establishing an initial balance for each participant
based on the present value of benefits earned through 1995. For service after
1995, participants accrue benefits based on a specific percentage of annual
salary and earn interest credits based on the prior year's balance at a specific
interest rate. Employees who are age 50 or older and have at least five years of
service as of December 31, 1995, will have their benefits continue to accrue
under the previous formula through the year 2000.
F-18
<PAGE> 44
Employee Stock Ownership Plan and 401(k) Plans
The company has combined employee stock ownership (ESOP) and 401(k) plans
covering substantially all of its employees. The 401(k) plans allow employees to
defer pretax income in accordance with the requirements of Internal Revenue Code
Section 401(k). The company matches employee contributions up to a certain
limit. Participants vest in the company's matching contributions at a rate of
20% per year of service and are immediately 100% vested in their elective
deferrals. The company contributed approximately 1.6 million shares, 1.7 million
shares, and 1.5 million shares of its common stock as the company's matching
contribution to the 401(k) plans for the plan years ended December 31, 1996,
1995 and 1994, respectively. The company suspended contributions to the ESOP in
1994.
WUI sponsors a 401(k) savings plan for its collectively bargained employees (WUI
401(k)). The savings plan is intended to meet requirements of Internal Revenue
Code Section 401(k). WUI 401(k) participants vest in the company's matching
contributions at a rate of 20% per year of service and are immediately 100%
vested in their elective deferrals. The company contributed approximately 18,000
shares, 24,000 shares, and 22,000 shares of its common stock to the WUI 401(k)
for the plan years ended December 31, 1996, 1995 and 1994, respectively.
NOTE 13. INCOME TAXES
The components of the total income tax provision are:
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C>
Current
Federal $387 $182 $190
State and local 68 23 26
- -------------------------------------------------------------------------------
Current income tax provision 455 205 216
Deferred
Federal 276 129 243
State and local 22 15 26
- -------------------------------------------------------------------------------
Deferred income tax provision 298 144 269
- -------------------------------------------------------------------------------
Total income tax provision $753 $349 $485
===============================================================================
</TABLE>
A reconciliation of the statutory federal income tax rate to the company's
effective income tax rate is:
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax rate 35% 35% 35%
State and local income taxes, net
of federal income tax effect 3 3 3
Nondeductible amortization 1 2 1
Other (1) (1) (1)
===============================================================================
Effective income tax rate 38% 39% 38%
===============================================================================
</TABLE>
In 1996, 1995 and 1994, the company recorded a tax benefit of $61 million, $25
million and $63 million, respectively, to additional paid in capital for tax
deductions related to common stock transactions with its employee benefit plans.
At December 31, 1996, for federal income tax purposes, the company has $123
million of Alternative Minimum Tax (AMT) credit carryforwards available which
have no expiration date. In addition, the company has available $109 million of
acquired U.S. net operating loss carryforwards expiring through 2011, all of
which are subject to limitation due to change in ownership control, and $145
million of acquired Canadian net operating loss carryforwards expiring through
2004.
F-19
<PAGE> 45
At December 31, 1996, 1995 and 1994, the company's net deferred income tax
liability is comprised of the following:
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C>
Deferred income tax asset $ 550 $ 587 $ 321
Deferred income tax liability (1,871) (1,627) (1,398)
===============================================================================
Net deferred income tax liability $(1,321) $(1,040) $(1,077)
===============================================================================
The components of these amounts are:
Communications system $(1,885) $(1,577) $(1,312)
Customer discounts (77) (87) (61)
Allowance for uncollectibles 114 56 46
Reorganization and realignment expenses 34 61 4
Domestic equity investments 62 38 (6)
Alternative minimum and general
business tax credits - 104 102
Other, net 431 365 150
===============================================================================
Net deferred income tax liability $(1,321) $(1,040) $(1,077)
===============================================================================
</TABLE>
The company believes that it is more likely than not to realize the deferred
income tax asset and accordingly, no valuation allowance has been recorded in
the three years ended December 31, 1996.
NOTE 14. 1995 SPECIAL CHARGES
During the third quarter of 1995, the company implemented a reorganization
designed to increase efficiency, enhance marketplace effectiveness and improve
business focus. The company consolidated its core business and centralized major
administrative functions. In connection with the reorganization and other third
quarter 1995 events, the company recorded special pretax charges of $831
million. These charges were comprised of three components.
First, the company recorded a $520 million charge for an asset write-down which
reflected a decline in value of certain assets caused by changes in business and
technology strategy. The amount of the write-down was measured in conformity
with Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
Disposal or abandonment of substantially all of these assets occurred by
December 31, 1995.
Second, the company recorded a $216 million charge to sales, operations and
general expenses, which related primarily to reorganization costs. The company
expected to reduce its workforce by approximately 2,800 employees, of whom
approximately 2,400 had left the company by December 31, 1995 and the remainder
F-20
<PAGE> 46
during 1996. The company also abandoned excess and duplicate facilities at
various business and operations locations due to automation, workforce
reductions and centralization. As of December 31, 1996, the company had incurred
approximately $124 million of the accrued reorganization costs and approximately
$92 million of the accrual remained. The remaining accrual is primarily
comprised of costs associated with lease obligations for excess facilities,
contract termination costs and certain accrued legal and other business costs.
Cash expenditures for these expenses were and will continue to be funded from
cash from operations.
In addition, the company recorded a $95 million charge in equity in income
(losses) of affiliated companies related to several investees where
restructuring plans were implemented in the third quarter of 1995 or where
product offerings were not able to generate future cash flows sufficient to
recover the current carrying value.
NOTE 15. CONTINGENCIES
The company, in the normal course of business, is a party to a number of
lawsuits and regulatory and other proceedings. The company's management does not
expect that the results in these lawsuits and proceedings will have a material
adverse effect on the consolidated financial position or results of operations
of the company.
In December 1992, the company petitioned the United States District Court for
the District of Columbia for a declaratory ruling that certain patents being
asserted against the company by AT&T Corp. (AT&T) were invalid and that AT&T
should therefore, and for other reasons, be barred from enforcing them against
the company. AT&T counterclaimed that the company was violating certain patents.
In May 1993, AT&T and Unitel Communications Inc., a Canadian corporation in
which AT&T has an equity interest, filed a companion suit in Canada, alleging
that the company and the Stentor Group of Canadian telephone companies (with
which the company has an alliance) are infringing in Canada four of the patents
at issue in the U.S. litigation. The company does not expect that the above
action will have a material adverse effect on the consolidated financial
position or results of operations of the company.
On November 4, 1996 and thereafter, the company and all of its directors,
including the two directors who are also executive officers of the company and
the three directors elected by BT, were named as defendants in twelve complaints
filed in the Court of Chancery in the State of Delaware. BT was named as a
defendant in ten of the complaints. The complaints were brought by alleged
shareholders of the company, individually and purportedly as class actions on
behalf of all other stockholders of the company. The complaints allege breaches
of fiduciary duty by the company's directors in connection with the Merger. Nine
of the complaints in which BT was named as a defendant allege that BT aided and
abetted those breaches of duty. One of the complaints in which BT was named as a
defendant alleges that BT owes fiduciary duties to the other stockholders of the
company and that it breached those duties in connection with the Merger. The
complaints seek damages and other relief. The defendants believe that the
complaints are without merit and the company does not expect that the above
action will have a material adverse effect on the consolidated financial
position or results of operations of the company.
F-21
<PAGE> 47
NOTE 16. SELECTED QUARTERLY INFORMATION (Unaudited)
<TABLE>
<CAPTION>
Three months ended Dec.31, Sept.30, June 30, Mar.31,
1996 1996 1996 1996
- --------------------------------------------------------------------------------
(In millions, except per share amounts)
<S> <C> <C> <C> <C>
Revenue $4,753 $4,685 $4,565 $4,491
Operating expenses:
Cost of services 2,433 2,370 2,342 2,344
Sales, operations and general 1,310 1,304 1,229 1,185
Depreciation 441 430 412 381
Income from operations 569 581 582 581
Equity in income (losses) of
affiliated companies (28) (28) (45) (55)
Net income 303 304 300 295
Earnings per common and common
equivalent shares .44 .44 .43 .42
Weighted average number of shares of
common stock and common stock
equivalents outstanding 694 691 698 701
</TABLE>
<TABLE>
<CAPTION>
Three months ended Dec.31, Sept.30, June 30, Mar.31,
1995 1995 1995 1995
- --------------------------------------------------------------------------------
(In millions, except per share amounts)
<S> <C> <C> <C> <C>
Revenue $4,136 $3,862 $3,706 $3,561
Operating expenses:
Cost of services 2,152 2,001 1,921 1,819
Sales, operations and general 1,127 1,283 1,023 993
Depreciation 336 328 325 319
Asset write-down - 520 - -
Income (loss) from operations 521 (270) 437 430
Equity in income (losses) of
affiliated companies (24) (116) (18) (29)
Net income (loss) 284 (240) 260 244
Earnings (loss) per common and
common equivalent shares .41 (.35) .38 .36
Weighted average number of shares of
common stock and common stock
equivalents outstanding 694 688 684 685
</TABLE>
In September and November 1995, the company acquired all of the outstanding
shares of common stock of Nationwide and Systemhouse, respectively. These
acquisitions were accounted for as purchases; accordingly, the net assets and
results of operations of the acquired companies are included in the information
above since their respective acquisition dates.
The three months ended September 30, 1995 include $831 million of special pretax
charges. Charges include a $520 million asset write-down, $216 million primarily
of reorganization costs and $95 million recorded as equity in income (losses) of
affiliated companies where restructuring plans have been implemented or where an
adjustment for recoverability was made.
Since there are changes in the weighted average number of shares outstanding
each quarter, the sum of earnings per common and common equivalent share by
quarter may not equal the total share for the applicable year.
F-22
<PAGE> 48
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of MCI Communications Corporation
In our opinion, the consolidated balance sheets and the related consolidated
income statements, statements of cash flows and stockholders' equity appearing
on pages F-2 through F-22 present fairly, in all material respects, the
financial position of MCI Communications Corporation and its subsidiaries at
December 31, 1996 and 1995, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Washington, D.C.
January 27, 1997
F-23
<PAGE> 49
MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW
The following discussion and analysis provides information that management
believes is relevant to an assessment and understanding of MCI Communications
Corporation and subsidiaries' (collectively, the company) consolidated results
of operations and financial condition for the three years ended December 31,
1996. The discussion should be read in conjunction with the company's
consolidated financial statements and accompanying notes.
The company operates predominantly in the telecommunications industry providing
a broad range of communication services. The company is one of the world's
leading providers of communication services, the second largest carrier of long
distance telecommunication services in the United States (U.S.) and the third
largest carrier of international long distance telecommunication services in the
world. Through continued investments and 1995 business acquisitions, the company
has expanded its business into certain ventures and developing markets,
including the local, wireless, information technology and multimedia markets.
Global Merger Agreement
On November 3, 1996, the company entered into an Agreement and Plan of Merger
(the Merger Agreement) with British Telecommunications plc (BT), a public
limited company organized under the laws of England and Wales. As a result of
the proposed merger (the Merger), the stockholders of the company and BT will
become the owners of a combined company, renamed Concert plc (Concert). Under
the terms of the Merger, each outstanding share of the company's common stock
(other than treasury shares and shares owned by BT including the shares of Class
A common stock) will be converted into the right to receive (i) .54 American
F-24
<PAGE> 50
Depository Share (ADS) of Concert, each ADS representing ten ordinary shares of
25 pence each of Concert (with cash being paid in lieu of fractional ADSs), and
(ii) $6.00 in cash.
Completion of the Merger is subject to certain conditions, including the
approval of the stockholders of the company and BT and receipt of required
regulatory approvals. The company expects to complete the Merger in the fall of
1997. The Merger will be accounted for under the purchase method of accounting
under both U.S. and United Kingdom generally accepted accounting principles. The
company believes that Concert, operating with the combined networks, financial
resources, management, personnel and technical expertise of the company and BT,
will be better able to capitalize on growth opportunities in the
telecommunications industry, both domestically and internationally. In addition,
the company expects Concert will be able to derive significant advantages from
the more efficient utilization of their combined assets, management and
personnel. Under the terms of the Merger Agreement, the company and BT will
continue to sell and service customers using their own brand names in their
respective home countries.
- --------------------------------------------------------------------------------
Forward-looking Statements May Prove Inaccurate
The company has made certain forward-looking statements in Management's
Discussion and Analysis that are subject to risks and uncertainties.
Forward-looking statements include information concerning the possible future
results of operations of the company, its long distance telecommunication
services business, its investments in ventures and developing markets (VDM)
businesses, the possible future results of operations of the company and Concert
after the Merger and statements of information preceded by, followed by or that
include the words "believes", "expects", "anticipates", or similar expressions.
For those statements, the company claims the protection of the safe-harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995. The reader is cautioned that the following important factors, in
addition to those contained elsewhere in Management's Discussion and Analysis
could affect the future results of the company, its long distance
telecommunication services and VDM businesses and the company and Concert after
the Merger and could cause those results to differ materially from those
expressed in the forward-looking statements, such as: material adverse changes
in the economic conditions in the markets served by the company; a significant
delay in the expected closing of the Merger; future regulatory actions and
conditions in the company's operating areas, including the ability of the
company to obtain local facilities at competitive rates; and competition from
others in the U.S. and international long distance markets, including the entry
of the seven regional Bell operating companies (RBOCs) and other companies into
the long distance markets in the U.S.
Telecommunications Legislation
On February 8, 1996, the Telecommunications Act of 1996 (the Act) was signed
into law. It represents the most comprehensive revision of U.S. communications
policies in more than 60 years. The Act eliminates legal barriers to competition
in the local telephone market and, at the same time, contains provisions
intended to protect consumers and businesses from unfair competition by all
incumbent local exchange carriers (ILECs) including the seven RBOCs. The RBOCs
are permitted to offer long distance services outside their regions, but are
barred from offering in-region long distance services until they open their own
markets and encounter facilities-based local competition. Further, the entry of
an RBOC into the in-region long distance market requires the approval of the
Federal Communications Commission (FCC) which, in consultation with the relevant
state and the Department of Justice (DOJ), must find, among other things, such
entry to be in the public interest. The Act allows the company to enter into
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<PAGE> 51
local telephone markets by building new facilities, leasing unbundled network
elements from ILECs, reselling local network capacity and partnering with other
new market entrants, including other long distance companies.
