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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A-1
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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TABLE OF CONTENTS
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ITEM 5. OTHER EVENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
THE MCI/WORLDCOM MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Effects of the MCI/WorldCom Merger; Estimated Synergies . . . . . . . . . . . . . . . . . . . . . . . 4
Management After the MCI/WorldCom Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Accounting Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Certain Regulatory Filings and Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Percentage Ownership Interest of MCI Stockholders After
the MCI/WorldCom Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Other Terms of the MCI/WorldCom Merger Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . 10
The BT Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Certain Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Interests of Certain Persons in the MCI/WorldCom Merger . . . . . . . . . . . . . . . . . . . . . . 24
Certain Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Business, Management and Principal Stockholders of MCI . . . . . . . . . . . . . . . . . . . . . . . 28
THE COMPUSERVE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
THE AOL TRANSACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
THE BFP MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
MANAGEMENT AND PRINCIPAL SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Information about Directors and Executive Officers . . . . . . . . . . . . . . . . . . . . . . . . . 36
Security Ownership of Management and Principal Shareholders . . . . . . . . . . . . . . . . . . . . 37
Information Regarding Stephen M. Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Information Regarding James C. Allen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
MANAGEMENT OF WORLDCOM FOLLOWING THE MCI/WORLDCOM MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . 40
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Compensation of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Executive Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Compensation of Executive Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . 43
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
ITEM 7(c). EXHIBITS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
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ITEM 5. OTHER EVENTS.
The following sets forth certain information regarding the MCI/WorldCom
Merger, the CompuServe Merger, the AOL Transaction and the BFP Merger (as those
terms are defined herein), as well as the management and shareholders of
WorldCom, Inc., a Georgia corporation ("WorldCom").
See "Cautionary Statement Regarding Forward-Looking Statements" and "Risk
Factors" herein for certain information that should be considered by investors.
THE MCI/WORLDCOM MERGER
General
On October 1, 1997, WorldCom announced its intention to commence an exchange
offer (the "MCI Offer") to acquire all of the outstanding shares of the common
stock of MCI Communications Corporation, a Delaware corporation ("MCI"), par
value $.10 ("MCI Common Stock"), for $41.50 of WorldCom common stock, par value
$.01 ("WorldCom Common Stock"), subject to adjustment as set forth in materials
filed with the Securities Exchange Commission (the "Commission"). On November
9, 1997, WorldCom entered into an Agreement and Plan of Merger (the
"MCI/WorldCom Merger Agreement") with MCI and 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, in which MCI would
merge 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
General Corporation Law of the State of Delaware (the "DGCL"). 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 common stock, par value $.01 per
share, of WorldCom ("WorldCom Common Stock") equal to the MCI Exchange Ratio
(as defined below) (the "MCI Common Stock Merger Consideration"), and each
share of Class A common stock, par value $.10, of MCI ("MCI Class A Common
Stock" and collectively, 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 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
any fractional share of WorldCom Common Stock in the MCI/WorldCom Merger. See
"-- Other Terms of the MCI/WorldCom Merger Agreement -- Conversion of Shares 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 will be issued in the MCI/WorldCom Merger. In addition, outstanding
options to purchase shares of MCI Common Stock would be converted in the
MCI/WorldCom Merger to options to acquire an aggregate of approximately
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 will become effective upon the filing of a
Certificate of Merger with the Secretary of State of the State of Delaware or
at such subsequent time as WorldCom and MCI may agree and is specified in the
Certificate of Merger. The filing of the Certificate of Merger will occur as
soon as practicable following the
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closing of the MCI/WorldCom Merger, which will occur on the fifth business day
after the satisfaction or waiver of the conditions set forth in the
MCI/WorldCom Merger Agreement, unless otherwise agreed by the parties.
Consummation of the MCI/WorldCom Merger, however, is dependent upon the
requisite approvals and authorizations for the MCI/WorldCom Merger under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"Hart-Scott-Rodino Act"), the Communications Act of 1934, as amended (the
"Communications Act"), and certain other applicable federal, state or other
applicable regulatory laws. There can be no assurance as to (i) if or when such
approvals will be obtained or that, if obtained, such approvals will satisfy
the conditions to the consummation of the MCI/WorldCom Merger set forth in the
MCI/WorldCom Merger Agreement or (ii) whether all of the other conditions
precedent to the MCI/WorldCom Merger will be satisfied or waived by the party
permitted to do so. If the MCI/WorldCom Merger is not effected on or before
December 31, 1998, the MCI/WorldCom Merger Agreement can be terminated by
either MCI or WorldCom, unless the failure to effect the MCI/WorldCom Merger by
such date is due to the failure of the party seeking to terminate the
MCI/WorldCom Merger Agreement to fulfill its obligations under the MCI/WorldCom
Merger Agreement (including without limitation its obligation to use its best
efforts to consummate the MCI/WorldCom Merger). See "-- Other Terms of the
MCI/WorldCom Merger Agreement -- Conditions Precedent to the MCI/WorldCom
Merger" and "-- Termination."
Effects of the MCI/WorldCom Merger; Estimated Synergies
The Board of Directors of WorldCom (the "WorldCom Board") believes that the
MCI/WorldCom Merger will create a fully integrated communications company that
will be well positioned to take advantage of growth opportunities in global
telecommunications. The combined company ("MCI WorldCom") is expected to have
over $30 billion in 1998 pro forma revenues and will provide a complete range
of local, long distance, Internet and international communications services.
In addition, the WorldCom Board has concluded that the MCI/WorldCom Merger
presents significant opportunities for cost savings and operating efficiencies.
WorldCom estimates that annual cash operating cost synergies of $2.5 billion
are achievable in 1999, increasing to $5.6 billion by 2002. In addition,
capital expenditure savings of $2 billion per year are expected in 1999 and
beyond. There can, however, be no assurance that any specific level of cost
savings or other synergies will be achieved or that such cost savings or other
synergies will be achieved within the time periods contemplated.
Set forth below are the synergies originally estimated by WorldCom to be
achievable as a result of the MCI/WorldCom Merger (the "Previous Synergy
Estimates") and the revised synergy estimates prepared by WorldCom following
the exchange of information between MCI and WorldCom (the "Revised Synergy
Estimates"). Both the Previous Synergy Estimates and the Revised Synergy
Estimates are net of the expenses WorldCom estimates will be incurred to
achieve such savings. 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. As described in the following paragraph and under "Risk
Factors" below, achievement of the expected synergies cannot be assured, and
the Board's recommendation was not predicated on the achievement of any
specific level of synergies.
The information contained in this section "Effects of the MCI/WorldCom
Merger; Estimated Synergies" was not prepared with a view toward compliance
with published guidelines of the Commission or the American Institute of
Certified Public Accountants regarding forward-looking information or generally
accepted accounting principles and was not examined, reviewed or compiled by
independent public accountants, and, accordingly, the independent public
accountants do not express an opinion or any other form of assurance with
respect thereto. The estimates of achievable cost synergies ("synergies") were
based upon a variety of estimates and assumptions. The estimates and
assumptions underlying the synergies involved judgments with respect to, among
other things, future economic, competitive, regulatory and financial market
conditions and future business decisions which may not be realized and are
inherently subject to significant business, economic, competitive and
regulatory uncertainties, all of which are difficult to predict and many of
which are beyond the control of WorldCom and MCI and will be beyond the control
of the combined companies. There can be no assurance that the synergies will be
realized, and actual results may vary materially from those shown.
Additionally, the synergies do not reflect revised prospects for WorldCom's,
MCI's or the combined companies' businesses, changes in general business and
economic conditions, or any other transaction or event that has occurred or
that may occur and that was not anticipated at the time such information
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was prepared. None of the synergies was intended to be a forecast of profits by
WorldCom, MCI and the combined companies or any of their directors. Neither
WorldCom nor MCI has updated or supplemented this information or intend to do
so. This section contains "forward looking statements" within the meaning of
the PSLRA. See "Cautionary Statement Regarding Forward Looking Statements" and
"Risk Factors" below.
ESTIMATES OF ACHIEVABLE COST SYNERGIES
PREVIOUS SYNERGY ESTIMATES
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FISCAL YEAR ENDED DECEMBER 31,
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1999 2000 2001 2002
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(DOLLARS IN BILLIONS)
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Network synergies and avoided local losses. . . $1.5 $2.0 $2.7 $3.2
Core SG&A . . . . . . . . . . . . . . . . . . . 0.9 1.0 1.1 1.2
--- --- --- ---
Total pre-tax cash operating synergies. . . . . $2.4 $3.0 $3.8 $4.4
As a % of combined revenues . . . . . . . . . 6% 6% 7% 7%
As a % of combined operating expenses . . . . 8% 8% 9% 9%
Capital expenditure savings . . . . . . . . . . $1.5 $1.6 $1.5 $1.5
As a % of combined revenues . . . . . . . . . 4% 3% 3% 2%
As a % of combined capital expenditures . . . 20% 21% 19% 18%
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REVISED SYNERGY ESTIMATES
FISCAL YEAR ENDED DECEMBER 31,
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1999 2000 2001 2002
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(DOLLARS IN BILLIONS)
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Network synergies and avoided local losses. . . $1.6 $2.6 $3.5 $4.4
Core SG&A . . . . . . . . . . . . . . . . . . . 0.9 1.0 1.1 1.2
--- --- --- ---
Total pre-tax cash operating synergies. . . . . $2.5 $3.6 $4.6 $5.6
As a % of combined revenues . . . . . . . . . 6% 8% 8% 8%
As a % of combined operating expenses . . . . 8% 10% 11% 12%
Capital expenditure savings . . . . . . . . . . $2.0 $2.0 $2.0 $2.0
As a % of combined revenues . . . . . . . . . 5% 4% 4% 3%
As a % of combined capital expenditures . . . 26% 26% 24% 23%
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The Previous Synergy Estimates were developed by WorldCom prior to October 1,
1997 based on publicly available information, WorldCom's general knowledge of
the telecommunications industry and WorldCom's experience in prior merger and
acquisition transactions. The Revised Synergy Estimates were developed
subsequently by WorldCom following an exchange of information between MCI and
WorldCom and discussions between the companies' respective management teams. As
a result of the information obtained by WorldCom and the discussions with the
MCI management team, the Revised Synergy Estimates include certain new
categories of potential savings, such as cost savings relating to the
elimination of duplicated information technology costs. In addition, categories
of savings included in the Previous Synergy Estimates were revised by WorldCom
in light of improved knowledge about MCI's business and prospects.
The Previous Synergy Estimates and the Revised Synergy Estimates are net of
the expenses WorldCom believes will be incurred to achieve the estimated costs
synergies.
Network Synergies and Avoided Local Losses. In both the Previous
Synergy Estimates and the Revised Synergy Estimates, network synergies
and avoided local losses were anticipated to be realized in three
areas: reduced domestic network costs, reduced cost of terminating
international traffic and avoided costs in MCI's local activities.
Reduced domestic network costs. As a result of WorldCom's
existing extensive local network, the combined company will
carry an increased proportion of its domestic traffic on its
own local network facilities resulting in a reduction in
leased line costs and access costs associated with switched
traffic. By combining WorldCom's and MCI's traffic, a
reduction in variable network costs such as In-WATS, Out-
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WATS and directory services are expected as a result of the
combined company's greater purchasing power. Assumptions used
by WorldCom to estimate the magnitude of potential cost
savings in this area included: (i) the magnitude of MCI's and
WorldCom's projected costs for terminating traffic
domestically; (ii) the mix of these costs between different
categories such as access, direct access lines and leased
lines, Out-WATS and In-WATS, and entrance facilities; and
(iii) the proportion of the projected costs that net of
implementation costs could be eliminated as a result of
combining MCI's and WorldCom's activities.
Reduced cost of terminating international traffic. MCI
currently has more extensive settlement agreements for
international traffic than does WorldCom. The combined company
will benefit from these settlement agreements. In addition, as
a result of construction of transatlantic facilities and
network facilities in Europe, the combined company will be
able to lower MCI's average costs of terminating certain
traffic in Europe. Assumptions used by WorldCom to estimate
the magnitude of potential costs savings in this area
included: (i) the magnitude of MCI's and WorldCom's projected
costs for terminating traffic overseas on a country-by-country
basis; (ii) the magnitude of MCI's and WorldCom's projected
international traffic on a country-by-country basis; and (iii)
the proportion of MCI's international traffic that could be
carried on WorldCom's facilities in Europe.
Avoided costs in MCI's local activities. As a result of
WorldCom's existing extensive local network and operations,
the combined company will be able to execute MCI's plans to
expand in the local market at a lower cost than MCI would be
able to on a stand-alone basis. The combined company will
avoid the need to duplicate certain sales, marketing and
administrative functions and will have reduced network costs
resulting from the more rapid transfer of traffic to the
combined company's network facilities. Assumptions used by
WorldCom to estimate the magnitude of potential cost savings
in this area included: (i) the projected operating costs
associated with MCI's plans to expand its presence in the
local market; and (ii) the proportion of these costs that net
of implementation costs could be avoided by combining MCI's
and WorldCom's businesses.
Comparing the Previous Synergy Estimates and the Revised Synergy
Estimates, network synergies and avoided local losses increased by
$100 million in 1999 and by $1.2 billion in 2002. These changes
occurred as a result of a substantial increase in estimated reduced
costs of terminating international traffic and a modest increase in
reduced domestic network costs offset by a modest reduction in avoided
costs in MCI's local activities.
Core SG&A. The increased scale of activities in the combined company's
operations will result in opportunities to reduce costs by avoiding
expenditures on duplicative activities, greater purchasing power and
the adoption of best practices in cost containment across the combined
company resulting in a reduction in core sales, general and
administrative expenses. Assumptions used by WorldCom to estimate the
magnitude of potential cost savings in this area included: (i) the
magnitude of MCI's and WorldCom's sales, general and administrative
expense by category such as sales, accounting and finance and
information services; and (ii) the proportion of the projected costs
that net of implementation costs could be eliminated as a result of
combining MCI's and WorldCom's activities, based in part on a
comparison to other comparable companies' levels of sales, general and
administrative expenses as a percentage of sales.
Core sales, general and administrative cost synergies did not change
materially between the Previous Synergy Estimates and the Revised
Synergy Estimates.
Capital Expenditure Savings. Capital expenditure savings are expected
to be realized primarily in three areas: domestic long distance
network activities, local network buildout and information technology.
Capital expenditures relating to the combined company's long distance
activities will be reduced primarily as a result of avoided
duplicative fixed capital expenses and the cost benefits realized from
greater purchasing efficiencies. Capital expenditures relating to the
combined company's local and information technology activities will be
reduced primarily as a result of avoided duplicative capital
expenditures. Assumptions used by WorldCom to estimate the magnitude
of potential cost savings in this category included: (i) the magnitude
of MCI's and WorldCom's long distance, local and information
technology related capital expenditures; and (ii) the proportion
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of the projected costs that net of implementation costs could be
eliminated as a result of combining MCI's and WorldCom's activities.
Comparing the Previous Synergy Estimates and the Revised Synergy
Estimates, capital expenditure savings increased by approximately $500
million per year primarily as a result of significant anticipated
savings in the area of information technology that were not included
in the Previous Synergy Estimates and a modest increase in anticipated
long distance network savings. In the Revised Synergy Estimates, in
1999 approximately 45% of total capital expenditure savings relate to
long distance, 35% to local and 20% to information technology. In
2002, approximately 65% of total capital expenditure savings relate to
long distance, 15% to local and 20% to information technology.
Specific business strategies necessary to realize the anticipated cost
synergies will include: (i) coordinating the purchasing activities of the
combined company to ensure that potential purchasing efficiencies are achieved,
(ii) coordinating network operations to ensure that to the extent economically
attractive traffic is carried on the network of the combined company
domestically and overseas, (iii) coordinating local activities of the combined
company to eliminate unneeded duplication, (iv) adopting best practice in cost
control throughout the combined company, and (v) coordinating capital
expenditure programs of the combined company to eliminate unneeded duplication.
The combined company would be the second largest long distance carrier in the
United States. The combined company would begin operations with one of the
industry's strongest bases of business customers and more than 22 million small
business and residential customers.
The WorldCom Board believes that the MCI/WorldCom Merger would create a
company strongly positioned to fulfill the promise of the Telecom Act and
accelerate the onset of competition in local telecommunications. WorldCom
believes that the combined company can expand further and faster into local
service areas now dominated by incumbent local exchange carriers than either
company could on a stand-alone basis because of the efficiencies that WorldCom
believes the combined company will achieve through, among other things as
described above, reduced capital expenditures in the deployment of the same
amount of, or more, network capacity than the total of what the two companies
would deploy on a stand-alone basis. The new company would offer local service
over its own facilities, including more than 9,000 route miles of local fiber,
in more than 100 markets.
The combined company, with offices in 65 countries, would be the second
largest carrier of international voice traffic in the world. The WorldCom Board
believes that the combination of WorldCom and MCI will position MCI WorldCom as
a powerful competitor in the $670 billion global telecom industry.
MCI WorldCom would bring together the Internet expertise of UUNET and MCI to
create one of the world's largest providers of Internet services. The combined
company's advanced portfolio of Internet/data services would include access,
web hosting and development, intranet applications as well as high-speed
virtual data services.
The WorldCom Board believes that MCI WorldCom would provide global customers
with unparalleled networking strength and more than 20 years of experience in
systems integration, superior outsourcing capabilities and technology support
and implementation.
Management After the MCI/WorldCom Merger
Pursuant to the MCI/WorldCom Merger Agreement, WorldCom has agreed that the
WorldCom Board, as of the Effective Time, shall consist of fifteen members,
eight of whom shall be designated by WorldCom from among the directors of
WorldCom, five of whom shall be designated by MCI from among the directors of
MCI and two of whom shall be directors designated by WorldCom from among
pending acquisitions of WorldCom; provided that the persons designated by each
party shall be reasonably acceptable to the other party. As of the date
hereof, the WorldCom Board is composed of eleven directors. WorldCom has
further agreed to cause Bert C. Roberts, Jr. to be appointed Chairman of MCI
WorldCom, and to cause the senior management of MCI WorldCom to be as
previously agreed by the parties. Pursuant to the MCI/WorldCom Merger
Agreement, Bernard J. Ebbers will be the
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President and Chief Executive Officer of MCI WorldCom. In addition, Gerald H.
Taylor, currently Chief Executive Officer of MCI, will become President and
Chief Executive Officer of MCI WorldCom International, responsible for all
strategy, operations and ventures outside of the U.S.; Timothy F. Price,
currently President and Chief Operating Officer of MCI, will become President
and Chief Executive Officer of MCI WorldCom's U.S. communications operating
subsidiary. The U.S. operating subsidiary will be responsible for the
communications business in the United States, including all sales and
marketing, customer service, product development, and network operations. John
W. Sidgmore, currently Vice Chairman and Chief Operations Officer of WorldCom,
will become President and Chief Executive Officer of Internet & Technology,
responsible for information technology (IT) services, including MCI
Systemhouse, architecture, design, and planning for the global network, and
managing MCI WorldCom's largest commercial Internet relationships; and Scott
D. Sullivan will continue to serve as Chief Financial Officer of MCI WorldCom.
See "Management of WorldCom Following the MCI/WorldCom Merger."
Accounting Treatment
The MCI/WorldCom Merger will be accounted for as a purchase for financial
accounting purposes in accordance with generally accepted accounting
principles. For purposes of preparing WorldCom's consolidated financial
statements, WorldCom will establish a new accounting basis for MCI's assets and
liabilities based upon the fair values thereof, the MCI/WorldCom Merger
Consideration and the costs of the MCI/WorldCom Merger. WorldCom's management
believes that any excess of cost over the fair value of the net assets of MCI
will be recorded as goodwill, in-process research and development, 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. A
final determination of the intangible asset lives and required purchase
accounting adjustments, including the allocation of the purchase price to the
assets acquired and liabilities assumed based on their respective fair values,
has not yet been made. Accordingly, the purchase accounting adjustments made in
connection with the development of the unaudited pro forma condensed combined
financial information appearing elsewhere in a Current Report on Form 8-K/A-2 of
even date herewith filed by WorldCom with the Commission are preliminary and
have been made solely for purposes of developing such unaudited pro forma
condensed combined financial information. WorldCom has undertaken a study to
determine the fair value of certain of MCI's assets and liabilities and will
make appropriate purchase accounting adjustments upon completion of that study.
For financial reporting purposes, the results of operations of MCI will be
included in the WorldCom consolidated statement of operations following the
MCI/WorldCom Effective Time.