On August 8, 1996, pursuant to the Act, the FCC adopted rules (the FCC
Interconnection Order) relating to the manner in which new entrants seeking
entry into local services markets will be able to interconnect with the ILECs.
The FCC Interconnection Order also contained a suggested range for discounts at
which the ILECs must offer new entrants facilities for resale until completion
of the various state proceedings to establish permanent rates. On October 15,
1996, the United States Court of Appeals for the Eighth Circuit stayed (the
Stay) certain key provisions including the pricing provisions of the FCC
Interconnection Order, until it is able to consider the parties' arguments and
render a decision on the appeal of the entire FCC Interconnection Order. Oral
argument on the appeal was heard on January 17, 1997. The company anticipates
that the court will render its decision sometime in the first or second quarter
of 1997. The Stay allows individual state regulatory agencies to interpret the
pricing provisions in the Act without regard to the FCC's interpretation of
those provisions. The company has completed arbitration of the interconnection
terms and conditions in most states and is in the process of filing
interconnection agreements with state public utility commissions for approval.
The company believes that the Stay hinders its ability to obtain ILEC services
and facilities on an economic basis and delays national competition in the local
services markets. The company will continue to pursue revenue growth and expand
local service capabilities in cities where the company has existing and planned
local switches. The company currently has 24 local switches installed in 25
major U.S. cities, 17 of which are operational. The remaining seven switches
will be placed in service by the end of the first quarter of 1997.
The company believes that the consummation of the proposed SBC Communications
Inc. / Pacific Telesis Group and Bell Atlantic Corp./Nynex Corp. mergers could
further slow the development of competition in the local services markets
because it removes significant potential competing parties. The SBC
Communications Inc./Pacific Telesis Group merger has been approved by the DOJ
and FCC but still requires state regulatory approval. The Bell Atlantic Corp./
Nynex Corp. merger still requires approval of the DOJ, FCC and regulatory
commissions in a number of states.
Earnings Highlights
Income from operations was $2,313 million in 1996 as compared to $1,118 million
in 1995 and $1,456 million in 1994. In 1995 and 1994, operating income was
affected by special pretax operating charges of $736 million and $133 million,
respectively. Excluding these charges, which are discussed below, income from
operations increased 25% in 1996 and 17% in 1995 and operating margins were
12.5% in 1996, 12.1% in 1995 and 11.9% in 1994.
Earnings were $1,202 million or $1.73 per share in 1996; $548 million or $.80
per share in 1995; and $794 million or $1.32 per share in 1994. Excluding
special charges, earnings were $1,066 million or $1.55 per share in 1995 and
$886 million or $1.47 per share in 1994. In 1996 and 1995, earnings were
negatively affected by the results of the company's ventures and developing
markets businesses and investments. The 1994 earnings per share reflect the
partial year dilutive impact of the issuance to BT on September 30, 1994 of 136
million shares of the company's Class A common stock, which included conversion
of preferred shares issued in 1993 to complete its 20% investment in the company
for $4.3 billion.
During the third quarter of 1995, the company implemented a reorganization
designed to increase efficiency, enhance marketplace effectiveness and improve
business focus. The reorganization was largely in response to the rapid changes
in business scope, technology and regulation affecting the telecommunications
industry. The company consolidated its core business and centralized major
administrative functions. In connection with the reorganization and other third
quarter 1995 events, the company recorded special pretax charges of $831
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<PAGE> 52
million. These charges were comprised of a $520 million asset write-down, a $216
million charge related primarily to reorganization costs and a $95 million
charge to equity in income (losses) of affiliated companies which related to
restructuring plans and write-down of carrying value for several investees.
After the applicable tax benefit, the charge resulted in a reduction to earnings
of $518 million or $.75 per share.
In 1994, the company recorded special pretax items totaling $148 million, which
related primarily to reduced utility of older asynchronous fiber-optic
transmission equipment and product launch costs. After the applicable tax
benefit, the charge resulted in a reduction to earnings of $92 million or $.15
per share.
CONSOLIDATED RESULTS OF OPERATIONS
The following provides a discussion of the company's consolidated results,
comprised of its long distance telecommunication services business (core
business) and ventures and developing markets (VDM) businesses, for the three
years ended December 31, 1996. Prior to 1996 and the company's acquisitions of
Nationwide Cellular Service, Inc. (Nationwide) and SHL Systemhouse, Inc.
(Systemhouse) (collectively, the acquired companies) in September and November
1995, respectively, substantially all of the company's revenues were derived
from its core business. Refer to the Enterprise Reporting section for further
discussion of the company's core and VDM businesses.
Revenue
In 1996, consolidated revenue increased by $3.2 billion or 21% over the prior
year versus a $1.9 billion or 14% increase in 1995 over 1994. In 1996, the
company's core business revenue increased by approximately $1.8 billion or 12%
while VDM business revenue, excluding sales to the company's core business,
increased by approximately $1.4 billion. Core business revenue continued to
increase primarily due to increased volumes and revenues from enhanced and value
added communication services provided to business customers. VDM growth reflects
the company's entry into certain developing markets primarily as a result of the
acquisition of the acquired companies. While VDM revenue in 1996 accounted for
44% of the consolidated year-over-year revenue increase, in 1995, revenue of the
acquired companies contributed to 10% of the consolidated year-over-year revenue
growth.
Cost of Services
Cost of services consists of telecommunications expense and costs of other
products and services primarily associated with VDM businesses.
Telecommunications expense is primarily comprised of access facilities fees paid
to local exchange carriers and other domestic service providers, and payments
made to foreign telephone companies (international settlements) to complete
calls made to foreign countries from the U.S. by the company's customers. In
VDM, costs of other products and services include equipment, software and
information technology service costs. In 1996, cost of services increased by
$1,596 million or 20% to $9,489 million as compared to $7,893 million and $6,916
million in 1995 and 1994, respectively. Such increases were consistent, as a
percentage, with the increase in consolidated revenues and full year
consolidation of the acquired companies. As a percentage of total revenues, cost
of services was 51.3% in 1996 as compared to 51.7% in 1995 and 51.9% in 1994.
With respect to core business, telecommunications expense as a percentage of
revenue decreased to 49.9% in 1996 from 51.9% in 1995 and 52.1% in 1994,
primarily due to decreases in access and international settlement rates, changes
in product mix and the use of alternative carriers.
Sales, Operations and General
Sales, operations and general expenses increased in 1996 by $602 million or 14%
to $5,028 million as compared to $4,426 million and $3,790 million in 1995 and
1994, respectively. Of this increase, approximately 60% was attributable to the
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<PAGE> 53
inclusion of a full year of expenses of the acquired companies. Of the remaining
increase, the majority was related to increases in sales and service employees,
marketing promotions and new product costs. Such increases were consistent, as a
percentage, with the growth in revenues. Excluding 1995 and 1994 special
charges, sales, operations and general expenses as a percentage of revenues were
27.2% in 1996, 27.6% in 1995 and 27.9% in 1994. The percentage reduction in 1996
is primarily the result of cost savings associated with the 1995 restructuring
efforts that resulted in the centralization of certain common functions
throughout the company and in reduced facilities costs as well as an ongoing
focus on cost efficiencies and the more efficient utilization of human
resources.
Depreciation
In 1996, depreciation expense increased by $356 million or 27% to $1,664 million
as compared to $1,308 million and $1,176 million in 1995 and 1994, respectively.
Of this increase, approximately 75% was primarily the result of additions to the
communications system network in order to increase network capacity, redundancy
and reliability, add product features and functionality and support the
company's entry into the local services market. The remaining increase is
primarily due to additional depreciation on property and equipment and
amortization associated with the acquired companies. As a percentage of revenue,
depreciation expense was 9% in 1996, 8.6% in 1995 and 8.8% in 1994. Depreciation
expense in 1995 reflects depreciation savings associated with the 1995 asset
write-down. Depreciation expense in 1994 reflects the additional $63 million
special charge to recognize the reduced utility of older asynchronous
fiber-optic transmission equipment and the results of an asset utilization
review.
Interest
Interest expense increased $47 million from 1995 due to an increase in the
average amount of outstanding debt as a result of commercial paper and debt
securities issuances during the year. Increases in average debt balances and
interest rates during 1995 resulted in higher interest costs than 1994; however
these increases were offset by increases in capitalized interest incurred as a
result of increased investment in the communications system.
Interest income decreased $113 million from 1995 due to lower short-term
marketable securities that resulted from the continued use of cash to fund
capital network expenditures, investments in the VDM businesses and the Direct
Broadcast Satellite (DBS) license and construction costs. Interest income
increased in 1995 from 1994 due to the investment of BT proceeds received in
September 1994.
Equity in Income (Losses) of Affiliated Companies
Equity in income (losses) of affiliated companies decreased by $31 million to
$(156) million at December 31, 1996. Excluding the 1995 special charge, equity
in losses of affiliated companies increased by $64 million due to increased
losses in certain of the company's investments and start-up ventures, including
ICS Communications, Inc., Avantel, S.A. de C.V. (Avantel) and operating costs
associated with the company's on-line project with The News Corporation Limited
(News Corp.). The 1995 increase in equity losses of affiliated companies as
compared to 1994 was primarily due to the aforementioned special charge and the
losses attributable to the company's investments in Concert Communications
Company (Concert Communications) and In-Flight Phone Corporation. As further
discussed in the Enterprise Reporting section, due to the start-up nature of
several of these investments and ventures, the company expects equity in losses
of affiliated companies to continue, but trend downward in 1997.
Other
Other expense, net, decreased by $27 million in 1996 and $37 million in 1995.
The 1996 decrease is primarily due to $54 million full year dividend income from
the company's preferred stock investment in News Corp. The 1995 decrease is due
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<PAGE> 54
to a $25 million charge recorded in 1994 for the settlement of two class action
suits and the dividend income of $18 million from the News Corp. preferred stock
investment made in August 1995.
Distributions on Subsidiary Trust Mandatorily Redeemable Preferred Securities
Distributions on subsidiary Trust mandatorily redeemable preferred securities,
issued in May 1996, totaled $35 million for the fiscal year.
ENTERPRISE REPORTING
This section segregates the performance of the company's core business from its
VDM businesses and investments. Core business services comprise a wide spectrum
of domestic and international voice and data services, including long distance
telephone, data communication, teleconferencing, Internet and electronic
messaging services. The company has invested in VDM businesses outside of its
core business through acquisitions, alliances and other strategic initiatives in
the local, information technology, wireless, international and multimedia
markets. Investments in these VDM businesses are included in the company's
financial statements as consolidated subsidiaries, unconsolidated equity
investments, or cost method investments such as News Corp.
The following unaudited information was prepared using all amounts included in
the company's consolidated financial statements and reflects estimates and
allocations that management believes provide a reasonable basis on which to
present such information. The revenue and income amounts include sales of
services between the VDM businesses and core business based primarily upon
prevailing market rates. Administrative expenses are allocated to the respective
enterprises on a fully distributed basis reflective of actual utilization. Net
interest expense is fully distributed based upon proportionate debt levels
reflecting the cash flow of the respective enterprise commencing on October 1,
1995. Prior to October 1, 1995, all debt was allocated to the core business
except for amounts allocated to support the acquisition of Nationwide and the
investments in News Corp. and MCImetro (SM). The consolidated income tax
provision and related tax payments are allocated to each enterprise based on its
tax attributes.
The following table summarizes the financial highlights of these enterprises.
SUPPLEMENTAL ENTERPRISE REPORTING DATA
<TABLE>
<CAPTION>
Core Business VDM Businesses
Year ended December 31, 1996 1995 1996 1995
- -------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C> <C>
Revenue $16,784 $14,990 $1,953 $ 365
Income (loss) from operations* 2,453 1,923 (126) (69)
Equity in income (losses) of
affiliated companies* - - (156) (92)
Net income (loss)* 1,514 1,191 (298) (125)
Capital expenditures 2,710 2,558 637 308
Depreciation 1,536 1,285 128 23
Net interest, income taxes
and other expense* (939) (732) (16) 36
EBITDA** 3,989 3,208 2 (46)
</TABLE>
* Amounts for 1995 have been adjusted to exclude the impact of the
aforementioned special charges.
** EBITDA, as defined by management, includes earnings, excluding equity in
income (losses) of affiliates, other income (expense), net, and subsidiary Trust
mandatorily redeemable preferred securities before interest, income taxes,
depreciation and amortization. EBITDA represents a measure of the company's
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<PAGE> 55
ability to generate cash flows and does not represent net income or cash flows
from operating, investing and financing activities as defined by generally
accepted accounting principles (GAAP). EBITDA should be considered in addition
to, but not as a substitute for, or superior to, measures of financial
performance reported in accordance with GAAP. EBITDA is often used by analysts
when evaluating the performance of a company. Readers are cautioned that the
company's definition of EBITDA may not be comparable to similar titled measures
used by other companies or analysts. EBITDA has been adjusted to exclude the
impact of the 1995 special charges.
The following discussion focuses on significant financial and operational
results of the company's core business and VDM businesses.
CORE BUSINESS
Core business revenues in 1996 increased by 12% to $16,784 million from $14,990
million in 1995. The company's revenue growth from its core business in 1996 was
approximately 30% of the total long distance industry revenue growth, estimated
to be approximately $6 billion.
<TABLE>
<CAPTION>
1996 vs. 1995 1995 vs. 1994
- -------------------------------------------------------------------------------
<S> <C> <C>
Increase in revenue 12% 13%
Increase in traffic 13% 16%
- -------------------------------------------------------------------------------
Revenue to traffic variance (1)% (3)%
- -------------------------------------------------------------------------------
</TABLE>
In 1996, the company's revenue to traffic variance in the core business narrowed
to (1)% as compared to (3)% in the prior year. The improvement in the revenue to
traffic variance over the prior year is primarily due to the improved mix of
higher margin product sales in the business and consumer markets such as
network, data and Intralata products, the impact of residential rate increases
and a reduction in consumer promotional activities. These improvements were
partially offset by increased provisions for uncollectibles during the year as a
result of tightened credit policies and increased bad debt write-offs. The
variance in revenue to traffic for the year was primarily the result of consumer
promotional activities, volume discounts and lower revenue rates associated with
sales to resellers.