Certain Regulatory Filings and Approvals
FCC Transfer Approvals. Certain activities of WorldCom and MCI are regulated
by the Federal Communications Commission (the "FCC"). Provisions of Title 47 of
the United States Code, including Sub-Titles II and III and the Cable Landing
License Act, require the prior approval of the FCC for the acquisition of
control of a company such as MCI that holds various licenses and authorizations
issued by the FCC. The FCC traditionally grants approval of such transactions
if it determines that the transfer of control is consistent with the public
interest, convenience and necessity, without consideration of the relative
merits of such a transfer of control vis-a-vis those of any other possible
transfers of control that may be pending or contemplated. On October 1, 1997,
WorldCom requested FCC approval for both stages of a two-step transfer of
control of MCI to WorldCom that contemplated as a first step an interim Step I
transfer of control to a "caretaker" voting trustee empowered to acquire and
hold shares of MCI tendered pursuant to the MCI Offer. Subsequently, WorldCom
and MCI agreed upon the terms of the MCI/WorldCom Merger and in light of the
MCI/WorldCom Merger Agreement, MCI and WorldCom jointly requested that the
request for a voting trust be withdrawn and jointly submitted amendments to
WorldCom's October 1, 1997 applications under Section 214 of the Communications
Act and applications under Title III of the Communications Act relating to
MCI's radio licenses, requesting approval of transfer of control of MCI to
WorldCom. WorldCom and its Subsidiaries already hold certain similar
authorizations issued by the FCC, and WorldCom believes it is likely that the
transfer applications will be granted. However, the transfer applications are
subject to public comment, petitions to deny and informal objections by third
parties, which may interpose
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objections in an attempt to delay or impede approval by the FCC. Some
objections have been filed and WorldCom and MCI have been given the opportunity
to respond to those objections. Accordingly, there can be no assurance that the
FCC will timely grant the transfer applications or not subject its approval to
various conditions and restrictions. The MCI/WorldCom Merger is conditioned on
receipt of approval of the transfer applications, other than those the failure
of which to be obtained would not reasonably be expected to have individually
or, together with any approvals from the state public utility or service
commissions ("PUCs") which shall not have been obtained, in the aggregate a
MCI/WorldCom Material Adverse Effect (defined below) on WorldCom and its
Subsidiaries (defined below) (including the surviving corporation of the
MCI/WorldCom Merger (the "MCI/WorldCom Surviving Corporation")).
State Regulatory Transfer Approval. WorldCom has amended pending state
transfer applications and has filed additional state applications (the "State
Applications") that seek prior approval of the contemplated acquisition of
control of MCI by WorldCom from multiple state PUCs, whose governing statutes
and rules require their consent for transfers of control of common carriers
such as MCI that provide intrastate local and interexchange telecommunications
services within their respective states. The State Applications are subject to
public comment and objections and oppositions of third parties which may
interpose objections in an attempt to delay or impede approval by the state
PUCs. Some objections have been filed and WorldCom and MCI have been given the
opportunity to respond to those objections. Notwithstanding any such
challenges, WorldCom believes it is likely that the state PUCs will grant all
State Applications other than those the failure of which to be obtained would
not reasonably be expected to have individually or in the aggregate an
MCI/WorldCom Material Adverse Effect. WorldCom's subsidiaries hold
authorizations from the state PUCs, and most of those authorizations convey the
same or similar authority as the corresponding authorizations held by MCI.
There can be no assurance, however, that the state PUCs will timely grant the
transfer applications or not subject their approval to various conditions and
restrictions. The MCI/WorldCom Merger is conditioned on receipt of approval of
the transfer applications, other than those the failure of which to be obtained
would not reasonably be expected to have individually or, together with any
approvals from the FCC which shall not have been obtained, in the aggregate an
MCI/WorldCom Material Adverse Effect on WorldCom and its Subsidiaries
(including the MCI/WorldCom Surviving Corporation).
Hart-Scott-Rodino Act and European Commission Approvals. Under the
Hart-Scott-Rodino Act and the rules promulgated thereunder by the Federal Trade
Commission (the "FTC") and the Department of Justice ("DOJ"), the MCI/WorldCom
Merger may not be consummated until notifications have been given and certain
information has been furnished to the FTC and specified waiting period
requirements have been satisfied. WorldCom filed notification and report forms
under the Hart- Scott-Rodino Act with the FTC and the DOJ on October 1, 1997.
On October 31, 1997, each of WorldCom and MCI received a request for additional
information from the DOJ. MCI and WorldCom intend to begin providing such
additional information shortly.
The consummation of the MCI/WorldCom Merger is also contingent upon
confirmation from the European Commission under the Merger Control Regulation
that the MCI/WorldCom Merger does not create or strengthen a dominant position
as a result of which effective competition would be significantly impeded in
the European common market. MCI and WorldCom jointly filed with the European
Commission the required notification of the MCI/WorldCom Merger on November 20,
1997. On December 18, 1997, the European Commission advised WorldCom and MCI
that it sought additional information regarding the merger. MCI and WorldCom
plan to provide the requested information during January 1998. The European
Commission has one month from the date on which such information is supplied in
which to complete its preliminary investigation into the MCI/WorldCom Merger.
If following such one month period, the European Commission considers that it
needs to examine the MCI/WorldCom Merger more closely, it may initiate a Phase
II investigation; if it does initiate a Phase II investigation, the European
Commission must make a final determination as to whether or not the
MCI/WorldCom Merger is compatible with the European common market no later than
four months after the initiation of such investigation. If the European
Commission were not to make a decision within this four month period, the
MCI/WorldCom Merger would automatically be deemed to be compatible with the
European common market and would be allowed to proceed. WorldCom and MCI
believe it is likely that the European Commission will determine that the
MCI/WorldCom Merger is compatible with the European common market. However, no
assurance can be given that the European Commission will not impose certain
conditions or restrictions on the MCI/WorldCom Merger.
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At any time before or after the MCI/WorldCom Effective Time, and
notwithstanding that the Hart-Scott-Rodino Act waiting period may have expired,
the MCI/WorldCom Merger may have been approved by the European Commission
pursuant to the Merger Control Regulation or the MCI/WorldCom Merger may have
been consummated, the DOJ, or any state could take such action under applicable
laws as it deems necessary or desirable. Such action could include seeking to
enjoin the consummation of the MCI/WorldCom Merger or seeking divestiture of
MCI or businesses of WorldCom or MCI acquired as a result of the MCI/WorldCom
Merger. Private parties may also initiate legal actions under the antitrust
laws under certain circumstances.
Percentage Ownership Interest of MCI Stockholders After the MCI/WorldCom Merger
The number of shares of WorldCom Common Stock to be issued in the
MCI/WorldCom Merger will depend on the actual MCI Exchange Ratio, which will
not be known until the end of the MCI Measurement Period (which ends three
trading days preceding the MCI/WorldCom Effective Time). If the minimum MCI
Exchange Ratio (1.2439) is applicable, and assuming that there will be
944,259,936 shares of WorldCom Common Stock and 571,230,935 shares of MCI
Common Stock outstanding immediately prior to the MCI/WorldCom Effective Time
(which numbers are based on the number of shares outstanding on January 20,
1998, without regard to shares issuable upon exercise of options, rights or
warrants or pursuant to the CompuServe Merger and the BFP Merger, but assuming
the conversion of WorldCom convertible securities), the number of shares of
WorldCom Common Stock to be issued in the MCI/WorldCom Merger would be
710,554,160, which would represent approximately 43% of the outstanding shares
of WorldCom Common Stock immediately after the MCI/WorldCom Effective Time. If
the maximum MCI Exchange Ratio (1.7586) is applicable, and based on the same
assumptions, the number of shares of WorldCom Common Stock to be issued in the
MCI/WorldCom Merger would be 1,004,566,722, which would represent approximately
52% of the outstanding shares of WorldCom Common Stock immediately after the
MCI/WorldCom Effective Time.
Other Terms of the MCI/WorldCom Merger Agreement
The description of the MCI/WorldCom Merger and the MCI/WorldCom Merger
Agreement contained herein describes the material terms of the MCI/WorldCom
Merger Agreement but does not purport to be complete and is qualified in its
entirety by reference to the MCI/WorldCom Merger Agreement, a copy of which is
incorporated herein by reference as an exhibit to this Form 8-K/A. Capitalized
terms appearing below that are not otherwise defined herein have the same
meanings as are given such terms in the MCI/WorldCom Merger Agreement. Whenever
particular sections or defined terms are referred to, it is intended that such
sections or defined terms shall be incorporated by reference.
Conversion of Shares in the MCI/WorldCom Merger. At the MCI/WorldCom
Effective Time, by virtue of the MCI/WorldCom Merger and without any further
action on the part of the holder thereof:
(i) each share of common stock of MCI Merger Sub issued and outstanding
immediately prior to the MCI/WorldCom Effective Time will remain issued,
outstanding and unchanged as validly issued, fully paid and nonassessable
shares of common stock, par value $.01 per share, of the MCI/WorldCom
Surviving Corporation;
(ii) each share of MCI Capital Stock issued and owned or held by WorldCom,
MCI Merger Sub or MCI at the MCI/WorldCom Effective Time will, by virtue of
the MCI/WorldCom Merger, cease to be outstanding and will be canceled and
retired, and no stock of WorldCom or other consideration will be delivered
in exchange therefor;
(iii) each share of MCI Common Stock issued and outstanding immediately
prior to the MCI/WorldCom Effective Time (other than any shares to be
canceled as described in subparagraph (ii) above) will be converted into the
right to receive that number of shares of WorldCom Common Stock equal to the
MCI Exchange Ratio; provided, however, that cash will be paid in lieu of any
fractional share of WorldCom Common Stock (see "-- No Fractional Shares");
and
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(iv) each share of MCI Class A Common Stock issued and outstanding
immediately prior to the MCI/WorldCom Effective Time (other than shares to
be canceled as described in paragraph (ii) above) will be converted into the
right to receive $51.00 in cash, without interest thereon.
As a result of the MCI/WorldCom Merger and without any action on the part of
the holders thereof, all shares of MCI Capital Stock will cease to be
outstanding and will be canceled and retired and will cease to exist, and each
holder of a certificate which immediately prior to the MCI/WorldCom Effective
Time represented any such shares of MCI Capital Stock (a "Certificate") will
cease to have any rights with respect thereto, except the right to receive, as
hereinafter described: (i) a certificate representing the number of whole
shares of WorldCom Common Stock into which any such shares of MCI Common Stock
have been converted; (ii) certain dividends and other distributions; and (iii)
the cash, without interest, into which the shares of MCI Class A Common Stock
have been converted and the cash in lieu of any fractional shares of WorldCom
Common Stock that would otherwise be issued.
No Fractional Shares
No certificates or scrip or shares of WorldCom Common Stock representing
fractional shares of WorldCom Common Stock will be issued upon the surrender
for exchange of Certificates, and such fractional share interests will not
entitle the owner thereof to vote or have any other rights of a shareholder of
WorldCom. In lieu of any such fractional share, each holder of shares of MCI
Common Stock exchanged pursuant to the MCI/WorldCom Merger Agreement who would
otherwise have been entitled thereto (after taking into account all
Certificates) will be paid cash (without interest) in an amount equal to the
product of (i) such fractional part of a share of WorldCom Common Stock
multiplied by (ii) the last sales price per share of WorldCom Common Stock
quoted on The Nasdaq National Market on the closing date of the MCI/WorldCom
Merger Agreement (the "MCI/WorldCom Closing Date").
Representations and Warranties
The MCI/WorldCom Merger Agreement contains various representations and
warranties of WorldCom, MCI and MCI Merger Sub relating, among other things, to
the following: (i) their incorporation, existence, good standing, corporate
power and similar corporate matters; (ii) their capitalization; (iii) their
authorization, execution, delivery and performance and the enforceability of
the MCI/WorldCom Merger Agreement and related matters; (iv) the absence of
conflicts, violations and defaults under their certificate or articles of
incorporation and bylaws and certain other agreements and documents; (v) the
absence of required consents, approvals, orders or authorizations of, or
registration, declaration or filing with certain governmental entities; (vi)
the documents and reports filed with the Commission and the accuracy and
completeness of the information contained therein; (vii) the registration
statement and the joint proxy statement/prospectus contained therein relating
to the MCI/WorldCom Merger and the accuracy and completeness of the information
contained therein; (viii) the absence of certain material changes or events
with respect to WorldCom since December 31, 1996; (ix) the stockholder votes
required to approve the MCI/WorldCom Merger; (x) the inapplicability of MCI's
stockholder rights plan to the MCI/WorldCom Merger; (xi) brokers or finders
fees and expenses; (xii) the receipt of fairness opinions by MCI from its
financial advisors; and (xiii) the receipt of letters identifying "affiliates"
of each company for purposes of Rule 145 under the Securities Act.
All representations and warranties of WorldCom, MCI and MCI Merger Sub expire
at the MCI/WorldCom Effective Time.
Conduct of Business Pending the MCI/WorldCom Merger
Each of WorldCom and MCI has agreed that during the period from the date of
the MCI/WorldCom Merger Agreement and continuing until the MCI/WorldCom
Effective Time, except as expressly contemplated or permitted by the
MCI/WorldCom Merger Agreement or as otherwise indicated on its disclosure
schedule or as required by a Governmental Entity (defined below) of competent
jurisdiction or to the extent that the other party shall otherwise consent in
writing, it and its Subsidiaries (defined below) will conduct their business in
the usual, regular and ordinary course of business in all material respects, in
substantially the same manner as conducted prior to the
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MCI/WorldCom Merger Agreement, and will use all reasonable efforts to preserve
intact their present lines of business, maintain their rights and franchises
and preserve their relationships with customers, suppliers and others having
business dealings with them to the end that their ongoing businesses are not
impaired in any material respect at the MCI/WorldCom Effective Time. As used in
the MCI/WorldCom Merger Agreement and this description thereof, "Subsidiary"
means any corporation or other organization, whether incorporated or
unincorporated, (i) of which such party or any other Subsidiary of such party
is a general partner (excluding partnerships, the general partnership interests
of which held by such party or any Subsidiary of such party do not have a
majority of the voting interests in such partnership) or (ii) at least a
majority of the securities or other interests of which have by their terms
ordinary voting power to elect a majority of the Board of Directors or others
performing similar functions with respect to such corporation or other
organization is directly or indirectly owned or controlled by such party or by
any one or more of its Subsidiaries, or by such party and one or more of its
Subsidiaries, and "Governmental Entity" means any supranational, national,
state, municipal or local government, any instrumentality, subdivision, court,
administrative agency or commission or other authority thereof, or any
quasi-governmental or private body exercising any regulatory, taxing, importing
or other governmental or quasi-governmental authority, including the European
Union.
Each of WorldCom and MCI has further agreed that, during the period from the
date of the MCI/WorldCom Merger Agreement and continuing until the MCI/WorldCom
Effective Time, except as expressly contemplated or permitted by the
MCI/WorldCom Merger Agreement or as otherwise indicated on its disclosure
schedule or as required by a Governmental Entity of competent jurisdiction or
to the extent that the other party otherwise consents in writing, it will not
and will not permit any of its Subsidiaries to:
(i) enter into any new material line of business or incur or commit to any
capital expenditures other than capital expenditures incurred or committed
in the ordinary course of business consistent with past practice and which,
in the case of MCI, together with all such expenditures incurred or
committed to during any fiscal year, are not in excess of specified amounts;
(ii) (A) declare or pay any dividends on or make other distributions in
respect of any of its capital stock, except (x) in the case of MCI, to
continue the declaration and payment of regular semiannual cash dividends
not in excess of $0.025 per share of MCI Common Stock and MCI Class A Common
Stock, in each case with usual record and payment dates for such dividends
in accordance with MCI's past practice and, in the case of WorldCom, to
continue the declaration and payment of regular quarterly cash dividends in
amounts, including increases, consistent with past practice, and (y)
dividends by its wholly-owned Subsidiaries, (B) split, combine or reclassify
any of its capital stock or issue or authorize or propose the issuance of
any other securities in respect of, in lieu of or in substitution for,
shares of its capital stock, except for any such transaction by a
wholly-owned Subsidiary which remains a wholly-owned Subsidiary after
consummation of such transaction, or (C) repurchase, redeem or otherwise
acquire any shares of its capital stock or any securities convertible into
or exercisable for any shares of its capital stock except for the purchase
from time to time of capital stock (and in the case of MCI, the associated
preferred stock purchase rights (each, an "MCI Right" and, collectively, the
"MCI Rights") issued pursuant to a Rights Agreement, dated as of September
30, 1994, between MCI and Morgan Guaranty Trust Company of New York, as
Rights Agent, as amended) in the ordinary course of business consistent with
past practice in connection with certain of its benefit plans or, in the
case of WorldCom, repurchases of shares of WorldCom Common Stock in open
market or privately negotiated transactions other than during the MCI
Measurement Period;
(iii) amend, in the case of Subsidiaries, in any material respect, or
propose to amend their respective certificates of incorporation, by-laws or
other governing documents, except to the extent required to comply with
their respective obligations under the MCI/WorldCom Merger Agreement,
required by law or required by the rules and regulations of the NASD;
(iv) issue, deliver or sell, or authorize or propose the issuance,
delivery or sale of, any shares of its capital stock of any class, any debt
securities having the right to vote on any matters on which stockholders may
vote ("Voting Debt") or any securities convertible into or exercisable for,
or any rights, warrants or options to acquire, any such shares or Voting
Debt or enter into any agreement with respect to any of the foregoing, other
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than (A) the issuance of common stock (and in the case of MCI, the
associated MCI Rights) upon the exercise of stock options or in connection
with other stock-based benefits plans outstanding on the date of the
MCI/WorldCom Merger Agreement in accordance with their present terms, (B)
issuances by a wholly-owned Subsidiary of capital stock to such Subsidiary's
parent, (C) issuances in accordance with its rights agreement, (D) in the
case of MCI, issuances of shares, options, rights or other awards and
amendments to equity-related awards pursuant to certain of its benefit
plans, in the ordinary course of business and consistent with past practice,
and (E) in the case of WorldCom, issuances in respect of any acquisitions by
WorldCom or its subsidiaries that are currently pending as of the date of
the MCI/WorldCom Merger Agreement ("WorldCom Pending Acquisitions");
(v) acquire or agree to acquire by merging or consolidating with, or by
purchasing a substantial equity interest in or a substantial portion of the
assets of, or by any other manner, any business or any corporation,
partnership, association or other business organization or division thereof
or otherwise acquire or agree to acquire any assets (other than the
acquisition of assets used in the ordinary course) other than (A) in the
case of WorldCom, the WorldCom Pending Acquisitions and (B) acquisitions in
existing or related lines of its business the fair market value of the total
consideration (including the value of indebtedness or other liability
acquired or assumed) for which, in the case of WorldCom, does not exceed
$525 million in the aggregate and for which, in the case of MCI does not
exceed $325 million in the aggregate, provided, however, that the foregoing
does not prohibit (x) internal reorganizations or consolidations involving
existing Subsidiaries or (y) the creation of new Subsidiaries organized to
conduct or continue activities otherwise permitted by the MCI/WorldCom
Merger Agreement;
(vi) sell, lease, encumber or otherwise dispose of, any of its assets
(including capital stock of its Subsidiaries) which are material,
individually or in the aggregate, other than (A) internal reorganizations or
consolidations involving existing Subsidiaries, (B) dispositions referred to
in its reports filed with the Commission prior to the date of the
MCI/WorldCom Merger Agreement and (C) as may be required by or in
conformance with law or regulation in order to permit or facilitate the
consummation of the transactions contemplated hereby;
(vii) make any loans, advances or capital contributions to, or investments
in, any other person, other than by MCI or WorldCom, or a respective
Subsidiary of each, to or in MCI or WorldCom or any respective Subsidiary of
each or to pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise), other
than indebtedness, issuances of debt securities, guarantees, loans,
advances, capital contributions, investments, payments, discharges or
satisfactions incurred or committed to in the ordinary course of business
consistent with past practice;
(viii) take any action that would prevent or impede the MCI/WorldCom
Merger from qualifying as a reorganization under Section 368 of the Code;
(ix) take any action that would, or that could reasonably be expected to,
result in, except, in the case of MCI as otherwise permitted with respect to
MCI/WorldCom Acquisition Proposals (as hereinafter defined), any of the
conditions to the MCI/WorldCom Merger not being satisfied;
(x) except as disclosed in its reports filed with the Commission prior to
the date of the MCI/WorldCom Merger Agreement, or as required by a
Governmental Entity, (A) change its methods of accounting in effect at
December 31, 1996, except as required by changes in United States generally
accepted accounting principles ("U.S. GAAP") as concurred in by its
independent auditors, (B) change its fiscal year or (C) make any material
tax election, other than in the ordinary course of business consistent with
past practice, without consultation with the other party; or
(xi) amend, modify or waive any provision of its respective rights
agreement, and shall not take any action to redeem the respective rights or
render them inapplicable to any transaction, except, in the case of MCI to
(A) render the rights inapplicable to the MCI/WorldCom Merger and (B) to
permit another transaction that the MCI Board has determined is a Superior
Proposal to be consummated no earlier than December 31, 1998. As used in the
MCI/WorldCom Merger Agreement and this Current Report on Form 8-K/A,
"Superior Proposal" means a
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bona fide written MCI/WorldCom Acquisition Proposal (as hereinafter defined)
which the MCI Board concludes in good faith (after consultation with its
financial advisors and legal counsel), taking into account all legal,
financial, regulatory and other aspects of the proposal and the person
making the proposal, (x) would, if consummated, result in a transaction that
is more favorable to MCI's stockholders (in their capacities as
stockholders), from a financial point of view, than the transactions
contemplated by the MCI/WorldCom Merger Agreement and (y) is reasonably
capable of being completed (provided that for purposes of this definition
the term "MCI/WorldCom Acquisition Proposal" will have the meaning assigned
to such term in "-- MCI/WorldCom Acquisition Proposals" except that the
reference to "10%" in the definition of "MCI/WorldCom Acquisition Proposal"
will be deemed to be a reference to "50%" and "MCI/WorldCom Acquisition
Proposal" will only be deemed to refer to a transaction involving MCI, or
with respect to assets (including the shares of any Subsidiary of MCI) of
MCI and its Subsidiaries, taken as a whole, and not any of its Subsidiaries
alone).
In addition, WorldCom has agreed that it will not, and that it will not
permit any of its Subsidiaries to, enter into any agreement with respect to or
consummate any transaction contemplated by an MCI/WorldCom Acquisition
Proposal.
Each of WorldCom and MCI has also further agreed that each party will (a)
confer on a regular and frequent basis with the other, (b) report (to the
extent permitted by law or regulation or any applicable confidentiality
agreement) on operational matters, (c) file all reports required to be filed by
each of them with the Commission (and all other Governmental Entities) between
the date of the MCI/WorldCom Merger Agreement and the MCI/WorldCom Effective
Time and will (to the extent permitted by law or regulation or any applicable
confidentiality agreement) deliver to the other party copies of all such
reports, announcements and publications promptly after the same are filed, (d)
have the right (subject to applicable laws relating to the exchange of
information) to review in advance, and will consult with the other with respect
to, all the information relating to the other party and each of their
respective Subsidiaries, which appears in any filings, announcements or
publications made with, or written materials submitted to, any third party or
any Governmental Entity in connection with the transactions contemplated by the
MCI/WorldCom Merger Agreement. In exercising the foregoing right, each of
WorldCom and MCI has agreed to act reasonably and as promptly as practicable,
and to the extent practicable and as timely as practicable, it will consult
with, and provide all appropriate and necessary assistance to, the other party
with respect to the obtaining of all permits, consents, approvals and
authorizations of all third parties and Governmental Entities necessary or
advisable to consummate the transactions contemplated by the MCI/WorldCom
Merger Agreement and each party will keep the other party apprised of the
status of matters relating to completion of the transactions contemplated
hereby.
Each of WorldCom and MCI has also further agreed that Bernard J. Ebbers, as
Chief Executive Officer of WorldCom, and Gerald H. Taylor, as Chief Executive
Officer of MCI, or their respective successors, jointly will be responsible for
coordinating all aspects of transition planning and implementation relating to
the MCI/WorldCom Merger and the other transactions contemplated thereby,
including, during the period between the date of the MCI/WorldCom Merger
Agreement and the MCI/WorldCom Effective Time, (i) examining various
alternatives regarding the manner in which to best organize and manage the
businesses of WorldCom and MCI after the MCI/WorldCom Effective Time and (ii)
coordinating policies and strategies with respect to regulatory authorities and
bodies, in all cases subject to applicable law and regulation; provided
however, that nothing contained in the MCI/WorldCom Merger Agreement will give
MCI or WorldCom, directly or indirectly, the right to control or direct the
other party's operations prior to the MCI/WorldCom Effective Time.
Each of WorldCom and MCI has also further agreed that (i) it will, as
promptly as practicable following the date of the MCI/WorldCom Merger
Agreement, in cooperation with the other, prepare and file with the Commission
a joint proxy statement/prospectus and an amendment to WorldCom's existing
registration statement on Form S-4 with respect to the Share Issuance, (ii) use
all reasonable efforts to have the Form S-4 cleared by the Commission as
promptly as practicable after filing with the Commission and to keep the Form
S-4 effective as long as is necessary to consummate the MCI/WorldCom Merger and
(iii) as promptly as practicable following the execution of the MCI/WorldCom
Merger Agreement, duly call, give notice of, convene and hold a meeting of its
stockholders for the purpose of obtaining the required votes with respect to
the transactions contemplated by the MCI/WorldCom Merger Agreement.
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WorldCom has further agreed to take all necessary action to, as of the
MCI/WorldCom Effective Time, (i) reconstitute the MCI WorldCom Board to consist
of fifteen members, eight of whom will be designated by WorldCom from among the
directors of WorldCom, five of whom will be designated by MCI from among the
directors of MCI and two of whom shall be directors designated by WorldCom from
among pending acquisitions of WorldCom; provided that the persons designated by
each party are reasonably acceptable to the other party, (ii) cause Bert C.
Roberts, Jr. to be appointed Chairman of the combined company, (iii) cause the
senior management of the combined company to be as previously agreed between
the parties and (iv) amend the WorldCom Articles to change its name to "MCI
WorldCom." Each of WorldCom and MCI has also agreed that the combined company
will be headquartered in Jackson, Mississippi and the MCI/WorldCom Surviving
Corporation (which will be a subsidiary of MCI WorldCom) will be headquartered
in Washington D.C.
Each of WorldCom and MCI has also further agreed that upon reasonable notice,
during the period prior to the MCI/WorldCom Effective Time, MCI will and will
cause its Subsidiaries to (i) afford to the officers, employees, accountants,
counsel, financial advisors and other representatives of WorldCom reasonable
access during normal business hours to all its properties, books, contracts,
commitments and records and (ii) furnish promptly to WorldCom (a) a copy of
each report, schedule, registration statement and other document filed,
published, announced or received by it during such period pursuant to the
requirements of Federal or state securities laws, as applicable (other than
reports or documents which such party is not permitted to disclose under
applicable law), and (b) consistent with its legal obligations, all other
information concerning its business, properties and personnel as such other
party may reasonably request; provided, however, that MCI may restrict the
foregoing access to the extent that (x) a Governmental Entity requires MCI or
any of its Subsidiaries to restrict access to any properties or information
reasonably related to any such contract on the basis of applicable laws and
regulations with respect to national security matters or (y) any law, treaty,
rule or regulation of any Governmental Entity applicable to MCI requires MCI or
its Subsidiaries to restrict access to any properties or information. The
parties have also agreed to hold any such information which is non-public in
confidence to the extent required by, and in accordance with, the provisions of
the letter dated October 16, 1997 between MCI and WorldCom (the
"Confidentiality Agreement").
Each of WorldCom and MCI has also further agreed that, subject to the terms
and conditions of the MCI/WorldCom Merger Agreement, it will use its best
efforts to take, or cause to be taken, all actions and to do, or cause to be
done, all things necessary, proper or advisable under applicable laws and
regulations to consummate the MCI/WorldCom Merger and the other transactions
contemplated by the MCI/WorldCom Merger Agreement as soon as practicable, and
in furtherance thereof, each party has made filings of a Notification and
Report Form pursuant to the Hart-Scott-Rodino Act with respect to the
transactions contemplated by the MCI/WorldCom Merger Agreement and each has
agreed to supply as promptly as practicable any additional information and
documentary material that may be requested pursuant to the Hart-Scott- Rodino
Act and to take all other actions necessary to cause the expiration or
termination of the applicable waiting periods under the Hart-Scott-Rodino Act
as soon as practicable.
Each of WorldCom and MCI has also further agreed that it will, in connection
with the efforts referenced in the previous paragraph, use its best efforts to
(i) cooperate in all respects with the other party in connection with any
filing or submission and in connection with any investigation or other inquiry,
including any proceeding initiated by a private party, (ii) promptly inform the
other party of any communication received by such party from, or given by such
party to, the FCC, PUCs, the DOJ or any other Governmental Entity and of any
material communication received or given in connection with any proceeding by a
private party, in each case regarding any of the transactions contemplated
thereby, and (iii) permit the other party to review any communication given by
it to, and consult with each other in advance of any meeting or conference
with, the FCC, PUCs, the DOJ or any such other Governmental Entity or, in
connection with any proceeding by a private party, with any other person, and
to the extent permitted by the FCC, PUCs, the DOJ or such other applicable
Governmental Entity or other person, give the other party the opportunity to
attend and participate in such meetings and conferences. As used in the
MCI/WorldCom Merger Agreement, "Regulatory Law" means the Sherman Act, as
amended, the Clayton Act, as amended, the Hart-Scott-Rodino Act, the Federal
Trade Commission Act, as amended, the Communications Act, and all other
federal, state and foreign, if any, statutes, rules, regulations, orders,
decrees, administrative and judicial doctrines and other laws that are designed
or intended to prohibit, restrict or regulate actions having the purpose or
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effect of monopolization or restraint of trade or lessening of competition,
whether in the communications industry or otherwise through merger or
acquisition.
Each of WorldCom and MCI has also further agreed that, in furtherance and not
in limitation of the covenants of the parties described in the previous two
paragraphs, if any administrative or judicial action or proceeding, including
any proceeding by a private party, is instituted (or threatened to be
instituted) challenging any transaction contemplated by the MCI/WorldCom Merger
Agreement as violative of any Regulatory Law, it will cooperate in all respects
with the other and use its respective best efforts to contest and resist any
such action or proceeding and to have vacated, lifted, reversed or overturned
any decree, judgment, injunction or other order, whether temporary, preliminary
or permanent, that is in effect and that prohibits, prevents or restricts
consummation of the transactions contemplated by the MCI/WorldCom Merger
Agreement, provided that the covenant described above of each party to use its
best efforts to effect the MCI/WorldCom Merger does not limit a party's right
to terminate the MCI/WorldCom Merger Agreement so long as such party has up to
then complied in all respects with such covenant.
Each of WorldCom and MCI has further agreed that, if any objections are
asserted with respect to the transactions contemplated by the MCI/WorldCom
Merger Agreement under any Regulatory Law or if any suit is instituted by any
Governmental Entity or any private party challenging any of the transactions
contemplated by the MCI/WorldCom Merger Agreement as violative of any
Regulatory Law, it will use its best efforts to resolve any such objection or
challenge as such Governmental Entity or private party may have to such
transactions under such Regulatory Law so as to permit consummation of the
transactions contemplated by the MCI/WorldCom Merger Agreement.
Each of WorldCom, MCI Merger Sub and MCI has further agreed that it will use
its best efforts to cause the MCI/WorldCom Merger to qualify and will not (both
before and after consummation of the MCI/WorldCom Merger) take any actions
which to its knowledge could reasonably be expected to prevent the MCI/WorldCom
Merger from qualifying as a reorganization under the provisions of Section 368
of the Code.
MCI/WorldCom Acquisition Proposals
Each of WorldCom and MCI has agreed that neither it nor any of its
Subsidiaries nor any of the officers and directors of it or its Subsidiaries
will, and that it will direct and use its best efforts to cause its and its
Subsidiaries' employees, agents and representatives (including any investment
banker, attorney or accountant retained by it or its Subsidiaries) not to,
directly or indirectly, initiate, solicit, encourage or otherwise facilitate
(including by way of furnishing information) any inquiries or the making of any
proposal or offer with respect to a merger, reorganization, share exchange,
consolidation, business combination, recapitalization, liquidation, dissolution
or similar transaction involving, or any purchase or sale of all or any
significant portion of the assets or 10% or more of the equity securities of,
it or any of its Subsidiaries that, in any such case, could reasonably be
expected to interfere with the completion of the MCI/WorldCom Merger or the
other transactions contemplated by the MCI/WorldCom Merger Agreement (any such
proposal or offer being herein referred to as an "MCI/WorldCom Acquisition
Proposal"). Each of WorldCom and MCI has further agreed not to, directly or
indirectly, have any discussion with or provide any confidential information or
data to any person relating to an MCI/WorldCom Acquisition Proposal, or engage
in any negotiations concerning an MCI/WorldCom Acquisition Proposal, or
otherwise facilitate any effort or attempt to make or implement an MCI/WorldCom
Acquisition Proposal or accept an MCI/WorldCom Acquisition Proposal.
Notwithstanding the foregoing, MCI or its Board of Directors may (A) comply
with Rule 14e-2(a) promulgated under the Exchange Act with regard to an
MCI/WorldCom Acquisition Proposal, (B) recommend an unsolicited bona fide
written MCI/WorldCom Acquisition Proposal to the stockholders of MCI, or
withdraw or modify in any adverse manner its approval or recommendation of the
MCI/WorldCom Merger Agreement in response to such an unsolicited bona fide
written MCI/WorldCom Acquisition Proposal or (C) engage in any discussions or
negotiations with, or provide any information to, any person in response to an
unsolicited bona fide written MCI/WorldCom Acquisition Proposal by any such
person, if and only to the extent that, in any such case as is referred to in
clause (B) or (C), (i) the MCI stockholders meeting relating to the
MCI/WorldCom Merger has not occurred, (ii) the Board
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of Directors of MCI concludes in good faith that such MCI/WorldCom Acquisition
Proposal (x) in the case of clause (B) above would, if consummated, constitute
a Superior Proposal or (y) in the case of clause (C) above could reasonably be
expected to constitute a Superior Proposal, (iii) prior to providing any
information or data to any person in connection with an MCI/WorldCom
Acquisition Proposal by any such person, the MCI Board of Directors receives
from such person an executed confidentiality agreement on terms substantially
similar to those contained in the Confidentiality Agreement, and (iv) prior to
providing any information or data to any person or entering into discussions or
negotiations with any person, the Board of Directors of MCI notifies WorldCom
immediately of such inquiries, proposals or offers received by, any such
information requested from, or any such discussions or negotiations sought to
be initiated or continued with, any of its representatives indicating, in
connection with such notice, the name of such person and the material terms and
conditions of any proposals or offers.
MCI has also agreed that it will keep WorldCom informed, on a current basis,
of the status and terms of any such proposals or offers and the status of any
such discussions or negotiations. Each of WorldCom and MCI has agreed that it
will immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any parties conducted prior to November 9,
1997 with respect to any MCI/WorldCom Acquisition Proposal. Each of WorldCom
and MCI has also agreed that it will take the necessary steps to promptly
inform its and its Subsidiaries' officers and directors, employees and
representatives of these obligations.
Conditions Precedent to the MCI/WorldCom Merger
The respective obligations of MCI, WorldCom and the MCI Merger Sub to effect
the MCI/WorldCom Merger are subject, among other things, to the satisfaction or
waiver on or prior to the MCI/WorldCom Closing Date of the following
conditions: (i) adoption of the MCI/WorldCom Merger Agreement by the
stockholders of MCI; (ii) approval of the Share Issuance by the shareholders of
WorldCom; (iii) no statute, rule, regulation, executive order, decree, ruling
or injunction shall have been adopted or promulgated or be in effect, having
the effect of making the MCI/WorldCom Merger illegal or otherwise prohibiting
consummation of the MCI/WorldCom Merger; provided, however, that this provision
shall not be available to any party whose failure to fulfill its obligations
pursuant to the MCI/WorldCom Merger Agreement shall have been the cause of, or
shall have resulted in, such order or injunction; (iv) approvals for the
MCI/WorldCom Merger from the FCC and from the PUCs, other than those the
failure of which to be obtained would not reasonably be expected to have
individually or in the aggregate a MCI/WorldCom Material Adverse Effect on
WorldCom and its Subsidiaries (including the MCI/WorldCom Surviving
Corporation); (v) the expiration or termination of the waiting period (and any
extension thereof) applicable to the MCI/WorldCom Merger under the
Hart-Scott-Rodino Act; (vi) the confirmation by way of a decision from the
European Commission under the Merger Control Regulation (with or without the
initiation of proceedings under Article 6(1)(c) thereof) that the MCI/WorldCom
Merger and any matters arising therefrom are compatible with the European
common market; (vii) the approval upon official notice of issuance for
quotation on The Nasdaq National Market of the shares of WorldCom Common Stock
to be issued in the MCI/WorldCom Merger; and (viii) effectiveness of the Form
S-4 relating to the MCI/WorldCom Merger by declaration of the Commission under
the Securities Act and the absence of a stop order suspending its
effectiveness. As used in the MCI/WorldCom Merger Agreement and this Current
Report on Form 8-K/A, "MCI/WorldCom Material Adverse Effect" means with respect
to any entity, any adverse change, circumstance or effect that, individually or
in the aggregate with all other adverse changes, circumstances and effects, is
or is reasonably likely to be materially adverse to the business, financial
condition or results of operations of such entity and its Subsidiaries taken as
a whole, other than any change, circumstance or effect relating to (i) the
economy or securities markets in general or (ii) the industries in which
WorldCom or MCI operate and not specifically relating to WorldCom or MCI.
The obligations of WorldCom and MCI Merger Sub to effect the MCI/WorldCom
Merger are also subject to the satisfaction of, or waiver by WorldCom, on or
prior to the MCI/WorldCom Closing Date of the following conditions:
(i) the representations and warranties of MCI set forth in the
MCI/WorldCom Merger Agreement that are qualified as to materiality being
true and correct on the date of the MCI/WorldCom Merger Agreement, and each
of the representations and warranties of MCI that is not so qualified being
true and correct in all material
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respects on the date of the MCI/WorldCom Merger Agreement, and WorldCom's
receipt of a certificate of the chief executive officer and the chief
financial officer of MCI to such effect;
(ii) MCI having performed or complied with all agreements and covenants
required to be performed by it under the MCI/WorldCom Merger Agreement at or
prior to the MCI/WorldCom Closing Date that are qualified as to materiality
and MCI having performed or complied in all material respects with all other
agreements and covenants required to be performed by it under the
MCI/WorldCom Merger Agreement at or prior to the MCI/WorldCom Closing Date
that are not so qualified as to materiality, and WorldCom's receipt of a
certificate of the chief executive officer and the chief financial officer
of MCI to such effect; and
(iii) WorldCom's receipt from counsel to WorldCom, on the MCI/WorldCom
Closing Date, of a written opinion stating, among other things, that the
MCI/WorldCom Merger qualifies as a reorganization under Section 368 of the
Code.
The obligations of MCI to effect the MCI/WorldCom Merger are also subject to
the satisfaction of, or waiver by MCI, on or prior to the MCI/WorldCom Closing
Date of the following additional conditions:
(i) the representations and warranties of WorldCom set forth in the
MCI/WorldCom Merger Agreement that are qualified as to materiality being
true and correct on the date of the MCI/WorldCom Merger Agreement, and each
of the representations and warranties of WorldCom that is not so qualified
being true and correct in all material respects on the date of the
MCI/WorldCom Merger Agreement, and MCI's receipt of a certificate of the
chief executive officer and the chief financial officer of WorldCom to such
effect;
(ii) WorldCom having performed or complied with all agreements and
covenants required to be performed by it under the MCI/WorldCom Merger
Agreement at or prior to the MCI/WorldCom Closing Date that are qualified as
to materiality and WorldCom having performed or complied in all material
respects with all other agreements and covenants required to be performed by
it under the MCI/WorldCom Merger Agreement at or prior to the MCI/WorldCom
Closing Date that are not so qualified as to materiality, and MCI's receipt
of a certificate of the chief executive officer and the chief financial
officer of WorldCom to such effect;
(iii) MCI's receipt from counsel to MCI, on the MCI/WorldCom Closing Date,
of a written opinion stating, among other things, that the MCI/WorldCom
Merger qualifies as a reorganization under Section 368 of the Code; and
(iv) since the date of the MCI/WorldCom Merger Agreement, the absence of
WorldCom and its Subsidiaries having incurred any material liability, except
in the ordinary course of business consistent with past practice, or any
adverse change, circumstance or effect that, individually or in the
aggregate with all other adverse changes, circumstances and effects, is or
is reasonably likely to be materially adverse to the business, financial
condition or results of operations of WorldCom and its Subsidiaries taken as
a whole, other than any change, circumstance or effect relating to (i) the
economy or securities markets in general or (ii) the industries in which
WorldCom or MCI operate and not specifically relating to WorldCom or MCI.
Stock Options and Other Stock Plans; Employee Benefit Matters
Each of MCI and WorldCom has also agreed that, pursuant to the MCI/WorldCom
Merger Agreement, on or prior to the MCI/WorldCom Effective Time, MCI will take
all action necessary to cause each option to purchase shares of MCI Common
Stock (each, an "MCI Stock Option") that was granted pursuant to the MCI stock
option plans prior to the MCI/WorldCom Effective Time and which remains
outstanding immediately prior to the MCI/WorldCom Effective Time to be
converted, at the MCI/WorldCom Effective Time, into an option to acquire, on
the same terms and conditions as were applicable under the MCI Stock Option,
that number of shares of WorldCom Common Stock determined by multiplying the
number of shares of MCI Common Stock subject to such MCI Stock Option by the
MCI Exchange Ratio, rounded, if necessary, up to the nearest whole share of
WorldCom Common Stock, at a price per share equal to the per-share exercise
price specified in such MCI Stock Option divided by the MCI Exchange Ratio;
provided, however, that in the case of any MCI Stock Option to which Section
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421 of the Code applies by reason of its qualification under Section 422 of the
Code, the option price, the number of shares subject to such option and the
terms and conditions of exercise of such option will be determined in a manner
consistent with the requirements of Section 424(a) of the Code. In addition,
all unvested and unpaid MCI restricted stock and incentive stock units will be
converted to the number of shares of WorldCom Common Stock or incentive stock
units determined by multiplying such shares of restricted stock and incentive
stock units by the MCI Exchange Ratio.
Indemnification; Directors and Officers' Insurance
The MCI/WorldCom Surviving Corporation will maintain in effect in its
certificate of incorporation and bylaws (i) for a period of six years after the
MCI/WorldCom Effective Time, the current provisions regarding elimination of
liability of directors and indemnification of officers, directors and employees
contained in the certificate of incorporation and bylaws of MCI and (ii) for a
period of six years, the current policies of directors' and officers' liability
insurance and fiduciary liability insurance maintained by MCI (provided that
the MCI/WorldCom Surviving Corporation may substitute therefor policies of at
least the same coverage and amounts containing terms and conditions which are,
in the aggregate, no less advantageous to the insured) with respect to claims
arising from facts or events that occurred on or before the MCI/WorldCom
Effective Time; provided, however, that in no event will the MCI/WorldCom
Surviving Corporation be required to expend in any one year an amount in excess
of 200% of the annual premiums currently paid by MCI for such insurance; and,
provided, further, that if the annual premiums of such insurance coverage
exceed such amount, the MCI/WorldCom Surviving Corporation will be obligated to
obtain a policy with the greatest coverage available for a cost not exceeding
such amount.