Revenues in the business market continued to increase in 1996 across all sales
channels with particular strength in the mid-sized customer and carrier
channels. As in 1995, growth continues to be strongest in the network, data and
inbound products. In addition, emerging products have also contributed to the
business market revenue growth with Internet, conferencing and prepaid card
services each achieving 100% or more growth in 1996. Growth in mass markets,
which includes the former consumer and small business market groups, was slowed
as competitive pressures continued to affect the revenue and traffic growth.
Customer churn has increased year-over-year, but the company has experienced
continual improvement on a sequential quarters basis during 1996 due to further
focus on multiple product sales of higher margin products and profitability per
customer. The company expects additional churn improvement and improved revenue
and traffic growth in 1997 due to this continued focus and other related
actions.
Revenue increases in the business market in 1995 were primarily attributable to
growth in data products, which grew 34% in 1995, as well as the continued
success of the company's virtual private network product (Vnet (R)), MCI Vision
(R) and 800 services. In the consumer market, revenue and traffic growth in 1995
was driven by the company's Friends & Family (R), collect-calling (1-800-COLLECT
(R)), calling card and Personal 800 (R) products.
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<PAGE> 56
VENTURES AND DEVELOPING MARKETS BUSINESSES
During 1996, the company continued to make investments in its VDM businesses and
strategic initiatives and expand its business opportunities in these markets.
The company incurred costs of $893 million for its DBS investment, which
included a $682 million payment for its DBS license won in the January 1996
auction and $211 million in related DBS development costs, an additional $350
million investment in News Corp., approximately $390 million of continued
capital investments in MCImetro (SM), the company's local services subsidiary,
and $306 million of investments in affiliated companies including Avantel and
Concert Communications. The company's results of operations in these markets are
provided below.
Local
MCImetro (SM) provides switched services to business customers and local
fiber-optic capacity and competitive access services to the company's core
business and other long distance carriers, large businesses and government users
of telecommunication services. MCImetro (SM) intends to become a single-source
provider of comprehensive local wireline telecommunication services and to
compete in the local services market, while also reducing the company's access
and interconnection rates. Despite the stay of key provisions of the FCC
Interconnection Order, MCImetro (SM) will continue to pursue revenue and profit
growth while expanding local service capabilities. At December 31, 1996,
MCImetro (SM) had been granted authority to offer local exchange service in 24
states and had applications for such services pending in 9 other states.
In 1996 and 1995, MCImetro (SM) revenues were $178 million and $108 million,
respectively, on sales of fiber-optic capacity and competitive access services,
substantially all of which was derived from sales to the company's core
business. Also in 1996, MCImetro (SM) began to provide local switched service.
The loss from operations was $(97) million and $(26) million for the years ended
December 31, 1996 and 1995, respectively, while net loss was $(70) million and
$(17) million, respectively, for the same periods. EBITDA for the years ended
December 31, 1996 and 1995 was $(62) million and $(15) million, respectively. As
of December 31, 1996, the number of operational local city networks increased to
62 in 35 cities from 38 networks in 25 cities at year end 1995. At December 31,
1996, MCImetro (SM) had 2,948 route miles, 4,132 right-of-way miles and 24 Class
5 local switches installed as compared to 2,338 route miles, 3,700 right-of-way
miles and 10 Class 5 local switches installed at year end 1995. For the same
periods, MCImetro (SM) made capital expenditures of approximately $390 million
and $265 million, respectively, primarily for the construction of its local city
networks and Class 5 switch deployment. MCImetro (SM) currently has 17 switches
operational providing service in 18 major U.S. cities and intends to make local
service commercially available in 7 additional cities in the first quarter of
1997.
Information Technology Services
Information Technology Services primarily includes the results of Systemhouse's
operations, which was acquired in November 1995 for U.S. $1.13 billion, and in
addition includes Call Center Services. Information Technology Services revenues
increased by $1,266 million to $1,401 million in 1996. Revenues were comprised
of $686 million of equipment deployment and educational services, $399 million
for consulting and systems integration, $223 million for outsourcing services
and $93 million for Call Center Services. Of the total revenue increase,
approximately 90% is attributable to an entire fiscal year of consolidated
Systemhouse operating results. Call Center Services, which provides call center
outsourcing, consulting and automation services to mid-sized and large companies
in the U.S., Canada and Europe, increased revenue in 1996 by more than 150% from
the prior year. Income (loss) from operations was $42 million and $(9) million
and net loss was $(59) million and $(20) million for the years ended December
31, 1996 and 1995, respectively. EBITDA was $114 million and $(3) million for
the same periods.
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<PAGE> 57
Backlog, which includes amounts committed under executed contracts or letters of
intent, at December 31, 1996 and 1995, was approximately $2 billion and
approximately $1.4 billion, respectively, the majority of which is from
Systemhouse's largest customers. The company expects that approximately 25% of
the backlog will be delivered in the next twelve months. Since revenue depends
on actual usage under service contracts and may be subject to termination under
certain circumstances, actual revenue for a particular contract may be higher or
lower than the reported backlog for such contract.
Wireless
Wireless primarily includes the results of operations of Nationwide, which was
acquired in September 1995 for $210 million, and in addition includes paging
services. Wireless revenues, which are derived from cellular and paging services
and equipment sales, increased by $254 million to $347 million in 1996. Of the
total revenue increase, approximately 80% is attributable to an entire fiscal
year of consolidated operating results of Nationwide. At December 31, 1996, the
number of cellular service subscribers increased to 429 thousand from 347
thousand at December 31, 1995. This increase is the result of the company's
expansion into new markets during the year bringing the company's coverage to
more than 35 markets. Paging subscribers declined during 1996 as the company
de-emphasized stand-alone paging offerings to consumers in the second quarter to
revise the cost and service infrastructure. The company anticipates re-launching
the service in the first half of 1997. Loss from operations was $(45) million
and $(17) million and net loss was $(43) million and $(18) million for the
twelve months ended December 31, 1996 and 1995, respectively. EBITDA was $(28)
million and $(16) million for the same periods.
International Services
During 1996, the company invested $25 million in Concert Communications, a 24.9%
owned international services venture with BT which provides a complete portfolio
of advanced global communication services including virtual network, frame
relay, managed bandwidth and packet services, available to multinational
business customers worldwide. For the year ended December 31, 1996 and 1995,
Concert Communications' distributor revenues amounted to approximately $570
million and $300 million, respectively. Concert Communications' virtual network
service continued to grow with over 90 sites active or becoming operational
around the world. The company's share of Concert Communications' losses reported
in accordance with U.S. GAAP was $(31) million for the year ended December 31,
1996 and $(57) million, exclusive of Concert Communications' special charges,
for the year ended December 31, 1995. Through December 31, 1996, the company has
invested approximately $170 million in Concert Communications since its launch
in July 1994.
In November 1996, the company invested an additional $248 million in Avantel, a
44.5% owned business venture with Grupo Financiero Banamex-Accival, bringing its
total invested cash position to $495 million since the Avantel joint venture was
formed in November 1995. Avantel has built Mexico's first all digital
fiber-optic network and on August 12, 1996 became the first company to provide
alternative long distance service in the Mexican telecommunications market
competing against Telefonos de Mexico. Avantel launched the first branded
Mexico-to-United States collect calling product and two new dialing products
targeted to consumers and businesses. Avantel began offering a full range of
competitive switched long distance services to residential and business
customers in January 1997. During 1996, Avantel invested approximately $520
million in capital expenditures for the continued development of its
communication system. Additionally, Avantel increased its fiber-optic network in
Mexico during the year to 3,431 route miles. For the year ended December 31,
1996, the company's share of Avantel's losses was $(30) million. The company
expects to incur increasing losses on its investment during 1997 as Avantel
moves forward with its entry into the Mexican telecommunications market
expanding its service and customer bases.
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<PAGE> 58
Multimedia Services
The company invested an additional $350 million in News Corp. in May 1996,
bringing its total cost investment to $1,350 million at December 31, 1996.
Dividend income on the investment for the years ended December 31, 1996 and 1995
was $54 million and $18 million, respectively.
In December 1996, the FCC issued the DBS license awarded to the company in the
January 1996 public auction. The DBS spectrum slot, located at 110-degrees West
Longitude, provides coverage of all fifty states and Puerto Rico. DBS is a
point-to-multipoint broadcast service that uses high-powered Ku band satellites
which are placed in geosynchronous orbit. During 1996, the company paid an
aggregate of $682 million for the license and invested $211 million in primarily
satellite construction costs. The company and News Corp. have agreed to form a
joint venture, in which the company anticipates owning less than a 20% interest,
to provide digital satellite services to homes and businesses beginning in late
1997.
The company is currently in the process of renegotiating its investment
agreement with News Corp. which may include the purchase by the company of
mandatorily redeemable preferred securities of News Corp., the payment by the
DBS joint venture to the company of a limited right-to-use fee for the DBS
spectrum slot, and the termination of the company's remaining investment
obligation and News Corp.'s rights relating thereto. Refer to footnote 6 of the
company's consolidated financial statements for further detail on its investment
obligation in News Corp.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Cash from operations increased to $3,144 million in 1996 from $2,979 million in
1995 which was consistent with the growth in income from operations offset by an
increase in the amount of taxes and interest paid and a decline in the amount of
interest received in 1996. Cash used for investing activities increased to
$4,782 million in 1996 from $4,292 million in 1995. In 1996, the company used
cash of $3,347 million, an increase of $481 million, to fund capital
expenditures primarily for network deployment and local services. The company
also invested $682 million to acquire the FCC license for the DBS slot and
funded an additional $171 million primarily in related satellite construction
costs. The company invested an additional $350 million in News Corp. in 1996
bringing its total investment to $1,350 million and made additional
contributions of $248 million to Avantel and $58 million to other equity
investments. Cash from operations and financing activities was used primarily to
support the company's investing activities during 1996.
Cash from financing activities increased to $1,354 million in 1996 from $355
million in 1995 primarily the result of net issuances of commercial paper,
issuances under the debt shelf registration and the subsidiary Trust mandatorily
redeemable preferred securities, and common stock issuances under employee
benefit plans. During 1996, the commercial paper balance increased by $717
million. In addition, the company issued two series of debt under its $1 billion
shelf registration including $500 million aggregate principal amount of 7 1/8%
Senior Debentures due June 15, 2027 and $300 million aggregate principal amount
of 6.95% Senior Notes due August 15, 2006. In May 1996, MCI Capital I, a
wholly-owned Delaware statutory business trust (Trust), issued $750 million
aggregate principal amount of 8% Cumulative Quarterly Income Preferred
Securities, Series A (preferred securities) due June 30, 2026. The Trust exists
for the sole purpose of issuing preferred securities and investing the proceeds
in the company's 8% Junior Subordinated Deferrable Interest Debentures, Series A
due June 30, 2026, the only assets of the Trust. Cash proceeds from issuances of
common stock under employee benefit plans were $426 million. The gross proceeds
of these issuances were offset by amounts used to repurchase $647 million of
treasury stock.
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<PAGE> 59
Working Capital
Working capital (defined as current assets less current liabilities) was $(330)
million and $(365) million at December 31, 1996 and 1995, respectively. In 1996,
current assets increased by $211 million, primarily as a result of increases in
accounts receivable and other current assets which reflect strong year end
business volume and are consistent with the growth in revenue offset by reduced
cash and marketable securities balances which were used to fund the company's
working capital requirements. Current liabilities increased by $176 million from
December 31, 1995 primarily due to increases of $395 million in accounts payable
and accrued telecommunications expense offset by a $297 million reduction in the
current maturities of long-term debt. The increases in accounts payable and
accrued telecommunications expense were attributable to the growth in the
company's overall business. Long-term debt due within one year decreased in 1996
as a result of the repayment of $300 million of maturing Senior Notes.
EBITDA
Consolidated EBITDA increased to $4 billion or 25% from $3.2 billion in 1995 and
$2.7 billion in 1994. The increase in EBITDA in 1996 is the result of the
increase in consolidated revenues and the improvement in cost of services and
sales, operations and general expenses as a percentage of consolidated revenues.
EBITDA, as defined by management, includes earnings, excluding equity in income
(losses) of affiliates, other income (expense), net, and distributions on
subsidiary Trust mandatorily redeemable preferred securities before interest,
income taxes, depreciation and amortization. EBITDA represents a measure of the
company's ability to generate cash flows and does not represent net income or
cash flows from operating, investing and financing activities as defined by
GAAP. EBITDA should be considered in addition to, but not as a substitute for,
or superior to, measures of financial performance reported in accordance with
GAAP. EBITDA is often used by analysts when evaluating the performance of a
company. Readers are cautioned that the company's definition of EBITDA may not
be comparable to similar titled measures used by other companies or analysts.
EBITDA has been adjusted to exclude the impact of the 1995 special charges.
Funding of Capital Expenditures and Investments in Ventures and Developing
Markets
In 1996, the company funded its capital expenditures, investments in News Corp.,
Avantel, DBS and other ventures through cash from operations and debt and
commercial paper issuances. In 1997, the company plans approximately $3.9
billion in capital expenditures, which includes MCImetro (SM) capital
expenditures, a majority of which will be funded with cash from operations. In
addition, the company expects to invest approximately $200 million in existing
VDM investments. The company believes that it will be able to meet its current
and long-term liquidity and capital requirements from cash from operations and
existing debt facilities. The company has a $2 billion bank credit facility
which expires in September 2001. The bank credit facility supports the company's
commercial paper program and may be used to fund short-term fluctuations in
working capital and other corporate requirements. In addition, the company has a
$1.2 billion shelf registration in effect, which covers the issuance of debt
securities with a range of maturities at either fixed or variable rates. At
December 31, 1996, there was $1,422 million outstanding under the commercial
paper program and bank credit facility, and no securities were issued under the
shelf registration. In light of the Merger Agreement, the company is currently
evaluating debt financing options which may include increases to the credit
facility and longer term debt issuances.