Termination
The MCI/WorldCom Merger Agreement may be terminated at any time prior to the
MCI/WorldCom Effective Time, by action taken or authorized by the Board of
Directors of the terminating party or parties, and except as provided below,
whether before or after approval of the matters presented in connection with
the MCI/WorldCom Merger by the stockholders of MCI or WorldCom:
(i) By mutual written consent of WorldCom and MCI, by action of their
respective Boards of Directors;
(ii) By either MCI or WorldCom if the MCI/WorldCom Effective Time has not
occurred on or before December 31, 1998 (the "MCI/WorldCom Termination
Date"); provided, however, that this right to terminate the MCI/WorldCom
Merger Agreement will not be available to any party whose failure to fulfill
any obligation under the MCI/WorldCom Merger Agreement has to any extent
been the cause of, or resulted in, the failure of the MCI/WorldCom Effective
Time to occur on or before the MCI/WorldCom Termination Date;
(iii) By either MCI or WorldCom if any Governmental Entity (A) has issued
an order, decree or ruling or taken any other action (which the parties have
used their best efforts to resist, resolve or lift, as applicable, in
accordance with the MCI/WorldCom Merger Agreement) permanently restraining,
enjoining or otherwise prohibiting the transactions contemplated by the
MCI/WorldCom Merger Agreement, and such order, decree, ruling or other
action has become final and nonappealable or (B) has failed to issue an
order, decree or ruling or to take any other action (which order, decree,
ruling or other action the parties have used their best efforts to obtain,
in accordance with the MCI/WorldCom Merger Agreement), in each case (A) and
(B) which is necessary to fulfill the conditions set forth in subsections
6.1(c) (FCC and PUC approvals), 6.1(d) (expiration or termination of the
waiting period under the Hart- Scott-Rodino Act) and 6.1(e) (receipt of a
decision from the European Commission that the MCI/WorldCom Merger is
compatible with the common market) of the MCI/WorldCom Merger Agreement, as
applicable, and such denial of a request to issue such order, decree, ruling
or take such other action has become final and nonappealable; provided,
however, that this right to terminate the MCI/WorldCom Merger Agreement will
not be available to any party whose failure to comply with the covenant in
the MCI/WorldCom Merger Agreement requiring such party to use its best
efforts to effect the MCI/WorldCom Merger has to any extent been the cause
of such action or inaction;
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(iv) By either MCI or WorldCom if the approval by the stockholders of MCI
or of WorldCom required for the consummation of the MCI/WorldCom Merger has
not been obtained by reason of the failure to obtain the requisite votes at
a duly held meeting of stockholders of MCI or WorldCom, as the case may be,
or at any adjournment thereof;
(v) By WorldCom if the Board of Directors of MCI, prior to the MCI
stockholders meeting relating to the MCI/WorldCom Merger (A) withdraws or
modifies in any adverse manner its approval or recommendation of the
MCI/WorldCom Merger Agreement, (B) approves or recommends a Superior
Proposal or (C) resolves to take any of the actions specified in clauses (A)
or (B) above; or
(vi) By MCI at any time prior to the MCI stockholders meeting relating to
the MCI/WorldCom Merger, upon two business days' (any days on which banks in
New York are not required or authorized to close in the City of New York)
prior notice to WorldCom, if the Board of Directors of MCI approves a
Superior Proposal; provided, however, that (A) MCI has complied with the
provisions described above under "-- MCI/WorldCom Acquisition Proposals,"
(B) the Board of Directors of MCI has concluded in good faith, after giving
effect to all concessions which may be offered by WorldCom as referred to in
clause (C) below, on the basis of the advice of its financial advisors and
outside counsel, that such proposal is a Superior Proposal and (C) prior to
any such termination, MCI has, and has caused its financial and legal
advisors to, negotiate with WorldCom to make such adjustments in the terms
and conditions of the MCI/WorldCom Merger Agreement as would enable WorldCom
to proceed with the transactions contemplated thereby; provided, however,
that it is a condition to the right of termination by MCI referred to in
this subsection (vi) that MCI has made the payment of the WorldCom
Alternative Transaction Fee to WorldCom referred to in "-- Termination
Fees."
The right to terminate the MCI/WorldCom Merger Agreement as described above
is not available to any party (i) that is in material breach of its obligations
under the MCI/WorldCom Merger Agreement or (ii) whose failure to fulfill its
obligations or to comply with its covenants under the MCI/WorldCom Merger
Agreement has been the cause of, or resulted in, the failure to satisfy any
condition to the obligations of either party under the MCI/WorldCom Merger
Agreement.
Fees and Expenses
Whether or not the MCI/WorldCom Merger is consummated, all expenses incurred
in connection with the MCI/WorldCom Merger Agreement and the transactions
contemplated thereby shall be paid by the party incurring such expenses, except
(a) if the MCI/WorldCom Merger is consummated, the MCI/WorldCom Surviving
Corporation shall pay any and all property or transfer taxes imposed on MCI or
its Subsidiaries and any real property transfer tax imposed on any holder of
shares of capital stock of MCI resulting from the MCI/WorldCom Merger, (b)
expenses incurred in connection with the filing, printing and mailing of the
joint proxy statement/prospectus, which shall be shared equally by WorldCom and
MCI and (c) the Reimbursement Amount described in "-- Termination Fees."
Termination Fees
WorldCom and MCI agreed that (i) if MCI terminates the MCI/WorldCom Merger
Agreement due to the MCI Board having approved a Superior Proposal or (ii) if
(x) MCI or WorldCom terminate the MCI/WorldCom Merger Agreement pursuant to the
failure of the MCI stockholders to approve and adopt the MCI/WorldCom Merger
Agreement or WorldCom terminates the MCI/WorldCom Merger Agreement due to the
withdrawal or modification of the approval or recommendation in any adverse
manner of the MCI Board or its approval or recommendation of a Superior
Proposal, (y) at the time of the event giving rise to such termination there
exists an MCI/WorldCom Acquisition Proposal with respect to MCI and (z) within
12 months of the termination of the MCI/WorldCom Merger Agreement, MCI enters
into a definitive agreement with any third party with respect to an
MCI/WorldCom Acquisition Proposal or an MCI/WorldCom Acquisition Proposal is
consummated, then MCI will pay to WorldCom an amount equal to $750 million (the
"WorldCom Alternative Transaction Fee") and will reimburse WorldCom for the fee
paid by WorldCom to British Telecommunications plc ("BT") pursuant to the
Agreement dated as of
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November 9, 1997, among MCI, BT and WorldCom (the "BT Agreement") (such amount,
the "Reimbursement Amount").
If (a) the MCI/WorldCom Merger Agreement is terminated (i) because the
MCI/WorldCom Merger has not been consummated by December 31, 1998 and any of
the following conditions to the MCI/WorldCom Merger have not been satisfied:
absence of injunctions prohibiting consummation of the MCI/WorldCom Merger
Agreement, receipt of FCC and PUC approvals, expiration or termination of the
waiting period under the Hart-Scott-Rodino Act, receipt of a decision from the
European Commission that the MCI/WorldCom Merger is compatible with the
European common market, accuracy of WorldCom's representations and warranties,
performance by WorldCom of its obligations under the MCI/WorldCom Merger
Agreement, or absence of any material adverse change with respect to WorldCom,
(ii) because of the issuance of an order, decree, ruling or other action
prohibiting the transactions contemplated by the MCI/WorldCom Merger Agreement
or the absence of a governmental action necessary to proceed with the
transactions contemplated by the MCI/WorldCom Merger Agreement, or (iii)
because of the failure to obtain the requisite vote to approve the Share
Issuance at a duly called WorldCom shareholders meeting relating to the
MCI/WorldCom Merger or (b) notwithstanding the satisfaction of all the
conditions to the obligations of WorldCom to effect the MCI/WorldCom Merger and
the satisfaction or waiver by MCI of all the conditions to its obligations to
effect the MCI/WorldCom Merger, WorldCom is not willing to consummate the
MCI/WorldCom Merger, then, unless (i) MCI has not used its best efforts to
cause, or cause to be taken all things necessary to consummate the MCI/WorldCom
Merger and other transactions contemplated by the MCI/WorldCom Merger Agreement
or (ii) MCI has breached its representations or warranties or its agreements or
covenants under the MCI/WorldCom Merger Agreement such that either of the
conditions to WorldCom's obligations to effect the MCI/WorldCom Merger has not
been satisfied, WorldCom will pay to MCI an amount in cash equal to $1.635
billion.
Amendment
The MCI/WorldCom Merger Agreement may be amended by WorldCom and MCI at any
time before or after approval of the matters presented in connection with the
MCI/WorldCom Merger by the stockholders of MCI and the shareholders of
WorldCom, but, after any such approval, no amendment may be made that by law or
in accordance with the rules of any relevant stock exchange requires further
approval by such stockholders or shareholders without such further approval.
The MCI/WorldCom Merger Agreement may not be amended except by an instrument in
writing signed on behalf of each of WorldCom and MCI.
Waiver
The MCI/WorldCom Merger Agreement permits WorldCom and MCI at any time prior
to the MCI/WorldCom Effective Time, to (i) extend the time for the performance
of any of the obligations or other acts of the other parties thereto, (ii)
waive any inaccuracies in the representations and warranties contained therein
or in any document delivered pursuant thereto and (iii) waive compliance with
any of the agreements or conditions contained therein, in each case pursuant to
a written instrument.
The BT Agreement
The description of the BT Agreement contained herein describes the material
terms of the BT Agreement but does not purport to be complete and is qualified
in its entirety by reference to the BT Agreement, a copy of which is
incorporated herein by reference as an exhibit to this Form 8-K/A. Capitalized
terms appearing below that are not otherwise defined herein have the same
meanings as are given such terms in the BT Agreement. Whenever particular
sections or defined terms are referred to, it is intended that such sections or
defined terms shall be incorporated by reference.
Termination of the BT/MCI Merger Agreement; Payment of Fees. Pursuant to the
BT Agreement, the Agreement and Plan of Merger among MCI, BT and a subsidiary
of BT, dated as of November 3, 1996 and as amended as of August 21, 1997 (the
"BT/MCI Merger Agreement"), was terminated and WorldCom agreed to pay BT a fee
of $450 million and expenses of $15 million. These fees were paid on November
12, 1997. WorldCom also agreed to
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pay to BT an additional payment of $250 million in the event that WorldCom is
required to make a payment to MCI in accordance with the provisions of the
MCI/WorldCom Merger Agreement (which requires WorldCom to pay MCI $1.635
billion if (a) the MCI/WorldCom Merger Agreement is terminated (i) because the
MCI/WorldCom Merger has not been consummated by December 31, 1998 and any of
the following conditions to be the MCI/WorldCom Merger have not been satisfied:
absence of injunctions, receipt of FCC and PUC approvals, expiration or
termination of the waiting period under the Hart-Scott-Rodino Act, receipt of
a decision from the European Commission that the MCI/WorldCom Merger is
compatible with the European common market, accuracy of WorldCom's
representations and warranties, performance by WorldCom of its obligations
under the MCI/WorldCom Merger Agreement, or absence of any material adverse
change with respect to WorldCom, (ii) because the MCI/WorldCom Merger has been
permanently enjoined or a required governmental action or approval has not been
obtained or (iii) because the WorldCom shareholders fail to approve the Share
Issuance or (b) WorldCom is unwilling to consummate the MCI/WorldCom Merger
(notwithstanding the satisfaction of the conditions precedent to its
obligations)).
Voting Agreement. Pursuant to the BT Agreement, BT has agreed to vote (or
cause to be voted) its shares of MCI Class A Common Stock in favor of the
MCI/WorldCom Merger, the adoption by MCI of the MCI/WorldCom Merger Agreement
and the approval of the other transactions contemplated by the MCI/WorldCom
Merger Agreement.
Pursuant to the BT Agreement, BT has also agreed to vote (or cause to be
voted) its shares of MCI Class A Common Stock against (i) any merger agreement
or merger (other than the MCI/WorldCom Merger Agreement and the MCI/WorldCom
Merger), consolidation, combination, sale of substantial assets,
reorganization, recapitalization, dissolution, liquidation or winding up of or
by MCI or any other MCI acquisition or (ii) any amendment of the MCI Restated
Certificate of Incorporation or MCI Bylaws or other proposal or transaction
involving MCI, or any of its subsidiaries, which amendment or other proposal or
transactions would in any manner impede, frustrate, prevent or nullify the
MCI/WorldCom Merger, the MCI/WorldCom Merger Agreement or any of the other
transactions contemplated by the MCI/WorldCom Merger Agreement.
Pursuant to the BT Agreement, BT has agreed not to (i) transfer (which term
includes, without limitation, any sale, gift, pledge or other disposition), or
consent to any transfer of, any or all of its shares of MCI Class A Common
Stock or any interest therein, except pursuant to the MCI/WorldCom Merger, (ii)
enter into any contract, option or other agreement, arrangement or
understanding with respect to any or all of its shares of MCI Class A Common
Stock or any interest therein, (iii) grant any proxy, power-of-attorney or
other authorization in or with respect to its shares of MCI Class A Common
Stock, except for the BT Agreement or (iv) deposit its shares of MCI Class A
Common Stock into a voting trust or enter into a voting agreement or
arrangement with respect to its shares of MCI Class A Common Stock.
Pursuant to the BT Agreement, BT has agreed to use all reasonable efforts to
take, or cause to be taken, all actions, and to do, or cause to be done, and to
assist and cooperate with the other parties in doing, all things necessary,
proper or advisable to consummate and make effective, in the most expeditious
manner practicable, the MCI/WorldCom Merger and the other transactions
contemplated by the MCI/WorldCom Merger Agreement.
Termination of Concert Joint Venture Agreement. Pursuant to the BT Agreement,
WorldCom, MCI and BT have agreed to appropriately modify the Modified Joint
Venture Agreement among BT, Moorgate (Twelve) Limited ("BTH"), MCI, MCI
Ventures Corporation ("Ventures"; together with BTH, the "JV Shareholders") and
Concert Communications Company ("Concert") (the "BT/MCI Joint Venture
Agreement"), effective as of the consummation of the purchase of the joint
venture interest described below (the "JV Purchase Date") to reflect the
following provisions:
(a) The exclusive distribution rights set forth in the BT/MCI Joint
Venture Agreement and the related distribution agreements will be
terminated.
(b) Concert will continue to provide services to MCI on a nonexclusive
basis to customers based in the United States for a period of five years
from the JV Purchase Date in accordance with the terms of the related
22
<PAGE> 23
MCI distribution agreement. This is intended to enable MCI to continue to
provide services to existing customers under the terms of its contractual
obligations and to enter into new contractual obligations with new customers
and existing customers provided that the term of such obligations does not
extend beyond the fifth anniversary of the JV Purchase Date.
Pursuant to the BT Agreement, BT has agreed to exercise the call option set
forth in the BT/MCI Joint Venture Agreement immediately following the
occurrence of the MCI/WorldCom Effective Time to purchase MCI's interest in
Concert.
Pursuant to the BT Agreement, BT and WorldCom have agreed to undertake in
good faith to negotiate within 180 days of the date of the BT Agreement a
transition agreement:
(i) to provide for a professional exit from the existing Concert
arrangements while satisfying the requirements of BT's and MCI's customers
before and during the exit;
(ii) to agree to the requirements (financial, operational, technical) of
making Concert more self-standing and better able to support customer and
distributor requirements; and
(iii) to give BT and customers comfort that during the pendency of the
MCI/WorldCom Merger and the post-merger period underlying components and
services necessary to provide Concert service which are sourced from MCI are
available on commercially reasonable terms despite the change in
circumstances.
Pursuant to the BT Agreement, if the transition agreement is not executed
within 180 days despite BT's and WorldCom's good faith efforts, the
nonexclusive distributorship referred to in (b) above will have a term of two
(rather than five) years.
Litigation. WorldCom agreed to promptly withdraw its complaint in the
Delaware matter entitled WorldCom, Inc. and TC Investments Corp. against MCI
Communications Corporation et al., and BT agreed to promptly withdraw the
answer to such complaint filed by it. A stipulation of dismissal was signed by
all parties and filed with the Delaware Court of Chancery on November 12, 1997.
MCI/WorldCom Merger Consideration. WorldCom and MCI agreed not to amend the
MCI/WorldCom Merger Agreement to increase the consideration payable to holders
of shares of MCI Common Stock, unless the consideration to be paid in respect
of the shares of MCI Class A Common Stock is increased in such amendment by a
like amount per share.
Amendments to MCI/WorldCom Merger Agreement. WorldCom and MCI agreed not to
amend the MCI/WorldCom Merger Agreement in a manner that adversely affects the
interests of BT.
Termination
The BT Agreement will terminate and be of no further force and effect upon
the earliest to occur of (a) the MCI/ WorldCom Effective Time, (b) the
termination of the MCI/WorldCom Merger Agreement pursuant to the provisions
described in clauses (i), (iii), or (iv) (but only with respect to the failure
to obtain the requisite vote of stockholders of WorldCom) under "--Other Terms
of the MCI/WorldCom Merger Agreement--Termination" or (c) the later to occur of
(x) September 30, 1998 or (y) termination of the MCI/WorldCom Merger Agreement
pursuant to the provisions described in clauses (ii), (iv) (but only with
respect to failure to obtain the requisite vote of stockholders of MCI), (v),
or (vi) under "--Other Terms of the MCI/WorldCom Merger
Agreement--Termination."
Certain Litigation
On November 4, 1996, and thereafter, and on August 25, 1997, and thereafter,
MCI, and all of its directors, including the two directors who are also
executive officers of MCI and the three directors elected by BT, were
23
<PAGE> 24
named as defendants in a total of 15 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
the cases commenced in or about November 1996 and in one of the cases filed in
or about August 1997. The complaints were brought by alleged stockholders of
MCI, individually and purportedly as class actions on behalf of all other
stockholders of MCI. Generally these complaints allege breach of fiduciary duty
by the MCI Board of Directors in connection with the BT/MCI Merger Agreement.
Seven of the complaints in which BT was named as a defendant allege that BT
aided and abetted those breaches of fiduciary duty. Five of the complaints in
which BT was named as a defendant allege that BT owes fiduciary duties to other
MCI stockholders and breached those duties in connection with the BT/MCI Merger
Agreement. They seek, inter alia, damages and injunctive and other relief.
On or about October 8, 1997, a purported derivative action was filed in
Delaware Chancery Court on behalf of MCI against the MCI Board, including the
two directors who are also executive officers and the three directors elected
by BT. BT and Tadworth Corporation were also named as defendants, and MCI was
named as a nominal defendant. Generally, the complaint alleges that the MCI
Board breached duties owed to stockholders in connection with the BT/MCI Merger
Agreement and the MCI Offer. The complaint seeks damages, injunctive relief,
and other relief.
On November 14, 1997, plaintiffs' counsel and defendants' counsel in the
Delaware actions held a conference with the Court of Chancery, at which
plaintiff sought an injunction requiring plaintiffs' representatives to
participate in any further merger negotiations. Plaintiffs' counsel also sought
expedited treatment and the setting of an early trial date with respect to
their challenge to the inducement fee to be paid to BT under the BT Agreement
and the different form of consideration payable to BT contemplated by the
MCI/WorldCom Merger Agreement. Citing the absence of immediate and irreparable
injury, the Court denied plaintiffs' request for injunctive relief and
expedited treatment, and declined to set an early trial date. Plaintiffs
indicated that they would be amending their complaints and joining additional
parties as defendants.
On or about November 14, 1997, one of the purported stockholder class actions
pending in Delaware Chancery Court was amended. On November 19, 1997,
plaintiffs in four of the purported stockholder class actions moved to amend
their complaints. The amended complaint and proposed amended complaints name as
defendants MCI, the MCI Board, WorldCom, BT and TC Investments Corp. They
generally allege that the defendants breached their fiduciary duty to
stockholders in connection with the MCI/WorldCom Merger, the agreement to pay a
termination fee to WorldCom, and alleged discrimination in favor of BT in
connection with the MCI/WorldCom Merger. They seek, inter alia, damages and
injunctive relief prohibiting the consummation of the MCI/WorldCom Merger and
the payment of the inducement fee to BT.
On August 28, 1997, a complaint was filed in the federal district court in
Washington D.C., by an alleged stockholder of MCI, individually and putatively
as a class action on behalf of purchasers of MCI's Common Stock 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 MCI, individually and putatively as a class
action on behalf of purchasers of MCI Common Stock 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 MCI, individually and putatively as a class action on
behalf of purchasers of MCI Common Stock during the period from July 10, 1997,
through August 22, 1997. The three complaints allege that MCI and certain of
its officers and directors failed to disclose material information about MCI,
including that MCI was renegotiating the terms of the BT/MCI Merger Agreement
dated November 3, 1996. The complaints seek damages and other relief.
MCI believes that all of these complaints are without merit.
Interests of Certain Persons in the MCI/WorldCom Merger
A number of executive officers of MCI, including some of the officers who are
also directors, have certain interests in the MCI/WorldCom Merger that are
different from, or in addition to, the interests of the stockholders of MCI
generally. With respect to Messrs. Roberts and Taylor, executives who serve as
directors of MCI and who will
24
<PAGE> 25
serve as executives and directors of the combined company, each will be
entitled to receive in connection with the MCI/WorldCom Merger a number of
shares of WorldCom Common Stock and options to purchase shares of WorldCom
Common Stock based upon the MCI/WorldCom Exchange Ratio, in exchange for the
shares of MCI Common Stock beneficially owned by Messrs. Roberts and Taylor as
of the MCI/WorldCom Effective Time and options to purchase shares of MCI Common
Stock held by Messrs. Roberts and Taylor as of the MCI/WorldCom Effective Time.
See "--Ownership of MCI Capital Stock; Stock Options" and "--Business,
Management and Principal Stockholders of MCI--Security Ownership of Directors,
Management and Principal Stockholders." In addition, in connection with the
MCI/WorldCom Merger, Messrs. Roberts, Taylor and Price will receive cash
retention bonuses of $10.5 million, $9.5 million and $9.0 million,
respectively, which replace the senior retention incentive stock units granted
pursuant to the BT/MCI Merger Agreement, which were discontinued when that
agreement was terminated.
Ownership of MCI Common Stock; Stock Options. As of December 31, 1997,
directors and executive officers of MCI beneficially owned an aggregate of
2,557,871 shares of MCI Common Stock (or approximately 0.4% of the then
outstanding MCI Common Stock), including restricted shares of MCI Common Stock
("MCI Restricted Shares") and incentive stock units ("ISUs") but excluding
shares of MCI Common Stock that may be acquired upon the exercise of
outstanding options to purchase MCI Common Stock ("MCI Stock Options.")
As of December 31, 1997, directors and executive officers of MCI held options
to purchase an aggregate of 4,299,020 shares of MCI Common Stock, of which
options to purchase 2,870,830 shares of MCI Common Stock were exercisable, and
the remainder of which will, pursuant to the MCI/WorldCom Merger Agreement,
become fully vested and exercisable immediately prior to the MCI/WorldCom
Effective Time if not previously vested. The MCI/WorldCom Merger Agreement
provides that, on or prior to the MCI/WorldCom Effective Time, MCI shall take
all action necessary to cause each option to purchase shares of MCI Common
Stock that remains outstanding at the MCI/WorldCom Effective Time to be
converted into an option to acquire that number of shares of WorldCom Common
Stock determined by multiplying the number of shares of MCI Common Stock
subject to such option by the MCI Exchange Ratio, rounded, if necessary, up to
the nearest whole share of WorldCom Common Stock, at a price per share equal to
the per-share exercise price specified in such MCI Stock Option divided by the
MCI Exchange Ratio. See "--Other Terms of the MCI/WorldCom Merger Agreement --
Stock Options and Other Stock Plans."
As of December 31, 1997, executive officers of MCI held an aggregate of
1,083,324 MCI Restricted Shares and ISUs. Pursuant to the MCI/WorldCom Merger
Agreement at the MCI/WorldCom Effective Time, all unvested and unpaid MCI
Restricted Shares and ISUs outstanding on the date of execution of the
MCI/WorldCom Merger Agreement will become fully vested and (unless voluntarily
deferred) paid. Any MCI Restricted Shares or ISUs outstanding, at the
MCI/WorldCom Effective Time shall be converted to the number of shares of
WorldCom Common Stock or ISUs determined by multiplying such MCI Restricted
Shares and ISUs by the MCI Exchange Ratio.
Employment Agreements. MCI had previously entered into employment agreements
(the "Employment Agreements") with Messrs. Roberts, Taylor, Price, Douglas L.
Maine, Michael J. Rowny, Michael H. Salsbury, Fred M. Briggs and Scott B. Ross
(the "Executives"), effective as of November 2, 1996, and expiring on December
31, 1999. The Employment Agreements will remain in place whether or not the
MCI/WorldCom Merger is approved by MCI's stockholders.
Pursuant to the Employment Agreements, each Executive will receive an annual
base salary, subject to increases (but not decreases) at the discretion of MCI.
The 1997 annual salaries of each of the Executives under the Employment
Agreements were as follows: Bert C. Roberts, Jr., $1,000,000; Gerald H. Taylor,
$700,000; Timothy F. Price, $550,000; Michael J. Rowny, $350,000; Scott B.
Ross, $325,000; Douglas L. Maine, $330,000; Michael H. Salsbury, $300,000; and
Fred M. Briggs, $300,000. In addition, each Executive will receive an annual
bonus for each fiscal year of MCI ending during the term of the Executive's
employment with a minimum bonus amount of no less than the average annual bonus
earned by the Executive in respect of the 1994, 1995 and 1996 fiscal years.
The Executives will also participate in any long-term incentive compensation
plan or program maintained by MCI for
25
<PAGE> 26
senior executives of MCI and all long-term compensation plans and programs in
existence immediately prior to the MCI/WorldCom Merger are, under the
Employment Agreements, required to be maintained for at least two years
following the MCI/WorldCom Effective Time or replaced by programs that are no
less favorable to the Executives. In addition, the Executives will participate
in all MCI pension and welfare benefit plans and programs which are applicable
to senior executives of MCI, and all pension and welfare benefit plans and
programs in existence immediately prior to the MCI/WorldCom Merger are, under
the Employment Agreements, required to be maintained for at least two years
following the MCI/WorldCom Effective Time or be replaced by programs that are
no less favorable to the Executives.
Under the Employment Agreements, in the event an Executive's employment is
terminated by MCI (for this purpose "MCI" shall mean MCI, WorldCom and their
respective affiliates) without "Cause" or by the Executive for "Good Reason"
(as each such term is defined below), the Executive is to receive (a) the
Executive's accrued but unpaid salary and vacation pay, and any unpaid bonus
from the prior fiscal year, (b) a cash payment equal to three times the sum of
(x) the Executive's annual base salary and (y) the greater of (A) the average
annual bonus paid to or accrued for the Executive by MCI in respect of the
three calendar years preceding the termination of employment and (B) the annual
bonus paid to or accrued for the Executive in respect of 1995, (c) continued
medical, dental and life insurance coverage for the Executive and the
Executive's eligible dependents on the same basis as in effect immediately
prior to the Executive's termination of employment until the earlier of (x) 36
months after the Executive's termination of employment or (y) the commencement
of coverage with a subsequent employer, but only to the extent such coverage
duplicates or exceeds the coverage provided by MCI, (d) unless otherwise
expressly elected by the Executive prior to such termination, payment, in a
cash lump sum, of all amounts deferred by the Executive under any non-qualified
plan of deferred compensation maintained by MCI or MCI WorldCom
(notwithstanding the payment provisions of any such plan to the contrary), (e)
full acceleration of vesting and exercisability of any equity based and cash
retention awards (including, but not limited to, MCI Stock Options, MCI
Restricted Shares and ISUs) granted to the Executive prior to the Executive's
termination of employment and (f) 36 months of age and service credit for all
purposes under all defined benefit plans of MCI (or the equivalent).
For purposes of the Employment Agreements, "Cause" means: (i) a deliberate
and material breach by the Executive of his duties and responsibilities under
the Employment Agreement that results in material harm to MCI, which breach is
(A) either the product of willful malfeasance or gross neglect, (B) committed
in bad faith or without reasonable belief that such breach is in, or not
contrary to, the best interests of MCI and (C) not remedied within 30 days
after receipt of written notice from MCI specifying such breach; (ii) the
Executive's willful and material breach of the restrictive covenants contained
in the Employment Agreements which is not remedied within 30 days after receipt
of written notice from MCI specifying such breach; or (iii) the Executive's
plea of guilty or nolo contendre to, or nonappealable conviction of, a felony,
which conviction or plea causes material harm to the reputation or financial
position of MCI. "Good Reason" means the occurrence of any of the following
without the Executive's express written consent: (i) the assignment to the
Executive of any duties inconsistent with the Executive's current positions,
duties, responsibilities and status with MCI, a change in the Executive's
reporting responsibilities, title or offices or any removal of the Executive
from or failure to elect or re-elect the Executive to any position with MCI
(including membership on the MCI Board) except in connection with the
Executive's promotion or a termination of employment for Cause; (ii) a
reduction in the Executive's base salary or target annual bonus or long-term
incentives, as such salary, target bonus and incentives are increased from time
to time; (iii) the failure to continue in effect any employee benefit plan or
compensation plan in which the Executive participates unless the Executive is
provided with participation in other plans that provide substantially
comparable benefits or the taking of any action that would adversely affect the
Executive's benefits under any such plan; (iv) any relocation of the
Executive's principal place of business from the location described in the
Employment Agreement; (v) any reduction in fringe benefits and perquisites
provided to the Executive; (vi) any material breach by MCI of any provisions of
the Employment Agreement; and (vii) a failure by MCI WorldCom to expressly
assume, as of the date of the MCI/WorldCom Merger, all obligations of MCI under
the Employment Agreement.
The Employment Agreements further provide that if the payments described
above constitute "parachute payments" under applicable provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), MCI is to pay the
Executive an additional amount sufficient to place the Executive in the same
after-tax financial position the
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<PAGE> 27
Executive would have been in if the Executive had not incurred the excise tax
imposed under Section 4999 of the Code in respect of such parachute payments.
In the event an Executive's employment is terminated due to the Executive's
death or "Disability" (as defined in the Employment Agreements), the Employment
Agreements provide that MCI is to pay to the Executive (or the Executive's
beneficiaries) a lump sum cash amount equal to (i) the annual rate of the
Executive's annual base salary as in effect on the date of termination and (ii)
the highest bonus paid to the Executive under MCI's annual bonus plan during
the three fiscal years preceding the termination of employment. In addition,
the Executive is to receive (i) the unpaid portion of his annual base salary
accrued to the date of termination and any accrued vacation as of the date of
termination and (ii) the unpaid portion of his bonus accrued with respect to
the last full fiscal year of MCI ended prior to the date of termination, when
such bonus would otherwise be payable.
The Employment Agreements contain confidentiality, non-competition and
non-solicitation clauses which provide, among other things, that the Executive
is not to (i) render services to a competitor of MCI or its affiliates or (ii)
solicit or offer employment to any employee of MCI or its affiliates during the
Executive's employment with MCI or its affiliates and, thereafter, for a period
expiring on the earlier of (x) the first anniversary of the Executive's
termination of employment and (y) the expiration of the term of the Employment
Agreement.
Executive Severance Policy. MCI has adopted an executive severance plan (the
"ESP") effective for the period commencing on November 3, 1996, and terminating
on November 9, 2000 (the "Benefits Termination Date"). The ESP covers 20 senior
executives of MCI (the "Covered Executives") who do not have employment
agreements. The ESP provides that if a Covered Executive's employment is
terminated prior to the Benefits Termination Date for any reason other than
"disability" or for "cause" (as such terms are defined in the ESP), or if the
Covered Executive terminates employment for "good reason" (as such term is
defined in the ESP) prior to the Benefits Termination Date, MCI will pay to the
Covered Executive an amount equal to two times the sum of (x) the Covered
Executive's annual base salary and (y) the greater of (A) the average annual
bonus paid to or accrued by the Covered Executive in respect of the three
calendar years preceding the termination of employment and (B) the Covered
Executive's annual bonus in respect of 1995. Under the ESP, such amount is to
be paid as follows: the amount attributable to base salary will be paid in a
lump sum following the termination of the Covered Executive's employment,
except that if the Covered Executive terminates his employment for good reason
such amount will be payable over a six-month period in equal installments, and
the amount attributable to the annual bonus will be paid in a lump sum
following the termination of the Covered Executive's employment. Under the ESP,
a Covered Executive whose employment terminates under the circumstances
described above will also be entitled to: (i) continued medical, dental and
life insurance coverage (or their equivalents) until the earlier of (A) 24
months after the Covered Executive's termination of employment or (B) the
commencement of coverage with a subsequent employer to the extent such coverage
duplicates or exceeds the coverage provided by MCI, (ii) unless otherwise
expressly elected by the Covered Executive prior to such termination, payment
in a cash lump sum of all amounts deferred by the Covered Executive pursuant to
any non-qualified deferred compensation and cash retention plan of MCI, (iii)
full acceleration of vesting and exercisability of any equity-based
compensation awards granted to the Covered Executive and (iv) 24 months of age
and service credit for all purposes under all defined benefit pension plans of
MCI (or their equivalents).
Under the ESP, in the event of the termination of a Covered Executive's
employment prior to the Benefits Termination Date due to a Covered Executive's
death or disability, MCI will pay to the Covered Executive or his
beneficiaries, as applicable, a lump sum cash amount equal to (i) the Covered
Executive's annual base salary and (ii) the highest bonus paid to the Covered
Executive by MCI during the three fiscal years preceding the termination of
employment. In addition, under the ESP, the Covered Executive will be entitled
to payment in a cash lump sum of all amounts deferred by the Covered Executive
under any nonqualified deferred compensation plan maintained by MCI, unless
otherwise expressly elected by the Covered Executive.
The ESP also provides for a gross-up payment to be made to a Covered
Executive for any excise tax imposed under Section 4999 of the Code with
respect to any payments made to the Covered Executive under the ESP or under
the terms of any other MCI plan, program, agreement or arrangement.
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The ESP contains confidentiality, non-competition and non-solicitation
clauses which provide, among other things, that a Covered Employee may not, for
a period of six months, in the event a Covered Employee terminates his or her
employment for good reason, (i) render services to a competitor of MCI or its
affiliates or (ii) solicit or offer employment to any employees of MCI or its
affiliates.
Retention Bonuses for Senior Executives. In connection with the MCI/WorldCom
Merger, a cash retention award pool (the "Executive Retention Program") of up
to approximately $170 million will be created to provide retention incentives
for MCI senior executives, including Messrs. Roberts, Taylor and Price, who
will receive $10.5 million, $9.5 million and $9.0 million, respectively. These
bonuses generally replace the Senior Retention ISUs granted pursuant to the
BT/MCI Merger Agreement dated November 3, 1996, which were discontinued when
that agreement was terminated. The schedule of payments of such incentives will
be subject to the approval of WorldCom, which will not be unreasonably
withheld; and WorldCom will be informed as to the other aspects of the
incentives.
Retention Bonuses for Employees. As was the case under the BT/MCI Agreement
dated November 3, 1996, MCI managers are permitted to make discretionary grants
of retention bonuses (in cash or otherwise) to key individuals (other than
those individuals who have entered into the Employment Agreements, and it being
understood that it is intended that the Covered Executives generally are not to
be eligible to participate) from a separate approximately $100 million pool
created for that purpose. Awards are to be granted from this pool as follows:
(i) up to one-half was awarded not earlier than December 1, 1997, and (ii)
one-half is to be awarded not earlier than December 1, 1998, except that upon
the closing date of any transaction involving the sale or other disposition of
a majority of MCI's capital stock or assets, any such amounts that have not yet
been paid will be accelerated and paid out.
Discretionary Retention Bonus Pool. In addition, a cash retention pool of up
to $150 million has been created for post-MCI/WorldCom Merger retention; such
pool will be allocated in consultation with WorldCom.
Director and Officer Indemnification and Insurance. Pursuant to the
MCI/WorldCom Merger Agreement, from and after the MCI/WorldCom Effective Time,
the Surviving Corporation is to cause to be maintained in effect in its
certificate of incorporation and bylaws (i) for a period of six years after the
MCI/WorldCom Effective Time, the current provisions regarding indemnification
of officers and directors contained in the MCI Restated Certificate of
Incorporation (the "MCI Restated Certificate of Incorporation") and the MCI
Bylaws (the "MCI Bylaws") and (ii) for a period of six years, the current
policies of directors' and officers' liability insurance and fiduciary
liability insurance maintained by MCI with respect to claims arising from facts
or events that occurred on or before the MCI/WorldCom Effective Time, except
that in no event is the MCI/WorldCom Surviving Corporation to be required to
expend in any one year an amount in excess of 200% of the annual premiums
currently paid by MCI for such insurance, and, if the annual premiums of such
insurance coverage exceed such amount, the MCI/WorldCom Surviving Corporation
is to obtain a policy with the greatest coverage available for a cost not
exceeding such amount.
Certain Related Transactions
WorldCom and MCI have entered into certain interconnection or other service
agreements with each other and certain of their affiliates in the ordinary
course of their businesses, which agreements have been amended from time to
time. In fiscal 1997, fiscal 1996 and fiscal 1995, MCI and its subsidiaries
and WorldCom and its subsidiaries have engaged in transactions aggregating
approximately $655 million, $558 million, and $273 million, respectively.
Business, Management and Principal Stockholders of MCI
Business. MCI is one of the world's leading providers of communications
services and the second largest carrier of long distance telecommunication
services in the U.S. MCI is the second largest carrier of international long
distance telecommunication services in the world. MCI provides a broad range of
communications services, including long distance, local and wireless
telecommunications services and information technology services. The provision
of long distance telecommunication services is MCI's core business. Long
distance telecommunication
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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.
Information about Directors and Executive Officers. The directors and
executive officers of MCI are: Clifford L. Alexander, Jr. (Director), Judith
Areen (Director), Michael H. Bader (Director), Sir Peter L. Bonfield
(Director), Robert P. Brace (Director), Richard M. Jones (Director), Gordon S.
Macklin (Director), Douglas L. Maine (Executive Vice President and Chief
Financial Officer), Timothy F. Price (President and Chief Operating Officer),
Bert C. Roberts, Jr. (Director, Chairman), Michael J. Rowny (Executive Vice
President), Richard B. Sayford (Director), Gerald H. Taylor (Director, Chief
Executive Officer), Judith Whittaker (Director) and John R. Worthington
(Director). Sir Colin A. Marshall and Mr. J. Keith Oates, who were directors
of MCI appointed by BT, resigned from the MCI Board in November 1997, and Mr.
Brace was appointed by BT to the MCI Board in December 1997.
Security Ownership of Directors, Management and Principal Stockholders. As of
December 31, 1997, the following persons, individually or as a group, were
known to MCI to be deemed to be the beneficial owners of more than five percent
of the issued and outstanding MCI Common Stock or MCI Class A Common Stock.
Other than as set forth in the table below, there are no persons known to MCI
to beneficially own more than 5% of MCI Common Stock or MCI Class A Common
Stock.
<TABLE>
<CAPTION>
AMOUNT AND
NAME AND ADDRESS OF NATURE OF EXISTING PERCENT
BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
- --------------------------- -------------------- ---------
<S> <C> <C>
British Telecommunications plc .... 135,998,932(1) 100%
81 Newgate Street
London, U.K.
</TABLE>
- -----------
(1) BT has sole voting and investment power with respect to all MCI Class
A Common Stock. BT has agreed, pursuant to the BT Agreement, to exchange
all of its MCI Class A Common Stock for $51.00 in cash from WorldCom.
The following table sets forth certain information regarding the beneficial
ownership of MCI Common Stock as of December 31, 1997, assuming the exercise of
all options exercisable on, or within 60 days of, such date, by the directors,
the named executive officers and all executive officers and directors as a
group. Each director or executive officer has sole voting and investment power
over the shares listed opposite his or her name except as set forth in the
footnotes hereto.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) OF CLASS
- ----------------------------------------- --------------------- ---------
<S> <C> <C>
Clifford L. Alexander, Jr . . . . . . . . . . . 20,000(2) *
Judith Areen . . . . . . . . . . . . . . . . . . 22,803 *
Michael H. Bader . . . . . . . . . . . . . . . . 241,674(3) *
Sir Peter L. Bonfield . . . . . . . . . . . . . . 350(4) *
Robert P. Brace . . . . . . . . . . . . . . . . . 0(4) *
Richard M. Jones . . . . . . . . . . . . . . . . 60,000(5) *
Gordon S. Macklin . . . . . . . . . . . . . . . . 64,000(6) *
Douglas L. Maine . . . . . . . . . . . . . . . . 506,591(7) *
Timothy F. Price . . . . . . . . . . . . . . . . 290,243(8) *
Bert C. Roberts, Jr. . . . . . . . . . . . . . . 1,609,823(9) *
Michael J. Rowny . . . . . . . . . . . . . . . . 297,068(10) *
Richard B. Sayford . . . . . . . . . . . . . . . 60,990(11) *
Gerald H. Taylor . . . . . . . . . . . . . . . . 998,579(12) *
Judith Whittaker . . . . . . . . . . . . . . . . 44,000(13) *
John R. Worthington . . . . . . . . . . . . . . . 278,684(14) *
All Directors and Current Officers as a Group(15) 6,091,826(16) 1.1%
</TABLE>
- ----------
* Less than one percent.
29
<PAGE> 30
(1) Unless otherwise noted, each person has sole voting power and sole
investment power with respect to the securities reported, except with
respect to shares of MCI Common Stock allocated to accounts under
MCI's Employee Stock Ownership and 401(k) Plan ("ESOP"), with respect
to which shares such person has sole voting power only. Where
indicated, the data also include shares which each person had the
right to acquire upon exercise of stock options within sixty days of
December 31, 1997, and also shares issued as awards of MCI Restricted
Shares and/or ISUs. As of December 31, 1997, no individual officer or
director beneficially owned more than 1% of the outstanding shares of
any class of MCI's capital stock.
(2) Includes 20,000 shares of MCI Common Stock Mr. Alexander has the right
to acquire pursuant to the exercise of stock options. Mr. Alexander
shares voting and investment power with respect to all shares other
than those which he has the right to acquire pursuant to the exercise
of such stock options.
(3) Includes 20,000 shares of MCI Common Stock Mr. Bader has the right to
acquire pursuant to the exercise of stock options. Mr. Bader shares
voting and investment power with respect to all shares other than
those which he has the right to acquire pursuant to the exercise of
such stock options. Mr. Bader is one of seven trustees for the William
G. McGowan Charitable Fund, Inc.; he does not, however, have voting or
investment power over any of the shares of MCI Common Stock held by
such Fund.
(4) Sir Peter Bonfield and Mr. Brace are executive officers and directors
of BT, the holder of all the outstanding shares of MCI Class A Common
Stock and 732,499 shares of MCI Common Stock.
(5) Includes 40,000 shares of MCI Common Stock Mr. Jones has the right to
acquire pursuant to the exercise of stock options.
(6) Includes 40,000 shares of MCI Common Stock Mr. Macklin has the right
to acquire pursuant to the exercise of stock options. Does not include
3,200 shares of MCI Common Stock owned solely by Mr. Macklin's wife,
in which shares he disclaims beneficial ownership.