The company's ratio of debt to total capitalization, defined as total debt to
total debt plus subsidiary Trust mandatorily redeemable preferred securities and
equity, increased to 30% at December 31, 1996 from 29% at December 31, 1995. The
increase in 1996 was the result of commercial paper and debt issuances to fund
investments in the VDM businesses and capital expenditures. Issuances of
commercial paper to fund the acquisitions of the acquired companies and
investments in the VDM businesses in 1995 caused the company's debt to total
capitalization ratio to increase to 29% at December 31, 1995 from 26% at
December 31, 1994.
F-34
<PAGE> 60
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1997 1996 1997 1996
-------- -------- ------- --------
<S> <C> <C> <C> <C>
REVENUE $4,819 $4,685 $14,545 $13,741
-------- -------- ------- --------
OPERATING EXPENSES
Cost of services 3,018 2,370 8,090 7,056
Sales, operations and general 1,444 1,304 4,028 3,718
Depreciation 543 430 1,475 1,223
-------- -------- ------- --------
TOTAL OPERATING EXPENSES 5,005 4,104 13,593 11,997
-------- -------- ------- --------
INCOME (LOSS) FROM OPERATIONS (186) 581 952 1,744
Interest expense (58) (51) (174) (153)
Interest income 4 7 14 27
Equity in income (losses) of
affiliated companies (46) (28) (107) (128)
Other income (expense), net 6 (1) (1) (1)
-------- -------- ------- --------
INCOME (LOSS) BEFORE INCOME TAXES
AND TRUST DISTRIBUTIONS (280) 508 684 1,489
Income tax (provision) benefit 113 (189) (246) (570)
Distributions on subsidiary Trust
mandatorily redeemable preferred
securities 15 15 45 20
-------- -------- ------- --------
NET INCOME (LOSS) $ (182) $ 304 $ 393 $ 899
======== ======== ======= =======
EARNINGS (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE $ (.26) $ .44 $ .56 $ 1.29
Weighted average number of shares
of common stock and common stock
equivalents outstanding 695 691 705 695
Dividends declared per common share $ - $ - $ .025 $ .025
</TABLE>
See accompanying Notes to Interim Condensed Consolidated Financial Statements.
F-35
<PAGE> 61
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
----------- -----------
(In millions)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 139 $ 187
Marketable securities 10 161
Receivables, net of allowance for
uncollectibles of $344 and $273 million 3,561 3,480
Other assets 893 888
------- -------
TOTAL CURRENT ASSETS 4,603 4,716
------- -------
PROPERTY AND EQUIPMENT, net 13,783 12,174
OTHER ASSETS
Noncurrent marketable securities 10 58
Other assets and deferred charges, net 971 678
Investment in affiliates 605 690
Investment in News Corp. 1,350 1,350
Investment in DBS 1,029 893
Goodwill, net 2,366 2,419
------- -------
TOTAL OTHER ASSETS 6,331 6,088
------- -------
TOTAL ASSETS $24,717 $22,978
======= =======
</TABLE>
See accompanying Notes to Interim Condensed Consolidated Financial Statements.
F-36
<PAGE> 62
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
----------- -----------
(In millions)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $1,038 $ 992
Accrued telecommunications expense 2,312 2,045
Other accrued liabilities 1,925 1,806
Long-term debt due within one year 2,052 203
------ ------
TOTAL CURRENT LIABILITIES 7,327 5,046
------ ------
NONCURRENT LIABILITIES
Long-term debt 3,282 4,798
Deferred taxes and other 2,037 1,723
------ ------
TOTAL NONCURRENT LIABILITIES 5,319 6,521
------ ------
COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED
SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY
JUNIOR SUBORDINATED DEFERRABLE INTEREST
DEBENTURES OF THE COMPANY 750 750
STOCKHOLDERS' EQUITY
Class A common stock, $.10 par value,
authorized 500 million shares, issued
136 million shares 14 14
Common stock, $.10 par value, authorized
2 billion shares, issued
560 million shares 60 60
Additional paid in capital 6,394 6,410
Retained earnings 5,607 5,231
Treasury stock, at cost,
32 and 44 million shares (754) (1,054)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 11,321 10,661
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 24,717 $ 22,978
======== ========
</TABLE>
See accompanying Notes to Interim Condensed Consolidated Financial Statements.
F-37
<PAGE> 63
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------
1997 1996
-------- --------
(In millions)
<S> <C> <C>
OPERATING ACTIVITIES
Receipts from customers $14,108 $13,267
Payments to suppliers and employees (11,316) (10,580)
Taxes paid (303) (497)
Interest paid (218) (163)
Interest and dividends received 8 28
-------- --------
CASH FROM OPERATING ACTIVITIES 2,279 2,055
-------- --------
INVESTING ACTIVITIES
Capital expenditures for property and equipment (2,642) (2,423)
Purchases, maturities and sales of
marketable securities, net 199 176
Investment in News Corp. - (350)
Investment in DBS (146) (268)
Investment in affiliates (45) (32)
Acquisition of businesses - (24)
Other, net (2) (8)
-------- --------
CASH USED FOR INVESTING ACTIVITIES (2,636) (2,929)
-------- --------
NET CASH FLOW BEFORE FINANCING ACTIVITIES (357) (874)
-------- --------
FINANCING ACTIVITIES
Issuance (payment) of Debentures and other debt, net (259) 492
Commercial paper and bank credit facility
activity, net 319 (368)
Issuance of Trust preferred securities, net - 726
Issuance of common stock for employee plans 359 342
Purchase of treasury stock (93) (522)
Payment of dividends on common stock and
Class A common stock (17) (17)
-------- --------
CASH FROM FINANCING ACTIVITIES 309 653
-------- --------
Net decrease in cash and cash equivalents (48) (221)
Cash and cash equivalents - beginning balance 187 471
-------- --------
Cash and cash equivalents - ending balance $ 139 $ 250
======== ========
Reconciliation of net income to cash from
operating activities:
Net income $ 393 $ 899
Adjustments to net income:
Depreciation and amortization 1,501 1,267
Equity in (income) losses of affiliated companies 107 127
Deferred income tax provision (37) 192
Net change in operating activity accounts
other than cash and cash equivalents:
Receivables (81) (419)
Operating accounts payable (195) 122
Other operating activity accounts 591 (133)
-------- --------
Cash from operating activities $ 2,279 $ 2,055
======== ========
</TABLE>
See accompanying Notes to Interim Condensed Consolidated Financial Statements.
F-38
<PAGE> 64
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
STATEMENT OF STOCKHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
Treas. Total
Class A Addit'l Stock, Stock-
Common Common Paid in Retained at holders'
Stock Stock Capital Earnings Cost Equity
------ ------ ------- -------- ------- -------
(In millions)
<S> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1996 $14 $60 $6,410 $5,231 $(1,054) $10,661
Common stock issued
for employee stock
and benefit plans and
other activity
(14 million shares) - - (16) - 387 371
Net income - - - 393 - 393
Common stock dividends - - - (17) - (17)
Treasury stock
purchased
(2 million shares) - - - - (87) (87)
--- --- ------ ------ ----- -------
Balance at
September 30, 1997 $14 $60 $6,394 $5,607 $ (754) $11,321
=== === ====== ====== ====== =======
</TABLE>
See accompanying Notes to Interim Condensed Consolidated Financial Statements.
F-39
<PAGE> 65
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. GENERAL
The accompanying unaudited interim condensed consolidated financial statements
have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission (SEC). The interim condensed consolidated
financial statements include the consolidated accounts of MCI Communications
Corporation and its majority-owned subsidiaries (collectively, the company) with
all significant intercompany transactions eliminated. In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
necessary for a fair statement of the financial position, results of operations
and cash flows for the interim periods presented have been made. The preparation
of the financial statements includes estimates that are used when accounting for
revenue, allowances for uncollectible receivables, telecommunications expense,
depreciation and amortization, employee benefit plans and taxes. Actual results
could differ from those estimates. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles (GAAP) have been condensed or omitted pursuant to
such SEC rules and regulations. These financial statements should be read in
conjunction with the company's Annual Report on Form 10-K for the year ended
December 31, 1996.
NOTE 2. MERGER AGREEMENT WITH WORLDCOM, INC.
On November 9, 1997, the company entered into an Agreement and Plan of Merger
(the Agreement) with WorldCom, Inc., a Georgia corporation (WorldCom), and TC
Investments Corp., a Delaware corporation and a wholly-owned subsidiary of
WorldCom (Merger Sub), pursuant to which the company will merge with and into
Merger Sub (the Merger). As a result of the Merger, (a) each outstanding share
of the company's common stock, par value $.10 per share (other than shares owned
by WorldCom or Merger Sub or held by the company) will be converted into the
right to receive that number of shares of WorldCom common stock, par value $.01
per share, equal to the quotient determined by dividing $51.00 by the average of
the high and low sale prices of WorldCom common stock as reported on The Nasdaq
National Market on each of the twenty consecutive trading days ending with the
third trading day immediately preceding the effective time of the Merger (the
Exchange Ratio), provided that the Exchange Ratio shall not be less than 1.2439
or greater than 1.7586; and (b) each outstanding share of the company's Class A
common stock (other than shares of Class A common stock owned by WorldCom or
Merger Sub or held by the company) shall be converted into the right to receive
$51.00 in cash, without interest thereon. The combined companies plan to operate
under the MCI WorldCom name.
F-40
<PAGE> 66
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Concurrent with the Agreement, the company, WorldCom and British
Telecommunications plc (BT) entered into an agreement whereby (i) the Agreement
and Plan of Merger, dated as of November 3, 1996, as amended (the BT Merger
Agreement), among the company, BT and Tadworth Corporation was terminated; (ii)
WorldCom agreed to pay BT $450,000,000 and expenses not in excess of $15,000,000
in order to induce BT to waive its rights under, and agree to terminate, the BT
Merger Agreement; (iii) BT agreed to support and vote its shares of Class A
Common Stock in favor of the Merger; and (iv) BT may exercise its call option to
acquire the company's shares in Concert Communications Services (CCS)
immediately following the effective date of the Merger. The company will be a
distributor of CCS services on a nonexclusive basis for five years following
BT's exercise of its call option.
Consummation of the Merger is subject to certain conditions, including receipt
of the approval of the Merger and the transactions contemplated thereby, by the
stockholders of the company and WorldCom and receipt of required regulatory
approvals.
NOTE 3. DEBT
On July 23, 1997, the company entered into a $500 million forward-starting swap
agreement at a fixed interest rate of 6.71%.
NOTE 4. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 130, Reporting Comprehensive Income, which is effective
for fiscal years beginning after December 15, 1997. The Statement establishes
standards for reporting and displaying comprehensive income, as defined, and its
components. The company plans to adopt the Statement's disclosure standards in
1998.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information, which is effective for fiscal years
beginning after December 15, 1997. The Statement establishes standards for the
way companies report information about operating segments in annual and interim
financial statements. The company plans to adopt the Statement's disclosure
standards in 1998.
F-41
<PAGE> 67
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 5. CONTINGENCIES
The company, in the normal course of business, is a party to a number of
lawsuits and regulatory and other proceedings certain of which are described
below.
On November 4, 1996 and thereafter, and on August 25, 1997 and thereafter, the
company and all of its directors, including the two directors who are also
executive officers of the company and the three directors elected by BT, were
named as defendants in a total of fifteen complaints filed in the Court of
Chancery in the State of Delaware. BT was named as a defendant in thirteen of
the complaints. In addition, amended or revised complaints were filed in four of
those cases commenced in November 1996 and in one of the cases filed in August
1997. The complaints were brought by alleged stockholders of the company,
individually and purportedly as class actions on behalf of all other
stockholders of the company. The complaints allege breaches of fiduciary duty by
the company's directors in connection with the BT Merger Agreement. Seven of the
complaints in which BT was named as a defendant allege that BT aided and abetted
those breaches of duty. Five of the complaints in which BT was named as a
defendant allege that BT owes fiduciary duties to the other stockholders of the
company and that it breached those duties in connection with the BT Merger
Agreement. The complaints seek damages and other relief.
On or about October 8, 1997, all of the company's directors, including the two
directors who are also executive officers of the company and the three directors
elected by BT, were named as defendants in a purported derivative complaint
filed in the Court of Chancery in the State of Delaware. BT and Tadworth
Corporation were also named as defendants, and the company was named as a
nominal defendant. The plaintiff, derivatively and on behalf of the company,
alleges breach of fiduciary duty by the company's directors and aiding and
abetting those breaches of duty by BT in connection with the BT Merger Agreement
and WorldCom's exchange offer. The complaint seeks injunctive relief, damages,
and other relief. On November 14, 1997, plaintiffs' counsel and defendants'
counsel held a conference with the Court of Chancery in Delaware in which
plaintiffs' counsel requested interim injunctive relief with respect to the
termination fee paid under the BT Merger Agreement, and requested that the Court
enter a mandatory injunction requiring defendants to allow representatives of
the plaintiffs to participate in any further negotiations. Plaintiffs' counsel
also requested expedited treatment and the setting of an early trial date with
respect to plaintiffs' challenge to the termination fee paid under the BT Merger
Agreement and the different form of consideration payable to BT contemplated by
the Agreement. Citing the absence of irreparable injury, the Court of Chancery
denied plaintiffs' request for injunctive relief and expedited treatment, and
declined to set an early trial date. At the conclusion of the conference,
plaintiffs' counsel indicated that they would be seeking to file new amended
complaints challenging aspects of the Merger and attempting to join additional
defendants as parties to the litigations.