(7) Includes 14,142 shares of MCI Common Stock allocated to Mr. Maine's
ESOP account, 423,400 shares of MCI Common Stock he has the right to
acquire pursuant to the exercise of stock options and 52,573 shares of
MCI Common Stock issued as ISUs. Does not include 1,700 shares of MCI
Common Stock held by Mr. Maine's wife as custodian for the benefit of
a minor child, in which shares Mr. Maine disclaims beneficial
ownership.
(8) Includes 14,891 shares of MCI Common Stock allocated to Mr. Price's
ESOP account, 102,825 shares of MCI Common Stock he has the right to
acquire pursuant to the exercise of stock options and 154,138 shares
of MCI Common Stock issued as ISUs. Does not include 1,000 shares of
MCI Common Stock held by Mr. Price's wife as custodian for the benefit
of their minor children, in which shares Mr. Price disclaims
beneficial ownership.
(9) Includes 46,020 shares of MCI Common Stock allocated to Mr. Roberts'
ESOP account, 798,500 shares of MCI Common Stock he has the right to
acquire pursuant to the exercise of stock options, 255,736 shares of
MCI Common Stock issued as restricted stock awards, 44,167 shares of
MCI Common Stock issued as ISUs, 122,400 shares of MCI Common Stock
owned by a limited partnership in which Mr. Roberts is a general
partner, and 18,000 shares of MCI Common Stock owned by the Roberts'
Foundation. Does not include 12,000 shares of MCI Common Stock held by
Mr. Roberts' wife as custodian for the benefit of their minor child,
in which shares Mr. Roberts disclaims beneficial ownership.
30
<PAGE> 31
(10) Includes 1,079 shares of MCI Common Stock allocated to Mr. Rowny's
ESOP account, 216,000 shares of MCI Common Stock he has the right to
acquire pursuant to the exercise of stock options and 76,940 shares of
MCI Common Stock issued as ISUs.
(11) Includes 40,000 shares of MCI Common Stock Mr. Sayford has the right
to acquire pursuant to the exercise of stock options. Does not include
800 shares of MCI Common Stock owned solely by Mr. Sayford's wife, in
which shares he disclaims beneficial ownership.
(12) Includes 36,251 shares of MCI Common Stock allocated to Mr. Taylor's
ESOP account, 661,420 shares of MCI Common Stock he has the right to
acquire pursuant to the exercise of stock options, and 229,641 shares
of MCI Common Stock issued as ISUs.
(13) Includes 25,000 shares of MCI Common Stock Ms. Whittaker has the right
to acquire pursuant to the exercise of stock options.
(14) Includes 10,000 shares of MCI Common Stock Mr. Worthington has the
right to acquire pursuant to the exercise of stock options. Does not
include 147,890 shares of MCI Common Stock owned solely by Mr.
Worthington's wife, in which shares he disclaims beneficial ownership.
(15) This group includes MCI executive officers, as such term is defined in
Rule 3b-7 of the Exchange Act, and its directors, a total of 20
persons.
(16) Includes 144,073 shares of MCI Common Stock allocated to such
officers' accounts under the ESOP, 3,533,955 shares of MCI Common
Stock that officers and directors have the right to acquire pursuant
to the exercise of stock options and 1,083,324 shares of MCI Common
Stock issued to officers pursuant to restricted stock awards and/or
ISUs. Officers and directors have shared voting and investment power
with respect to 221,674 of these shares of MCI Common Stock.
THE COMPUSERVE MERGER
On September 7, 1997, WorldCom entered into an Agreement and Plan of Merger
(the "CompuServe Merger Agreement") with H&R Block, Inc. ("H&R Block"), H&R
Block Group, Inc. ("Block Group"), CompuServe Corporation ("CompuServe") and a
wholly-owned acquisition subsidiary of WorldCom, providing for the merger (the
"CompuServe Merger") of the wholly-owned acquisition subsidiary of WorldCom
into CompuServe. In the CompuServe Merger, each share of CompuServe common
stock will be converted into a fraction of a share of WorldCom Common Stock
equal to the CompuServe exchange ratio (the "CompuServe Exchange Ratio"), which
will be determined as follows: (i) if the average trading price (generally
based on the average reported closing prices for a specified twenty day period
prior to closing) of a share of WorldCom Common Stock is greater than or equal
to $29.54, the CompuServe Exchange Ratio will be 0.40625; (ii) if such average
trading price is greater than or equal to $24.00 but less than $29.54, the
CompuServe Exchange Ratio will equal a fraction determined by dividing $12.00
by such average trading price; and (iii) if such average trading price is less
than $24.00, the CompuServe Exchange Ratio will be 0.5, provided that
CompuServe has the right to terminate the CompuServe Merger Agreement if such
average trading price is less than $24.00. Based on (i) the number of shares
of CompuServe common stock outstanding as of January 20, 1998 (assuming the
conversion of CompuServe stock options into WorldCom Common Stock) and (ii)
assumed CompuServe Exchange Ratios of 0.40625 and 0.5, approximately 38,293,901
shares and 47,130,956 shares, respectively, of WorldCom Common Stock will be
issued in the CompuServe Merger. Consummation of the CompuServe Merger is
subject to certain conditions, including the approval of the stockholders of
CompuServe. The applicable waiting period under the Hart-Scott-Rodino Act has
expired. The CompuServe Merger Agreement may be terminated if the effective
time has not occurred on or before March 1, 1998 and under certain other
circumstances. Termination of the CompuServe Merger Agreement by WorldCom or
CompuServe under certain circumstances, including failure to receive the
approval of CompuServe's stockholders, will require one party to make a $15
million payment to the other party as a termination fee. H&R Block and Block
Group have agreed to vote all of the CompuServe shares directly or
31
<PAGE> 32
indirectly owned by them (the "Block Shares," which, as of September 30, 1997,
represents approximately 80.1% of the outstanding CompuServe shares) in favor
of the CompuServe Merger, which number of shares is sufficient for such
approval. In addition, H&R Block and Block Group have irrevocably appointed
WorldCom or its nominee as proxy to vote the Block Shares at any stockholder
meeting or otherwise as described above, and have granted WorldCom an option to
purchase the Block Shares under certain circumstances. The closing of the
CompuServe Merger, which will be accounted for as a purchase, is expected to
occur on or about January 31, 1998, provided that the conditions to the
CompuServe Merger are then fulfilled or waived.
The CompuServe Merger Agreement includes customary representations and
warranties, and provisions for each of WorldCom, on the one hand, and H&R Block
and CompuServe, on the other hand, to indemnify each other for certain losses
and expenses, subject to specified time limits and minimum amounts.
A copy of the CompuServe Merger Agreement is attached as Exhibit 2.1 to
WorldCom's Current Report on Form 8-K dated September 7, 1997 (filed September
17, 1997) and incorporated herein by reference. The foregoing description does
not purport to be complete and is qualified in its entirety by reference to the
CompuServe Merger Agreement.
CompuServe operates primarily through two divisions: Interactive Services
and Network Services. Interactive Services offers worldwide online and
Internet access services for consumers, while Network Services provide
worldwide network access, management and applications, and Internet service to
businesses.
THE AOL TRANSACTION
On September 7, 1997, WorldCom also entered into a Purchase and Sale
Agreement (the "AOL Agreement") with America Online, Inc. ("AOL"), under which
WorldCom agreed to (a) transfer to AOL the online services business (the
"COLS") of CompuServe and Spry, Inc., a CompuServe subsidiary ("Sprynet"),
which WorldCom will acquire as a result of the CompuServe Merger, and (b)
acquire all outstanding shares of ANS Communications, Inc. ("ANS"), a
wholly-owned subsidiary of AOL which provides Internet and other networking
services to AOL and other customers. In addition to the transfer of the COLS,
WorldCom will pay AOL $175 million in cash, subject to certain adjustments
specified in the AOL Agreement. If there should occur a material adverse change
relating to the COLS between the date of the AOL Agreement and the date of
closing thereunder, WorldCom would be required to compensate AOL in respect
thereof, but such event would not affect AOL's obligation to proceed with the
closing. The closing of the transactions contemplated by the AOL Agreements
(the "AOL Transaction") is conditioned on, and is expected to occur immediately
after, the closing of the CompuServe Merger. The closing of the AOL
Transaction, which will be accounted for as a purchase, is also subject to
certain other conditions. The applicable waiting period under the
Hart-Scott-Rodino Act with respect to the AOL Transaction has expired.
Following the closing under the AOL Agreement, AOL will have rights to use
the CompuServe name in the online services business, and WorldCom will have
rights to use the name in the network services business.
Pursuant to the AOL Agreement, WorldCom, AOL and ANS have agreed to enter
into a Master Agreement for Data Communications upon the closing of the AOL
Transaction, which will have an initial term expiring December 31, 2002,
subject to extension by AOL in certain circumstances. The agreement provides
that ANS will (i) continue to maintain and operate portions of AOL's dial-up
member access network; (ii) install, activate, maintain and operate additional
modems for AOL's dial-up network in the United States and Canada; and (iii)
provide AOL with Internet access. AOL will commit to purchase from ANS
specified percentages of its incremental modem requirements each year, subject
to ANS fulfilling certain obligations. The fees for the foregoing services will
be based on several factors, including certain fixed base prices, the prices
offered by ANS to its non-affiliated customers, prices paid by AOL to, or
offered to AOL by, other significant suppliers of modems and modem services,
and, if AOL provides such services to itself, AOL's cost. The fees are subject
to adjustment twice per year and include certain agreed-upon discounts.
The AOL Agreement also provides that AOL, UUNET and the surviving corporation
of the CompuServe Merger (i.e., the corporation surviving the merger of
Acquisition Subsidiary into CompuServe) will enter into a Network Services
Agreement upon the closing of the AOL Transaction, which will have an initial
term expiring
32
<PAGE> 33
December 31, 2002, subject to extension by AOL in certain circumstances. Under
this agreement, such surviving corporation will provide AOL with capacity on
the CompuServe network, and AOL will commit to use the network for specified
portions of its requirements. The fees to be paid by AOL will be based on
several factors, including certain fixed base prices, the prices offered to AOL
by other significant suppliers of network capacity, and such surviving
corporation's actual cost to provide the network capacity.
The AOL Agreement provides that, if so requested at least five business days
before the closing of the AOL Transaction, WorldCom will cause Stephen M. Case,
Chairman of the Board, Chief Executive Officer and President of AOL, to be
appointed to the WorldCom Board. Mr. Case has made such request. See
"Management of WorldCom Following the MCI/WorldCom Merger."
The AOL Agreement includes customary representations and warranties, and
provisions for each of AOL and WorldCom to indemnify the other for certain
losses and expenses, subject to specified time limits and minimum amounts.
Representations and warranties by WorldCom include certain representations and
warranties relating to the COLS, a number of which are incorporated by
reference from the CompuServe Merger Agreement. WorldCom anticipates that, if
AOL were to successfully assert a claim for indemnification based on any
provision incorporated by reference from the CompuServe Merger Agreement,
WorldCom would be entitled to assert a corresponding claim against H&R Block or
Block Group under the CompuServe Merger Agreement. However, since the AOL
Agreement and the CompuServe Merger Agreement are separate, and since any
liability of WorldCom under the AOL Agreement is not conditioned on its ability
to recover in respect of claims which may be asserted under the CompuServe
Merger Agreement, there can be no assurance that amounts recovered by WorldCom
in respect of any claim related to COLS would equal any amounts which WorldCom
might be required to pay to AOL in respect of the same claim.
At the closing under the AOL Agreement, WorldCom, AOL and ANS will enter into
a Noncompetition and Nonsolicitation Agreement under which (i) AOL will agree
to certain limitations on its business activities in the network services
business, (ii) WorldCom will agree that CompuServe will be subject to certain
limitations in the online services business, and (iii) each of the parties will
agree to certain restrictions on its right to solicit or otherwise deal with
customers, suppliers, employees, independent contractors, agents or
representatives of the other.
Under a Stockholders Agreement by and among H&R Block, Block Group and
WorldCom, WorldCom has been granted an option to acquire the H&R Block Shares
under certain circumstances. The AOL Agreement provides that if WorldCom
becomes entitled to exercise the option, WorldCom and AOL will negotiate with
each other in good faith, for so long as the option remains exercisable and, if
the option is exercised by WorldCom, for 180 days following such exercise, with
the goal of entering into agreements and arrangements and engaging in
transactions which would, as closely as would be commercially reasonable at
that time and in accordance with applicable law and taking into account the
changed facts and circumstances as they exist at that time, effectuate the
intent and purposes of the AOL Agreement and the transactions contemplated
thereby.
The AOL Agreement may be terminated by either WorldCom or AOL under certain
circumstances, including certain defaults by the other party. Depending on the
reason for termination, either WorldCom or AOL may be required to pay $15
million to the other as a reimbursement of expenses. In addition, in the event
H&R Block, Block Group or CompuServe pays WorldCom the $15 million termination
fee required under certain circumstances by the CompuServe Merger Agreement,
WorldCom is obligated under the AOL Agreement to pay AOL one-half of such fee.
ANS provides Internet access to AOL and to AOL's subscribers in the United
States and Canada and also designs, develops and operates high performance
wide-area networks for business, research, education and governmental
organizations.
A copy of the AOL Agreement is attached as Exhibit 2.4 to WorldCom's Current
Report on Form 8-K dated September 7, 1997 (filed September 17, 1997) and
incorporated herein by reference. The foregoing description does not purport to
be complete and is qualified in its entirety by reference to the AOL Agreement.
33
<PAGE> 34
THE BFP MERGER
WorldCom entered into an Amended and Restated Agreement and Plan of Merger
dated as of October 1, 1997 (the "BFP Merger Agreement") with Brooks Fiber
Properties, Inc. ("BFP") and a wholly-owned acquisition subsidiary of WorldCom,
providing for the merger of such WorldCom subsidiary with and into BFP (the
"BFP Merger"). In the BFP Merger, each share of common stock, par value $.01,
of BFP (the "BFP Common Stock") will be converted into a fraction of a share of
WorldCom Common Stock equal to the BFP Exchange Ratio. The "BFP Exchange Ratio"
will be determined as follows: (i) if the average trading price (generally
based on the average reported closing prices for a specified twenty-day period
prior to closing) of a share of WorldCom Common Stock is greater than or equal
to $35.15, the BFP Exchange Ratio will equal 1.65; (ii) if such average trading
price is greater than or equal to $31.35 but less than $35.15, the BFP Exchange
Ratio will equal a fraction determined by dividing $58.00 by such average
trading price; and (iii) if such average trading price is less than $31.35, the
BFP Exchange Ratio will equal 1.85. Based on (i) BFP common stock outstanding
as of December 23, 1997 (including an estimated 73,000 shares that will be
issuable immediately prior to the effective time of the BFP Merger pursuant to
an employee stock purchase plan) and (ii) assumed BFP Exchange Ratios of 1.65
and 1.85, approximately 64,729,280 shares and 72,575,253 shares, respectively,
of WorldCom Common Stock will be issued in the BFP Merger. In addition,
outstanding warrants and options to purchase shares of BFP Common Stock would
be converted in the BFP Merger to warrants and options to acquire an aggregate
of approximately 4,634,777 shares and 5,196,569 shares, respectively, of
WorldCom Common Stock, and the exercise price would be adjusted to reflect the
BFP Exchange Ratio, so that, on exercise, the holders would receive, in the
aggregate, the same number of shares of WorldCom Common Stock as if they had
exercised prior to the BFP Merger, at the same aggregate exercise price. The
BFP Merger has been structured to qualify as a pooling of interests.
Consummation of the BFP Merger is subject to the fulfillment of a number of
conditions, including the expiration or termination of any applicable waiting
period under the Hart-Scott-Rodino Act and the receipt of other required
regulatory approvals (which condition has been satisfied), and the absence of
certain material adverse changes. Consummation of the BFP Merger is also
subject to the approval and adoption of the BFP Merger Agreement by the
stockholders of BFP. The BFP Merger Agreement may be terminated if the
effective time has not occurred on or before March 31, 1998 and under certain
other circumstances. Termination of the BFP Merger Agreement by WorldCom or BFP
under certain circumstances will require one party to make a $40 million
payment to the other party. Each of BFP's directors has agreed to vote his or
her beneficially owned shares of BFP stock in favor of the BFP Merger
Agreement. The closing of the BFP Merger is expected to occur on or about
January 29, 1998, provided that the conditions to the BFP Merger are then
fulfilled or waived.
In connection with the negotiation and approval of the BFP Merger Agreement,
Mr. Ebbers indicated his expectation that the WorldCom Board would consider the
nomination of an individual designated by the BFP Board of Directors (who is
expected to be Mr. James C. Allen) for election as a director of WorldCom
following the effective time of the BFP Merger. Mr. Allen has been Vice
Chairman and Chief Executive Officer and a director of BFP since its inception
in November 1993. See "Management of WorldCom Following the MCI/WorldCom
Merger."
BFP has three issues of public debt outstanding: $425 million aggregate
principal amount of 10 7/8% Senior Discount Notes Due 2006, which were issued
on February 26, 1996 (the "1996A Notes"), $400 million aggregate principal
amount of 11 7/8% Senior Discount Notes Due 2006, which were issued on November
7, 1996 (the "1996B Notes"), and $250 million aggregate principal amount of 10%
Senior Notes Due 2007, which were issued on May 29, 1997 (the "1997 Notes," and
together with the 1996A Notes and the 1996B Notes, the "BFP Notes"). Pursuant
to the terms of the 1996A Notes and the 1996B Notes, cash interest is not
payable until March 1, 2001, with respect to the 1996A Notes, and May 1, 2002,
with respect to the 1996B Notes. As of September 30, 1997, the indebtedness
under the BFP Notes (accreted in the case of the 1996A Notes and 1996B Notes)
totaled $796.1 million.
Pursuant to the terms of the Indentures governing the terms of the BFP Notes,
if the BFP Merger is consummated, BFP will be required to give each holder of
the BFP Notes the option to have BFP repurchase such holder's BFP Notes, for
cash, at 101% of the accreted value, in the case of the 1996A and 1996B Notes,
or at 101% of the principal amount plus accrued interest, in the case of the
1997 Notes, on the date of such repurchase. Such
34
<PAGE> 35
offer to purchase must generally be made to the holders of the BFP Notes within
30 days of the effective time of the BFP Merger with all cash payments
completed within approximately 60 days of such offer. WorldCom believes that
such repurchase can be made by BFP, together with WorldCom, after consummation
of the BFP Merger without materially adversely affecting the financial
condition of the combined company.
BFP has a $250 million senior secured revolving credit facility which has a
provision which requires BFP to prepay the loan in full upon a change of
control (which includes the BFP Merger) unless (1) BFP gives notice to the
lenders at least 30 days prior to the occurrence of the change of control and
(2) a majority of lenders do not request that all outstanding loans under the
credit facility be paid in full. As of December 22, 1997, approximately $75
million was drawn under the credit facility. BFP does not expect any material
financial implication to the combined company if the credit facility is
terminated.
The BFP indentures and credit agreement contain certain covenants which,
among other things, restrict BFP's ability to incur additional debt, create
liens, enter into sale-leaseback transactions, pay dividends (including to
WorldCom subsequent to the BFP Merger), make certain restricted payments and
enter into transactions with affiliates.
The following information concerning BFP has been prepared on the basis of
information filed by BFP with the Commission.
BFP, founded in November 1993, is a leading facilities-based provider of
competitive local telecommunications services, commonly referred to as a
competitive local exchange carrier ("CLEC"), in selected cities within the
United States. BFP acquires and constructs its own state-of-the-art fiber optic
networks and facilities and leases network capacity from others to provide long
distance carriers ("IXCs"), ISPs, wireless carriers and business, government
and institutional end users with an alternative to the ILECs for a broad array
of high quality voice, data, video transport and other telecommunications
services. BFP has assembled an experienced management, sales and operations
team with extensive experience and strong contacts within the
telecommunications industry.
BFP's goal is to become the primary full-service provider of competitive
local telecommunications services to its customers in selected cities by
offering superior products with excellent customer service at prices below
those charged by the ILECs. The principal elements of BFP's strategy include
targeting selected U.S. markets with an emphasis on second- and third-tier
markets, aggressively pursuing switched services opportunities, further
building out its existing systems and expanding its service offerings. As of
September 30, 1997, BFP had networks in operation or under construction in a
total of 44 U.S. cities, as follows:
<TABLE>
<CAPTION>
OTHER CLEC
NETWORKS IN CITY
----------------
CURRENT ANNOUNCED
------- ---------
<S> <C> <C>
EASTERN REGION
Springfield, Massachusetts . . . . . . . . . . . . . . . . 0 0
Providence, Rhode Island . . . . . . . . . . . . . . . . . 1 0
Hartford, Connecticut(3)(4) . . . . . . . . . . . . . . . . 3 0
Grand Rapids, Michigan . . . . . . . . . . . . . . . . . . 0 1
Lansing, Michigan . . . . . . . . . . . . . . . . . . . . . 0 1
Traverse City, Michigan . . . . . . . . . . . . . . . . . . 0 0
Toledo, Ohio . . . . . . . . . . . . . . . . . . . . . . . 1 0
White Plains, New York(3) . . . . . . . . . . . . . . . . . 1 0
Stamford, Connecticut(3) . . . . . . . . . . . . . . . . . 2 1
Long Island, New York(1)(3) . . . . . . . . . . . . . . . . 3 2
Portland, Maine(1)(2) . . . . . . . . . . . . . . . . . . . 0 1
Nashua, New Hampshire(1)(2) . . . . . . . . . . . . . . . . 1 0
Manchester, New Hampshire(1)(2) . . . . . . . . . . . . . . 0 1
CENTRAL REGION
Oklahoma City, Oklahoma . . . . . . . . . . . . . . . . . . 2 1
</TABLE>
35
<PAGE> 36
<TABLE>
<S> <C> <C>
Tulsa, Oklahoma . . . . . . . . . . . . . . . . . . . . . . 1 1
Little Rock, Arkansas . . . . . . . . . . . . . . . . . . . 3 0
Tucson, Arizona . . . . . . . . . . . . . . . . . . . . . . 2 0
Albuquerque, New Mexico . . . . . . . . . . . . . . . . . . 2 0
Knoxville, Tennessee . . . . . . . . . . . . . . . . . . . 0 2
Jackson, Mississippi . . . . . . . . . . . . . . . . . . . 1 1
Kansas City, Missouri . . . . . . . . . . . . . . . . . . . 3 0
Springfield, Missouri(1) . . . . . . . . . . . . . . . . . 1 1
Minneapolis, Minnesota(1)(3)(4) . . . . . . . . . . . . . . 2 2
St. Paul, Minnesota(1)(3)(4) . . . . . . . . . . . . . . . 0 1
Austin, Texas . . . . . . . . . . . . . . . . . . . . . . . 2 1
Dallas, Texas(3)(4) . . . . . . . . . . . . . . . . . . . . 4 1
Fort Worth, Texas . . . . . . . . . . . . . . . . . . . . . 2 0
San Antonio, Texas(4) . . . . . . . . . . . . . . . . . . . 2 1
Corpus Christi, Texas(1) . . . . . . . . . . . . . . . . . 2 0
Houston, Texas(3)(4) . . . . . . . . . . . . . . . . . . . 4 0
Waco, Texas(1) . . . . . . . . . . . . . . . . . . . . . . 0 0
WESTERN REGION
Sacramento, California . . . . . . . . . . . . . . . . . . 3 2
San Jose, California(3) . . . . . . . . . . . . . . . . . . 3 0
Sunnyvale, California . . . . . . . . . . . . . . . . . . . 3 0
Santa Clara, California . . . . . . . . . . . . . . . . . . 3 0
Stockton, California . . . . . . . . . . . . . . . . . . . 0 0
Fresno, California . . . . . . . . . . . . . . . . . . . . 1 0
Bakersfield, California . . . . . . . . . . . . . . . . . . 1 0
Milpitas, California . . . . . . . . . . . . . . . . . . . 3 0
Palo Alto, California . . . . . . . . . . . . . . . . . . . 3 0
Salt Lake City, Utah . . . . . . . . . . . . . . . . . . . 3 1
San Mateo, California(1) . . . . . . . . . . . . . . . . . 2 0
Reno, Nevada . . . . . . . . . . . . . . . . . . . . . . . 0 0
San Francisco and Los Angeles, California(3)(4)(5) . . . . N/A N/A
</TABLE>
- ------------
(1) Networks under construction.
(2) Majority-owned joint venture.
(3) City where WorldCom has a network.
(4) City where MCImetro has a network.
(5) Facilities management operations.
As of September 30, 1997, BFP had a total of 28 digital telephone switches
installed serving a total of 33 of its operating networks, collocation in a
total of 121 ILEC central offices and a total of 2,177 route miles of optical
fiber cable installed, 1,041,275 voice grade equivalent ("VGE") circuits in
service, 80,019 CLEC lines installed and 1,667 on-net and 2,202 off-net
buildings connected. BFP's annualized revenues, based on the revenues for the
quarter ended September 30, 1997, are $143.1 million, as compared with total
revenues in 1996, 1995 and 1994, BFP's first full year of operation, of $45.6
million, $14.2 million and $2.8 million, respectively.
MANAGEMENT AND PRINCIPAL SHAREHOLDERS
Information about Directors and Executive Officers
The directors and executive officers of WorldCom are: Carl J. Aycock
(Director), Max E. Bobbitt (Director), Bernard J. Ebbers (Director, Chairman,
President and Chief Executive Officer), Francesco Galesi (Director), Richard R.
Jaros (Director), Stiles A. Kellett, Jr. (Director), David C. McCourt
(Director), John A. Porter (Director), John W. Sidgmore (Director, Vice
Chairman of the Board and Chief Operations Officer), Scott D. Sullivan
(Director, Chief Financial Officer and Secretary) and Lawrence C. Tucker
(Director). In September 1997, Mr.
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<PAGE> 37
McCourt became Chairman and Chief Executive Officer of Cable Michigan, Inc. a
cable television company, Chairman and Chief Executive Officer of RCN
Corporation, a telecommunications company, and Chairman of the Board and Chief
Executive Officer of Commonwealth Telephone Enterprises, Inc. (formerly known
as C-TEC Corporation), a telecommunications company.
The Audit Committee of the WorldCom Board consists of Max E. Bobbitt
(Chairman), Francesco Galesi, David C. McCourt and Richard R. Jaros. The
Compensation and Stock Option Committee of the WorldCom Board of Directors
consists of Stiles A. Kellett, Jr. (Chairman), Max E. Bobbitt and Lawrence C.
Tucker. The Nominating Committee of the WorldCom Board consists of John A.
Porter (Chairman), Carl J. Aycock and Richard R. Jaros.
In the fourth quarter of 1997, Mr. Ebbers and Mr. Sullivan received payments
of $13.0 million and $3.5 million, respectively, pursuant to the WorldCom
Performance Bonus Plan approved by WorldCom shareholders on May 22, 1997.
Security Ownership of Management and Principal Shareholders
As of January 20, 1998, the following persons, individually or as a group,
were known to WorldCom to be deemed to be the beneficial owners of more than
five percent of the issued and outstanding WorldCom Common Stock, each of which
persons has sole voting and investment power over such WorldCom Common Stock,
except as set forth in the footnotes hereto:
<TABLE>
<CAPTION>
AMOUNT AND
NAME AND ADDRESS OF NATURE OF EXISTING PERCENT
BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) OF CLASS(1)
-------------------------- --------------------------- -----------
<S> <C> <C>
FMR Corp . . . . . . . . . . . . . . 70,566,021(2) 7.7%
82 Devonshire Street
Boston, Massachusetts 02104
</TABLE>
- ---------
(1) Based upon 910,348,124 shares of WorldCom Common Stock issued and
outstanding plus, as to the holder thereof only, exercise or conversion of
all derivative securities that are exercisable or convertible currently or
within 60 days after January 20, 1998.
(2) Based upon shares owned as of March 6, 1997, as provided by FMR Corp.,
including 60,322,566 shares beneficially owned by Fidelity Management &
Research Company ("Fidelity"), as a result of its serving as investment
adviser to various investment companies registered under Section 8 of the
Investment Company Act of 1940 and serving as investment adviser to certain
other funds which are generally offered to limited groups of investors;
9,390,385 shares beneficially owned by Fidelity Management Trust Company, as
a result of its serving as trustee or managing agent for various private
investment accounts, primarily employee benefit plans, and serving as
investment adviser to certain other funds which are generally offered to
limited groups of investors; and 853,070 shares beneficially owned by
Fidelity International Limited, as a result of its serving as investment
adviser to various non-United States investment companies.
The number of shares beneficially owned by Fidelity includes 4,301,357
shares issuable upon conversion of WorldCom Series A Preferred Stock. The
number of shares beneficially owned by Fidelity Management Trust Company
includes 267,839 shares issuable upon conversion of WorldCom Series A
Preferred Stock. FMR Corp. has sole voting power with respect to 5,627,963
shares and sole dispositive power with respect to 69,712,951 shares.
Fidelity International Limited has sole voting and dispositive power with
respect to all the shares it beneficially owns.
The following table sets forth the beneficial ownership of WorldCom Common
Stock and WorldCom Series B Preferred Stock, as of January 20, 1998, by each
director, the named executive officers and by all persons, as a group, who are
currently directors and executive officers of WorldCom. No person listed on the
following table is
37
<PAGE> 38
the beneficial owner of any shares of WorldCom Series A Preferred Stock. Each
director or executive officer has sole voting and investment power over the
shares listed opposite his name except as set forth in the footnotes hereto.
<TABLE>
<CAPTION>
PERCENT
NUMBER OF SHARES -------
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) OF CLASS(1)
----------------------------------------------- --------------------- -----------
<S> <C> <C>
Carl J. Aycock . . . . . . . . . . . . . . . . . . 707,838(2) *
Max E. Bobbitt . . . . . . . . . . . . . . . . . . 256,292(3) *
Bernard J. Ebbers . . . . . . . . . . . . . . . . . 16,919,993(4) 1.9%
Francesco Galesi . . . . . . . . . . . . . . . . . 3,522,108(5) *
Richard R. Jaros . . . . . . . . . . . . . . . . . 701,536(6) *
Stiles A. Kellett, Jr . . . . . . . . . . . . . . . 4,020,816(7) *
David C. McCourt . . . . . . . . . . . . . . . . . 824,423(8) *
John A. Porter . . . . . . . . . . . . . . . . . . 4,668,053(9) *
John W. Sidgmore . . . . . . . . . . . . . . . . . 3,469,968(10) *
Scott D. Sullivan . . . . . . . . . . . . . . . . . 436,904(11) *
Lawrence C. Tucker . . . . . . . . . . . . . . . . 3,170,096(12) *
All Directors and Current Executive Officers as a
Group (11 persons) . . . . . . . . . . . . . . . 38,698,027(13) 4.2%
</TABLE>
- ---------
* Less than one percent.
(1) Based upon 910,348,124 shares of WorldCom Common Stock issued and
outstanding plus, as to the holder thereof only, exercise or conversion
of all derivative securities that are exercisable or convertible
currently or within 60 days after January 20, 1998.
(2) Includes 5,576 shares owned by Mr. Aycock's spouse; 73,048 shares
purchasable upon exercise of options; and 3,312 shares held as
custodian for children.
(3) Includes 38,512 shares purchasable upon exercise of options; and
108,890 shares as to which Mr. Bobbitt shares voting and investment
power with his spouse.
(4) Includes 36,432 shares held as custodian for children; 2,875,696 shares
purchasable upon exercise of options; and 855,448 shares owned by
Linda Ebbers, as to which Mr. Ebbers has voting power.
(5) Consists of 3,483,596 shares owned by Rotterdam Ventures, Inc., of
which Mr. Galesi is sole shareholder; and 38,512 shares purchasable
upon exercise of options.
(6) Includes 6,449 shares issuable upon conversion of WorldCom Series B
Preferred Stock; 5,000 shares purchasable upon exercise of options; and
15,930 shares held as custodian for Mr. Jaros' children, as to which
Mr. Jaros disclaims beneficial ownership.
(7) Includes 16,000 shares owned by Mr. Kellett's spouse; 900,000 shares
owned by a family partnership; and 90,316 shares purchasable upon
exercise of options.
(8) Includes 95 shares issuable upon conversion of WorldCom Series B
Preferred Stock; and 5,000 shares purchasable upon exercise of options.
(9) Includes 167,578 shares held as custodian or trustee for minor
children; 73,048 shares purchasable upon exercise of options; 218,000
shares owned by Mr. Porter's spouse, as to which beneficial ownership
is disclaimed; 85,812 shares held in trust for a son of majority age,
as to which beneficial ownership is also disclaimed; 5,700 shares held
in a trust of which Mr. Porter is trustee with sole voting and
dispositive power; and 3,250 shares held in trust for employees of Mr.
Porter.
38
<PAGE> 39
(10) Includes 368,704 shares purchasable upon exercise of options; and
12,502 shares held in a trust of which Mr. Sidgmore is sole trustee
with sole voting and dispositive power.
(11) Includes 433,333 shares purchasable upon exercise of options.
(12) A total of 3,131,828 of these shares are beneficially owned by The 1818
Fund, L.P., and The 1818 Fund II, L.P. (collectively, "The 1818
Funds"). Mr. Tucker is the general and managing partner of The 1818
Funds and Mr. Tucker, as a general partner of Brown Brothers Harriman &
Co., shares voting and investment power with respect to such
securities. Also includes 38,268 shares purchasable upon exercise of
options.
(13) Includes 4,045,981 shares purchasable upon exercise of options or
conversion of WorldCom Series B Preferred Stock.
Information Regarding Stephen M. Case
The AOL Agreement provides that, if so requested at least five business days
before the closing of the AOL Transaction, WorldCom will cause Stephen M. Case,
Chairman of the Board, Chief Executive Officer and President of AOL, to be
appointed to the WorldCom Board. Mr. Case has made such request. Mr. Case, a
co-founder of AOL, has been Chairman of the Board of Directors of AOL since
October 1995, Chief Executive Officer of AOL since April 1993 and a director of
AOL since September 1992. Mr. Case has served as President of AOL since July
1996 and served previously as President from January 1991 to February 1996.
Previously, he served as Executive Vice President of AOL from September 1987 to
January 1991 and Vice President, Marketing, from 1985 to September 1987.
AOL and WorldCom and/or certain of its subsidiaries are currently parties to
certain agreements regarding the provision of dial-up and leased line access to
AOL. In addition, as described under "The AOL Transaction," AOL and WorldCom
and/or certain of its subsidiaries will enter into a Master Agreement for Data
Communications and a Network Services Agreement upon the closing of the AOL
Transaction. Expenditures by AOL under all of such agreements during the twelve
month period commencing as of the closing of the AOL Transaction is anticipated
to exceed $400 million. Actual results may vary materially from such
expectation. See "Cautionary Statement Regarding Forward-Looking Statements"
and "Risk Factors." To the best of WorldCom's knowledge, neither Mr. Case nor
AOL has since January 1, 1994 had any transaction with WorldCom or any of its
subsidiaries that would require disclosure under the rules and regulations of
the Commission applicable to the CompuServe Merger, except as described herein.
See "The AOL Transaction" and "Management of WorldCom Following the
MCI/WorldCom Merger."
Information Regarding James C. Allen
In connection with the negotiation and approval of the BFP Merger Agreement,
Mr. Ebbers indicated his expectation that the WorldCom Board would consider the
nomination of an individual designated by the BFP Board of Directors (who is
expected to be Mr. James C. Allen) for election as a director of WorldCom
following the effective time of the BFP Merger. Mr. Allen has been Vice
Chairman and Chief Executive Officer and a director of BFP since its inception
in November 1993. Mr. Allen served as President and Chief Operating Officer of
Brooks Telecommunications Corporation, a founder of BFP, from April 1993 until
it was merged with BFP in January 1996; prior thereto, he was Chief Operating
Officer and Chief Financial Officer of David Lipscomb University. Since January
1, 1994, Mr. Allen has not had any transactions with WorldCom or any of its
subsidiaries that would require disclosure under the rules and regulations of
the Commission applicable to the CompuServe Merger, except as described herein.
See "The BFP Merger" and "Management of WorldCom Following the MCI/WorldCom
Merger."
The BFP Merger will result in the vesting of Mr. Allen's 66,667 shares of BFP
stock options exercisable at $12.50 per share. In addition, BFP entered into a
Change of Control Severance Agreement with Mr. Allen as of April 8, 1997. The
agreement generally provides that if Mr. Allen's employment is terminated,
within a three year
39
<PAGE> 40
period, following a change in control of BFP for any reason other than for
death, disability or cause or by Mr. Allen for "good reason" (including
changes in status, office, title or reporting requirements, other than any
change which is inherent in the BFP Merger, and/or compensation or geographic
location), Mr. Allen would be paid an amount equal to the product of the sum of
Mr. Allen's annual base salary rate and annual bonus target in effect on the
date of termination and a "termination multiplier" (which, in the event of a
termination of Mr. Allen occurring within the first eighteen months following
any change in control, would be three, and, in the event of a termination at
any time thereafter during said three year period would be a fraction the
numerator of which would be the days remaining in said three year period and
the denominator of which would be 365). In 1997, Mr. Allen's annual base salary
rate was $375,000, and his annual bonus target was $281,000. In addition, if
any payment to Mr. Allen would be subject to the excise tax imposed by Section
4999 of the Code or any interest or penalties with respect to such tax, Mr.
Allen would also be entitled to receive an additional payment (net of income
and excise taxes) to compensate him for such tax, interest or penalties. In the
event of a termination occurring within the first eighteen months following the
effective time of the BFP Merger, the surviving corporation in the BFP Merger
would be obligated to continue Mr. Allen's medical insurance benefits for a
three year period following termination and, in the event of a termination
thereafter during said three year period, would be obligated to continue such
benefits until the end of said three year period. Under the terms of the Change
of Control Severance Agreement, BFP has agreed to require the surviving
corporation in the BFP Merger to expressly assume and agree to perform said
agreement. The Change of Control Severance Agreement contains non-competition
and non-solicitation provisions binding on Mr. Allen in the event of payment of
benefits thereunder until the sooner to occur of (i) the end of the eighteen
month period following the date of termination or (ii) the end of such three
year period.
MANAGEMENT OF WORLDCOM FOLLOWING THE MCI/WORLDCOM MERGER
General
Pursuant to the terms of the MCI/WorldCom Merger Agreement, WorldCom has
agreed to cause the WorldCom Board of Directors as of the MCI/WorldCom
Effective Time to consist of fifteen members, which shall consist of eight
members designated by WorldCom from among directors of WorldCom, five members
designated by MCI from among directors of MCI, and two additional members
designated by WorldCom from among pending acquisitions of WorldCom; provided
that the persons designated by each party are required to be reasonably
acceptable to the other party. As of the date hereof, the WorldCom Board is
comprised of 11 directors. As of the date hereof, other than Messrs. Roberts,
Ebbers, Sidgmore, Taylor and Sullivan, neither WorldCom nor MCI had designated
the persons to serve as directors after the MCI/WorldCom Effective Time.
Additionally, the AOL Agreement provides that, if so requested at least five
business days before the closing of the AOL Transaction, WorldCom will cause
Stephen M. Case, Chairman of the Board, Chief Executive Officer and President
of AOL, to be appointed to the WorldCom Board. Mr. Case has made such request.
See "Management and Principal Shareholders -- Information Regarding Stephen M.
Case." Further, in connection with the negotiation and approval of the BFP
Merger Agreement, Mr. Ebbers indicated his expectation that the WorldCom Board
of Directors would consider the nomination of an individual designated by the
BFP Board of Directors (who is expected to be Mr. James C. Allen, Vice Chairman
and Chief Executive Officer of BFP) for election as a director of WorldCom
following the effective time of the BFP Merger. See "Management and Principal
Shareholders -- Information Regarding James C. Allen." If, prior to the
MCI/WorldCom Effective Time, any of the persons named by either WorldCom or MCI
to serve on the MCI WorldCom Board of Directors as of the MCI/WorldCom
effective time declines or is unable to serve as a director, the party that
designated such individual may name a replacement to become a director. The
directors of MCI WorldCom will be elected annually. See "Management and
Principal Shareholders" for certain information regarding the current
management of WorldCom.
Neither of the two director designees of MCI beneficially owned any shares of
WorldCom Common Stock as of the date hereof. As of November 30, 1997, neither
Mr. Allen nor Mr. Case beneficially owned any shares of WorldCom Common Stock.
As of such date, Mr. Allen beneficially owned 319,885 shares of BFP Common
Stock which, based on assumed BFP exchange ratios of 1.65 and 1.85 (the minimum
and maximum possible exchange ratios, respectively), would be converted into
the right to receive 527,810 shares and 591,787 shares, respectively, of
WorldCom Common Stock as a result of the BFP Merger. Additional information
about such potential director
40
<PAGE> 41
designees is contained under the captions "Management and Principal
Shareholders" as well as the WorldCom 1996 Form 10-K and WorldCom's Current
Report on Form 8-K/A-2 filed of even date herewith. See "Management and
Principal Shareholders--Information Regarding Stephen M. Case" and
"--Information Regarding James C. Allen" for additional information regarding
such individuals.
For additional information concerning certain interests of directors of MCI
and WorldCom in the MCI/WorldCom Merger and certain transactions between
WorldCom and MCI, see "The MCI/WorldCom Merger--Interests of Certain Persons in
the MCI/WorldCom Merger," "--Management After the MCI/WorldCom Merger," and
"--Certain Related Transactions."
Compensation of Directors
WorldCom's directors are currently paid fees of $22,500 per year and $1,000
per meeting of the WorldCom Board plus certain expenses. Committee members are
currently paid a fee of $750 for any committee meeting on the same day as a
WorldCom Board meeting and $1,000 for any other committee meeting, plus certain
expenses. The chairman of each committee receives an additional $3,000 per
year.
Pursuant to WorldCom's Third Amended and Restated 1990 Stock Option Plan,
each non-employee director receives annually a non-discretionary grant of
options to purchase 5,000 shares of WorldCom Common Stock at the fair market
value of such stock on the date of grant. Such options are immediately
exercisable and expire on the earliest to occur of (a) ten years following the
date of grant, (b) three months following retirement, (c) 12 months following
termination of service due to disability or death, (d) upon cessation of
service for reasons other than retirement, death or disability, or (e) the date
of consummation of a specified change in control transaction, defined generally
to include the dissolution or liquidation of WorldCom, a reorganization, merger
or consolidation of WorldCom in which WorldCom is not the surviving
corporation, or a sale of substantially all of the assets or 80% or more of the
outstanding stock of WorldCom to another entity. The exercise price may be paid
in cash or, in the discretion of the committee which administers the plan,
WorldCom Common Stock. In the discretion of such committee, shares receivable
on exercise may be withheld to pay applicable taxes on the exercise.