On or about August 28, 1997, a complaint was filed in the federal district court
in Washington, D.C., by an alleged stockholder of the company, individually and
putatively as a class action on behalf of purchasers of the company's shares
during the period from August 14, 1997 through August 20, 1997. On or about
October 27, 1997, another complaint was filed in the federal district court in
Washington, D.C., by two alleged stockholders of the company, individually and
putatively as a class action on behalf of purchasers of the company's shares
during the period from August 14, 1997 through August 22, 1997. On or about
October 31, 1997, another complaint was filed in the federal district court in
Washington, D.C., by an alleged stockholder of the company, individually and
putatively as a class action on behalf of purchasers of the company's shares
during the period from July 10, 1997 through August 22, 1997. All three
complaints allege that the company and certain of its officers and
F-42
<PAGE> 68
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
directors improperly failed to disclose material information about the company,
including that the company was renegotiating the terms of the Merger Agreement
with BT dated November 3, 1996. The complaints seek damages and other relief.
The defendants believe that all of the complaints are without merit and the
company presently does not expect that the above actions will have a material
adverse effect on the consolidated financial position or results of operations
of the company.
F-43
<PAGE> 69
PART I.
ITEM 2.
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
GENERAL
- -------
The following discussion and analysis provides information that management
believes is relevant to an assessment and understanding of the consolidated
results of operations and financial condition of MCI Communications Corporation
and its subsidiaries (collectively, the company). The discussion should be read
in conjunction with the interim condensed consolidated financial statements and
notes thereto and the company's Annual Report on Form 10-K for the year ended
December 31, 1996.
MERGER AGREEMENT WITH WORLDCOM, INC.
- ------------------------------------
On November 3, 1996, the company entered into an Agreement and Plan of Merger
with British Telecommunications plc (BT), which was last amended on August 21,
1997 (the BT Merger Agreement).
On October 1, 1997, WorldCom, Inc. (WorldCom) announced its intent to make an
exchange offer of shares of WorldCom common stock for all the outstanding common
stock and Series A common stock of the company. On October 15, 1997, GTE
Corporation (GTE) announced its intent to effect a negotiated two-step
acquisition of all the outstanding common stock and Class A common stock of the
company.
- -------------------------------------------------------------------------------
Forward-looking Statements May Prove Inaccurate
The company has made certain forward-looking statements in Management's
Discussion and Analysis that are subject to risks and uncertainties.
Forward-looking statements include information concerning the possible future
results of operations of the company, its long distance telecommunication
services (core) business, its investments in ventures and developing markets
(VDM) businesses, the possible future results of operations of the company and
MCI WorldCom after the Merger and statements preceded by, followed by or that
include the words "believes", "expects", "anticipates", or similar expressions.
For those statements, the company claims the protection of the safe-harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995. The reader is cautioned that the following important factors among
others, in addition to those contained elsewhere in Management's Discussion and
Analysis, could adversely affect the future results of the company, its long
distance telecommunication services and VDM businesses and the company and MCI
WorldCom after the Merger and could cause those results to differ materially
from the statements and information expressed in the forward-looking statements:
material adverse changes in the economic conditions in the markets served by the
company; a significant delay in the expected closing of the Merger; future
regulatory actions and conditions in the company's operating areas, including
the ability of the company to implement its local strategy and obtain local
facilities at competitive rates and resulting changes in the implementation of
its local strategy; and competition from others in the U.S. and international
long distance markets, including the entry of the regional Bell operating
companies (RBOCs) and other companies into the long distance markets in the U.S.
For additional information about other important factors that should be
considered, the reader should read the company's Annual Report on Form 10-K for
the year ended December 31, 1996 and all of the company's filings with the
Securities and Exchange Commission subsequent thereto.
F-44
<PAGE> 70
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
On November 9, 1997, the company entered into an Agreement and Plan of Merger
(the Agreement) with WorldCom, a Georgia corporation, and TC Investments Corp.,
a Delaware corporation and a wholly-owned subsidiary of WorldCom (Merger Sub),
pursuant to which the company will merge with and into Merger Sub (the Merger).
As a result of the Merger, (a) each outstanding share of the company's common
stock, par value $.10 per share (other than shares owned by WorldCom or Merger
Sub or held by the company) will be converted into the right to receive that
number of shares of WorldCom common stock, par value $.01 per share, equal to
the quotient determined by dividing $51.00 by the average of the high and low
sale prices of WorldCom common stock as reported on the Nasdaq National Market
on each of the twenty consecutive trading days ending with the third trading day
immediately preceding the effective time of the Merger (the Exchange Ratio),
provided that the Exchange Ratio shall not be less than 1.2439 or greater than
1.7586; and (b) each outstanding share of the company's Class A common stock
(other than shares of Class A common stock owned by WorldCom or Merger Sub or
held by the company) shall be converted into the right to receive $51.00 in
cash, without interest thereon. The combined companies plan to operate under the
MCI WorldCom name.
Concurrent with the BT Agreement, the company, WorldCom and BT entered into an
agreement whereby (i) the BT Merger Agreement was terminated; (ii) WorldCom
agreed to pay BT $450,000,000 and expenses not in excess of $15,000,000 order to
induce BT to waive its rights under, and agree to terminate, the BT Merger
Agreement; (iii) BT agreed to support and vote its shares of Class A Common
Stock in favor of the Merger; and (iv) BT may exercise its call option to
acquire the company's shares in Concert Communications Services (CCS)
immediately following the effective date of the Merger. The company will be a
distributor of CCS services on a nonexclusive basis for five years following
BT's exercise of its call option.
Consummation of the Merger is subject to certain conditions, including receipt
of the approval of the Merger and the transactions contemplated thereby by the
stockholders of the company and WorldCom and receipt of required regulatory
approvals.
F-45
<PAGE> 71
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
TELECOMMUNICATIONS REGULATORY ENVIRONMENT
- -----------------------------------------
The Telecommunications Act of 1996 (the Act) was enacted by Congress to help
minimize legal barriers to local telephone market entry while affording
residential and business consumers protection from unfair competition by
incumbent local exchange carriers (ILECs). A company is permitted to enter the
local market by constructing new facilities, leasing unbundled network elements,
reselling local network capacity or by partnering with other new market
entrants. The regional Bell operating companies'(RBOCs) are permitted to offer
long distance services outside their regions but are barred from offering
in-region long distance services until they open their own markets and encounter
facilities-based local competition. The Act establishes criteria pursuant to
which each RBOC application to provide in-region long distance service may be
approved by the FCC, in consultation with the relevant state regulatory agencies
as well as the DOJ.
In order to implement the Act, the FCC outlined a trilogy of issues to be
resolved to ensure competition in the local market-interconnection, universal
service and access charge reform. On May 7, 1997, the FCC completed action on
the trilogy when it rendered its access charge and universal service reform
decisions. The FCC adopted a plan in a price cap order that it stated would
reduce interstate access charges approximately $1.7 billion on an industry-wide
basis. However, only $1.6 billion of such access charge reductions went into
effect on July 1, 1997. As part of its effort to establish cost based services,
the FCC, in its access charge order reclassified certain access charges from
usage based to line based. The company anticipates that it will pass through to
consumers the realized savings from switched access charge reductions, net of
pre-subscribed interconnect carrier costs and new universal service obligations,
which are discussed below. The company has appealed the price cap and the access
charge reform orders.
The FCC's universal service order, which includes current subsidies paid by long
distance carriers and new obligations to fund discounted services for schools,
libraries, rural health care providers and low income consumers, will become
effective on January 1, 1998 and be funded by all telecommunications carriers.
This order is currently being appealed by several parties. These challenges seek
changes that could materially affect the size of the universal service fund and
the company's required contributions.
F-46
<PAGE> 72
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
In an August 1997 decision, the FCC ordered ILECs to unbundle and provide access
to their transport facilities for the routing of new entrants' local traffic.
This is an important mode of entry for competitive local exchange carriers
(CLECs). Without access to these facilities, CLECs would be forced to duplicate
the ILEC's network by constructing their own local transport or by leasing
costly flat-rated dedicated transport. The order is currently being appealed by
several ILECs in the U.S. Court of Appeals for the Eighth circuit (Eighth
Circuit).
In July 1997, the U.S. Court of Appeals for the Eighth Circuit determined that
the FCC had exceeded its authority when it established a national pricing
structure for interconnection with the ILECs pursuant to the Act. The Eighth
Circuit also held that certain portions of the FCC rules, such as the scope of
its enforcement activities, are invalid. Most recently, in October 1997, the
Eighth Circuit rendered an additional decision, invalidating an FCC rule
prohibiting ILECs from disassembling already combined elements in their
networks. This decision means that new entrants may be forced to purchase and
then recombine the previously combined elements themselves. As a result of the
most recent decision , the company believes that new entrants will now be
subject to increased costs for disconnecting and reconnecting elements and new
customers may be subject to delays in changing local telephone service
providers. Although the Act was designed by Congress to deregulate the telephone
industry and encourage competition in the local and long distance markets, the
company believes the Eighth Circuit's rulings will delay local phone competition
because potential competitors to the ILECs, including the company, will have to
continue to negotiate interconnection agreements in individual states without
the benefit of uniform pricing rules guided by a national policy and will face
increased costs and operational delays as they enter the local market. For
further discussion of these matters refer to "Enterprise Reporting-Local"
section.
F-47
<PAGE> 73
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
EARNINGS HIGHLIGHTS
- -------------------
Income (loss) from operations was $(186) million and $952 million for the three
and nine months ended September 30, 1997, respectively. Operating margin for the
three and nine months ended September 30, 1997 decreased to (3.9)% and 6.5%,
respectively, from 12.4% and 12.7%, in the comparable periods in 1996. Net
income (loss) for the three and nine months ended September 30, 1997 decreased
to $(182) million and $393 million, or $(0.26) and $.56 per share, respectively,
from $304 million and $899 million, or $0.44 and $1.29 per share, for the
comparable periods in 1996. The 1997 third quarter net loss reflects expenses of
$432 million associated with a series of steps taken by the company to improve
its short and long-term financial performance. These steps include charges
associated with exiting and restructuring several business customer contracts,
eliminating selected retail channels and discontinuing certain unprofitable
information technology services.
The company is continuing to evaluate additional steps to improve returns in the
core and VDM businesses through new customer and marketing initiatives,
re-engineering certain processes and operations, improved asset utilization and
resource re-deployment. In addition, the company will also be taking steps in
the fourth quarter of 1997 to enhance customer and employee retention in light
of the company's recent merger activities. While these steps have not all been
finalized, if taken, they could result in material expenses impacting the
company's 1997 results of operations. In the local business, given that the
company anticipates merging with WorldCom, which has substantial local
facilities, the company is re-addressing its local investments and costs and
expects to reduce local losses below previously disclosed estimates. For further
discussion of these matters refer to the "Consolidated Results of Operations"
and "Enterprise Reporting-Local" section.
CONSOLIDATED RESULTS OF OPERATIONS
- ----------------------------------
Consolidated revenue for the three and nine months ended September 30, 1997,
including the impact of $67 million in increased uncollectible provisions and
other actions, increased 2.9% and 5.9% to $4.8 billion and $14.5 billion,
respectively, from the comparable periods in 1996. As explained under
"Enterprise Reporting", for the three and nine months ended September 30, 1997,
core business revenue increased by $69 million and $598 million or 1.6% and
4.8%, respectively, from the prior year periods and Ventures and Developing
Markets (VDM) revenue increased by $134 million and $373 million for the three
and nine months ended September 30, 1997, respectively, over the comparable
periods in 1996. The company expects fourth quarter 1997 revenue growth to be
similar to the third quarter of 1997.
F-48
<PAGE> 74
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Cost of services consists of telecommunications expense and costs of other
products and services. Telecommunications expense is primarily comprised of
access fees paid to ILECs and other domestic service providers, and payments
made to foreign telephone companies (international settlements) to complete
calls made to foreign countries from the U.S. by the company's customers. In the
VDM businesses, costs of other products and services primarily include
equipment, software and technology service costs. Consolidated cost of services
for the three and nine months ended September 30, 1997 increased to $3 billion
and $8.1 billion, respectively, from the comparable periods in 1996 reflecting
$340 million in costs and provisions incurred in the third quarter of 1997 to
exit and restructure certain business customer contracts.
Telecommunications expense, as a percent of core business revenue, increased 2.8
percentage points for the three months ended September 30, 1997 compared to the
same period in 1996, due to the introduction of payphone compensation costs and
fluctuations in the revenue mix, which were partially offset by a decline in
domestic telecommunication and international settlement rates. For the nine
months ended September 30, 1997, telecommunications expense as a percent of core
business revenue remained consistent with the year ago period.
Sales, operations and general expense increased 10.7% and 8.3% to $1.4 billion
and $4 billion for the three and nine months ended September 30, 1997,
respectively, from the comparable periods in 1996. In the core business, sales,
operations and general expense for the three and nine months ended September 30,
1997 as a percentage of revenue decreased to 24.8% and 24.5%, respectively, from
26.9% and 26.1% in the same periods in 1996, respectively, primarily as a result
of continued redeployment of certain resources and operations to local services
and other cost containment efforts. The core business sales, operations and
general expenses includes $57 million in costs for severance and contract
commitment and termination costs associated with the discontinuance of certain
mass markets retail sales channels and certain legal costs. The VDM sales,
operations and general expense as a percentage of revenue for the three and nine
months ended 1997 increased to 61.2% and 46.4%, respectively, from 32.3% and
32.2% in the same periods in 1996. This increase was attributable to the
continued development in local services markets and information technology
services and the related increases in marketing efforts and personnel
expenditures. In addition, the VDM sales, operations and general expenses
include $34 million in expenses for redundant facility and severance costs and
contract termination costs associated with the discontinuance of certain
information and technology service operations. The company is continuing to work
towards addressing the actions necessary to make its computer systems Year 2000
compliant. Estimated costs associated with this undertaking are preliminary, but
could exceed $200 million in aggregate during the period between fourth quarter
of 1997 and December 31, 1998.
F-49
<PAGE> 75
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Depreciation expense increased 26.3% and 20.6% for the three and nine months
ended September 30, 1997 to $543 million and $1,475 million, respectively, from
the comparable periods in 1996. The increases are primarily the result of 1996
and 1997 additions to the communications system network to increase network
capacity, redundancy and reliability, add product features and functionality and
support the company's local services business. Depreciation costs in the third
quarter of 1997 also include $17 million of costs related to the disposal and
abandonment of assets associated with the discontinuance of the aforementioned
retail and information technology service operations.
Interest expense increased $7 million and $21 million, respectively, from the
comparable periods in 1996 due to increased 1997 debt balances.
Equity losses of affiliates increased $18 million for the three month period
ended September 30, 1997 from the comparable period in 1996, primarily due to
continued operating losses incurred by Avantel. For the nine months ended
September 30, 1997, equity in losses improved as the company recognized a
reduction of $21 million from the comparable period in 1996, primarily due to
reductions in losses on the former on-line project with News Corporation Limited
(News Corp.), which ceased operations in 1996, partially offset by an increase
in Avantel operating losses. As further discussed in "Enterprise Reporting"
below, due to the start-up nature and current operations of several of these
affiliates, the company expects equity in losses of affiliated companies to
continue for the remainder of 1997.
Distributions on subsidiary Trust mandatorily redeemable securities, issued in
May 1996, totaled $15 million and $45 million for the three and nine months
ended September 30, 1997, respectively.
F-50
<PAGE> 76
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
ENTERPRISE REPORTING
- --------------------
This section segregates the performance of the company's core business from its
VDM businesses and investments. Core business services comprise a wide spectrum
of domestic and international voice and data services, including long distance
telephone, data communication, teleconferencing, Internet and electronic
messaging services. The company has invested in VDM businesses outside of its
core business through acquisitions, alliances and other strategic initiatives in
the local, information technology, wireless, international and multimedia
markets. Investments in these VDM businesses are included in the company's
financial statements as consolidated subsidiaries, unconsolidated equity
investments, or cost investments such the company's investment in News Corp.
The following information was prepared using all amounts included in the
company's interim condensed consolidated financial statements and reflects
estimates and allocations that management believes provide a reasonable basis on
which to present such information.
CORE BUSINESS RESULTS
- ---------------------
<TABLE>
<CAPTION>
(In millions) Three Months Ended Nine Months Ended
September 30, September 30,
---------------- ------------------
1997 1996 1997 1996
------ ------ ------- -------
<S> <C> <C> <C> <C>
Revenue $4,343 $4,274 $13,080 $12,482
Income from operations 75 617 1,389 1,831
Equity in income (losses)
of affiliated companies - - - -
Net income 48 381 855 1,131
Depreciation 479 395 1,324 1,127
Net interest, income taxes
and other expense (27) (236) (534) (700)
EBITDA* 554 1,012 2,713 2,958
</TABLE>
* EBITDA, as defined by management, consists of earnings (loss), excluding
equity in income (losses) of affiliates, other income (expense), net, and
distributions on subsidiary Trust mandatorily redeemable preferred securities,
before interest, income taxes, depreciation and amortization. EBITDA represents
a measure of the company's ability to generate cash flows and does not represent
net income or cash flows from operating, investing and financing activities as
defined by GAAP. EBITDA should be considered in addition to, but not as a
substitute for, or superior to, measures of financial performance reported in
accordance with GAAP. Analysts often use EBITDA when evaluating the performance
of a company. Readers are cautioned that the company's definition of EBITDA may
not be comparable to similarly titled measures used by other companies or
analysts.
F-51
<PAGE> 77
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
The following discussion focuses on significant financial and operational
results of the company's core business.
Core business revenue for the three months ended September 30, 1997 increased
1.6% from the year ago period to $4.3 billion, reflecting the impact of $67
million in additional uncollectible provisions required by recent bankruptcies
and delinquencies of business customer accounts and other actions. Traffic grew
6.2% from the year ago quarter. As further explained below, the revenue to
traffic variance reflects the strategic de-emphasis of the wholesale channel,
continued competitive pricing and industry wide moderation in revenue growth.
Core business revenue for the nine months ended September 30, 1997 increased
4.8% from the comparable year ago period while traffic grew 5.2%, resulting in
revenue to traffic variance of (.4%). This variance reflects the transition away
from the high level of customer acquisition programs in the first half of 1996
and the company's focus on value, service and integration during 1997.
In the business market, revenue continued to grow in the three and nine months
ended September 30, 1997 from the comparable periods in 1996. Revenue growth was
driven by strong demand for data and Internet services, as well as a result of
the company's direction towards providing integrated services. Offsetting these
gains were a decline in wholesale revenue due to management's de-emphasis of the
wholesale market and the restructuring of this sales channel. Revenue in the
mass market for the three and nine months ended September 30, 1997 decreased
from the comparable periods in 1996. This is due to the company's continued
focus on high value customers, service and integration, which improve customer
retention. The company continued to selectively target high value customers
through its integrated package offering of inbound, outbound, wireless and
Internet services and programs aimed at customer retention while curtailing the
use of high-cost customer acquisition programs during the nine months ended
September 30, 1997. As a result, customer churn declined and customer spending
improved in 1997 as compared to the same period a year ago.
F-52
<PAGE> 78
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
VENTURES AND DEVELOPING MARKETS RESULTS
- ---------------------------------------
<TABLE>
<CAPTION>
(In millions) Three Months Ended Nine Months Ended
September 30, September 30,
--------------- -------------------
1997 1996 1997 1996
------ ------ ------- -------
<S> <C> <C> <C> <C>
Revenue $608 $474 $1,800 $1,427
Loss from operations (247) (32) (406) (80)
Equity in income (losses)
of affiliated companies (46) (28) (107) (128)
Net loss (222) (73) (441) (225)
Depreciation 64 35 151 96
Net interest, income taxes
and other expense 71 (13) 72 (17)
EBITDA* (183) 3 (255) 16
</TABLE>
During the third quarter of 1997, the company continued to make investments in
its VDM businesses and strategic initiatives in an effort to expand its business
opportunities in these markets. The company invested approximately $146 million
in local services, $49 million in direct broadcast satellite (DBS) development
costs and $7 million in affiliated companies during the third quarter of 1997.
Certain information about the company's results of operations in these
businesses and strategic initiatives are provided below.
LOCAL
- -----
The company provides switched local service to both business and residential
customers and it additionally provides dedicated access and dark fiber services
to its core business customers using the company-owned network facilities and
facilities or wholesale services provided by other companies. In addition to
these services, the company provides infrastructure support to the company's
core long distance network. As of September 30, 1997, the company had been
granted authority to offer local exchange services in 38 states and had
applications for such services pending in 10 other states.
F-53
<PAGE> 79
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Local service revenue increased by $47 million and $108 million year-over-year
to $92 million and $237 million for the three and nine months ended September
30, 1997, respectively. A majority of this growth resulted from service provided
to end user business customers, with a smaller portion resulting from
residential customer revenue and services provided to the core long distance
network. The revenue derived from sales to the company's core business customers
and its long distance network remains the largest portion of local revenue. Net
loss for the three and nine months ended September 30, 1997 increased by $99
million and $185 million year-over-year to $118 million and $229 million,
respectively. EBITDA for the three and nine months ended September 30, 1997
decreased by $142 million and $253 million year-over-year to $(157) million and
$(288) million, respectively. The increase in net losses and the decrease in
EBITDA for the three and nine months ended September 30, 1997 reflect the
increased operating costs associated with the continued investment in the local
market. During the third quarter of 1997, the company added 7 local city
networks, bringing the total number of operational local city networks to 76 in
39 markets, compared to 61 operational networks in 34 markets at the end of the
third quarter of 1996. In addition, route miles increased 19% year-over-year to
3,305 miles as of September 30, 1997. At present, the company provides
facilities-based switched local services in 25 markets and intends to have
service operational in over 30 markets by the end of 1997.
The company's expansion and traffic growth in the local market continued to be
hampered by changes in Federal and state regulations governing the opening of
local markets, exacerbated by anti-competitive behavior and delaying tactics of
the ILECS, as described under "Telecommunications Regulatory Environment". This
environment has continued the delay of the company's entrance into the local
market, and as a result the company will continue to incur additional costs to
support regulatory efforts and other local problems. Given that the company
anticipates merging with WorldCom, which has substantial local facilities, the
company is re-addressing its local investments and costs and expects to reduce
local losses below previously disclosed estimates.
F-54
<PAGE> 80
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
INFORMATION TECHNOLOGY SERVICES
- -------------------------------
Information technology services primarily consist of MCI Systemhouse, the
company's global systems integration subsidiary. Revenue for the three and nine
months ended September 30, 1997 increased by $91 million and $297 million to
$430 million and $1,307 million, respectively, from the comparable periods in
1996. This revenue growth reflects the industry-wide demand for information
technology services for which Systemhouse is becoming a leading provider,
particularly in the global telecommunications outsourcing market. Net loss for
the three and nine months ended September 30, 1997 increased by $38 million and
$53 million, respectively, over the comparable periods in 1996 to $57 million
and $99 million, respectively. EBITDA for the three and nine months ended
September 30, 1997 was $(21) million and $38 million, respectively, compared to
$21 million and $87 million for the same periods in 1996. The increase in net
loss for the periods reflect $53 million in costs associated with the
aforementioned discontinuance of certain information and technology services as
well as the result of increases in sales, operations and general expenses for
advanced staffing necessary to meet the increasingly strong demand for
information technology services.
WIRELESS
- --------
Wireless services primarily include the operations of MCI Wireless, Inc., the
company's cellular provider, and paging services. Revenue for the three months
ended September 30, 1997 decreased by $3 million from the year ago period to $80
million. This decrease was primarily attributable to the decrease in average
revenue per cellular subscriber partially offset by an increase in the number of
cellular customers of approximately 8% to 438,000. Revenue for the nine months
ended September 30, 1997 decreased $29 million from the year ago period due to a
decrease in paging customers to 188,000, as the company continued to concentrate
on profitability per customer in the mass market and to de-emphasize stand alone
paging services. For the three and nine months ended September 30, 1997, net
loss was $13 million and $32 million, respectively, and EBITDA was $(7) million
and $(13) million, respectively.
F-55
<PAGE> 81
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
INTERNATIONAL SERVICES
- ----------------------
CCS is the company's 24.9% owned international services venture with BT that
provides a broad portfolio of advanced global communication services, including
virtual network, frame relay, managed bandwidth and packet services, to
multinational business customers worldwide. CCS' distributor revenues increased
25% and 35% year-over-year to $200 million and $547 million for the three and
nine months ended September 30, 1997, respectively. The company's share of CCS'
losses reported in accordance with U.S. GAAP for the three and nine months ended
September 30, 1997, decreased by $1 million and $5 million, respectively, from
the year ago periods to $6 million and $18 million, respectively.
Avantel is the company's 44.5% owned Mexican business venture which began
offering a full range of competitive switched long distance services to
residential and business customers on January 1, 1997. During the third quarter
of 1997, Avantel's network became fully operational and Avantel is now offering
services throughout most of Mexico. In addition, Avantel has obtained more than
a 10% share in the total Mexican long distance market. The company's share of
Avantel's losses reported in accordance with U.S. GAAP for the three and nine
months ended September 30, 1997 increased by $20 million and $44 million to $29
million and $64 million, respectively, from the comparable periods in 1996. The
company expects to incur additional losses on its investment as Avantel
continues to expand its service and customer bases in the Mexican
telecommunications market.
MULTIMEDIA SERVICES
- -------------------
The company's investments in News Corp. and DBS comprise Multimedia Services.
Dividend income on the company's investment in News Corp. for the three and nine
months ended September 30, 1997 was approximately $15 million and $44 million,
respectively, compared to $15 million and $39 million for the comparable periods
in 1996. The company has invested $146 million in DBS in the nine months ended
September 30, 1997, bringing its total investment in the project to
approximately $1 billion as of September 30, 1997.
F-56
<PAGE> 82
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
In June 1997, the company and News Corp. entered into an agreement with
Primestar Partners, L.P. (Primestar) for the sale and transfer of substantially
all of their assets relating to the DBS business, including the DBS license but
excluding two of the four satellites under construction. This transaction is
part of a larger transaction that involves the consolidation of Primestar and
TCI Satellite Entertainment, Inc. into a newly formed entity (New Primestar).
Concurrent with the closing of the Primestar transaction, the company will
acquire preferred shares in a subsidiary of News Corp. for a face amount equal
to the company's cost of obtaining the FCC license plus interest thereon. The
company will also receive from Primestar consideration for its 19.9% joint
venture interest, an interest in New Primestar in the form of cash and interest
bearing non-voting New Primestar securities. The process in which the company
and News Corp. will allocate the proceeds and recover their respective
investments in the DBS business has yet to be completed. The transaction is
subject to regulatory approvals, including approval by the FCC of the company's
transfer of the DBS license to New Primestar.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------------------------
CASH FLOWS
- ----------
Cash from operating activities increased by $224 million for the nine months
ended September 30, 1997 to $2,279 million from the comparable period in 1996.
This increase is primarily the result of an increase in customer receipts
resulting from the growth in revenue and a decrease in taxes paid, offset by an
increase in payments to suppliers and employees resulting from the increase in
costs of services and sales, operations and general expense.
Cash used for investing activities decreased by $293 million for the nine months
ended September 30, 1997 to $2,636 million from the comparable period in 1996
primarily because of a $472 million reduction in cash used for the DBS and News
Corp. investments offset by higher capital expenditures. In the first nine
months of 1997, the company used cash of $2,642 million, an increase of $219
million, for capital expenditures primarily for network deployment and local
services. The company also invested an additional $146 million for additional
satellite construction and other costs for its DBS investment and $45 million in
investments in its affiliates. No additional amounts were invested in News Corp.
during 1997.
Cash from financing activities decreased by $344 million for the nine months
ended September 30, 1997 to $309 million from the comparable period in 1996. The
reduction is primarily the result of financing activities that had occurred
during 1996 when the company issued approximately $750 million aggregate
principal amount of 8% Cumulative Quarterly Income Preferred Securities, Series
A and $800 million in aggregate principal amount of Senior Debentures and Notes
F-57
<PAGE> 83
MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
which did not recur in 1997. In addition, for the nine months ended September
30, 1997, the company repaid $259 million in debentures and other debt and
reduced treasury stock repurchases to $93 million from $522 million repurchased
in the year ago period . Offsetting these net proceeds was a net increase in
commercial paper issuance of $687 million.
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
For the nine months ended September 30, 1997, the company funded its capital
expenditures and its investment in the VDM businesses primarily through cash
from operations and commercial paper issuance. The company believes that it will
be able to meet its current and foreseeable liquidity and capital requirements
through its cash flows from operating activities and its existing debt
facilities. At September 30, 1997, the company had approximately $2.2 billion
available under its commercial bank program and bank credit facility. In
addition, the company has a $1.2 billion shelf registration in effect, which
covers the issuance of debt securities with a range of maturities at either
fixed or variable rates. In addition, the company expects that its revolving
credit loan agreement expiring on April 28, 1998 will be renewed or similiar
financing will be obtained. On July 23, 1997, the company entered into a $500
million notional amount forward-starting swap agreement to hedge future debt
issuances at a fixed interest rate of 6.71%.
EBITDA
- ------
Reflecting the impact of the aforementioned actions and cost provisions,
Consolidated EBITDA decreased 18.2% to $2,427 million for the nine months ended
September 30, 1997 from $2,967 million for the year ago period primarily as a
result of the reduction in operating income for the nine months ended September
30, 1997. EBITDA, as defined by management, consists of earnings, excluding
equity in income (losses) of affiliates, other income (expense), net, and
distributions on subsidiary Trust mandatorily redeemable preferred securities,
before interest, income taxes, depreciation and amortization. EBITDA represents
a measure of the company's ability to generate cash flows and does not represent
net income or cash flows from operating, investing and financing activities as
defined by GAAP. EBITDA should be considered in addition to, but not as a
substitute for, or superior to, measures of financial performance reported in
accordance with GAAP. Analysts often use EBITDA when evaluating the performance
of the company. Readers are cautioned that the company's definition of EBITDA
may not be comparable to similarly titled measures used by other companies or
analysts.
F-58
<PAGE> 84
PRO FORMA FINANCIAL INFORMATION
The unaudited pro forma condensed combined financial statements combine the
consolidated balance sheets and statements of operations of WorldCom and MCI as
if the MCI/WorldCom Merger had occurred for the periods indicated. The
MCI/WorldCom Merger will be treated as a purchase for financial reporting
purposes. No adjustment has been included in the pro forma amounts for any
anticipated cost savings or other synergies.
WORLDCOM PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited Pro Forma Condensed Combined Balance Sheet as of
September 30, 1997 and unaudited Pro Forma Condensed Combined Statements of
Operations for the nine months ended September 30, 1997 and for the year ended
December 31, 1996, illustrate the effect of the MCI/WorldCom Merger as if the
MCI/WorldCom Merger had occurred on September 30, 1997, for the Pro Forma
Condensed Combined Balance Sheet and as of the earliest date presented for the
Pro Forma Condensed Combined Statements of Operations. No adjustment has been
included in the pro forma amounts for any anticipated cost savings or other
synergies. The Pro Forma Condensed Combined Financial Statements also do not
include amounts with respect to the BFP Merger, the AOL Transaction or the
CompuServe Merger (as those terms are defined in WorldCom's Current Report on
Form 8-K/A-1 filed January 27, 1998) because they are individually, and in the
aggregate, not material to WorldCom.
Pursuant to the terms of the MCI/WorldCom Merger, each share of MCI Common
Stock will be converted into the right to receive that number of shares of
WorldCom Common Stock equal to the MCI Exchange Ratio. The holder of MCI Class A
Common Stock will be entitled to receive $51.00 per share in cash for each of
the MCI Class A Common Stock shares it owns, or approximately $7 billion in the
aggregate. The Pro Forma Condensed Combined Financial Statements have been
prepared assuming the MCI/WorldCom Average Price to be $33.13, resulting in an
assumed MCI Exchange Ratio of 1.5396. The actual MCI Exchange Ratio may vary as
described herein. The MCI/WorldCom Merger will be accounted for as a purchase.
These Pro Forma Condensed Combined Financial Statements should be read in
conjunction with the historical financial statements of WorldCom and MCI which
are incorporated by reference herein and the Additional Pro Forma Presentation
which is set forth elsewhere herein.
The Pro Forma Condensed Combined Financial Statements are presented for
comparative purposes only and are not intended to be indicative of actual
results had the transactions occurred as of the dates indicated above nor do
they purport to indicate results which may be attained in the future.
F-59
<PAGE> 85
WORLDCOM PRO FORMA CONDENSED COMBINED BALANCE SHEET(1)
AS OF SEPTEMBER 30, 1997
(IN MILLIONS)
<TABLE>
<CAPTION>
MCI WORLDCOM
WORLDCOM MCI PRO FORMA PRO FORMA
HISTORICAL(2) HISTORICAL(3) ADJUSTMENTS COMBINED
------------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Current assets.......................... $ 1,625 $ 4,603 $ 7,446(5) $ 6,228
(7,446)(4)
Property, plant and equipment, net...... 5,419 13,783 (2,700)(4) 16,502
Goodwill and other intangibles, net..... 13,002 2,366 28,621(4) 43,989
Other assets............................ 767 3,965 -- 4,732
------- ------- ------- -------
Total assets.................. $20,813 $24,717 $25,921 $71,451
======= ======= ======= =======
Current liabilities..................... $ 1,870 $ 7,327 $ -- $ 9,197
Long-term debt.......................... 5,349 3,282 7,446(5) 16,077
Other liabilities....................... 228 2,037 (1,015)(4) 1,250
Mandatorily redeemable preferred
stock................................. -- 750 -- 750
Shareholders' equity:
Preferred stock....................... -- -- -- --
Class A common stock.................. -- 14 (14)(6) --
Common stock.......................... 9 60 (60)(6) 18
9(7)
Paid in capital....................... 15,036 6,394 (6,394)(6) 45,838
30,802(7)
Retained earnings (deficit)........... (1,713) 5,607 (5,607)(6) (1,713)
Other................................. 34 (754) 754(6) 34
------- ------- ------- -------
Total shareholders' equity.... 13,366 11,321 19,490 44,177
------- ------- ------- -------
Total liabilities and
shareholders' equity........ $20,813 $24,717 $25,921 $71,451
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of this statement.
F-60
<PAGE> 86
WORLDCOM PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS(1)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MCI WORLDCOM
WORLDCOM MCI PRO FORMA PRO FORMA
HISTORICAL(2) HISTORICAL(3) ADJUSTMENTS COMBINED
------------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues................................. $5,349 $14,545 $(280)(8) $19,614
Operating expenses:
Line costs............................. 2,806 8,090 (280)(8) 10,616
Selling, general and administrative.... 1,141 4,028 5,169
Depreciation and amortization.......... 682 1,475 537(9) 2,281
(413)(10)
------ ------- ----- -------
Operating income......................... 720 952 (124) 1,548
Other income (expense):
Interest expense....................... (235) (174) (363)(11) (772)
Other.................................. 17 (94) -- (77)
------ ------- ----- -------
Income before income taxes............... 502 684 (487) 699
Provision for income taxes............... 261 246 19(12) 526
------ ------- ----- -------
Income from continuing operations........ 241 438 (506) 173
Preferred dividend requirements.......... 20 45 -- 65
------ ------- ----- -------
Net income applicable to common
shareholders........................... $ 221 $ 393 $(506) $ 108
====== ======= ===== =======
Number of shares issued and outstanding:
Primary................................ 955 705 1,831
====== ======= =======
Fully diluted.......................... 959 706 1,838
====== ======= =======
Earnings per share(13):
Primary................................ $ 0.25 $ 0.56 $ 0.06
Fully diluted.......................... $ 0.25 $ 0.56 $ 0.06
</TABLE>
The accompanying notes are an integral part of this statement.
F-61
<PAGE> 87
WORLDCOM PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS(1)
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MCI WORLDCOM
WORLDCOM MCI PRO FORMA PRO FORMA
HISTORICAL(2) HISTORICAL(3) ADJUSTMENTS COMBINED
------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Revenues.................................. $ 4,485 $18,494 $(558)(8) $22,421
Operating expenses:
Line costs.............................. 2,457 9,489 (500)(8) 11,446
Selling, general and administrative..... 829 5,028 5,857
Depreciation and amortization........... 303 1,664 716(9) 2,133
(550)(10)
Charge for in-process research and
development.......................... 2,140 -- -- 2,140
Other................................... 600 -- (58)(8) 542
------- ------- ----- -------
Operating income (loss)................... (1,844) 2,313 (166) 303
Other income (expense):
Interest expense........................ (222) (196) (484)(11) (902)
Other................................... 6 (127) -- (121)
------- ------- ----- -------
Income (loss) before income taxes......... (2,060) 1,990 (650) (720)
Provision for income taxes................ 129 753 25(12) 907
------- ------- ----- -------
Income (loss) from continuing
operations.............................. (2,189) 1,237 (675) (1,627)
Preferred dividend requirements........... 1 35 -- 36
------- ------- ----- -------
Net income (loss) applicable to common
shareholders............................ $(2,190) $ 1,202 $(675) $(1,663)
======= ======= ===== =======
Number of shares issued and outstanding:
Primary................................. 398 695 1,246
======= ======= =======
Fully diluted........................... 398 701 1,246
======= ======= =======
Earnings (loss) per share(13):
Primary................................. $ (5.50) $ 1.73 $ (1.33)
Fully diluted........................... $ (5.50) $ 1.72 $ (1.33)
</TABLE>
The accompanying notes are an integral part of this statement.
F-62
<PAGE> 88
NOTES TO WORLDCOM PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
1. The unaudited pro forma financial data do not give effect to any
restructuring costs, nor any potential cost savings or other synergies that
could result from the MCI/WorldCom Merger. WorldCom is in the process of
developing its plan to integrate the operations of MCI which may include
certain exit costs. As a result of this plan, a charge, which may be
material but which cannot now be quantified, is expected to be recognized in
the period in which such a restructuring occurs. Furthermore, the pro forma
financial data do not reflect any expense of intangible assets attributable
to the value of any in-process research and development projects of MCI at
the time of the MCI/WorldCom Merger. However, WorldCom has undertaken a
study to determine the allocation of the total purchase price to the various
assets acquired, including in- process research and development, and the
liabilities assumed. To the extent that a portion of the purchase price is
allocated to in-process research and development projects of MCI, a charge,
which may be material, would be recognized in the period in which the
MCI/WorldCom Merger occurs. The pro forma data are not necessarily
indicative of the operating results or financial position that would have
occurred had the MCI/WorldCom Merger been consummated at the dates
indicated, nor necessarily indicative of future operating results or
financial position.
2. On December 31, 1996, WorldCom completed the Merger with MFS Communications
Company (the "MFS Merger"). The MFS Merger was accounted for as a purchase;
accordingly, the operating results for MFS are not reflected in the
historical results of WorldCom for the year ended December 31, 1996. See
"Additional Pro Forma Presentation," which should be read in conjunction
with these pro forma financial statements.
3. These columns represent historical results of operations and financial
position.
4. This adjustment reflects the excess of consideration over net assets
acquired. The following is a calculation (in millions except per share
data):
<TABLE>
<S> <C>
MCI Common Stock outstanding at September 30, 1997.......... 560
Shares issuable (treasury stock method) upon exercise of MCI
options................................................... 44
--------
MCI Common Stock assumed outstanding at September 30,
1997...................................................... 604
MCI Exchange Ratio per share................................ 1.5396
--------
WorldCom Common Stock assumed to be issuable................ 930
WorldCom per share closing price on November 7, 1997........ $ 33.13
--------
Sub-total................................................... $ 30,811
Payment to MCI Class A Common Stockholder................... 6,936
Inducement fee and other estimated transaction costs........ 510
--------
Total consideration......................................... $ 38,257
Preliminary purchase accounting adjustments:
Fair value adjustment to property, plant and equipment...... 2,700
Deferred tax impact of fair value adjustment................ (1,015)
--------
39,942
Historical net book value of MCI net assets acquired........ (11,321)
--------
Excess of consideration over net assets acquired............ $ 28,621
========
</TABLE>
The total consideration will be allocated to the assets and liabilities of
MCI based on their estimated fair value. A preliminary allocation of the
purchase price has been presented in the pro forma condensed combined
financial statements in which the historical MCI property, plant and
equipment has been adjusted to its estimated fair value based upon its
depreciated replacement cost. The impact of this fair value adjustment has
also been reflected in pro forma deferred tax balances. The excess of
consideration over the historical book value of MCI net assets acquired has
been preliminarily allocated to goodwill and other intangible assets. A
final allocation of the purchase price to the MCI assets acquired and
liabilities assumed is dependent upon certain valuations and studies that
have not progressed to a stage where there
F-63
<PAGE> 89
is sufficient information to make such an allocation in the accompanying pro
forma financial information. WorldCom's management believes that the
consideration in excess of the historical book value of MCI's net assets
acquired, primarily comprises goodwill, certain in-process research and
development projects and other intangible assets. In-process research and
development projects may include projects for which technological
feasibility has not been established and the technology has no future
alternative use. To the extent that a portion of the purchase price is
allocated to such in-process research and development projects, a charge,
which may be material to WorldCom's results of operations, would be
recognized in the period in which the MCI/WorldCom Merger occurs. (See Note
1).
5. This adjustment represents additional borrowings of $7.4 billion for the
purpose of financing the cash payment to the holder of the MCI Class A
Common Stock of $6.9 billion, and other estimated transaction costs of $510
million (which includes a $465 million inducement fee paid to BT).
6. These adjustments represent the elimination of MCI's stockholders' equity
accounts.
7. These adjustments represent the issuance of approximately 930 million shares
of WorldCom Common Stock in connection with the MCI/WorldCom Merger and an
assumed MCI Exchange Ratio of 1.5396 shares of WorldCom Common Stock for
each share of MCI Common Stock outstanding. The actual MCI Exchange Ratio
may vary as described herein.
8. These estimated adjustments eliminate the revenues and corresponding line
costs and other charges attributable to the intercompany transactions
between WorldCom and MCI.
9. This entry reflects the adjustment to amortization for the effect of the
excess of consideration over net assets acquired in the MCI/WorldCom Merger.
For purposes of the Pro Forma Condensed Combined Financial Statements, the
excess consideration has been amortized over an estimated life of 40 years.
WorldCom management expects that amounts allocated to goodwill and trade
names will be amortized over 40 years while other intangible assets may be
amortized over shorter periods consequently reducing net income reported by
MCI WorldCom. A final determination of the lives attributable to the
intangible assets has not yet been made (See Note 1). As discussed in Note
4, a portion of the excess consideration may be allocated to certain
in-process research and development projects. To the extent amounts are
allocated to certain in-process research and development projects, pro forma
amortization expense would be ratably reduced accordingly.
10. This entry reflects the adjustment to depreciation expense for the effect of
the fair value adjustment of MCI's property, plant and equipment based on a
preliminary evaluation of depreciated replacement cost (See Note 4).
11. These adjustments represent the recognition of interest expense on the
additional borrowings of WorldCom to finance the cash payment to the holder
of the MCI Class A Common Stock and transaction costs (see Note 5). The
interest expense was calculated based on WorldCom's incremental borrowing
rate of 6.5%. A change of 1/8% in the incremental rate would affect
interest expense by $7.0 million for the nine months ended September 30,
1997, and $9.3 million for the year ended December 31, 1996.
12. These entries represent the tax effect of the pro forma adjustments.
13. Pro forma per share data are based on the number of WorldCom common and
common equivalent shares that would have been outstanding had the
MCI/WorldCom Merger occurred on the earliest date presented.
F-64
<PAGE> 90
ADDITIONAL PRO FORMA PRESENTATION
The following unaudited Additional Pro Forma Presentation illustrates the
effect of the MCI/WorldCom Merger and the MFS Merger as well as MFS's earlier
acquisition of UUNET Technologies, Inc. (the "UUNET Acquisition") on the results
of operations of WorldCom for the year ended December 31, 1996, as if the
transactions had occurred on January 1, 1996. The Additional Pro Forma
Presentation is presented for purposes of additional analysis due to the
significance of the MFS Merger.
Pursuant to the terms of the MCI/WorldCom Merger, each share of MCI Common
Stock will be converted into the right to receive that number of shares of
WorldCom Common Stock equal to the MCI Exchange Ratio. The holder of MCI Class A
Common Stock will be entitled to receive $51.00 per share in cash for each of
the MCI Class A Common Stock shares it owns, or approximately $7 billion in the
aggregate. The pro forma financial statements have been prepared assuming the
MCI/WorldCom Average Price to be $33.13 resulting in an assumed MCI Exchange
Ratio of 1.5396. The actual MCI Exchange Ratio may vary as described herein. The
MCI/WorldCom Merger will be accounted for as a purchase.
On December 31, 1996, WorldCom through a wholly owned subsidiary merged
with MFS. As a result of the MFS Merger, each share of MFS common stock was
converted into the right to receive 2.1 shares of WorldCom Common Stock or
approximately 471.0 million shares of WorldCom Common Stock in the aggregate.
Each share of MFS Series A 8% Cumulative Convertible Preferred Stock was
converted into the right to receive one share of WorldCom Series A Preferred
Stock or 94,992 shares of WorldCom Series A Preferred Stock. Each share of MFS
Series B Convertible Preferred Stock was converted into the right to receive one
share of WorldCom Series B Preferred Stock or approximately 12.7 million shares
of WorldCom Series B Preferred Stock. In addition, each depositary share
representing 1/100th of a share of MFS Series A Preferred Stock was exchanged
for a depositary share representing 1/100th of a share of WorldCom Series A
Preferred Stock.
On August 12, 1996 and prior to the MFS Merger, MFS issued approximately 58
million shares of MFS common stock and options valued at approximately $2.1
billion in connection with its acquisition of UUNET.
The Additional Pro Forma Presentation should be read in conjunction with
the historical financial statements of WorldCom, MCI, MFS and UUNET which are
incorporated by reference herein.
The Additional Pro Forma Presentation is presented for comparative purposes
only and is not intended to be indicative of actual results had the transactions
occurred as of the dates indicated above nor do they purport to indicate results
which may be attained in the future. No adjustment has been included in the pro
forma amounts for any anticipated cost savings or other synergies. The
Additional Pro Forma Presentation also does not include amounts with respect to
the BFP Merger, the AOL Transaction or the CompuServe Merger because they are
individually, and in the aggregate, not material to WorldCom.
F-65
<PAGE> 91
ADDITIONAL PRO FORMA PRESENTATION(1)
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
UUNET WORLDCOM/
HISTORICAL(2) MFS/UUNET
WORLDCOM MFS JANUARY 1, 1996 - PRO FORMA PRO FORMA MCI
HISTORICAL(2) HISTORICAL(2) AUGUST 12, 1996 ADJUSTMENTS COMBINED HISTORICAL(2)
------------- ------------- ----------------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues........................... $ 4,485 $1,115 $129 $ (94)(3) $ 5,635 $18,494
Operating expenses:
Line costs....................... 2,457 687 71 (94)(3) 3,121 9,489
Selling, general and
administrative................. 829 493 44 -- 1,366 5,028
Depreciation and amortization.... 303 286 12 237(4) 838 1,664
Charge for in-process research
and development................ 2,140 -- -- -- 2,140 --
Other............................ 600 -- -- -- 600 --
------- ------ ----- ----- ------- -------
Operating income (loss)............ (1,844) (351) 2 (237) (2,430) 2,313
Other income (expense):
Interest expense................. (222) (62) (1) -- (285) (196)
Other............................ 6 (3) -- -- 3 (127)
------- ------ ----- ----- ------- -------
Income (loss) before income
taxes............................ (2,060) (416) 1 (237) (2,712) 1,990
Provision for income taxes......... 129 1 -- (125)(5) 5 753
------- ------ ----- ----- ------- -------
Income (loss) from continuing
operations....................... (2,189) (417) 1 (112) (2,717) 1,237
Preferred dividend requirements.... 1 29 -- -- 30 35
------- ------ ----- ----- ------- -------
Net income (loss) applicable to
common shareholders.............. $(2,190) $ (446) $ 1 $(112) $(2,747) $ 1,202
======= ====== ===== ===== ======= =======
Number of shares issued and
outstanding:
Primary.......................... 398 N/M N/M 869 695
======= ======= =======
Fully diluted.................... 398 N/M N/M 869 701
======= ======= =======
Earnings (loss) per share (6):
Primary.......................... $ (5.50) N/M N/M $ (3.16) $ 1.73
Fully diluted.................... $ (5.50) N/M N/M $ (3.16) $ 1.72
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS COMBINED
----------- ---------
<S> <C> <C>
Revenues........................... $(558)(3) $23,571
Operating expenses:
Line costs....................... (500)(3) 12,110
Selling, general and
administrative................. -- 6,394
Depreciation and amortization.... 716(7) 2,668
(550)(8)
Charge for in-process research
and development................ -- 2,140
Other............................ (58)(3) 542
----- -------
Operating income (loss)............ (166) (283)
Other income (expense):
Interest expense................. (484)(9) (965)
Other............................ -- (124)
----- -------
Income (loss) before income
taxes............................ (650) (1,372)
Provision for income taxes......... 25(5) 783
----- -------
Income (loss) from continuing
operations....................... (675) (2,155)
Preferred dividend requirements.... -- 65
----- -------
Net income (loss) applicable to
common shareholders.............. $(675) $(2,220)
===== =======
Number of shares issued and
outstanding:
Primary.......................... 1,718
=======
Fully diluted.................... 1,718
=======
Earnings (loss) per share (6):
Primary.......................... $ (1.29)
Fully diluted.................... $ (1.29)
</TABLE>
The accompanying notes are an integral part of this statement.
F-66
<PAGE> 92
NOTES TO ADDITIONAL
PRO FORMA PRESENTATION
1. The unaudited Additional Pro Forma Presentation does not give effect to any
potential cost savings or other synergies that could result from the
MCI/WorldCom Merger, the MFS Merger and UUNET Acquisition. WorldCom's
results for 1996 do not include charges related to extraordinary items of
$24.4 million, net of taxes. Furthermore, the pro forma financial data do
not reflect any expense of intangible assets attributable to the value of
any in-process research and development projects of MCI at the time of the
MCI/WorldCom Merger. However, WorldCom has undertaken a study to determine
the allocation of the total purchase price to the various assets acquired,
including in-process research and development, and the liabilities assumed.
To the extent that a portion of the purchase price is allocated to certain
in-process research and development projects of MCI, a charge, which may be
material, would be recognized in the period in which the MCI/WorldCom
Merger occurs. The pro forma data are not necessarily indicative of the
operating results or financial position that would have occurred had the
MCI/WorldCom Merger, MFS Merger and UUNET Acquisition been consummated at
the date indicated, nor necessarily indicative of future operating results
or financial position.
2. These columns represent historical results of operations.
3. These estimated adjustments eliminate the revenues, corresponding line
costs and other charges attributable to the intercompany transactions among
WorldCom, MFS, UUNET and MCI.
4. This entry reflects the adjustment to amortization for the effect of the
intangible assets acquired. For purposes of allocating the acquisition
costs among the various assets acquired in the MFS Merger and UUNET
Acquisition, the carrying value of the acquired assets approximated their
fair value, with all of the excess of such acquisition costs being
attributed to in-process research and development (network design and
development projects in-process), goodwill, network technology and
assembled workforce. It is WorldCom's intention to continue to evaluate the
acquired assets and, as a result, the allocation of the acquisition costs
among the tangible and intangible assets acquired may change. Goodwill
attributable to MFS is being amortized over 40 years while goodwill
attributable to UUNET is being amortized over 5 years. Network technology
and assembled work force are being amortized over 5 years and 10 years,
respectively.
5. These entries represent the tax effect of the pro forma adjustments.
6. Pro forma per share data is based on the number of shares of WorldCom
Common Stock that would have been outstanding had the MCI/WorldCom Merger,
the MFS Merger and UUNET Acquisition occurred on the earliest date
presented. The per share data also includes the effect of the $2.14 billion
charge for in-process research and development related to the MFS Merger.
Excluding this non-recurring charge from the pro forma data would have
resulted in loss per share of $(0.05).
7. This entry reflects the adjustment to amortization for the effect of the
excess of consideration over net assets acquired in the MCI/WorldCom
Merger. The total consideration of the MCI/WorldCom Merger will be
allocated to the assets and liabilities of MCI based on their estimated
fair value. The excess of consideration over the historical book value of
MCI net assets acquired has been preliminarily allocated to goodwill and
other intangible assets. A final allocation of the purchase price to the
MCI assets acquired and liabilities assumed is dependent upon certain
valuations and studies that have not progressed to a stage where there is
sufficient information to make such an allocation in the accompanying pro
forma financial information. WorldCom's management believes that the
consideration in excess of the historical book value of MCI's net assets
acquired, primarily comprises goodwill, certain in-process research and
development projects and other intangible assets. In-process research and
development projects may include projects for which technological
feasibility has not been established and the technology has no future
alternative use. To the extent that a portion of the purchase price is
allocated to such in-process research and development projects, a charge,
which may be material to WorldCom's results of operations, would be
recognized in the period in which the MCI/WorldCom Merger occurs. For
purposes of the Additional Pro Forma Presentation, the excess consideration
has been amortized over an estimated life of
F-67
<PAGE> 93
40 years. WorldCom management expects that amounts allocated to goodwill and
trade names will be amortized over 40 years while other intangible assets may
be amortized over shorter periods consequently reducing net income reported
by the combined company. A final determination of lives attributable to the
intangible assets has not yet been made (See Note 1). To the extent amounts
are allocated to certain in-process research and development projects, pro
forma amortization expense would be ratably reduced accordingly.
8. This entry reflects the adjustment to depreciation expense for the effect of
the fair value adjustment of MCI's property, plant and equipment based on a
preliminary evaluation of depreciated replacement cost (See Note 7).
9. These adjustments represent the recognition of interest on the additional
borrowings of WorldCom to finance the cash payment to the holder of the MCI
Class A Common Stock and other estimated transaction costs of $510 million
(which includes a $465 million inducement fee paid to BT). The interest
expense was calculated at WorldCom's incremental borrowing rate of 6.5%. A
change of 1/8% in the incremental rate would affect interest expense by $9.3
million for the year ended December 31, 1996.
F-68
<PAGE> 94
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
WORLDCOM, INC.
By: /s/ Scott D. Sullivan
----------------------------------
Scott D. Sullivan
Dated: January 27, 1998 Chief Financial Officer
<PAGE> 95
EXHIBIT INDEX
Exhibit No. Description of Exhibit
----------- ----------------------
2.1 Agreement and Plan of Merger by and among WorldCom,
TC Investments Corp. and MCI Communications
Corporation dated as of November 9, 1997
(incorporated herein by reference to Exhibit 2.1 to
WorldCom's Current Report on Form 8-K dated November
9, 1997 (filed November 12, 1997) (File 0-11258))*
2.2 Agreement by and among British Telecommunications
plc, MCI Communications Corporation and WorldCom
dated as of November 9, 1997 (incorporated herein by
reference to Exhibit 99.1 to WorldCom's Current
Report on Form 8-K dated November 9, 1997 (filed
November 12, 1997) (File 0-11258))*
23.1 Consent of Price Waterhouse LLP
*The Registrant hereby agrees to furnish supplementally a copy of any omitted
schedules to this Agreement to the Securities and Exchange Commission upon its
request.
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-69322, 33-71450, 33-52168, 33-89072, 333-02115,
333-10349, 333-30279, 333-30281, 333-16531, and 333-16015) and in the
Prospectuses constituting part of the Registration Statements on Form S-3 (Nos.
33-63810, 33-71510, 33-87514, 33-77964, 33-87516, 33-58719, 333-10455, 333-10459
and 333-20911) of WolrdCom, Inc. of our report dated January 27, 1997, relating
to the consolidated financial statements of MCI Communications Corporation for
the year ended December 31, 1996, which report appears on page F-23 of this Form
8K/A-2.
PRICE WATERHOUSE LLP
January 28, 1998
Washington, D.C.