Executive Officers
WorldCom has agreed to cause Bert C. Roberts, Jr. to be appointed Chairman of
MCI WorldCom, and to cause the senior management of MCI WorldCom to be as
previously agreed between the parties. Pursuant to the MCI/WorldCom Merger
Agreement, Bernard J. Ebbers will be the President and Chief Executive Officer
of MCI WorldCom. In addition, Gerald H. Taylor, currently Chief Executive
Officer of MCI, will become President and Chief Executive Officer of MCI
WorldCom International, responsible for all strategy, operations and ventures
outside of the U.S.; Timothy F. Price, currently President and Chief Operating
Officer of MCI, will become President and Chief Executive Officer of MCI
WorldCom's U.S. communications operating subsidiary. The U.S. operating
subsidiary will be responsible for the communications business in the United
States, including all sales and marketing, customer service, product
development, and network operations. John W. Sidgmore, currently Vice Chairman
and Chief Operations Officer of WorldCom, will become President and Chief
Executive Officer of Internet & Technology, responsible for information
technology (IT) services, including MCI Systemhouse, architecture, design, and
planning for the global network, and managing MCI WorldCom's largest commercial
Internet relationships; and Scott D. Sullivan will continue to serve as Chief
Financial Officer of MCI WorldCom.
Additional information about the persons referred to in the preceding
paragraph follows:
Bert C. Roberts, Jr., age 55, 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 BT since October 1994; and a non-executive director
of The News Corporation Limited, a global multi-media company located in
Australia, since 1995.
41
<PAGE> 42
Bernard J. Ebbers, age 56, has been President and Chief Executive Officer of
WorldCom since April 1985. Mr. Ebbers has served as director of WorldCom
since 1983.
Gerald H. Taylor, age 56, 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 was a non-executive
director of BT from November 1996 to November 1997.
Timothy F. Price, age 44, 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.
John W. Sidgmore, age 46, serves as Vice Chairman of the Board and Chief
Operations Officer of WorldCom. Mr. Sidgmore has been a director of WorldCom
since the MFS Merger and has served as a director of MFS since August 1996.
Mr. Sidgmore was President and Chief Operating Officer of MFS from August 1996
until the MFS Merger and has been Chief Executive Officer and a director of
UUNET from June 1994 to the present. Mr. Sidgmore has also held the position
of President of UUNET from June 1994 to August 1996 and from January 1997 to
the present. From 1989 to 1994, he was President and Chief Executive Officer
of CSC Intelicom, a telecommunications software company. Mr. Sidgmore is a
director of Saville Systems PLC and EarthLink Network, Inc.
Scott D. Sullivan, age 36, serves as Chief Financial Officer and Secretary of
WorldCom. From the time of the merger of WorldCom with Advanced
Telecommunications Corporation in December 1992 until December 1994, Mr.
Sullivan served as Vice President and Assistant Treasurer of WorldCom. From
1989 until 1992, Mr. Sullivan served as an executive officer of two
long-distance companies, including Advanced Telecommunications Corporation.
From 1983 to 1989, Mr. Sullivan served in various capacities with KPMG Peat
Marwick LLP. Mr. Sullivan has served as a director of WorldCom since March
1996.
Additional information about such persons is contained under the captions
"The MCI/WorldCom Merger -- Business, Management and Principal Stockholders of
MCI" and "Management and Principal Shareholders." See "The MCI/WorldCom Merger
- -- Interests of Certain Persons in the MCI/WorldCom Merger" and "--Management
After the MCI/WorldCom Merger" for a description of certain interests of MCI
and WorldCom executive officers in the MCI/WorldCom Merger. For additional
information regarding the executive officers of MCI, see WorldCom's Current
Report on Form 8-K/A-2 filed of even date herewith. For additional information
regarding the executive officers of WorldCom, see the WorldCom 1996 Form 10-K.
For information concerning the compensation paid to the chief executive
officer and certain other executive officers of each of WorldCom and MCI for
the 1996 fiscal year, see the WorldCom 1996 Annual Report on Form 10-K and
WorldCom's Current Report on Form 8-K/A-2 filed of even date herewith.
Compensation of Executive Officers
WorldCom relies on the Compensation and Stock Option Committee of the
WorldCom Board (the "Compensation Committee") to recommend the form and amount
of compensation of its executive officers. It is anticipated that, when the
Compensation Committee meets to determine such compensation after the
MCI/WorldCom Closing Date, the Compensation Committee will evaluate its
policies designed to attract, motivate, reward and retain executives with the
skills, experience and talents required to promote the short-term and long-
42
<PAGE> 43
term performance and growth of WorldCom. Historically, WorldCom's executive
compensation has had three elements: base salary, annual incentive compensation
and long-term incentive compensation.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The following statements are or may constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
"PSLRA"):
(i) certain statements, including possible or assumed future results of
operations of WorldCom, MCI, CompuServe, BFP, ANS and the combined companies
contained in "Risk Factors," "The MCI/WorldCom Merger--Effects of the
MCI/WorldCom Merger; Estimated Synergies" and "Management and Principal
Shareholders--Information Regarding Stephen M. Case," including any forecasts,
projections and descriptions of anticipated cost savings or other synergies
referred to therein, and certain statements incorporated by reference from
documents filed with the Commission by WorldCom and MCI, including any
statements contained herein or therein regarding the development of possible or
assumed future results of operations of WorldCom's and MCI's businesses, the
markets for WorldCom's and MCI's services and products, anticipated capital
expenditures, regulatory developments, competition or the effects of the
MCI/WorldCom Merger, the CompuServe Merger, the AOL Transaction or the BFP
Merger;
(ii) any statements preceded by, followed by or that include the words
"believes," "expects," "anticipates," "intends" or similar expressions; and
(iii) other statements contained or incorporated by reference herein
regarding matters that are not historical facts.
Because such statements are subject to risks and uncertainties, actual
results may differ materially from those expressed or implied by such
forward-looking statements; factors that could cause actual results to differ
materially include, but are not limited to, those discussed under "Risk
Factors." Potential purchasers of WorldCom Common Stock are cautioned not to
place undue reliance on such statements, which speak only as of the date
thereof.
The independent public accountants for WorldCom have not examined or compiled
the accompanying forward-looking statements or any forecasts or other
projections referred to herein and, accordingly, do not provide any assurance
with respect to such statements.
The cautionary statements contained or referred to in this section should be
considered in connection with any subsequent written or oral forward-looking
statements that may be issued by WorldCom or MCI or persons acting on its or
their behalf. WorldCom does not undertake any obligation to release publicly
any revisions to such forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
RISK FACTORS
Potential purchasers of WorldCom securities should consider carefully all of
the information contained in this Form 8-K/A, including the following factors:
RISKS RELATED TO THE MCI/WORLDCOM MERGER AND OTHER ACQUISITIONS
Uncertainties in Integrating the Acquired Companies and Achieving Cost Savings
WorldCom has entered into the MCI/WorldCom Merger Agreement, the BFP Merger,
the CompuServe Merger Agreement and the AOL Agreement, in each case with the
expectation that the transactions will result in certain benefits, including,
without limitation, cost savings, operating efficiencies, revenue enhancements
and other synergies. See "The MCI/WorldCom Merger--Effects of the MCI/WorldCom
Merger; Estimated Synergies." Achieving the benefits of the MCI/WorldCom Merger
(which would be significantly larger than previous acquisitions completed by
WorldCom), the BFP Merger, the CompuServe Merger and the AOL Transaction, will
43
<PAGE> 44
depend in part upon the integration of the businesses of WorldCom together with
MCI, BFP, CompuServe and ANS, in an efficient manner, and there can be no
assurance that this will occur. The consolidation of operations will require
substantial attention from management. The diversion of management attention
and any difficulties encountered in the transition and integration processes
could have a material adverse effect on the revenues, levels of expenses and
operating results of the combined companies. There can be no assurance that the
combined companies will realize any of the anticipated benefits of the
CompuServe Merger, the MCI/WorldCom Merger, the BFP Merger or the AOL
Transaction. For a discussion of other factors and assumptions related to the
synergy estimates, see "The MCI/WorldCom Merger--Effects of the MCI/WorldCom
Merger; Estimated Synergies."
Necessity of Receiving Governmental Approvals Prior to the MCI/WorldCom Merger;
Risks Associated with Failure to Obtain Approvals of Certain Governmental
Authorities
The consummation of the MCI/WorldCom Merger is conditioned upon the
expiration or termination of the applicable waiting period under the
Hart-Scott-Rodino Act of 1976, and confirmation from the Commission of the
European Communities (the "European Commission") by way of a decision under
Council Regulation 4064/89 (the "Merger Control Regulation") that the
MCI/WorldCom Merger does not create or strengthen a dominant position as a
result of which competition would be significantly impeded in the European
common market. In addition, other filings with, notifications to and
authorizations and approvals of, various governmental agencies, both domestic
and foreign, with respect to the transactions contemplated by the MCI/WorldCom
Merger Agreement, relating primarily to the FCC and state PUCs, must be made
and received prior to consummation of the MCI/WorldCom Merger. There can be no
assurance that such authorizations, approvals or decisions will be granted, or,
if granted will not contain certain material conditions or restrictions, that
an injunction will not be issued before or after receipt of MCI and WorldCom
shareholder approval by a court of competent jurisdiction enjoining the
consummation of the MCI/WorldCom Merger or that a challenge to the MCI/WorldCom
Merger on the grounds that it is not compatible with the European common market
will not be made, or if a challenge is made, what the result will be.
Consummation of the MCI/WorldCom Merger is subject to additional approvals
from certain governmental authorities. If such approvals have not been
received at such time as all other material conditions to the MCI/WorldCom
Merger have been satisfied or waived, MCI and WorldCom may nonetheless
determine to consummate the MCI/WorldCom Merger. Although MCI and WorldCom are
seeking such approvals, it is uncertain whether such approvals will be timely
received from, among others, every jurisdiction in which MCI and WorldCom are
authorized to do business. If MCI and WorldCom determine to consummate the
MCI/WorldCom Merger without having received all such approvals, no assurance
can be given that any resulting loss of business would not have a material
adverse effect on the businesses, prospects, financial condition or results of
operations of WorldCom and MCI on a combined basis. See "The MCI/WorldCom
Merger -- Certain Regulatory Filings and Approvals."
The Effect of Stock Price Fluctuations
The relative stock prices of WorldCom Common Stock in the future may vary
significantly from the prices as of the date hereof. These variances may be due
to changes in the businesses, operations, results and prospects of WorldCom, as
well as MCI, BFP, CompuServe and ANS, market assessments of the likelihood that
the CompuServe Merger, the MCI/WorldCom Merger, the BFP Merger and the AOL
Transaction will be consummated and the timing thereof, the effect of any
conditions or restrictions imposed on or proposed with respect to any of the
combined companies by regulatory agencies in connection with or following
consummation of the CompuServe Merger, the MCI/WorldCom Merger, the BFP Merger
or the AOL Transaction, general market and economic conditions, and other
factors. In addition, the stock market generally has experienced significant
price and volume fluctuations. These market fluctuations could have a material
adverse effect on the market price or liquidity of WorldCom Common Stock.
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<PAGE> 45
RISKS RELATING TO THE BUSINESSES AND OPERATIONS OF THE COMBINED COMPANIES
Debt Service, Interest Rate Fluctuations, Other Restrictive Covenants and
Capital Spending
In connection with the MCI/WorldCom Merger, WorldCom has agreed to pay BT
$51.00 in cash without interest for each share of MCI Class A Common Stock it
owns, or approximately $7 billion in the aggregate. Additionally, WorldCom has
paid BT fees of $465 million. See "The MCI/WorldCom Merger--The BT Agreement."
WorldCom expects to fund this commitment through a combination of bank and bond
financing and believes that the indebtedness incurred in connection with
WorldCom's proposed acquisitions may have an effect on WorldCom's credit
rating. Increases in interest rates on WorldCom's debt would have an adverse
effect upon WorldCom's reported net income and cash flow. WorldCom believes
that the combined operations of WorldCom, MCI, CompuServe, ANS and BFP would
generate sufficient cash flow to service WorldCom's debt and capital
requirements upon consummation of the MCI/WorldCom Merger, the CompuServe
Merger, the AOL Transaction and the BFP Merger; however, economic downturns,
increased interest rates and other adverse developments, including factors
beyond WorldCom's control, could impair its ability to service its
indebtedness. In addition, the cash flow required to service WorldCom's debt
may reduce its ability to fund internal growth, additional acquisitions and
capital improvements.
The development of the businesses of the combined companies (including MCI,
CompuServe, ANS and BFP) and the installation and expansion of their domestic
and international networks would continue to require significant capital
expenditures. Failure to have access to sufficient funds for capital
expenditures on acceptable terms or the failure to achieve capital expenditure
synergies may require the combined companies to delay or abandon some of their
plans, which could have a material adverse effect on the success of the
proposed mergers and the combined companies.
Acquisition Integration
A major portion of WorldCom's growth in recent years has resulted from
acquisitions, which involve certain operational and financial risks.
Operational risks include the possibility that an acquisition does not
ultimately provide the benefits originally anticipated by WorldCom's
management, while WorldCom continues to incur operating expenses to provide the
services formerly provided by the acquired company. Financial risks involve the
incurrence of indebtedness as a result of the acquisition and the consequent
need to service that indebtedness. In addition, the issuance of stock in
connection with acquisitions dilutes the voting power and may dilute the
economic interests of existing shareholders. In carrying out its acquisition
strategy, WorldCom attempts to minimize the risk of unexpected liabilities and
contingencies associated with acquired businesses through planning,
investigation and negotiation, but there can be no assurance that it will be
successful in doing so. Nor can there be any assurance that WorldCom will be
successful in identifying attractive acquisition candidates or completing
additional acquisitions on favorable terms.
Risks of International Business
WorldCom and MCI derive substantial revenues from providing international
communications services to United States commercial and carrier customers. Such
operations are subject to certain risks such as changes in United States or
foreign government regulatory policies, disruption, suspension or termination
of operating agreements, carrier alliances and currency fluctuations. In
particular, WorldCom's and MCI's revenues and costs of sales are sensitive to
changes in international settlement rates and international traffic routing
patterns. The rates that WorldCom and MCI can charge their customers for
international services may decrease in the future due to the entry of new
carriers with substantial resources, aggressiveness on the part of new or
existing carriers, the widespread resale of international private lines to
provide switched voice services, the provision of international services via
non-traditional means including the Internet, the consummation of mergers,
joint ventures and alliances among large international carriers that facilitate
targeted pricing and cost reductions, and the rapid growth of international
circuit capacity due to the deployment of new undersea fiber optic cables and
new high capacity satellite systems in the Atlantic, Pacific and Indian Ocean
regions.
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Risks of Overseas Business Operations
WorldCom and MCI derive substantial revenues from providing services to
customers in overseas locations, particularly the United Kingdom, Germany and
Mexico. Such operations are subject to certain risks such as changes in the
legal and regulatory policies of the foreign jurisdiction, local political and
economic developments, currency fluctuations, exchange controls, royalty and
tax increases, retroactive tax claims, expropriation, and import and export
regulations and other laws and policies of the United States affecting foreign
trade, investment and taxation. In addition, in the event of any dispute
arising from foreign operations, WorldCom and MCI may be subject to the
exclusive jurisdiction of foreign courts and may not be successful in
subjecting foreign persons or entities to the jurisdiction of the courts in the
United States. WorldCom and MCI may also be hindered or prevented from
enforcing their rights with respect to foreign governments because of the
doctrine of sovereign immunity. There can be no assurance that the laws,
regulations or administrative practices of foreign countries relating to
WorldCom or MCI's ability to do business in that country will not change. Any
such change could have a material adverse effect on the business and financial
condition of the combined companies.
Rapid Technological Change; Dependence upon Product Development
The telecommunications industry is subject to rapid and significant changes
in technology. While WorldCom does not believe that, for the foreseeable
future, these changes will either materially or adversely affect the continued
use of fiber optic cable or materially hinder its ability to acquire necessary
technologies, the effect of technological changes, including changes relating
to emerging wireline and wireless transmission and switching technologies, on
the businesses of the combined companies cannot be predicted.
The market for the data communications products and services of MCI, UUNET
Technologies, Inc. ("UUNET"), CompuServe and ANS, including Internet access and
related products, is characterized by rapidly changing technology, evolving
industry standards, emerging competition and frequent new product and service
introductions. There can be no assurance that the combined companies will
successfully identify new product and service opportunities and develop and
bring new products and services to market in a timely manner. The combined
companies also will be at risk from fundamental changes in the way data
communications, including Internet access, services are marketed and delivered.
The combined companies' Internet service strategy assumes that the Transmission
Control Protocol/Internet Protocol, utilizing fiber optic or copper-based
telecommunications infrastructures, will continue to be the primary protocol
and transport infrastructure for Internet-related services. Emerging transport
alternatives include wireless cable modems and satellite delivery of Internet
information; alternative open protocol and proprietary protocol standards have
been or are being developed. WorldCom's pursuit of necessary technological
advances may require substantial time and expense, and there can be no
assurance that WorldCom will succeed in adapting its data communications
services business to alternate access devices, conduits and protocols.
Regulation Risks
WorldCom's and MCI's operating subsidiaries are subject to varying degrees of
federal, state, local and international regulation. In the United States,
WorldCom's and MCI's subsidiaries are most heavily regulated by the states,
especially for the provision of local exchange services. Each such subsidiary
must be separately certified in each state to offer local exchange and
intrastate long distance services. No state, however, subjects WorldCom or MCI
to price cap or rate of return regulation, nor is WorldCom or MCI currently
required to obtain FCC authorization for installation or operation of its
network facilities used for domestic services, other than licenses for specific
terrestrial microwave and satellite earth station facilities which utilize
radio frequency spectrum. FCC approval is required, however, for the
installation and operation of international facilities and services. WorldCom
and MCI are also subject to varying degrees of regulation in the foreign
jurisdictions in which they conduct business including authorization for the
installation and operation of network facilities. Although the trend in
federal, state, local and international regulation appears to favor increased
competition, no assurance can be given that changes in current or future
regulations adopted by the FCC, state or foreign regulators or legislative
initiatives in the United States and abroad would not have a material adverse
effect on WorldCom.
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On February 8, 1996, President Clinton signed the Telecommunications Act of
1996 (the "Telecom Act"), which permits the Bell Operating Companies (the
"BOCs") to provide domestic and international long distance services to
customers located outside of the BOCs' home regions; permits a petitioning BOC
to provide domestic and international long distance service to customers within
its operating area on a state by state basis upon a finding by the FCC that a
petitioning BOC has satisfied certain criteria for opening up its local
exchange network to competition and that its provision of long distance
services would further the public interest; and removes existing barriers to
entry into local service markets. Additionally, there were significant changes
in: the manner in which carrier-to-carrier arrangements are regulated at the
federal and state level; procedures to revise universal service standards; and
penalties for unauthorized switching of customers. The FCC has instituted and,
in most instances completed, proceedings addressing the implementation of this
legislation.
In implementing the Telecom Act, the FCC established nationwide rules
designed to encourage new entrants to participate in the local services markets
through interconnection with the incumbent local exchange carriers ("ILECs"),
resale of ILECs' retail services, and use of individual and combinations of
unbundled network elements. These rules set the groundwork for the statutory
criteria governing BOC entry into the long distance market. Appeals of the FCC
order adopting those rules were consolidated before the United States Court of
Appeals for the Eighth Circuit (the "Eighth Circuit"). The Eighth Circuit found
constitutional challenges to certain practices implementing cost provisions of
the Telecom Act that were ordered by certain state PUCs to be premature, but
vacated significant portions of the FCC's nationwide pricing rules, and vacated
an FCC rule requiring that unbundled network elements be provided on a combined
basis. The Solicitor General, on behalf of the FCC, and certain other parties,
including WorldCom and MCI, sought certiorari in the United States Supreme
Court. Certain BOCs have also raised constitutional challenges to provisions
of the Telecom Act restricting BOCs provision of long distance services,
manufacturing of telecommunications equipment, electronic publishing and alarm
monitoring services. On December 31, 1997, the United States District Court
for the Northern District of Texas ruled that these restrictions violate the
Bill of Attainder Clause of the U.S. Constitution. Currently, this decision
only applies to SBC Corporation ("SBC"), US WEST Communications Group ("US
WEST"), and Bell Atlantic Corporation ("Bell Atlantic"). AT&T Corp. ("AT&T"),
MCI, the U.S. Department of Justice and the FCC announced that they will appeal
the decision and have sought a stay of the ruling. WorldCom cannot predict
either the ultimate outcome of these or future challenges to the Telecom Act,
any related appeals of regulatory or court decisions, or the eventual effect on
its businesses or the industry in general.
The FCC has denied applications filed by Ameritech Corporation ("Ameritech"),
SBC and BellSouth Corporation ("BellSouth") seeking authority to provide
inter-local access transport area ("interLATA") long distance service in
Michigan, Oklahoma and South Carolina, respectively. SBC has appealed the FCC's
denial of its application to the Eighth Circuit. In its denial of an Ameritech
application and a BellSouth application, the FCC provided detailed guidance to
applicants regarding the obligations of the applicants, the format of future
applications, the content of future applications, and the review standards that
it will apply in evaluating any future applications. The National Association
of Regulatory Utility Commissioners and several state regulatory commissions
have appealed jurisdictional aspects of that Ameritech application denial to
the Eighth Circuit. WorldCom cannot predict either the outcome of these
appeals, or the BOCs' willingness to abide by these FCC guidelines, or the
timing or outcome of future applications submitted to the FCC. Additionally,
the FCC is presently considering BellSouth's application for authority to
provide interLATA service in Louisiana. Other BOCs have announced their
intention to file applications at the FCC for authority to provide interLATA
services. WorldCom cannot predict the outcome of these proceedings.
On May 7, 1997, the FCC announced that it will issue a series of orders that
will reform Universal Service Subsidy allocations and adopted various reforms
to the existing rate structure for interstate access services provided by the
ILECs that are designed to reduce access charges, over time, to more
economically efficient levels and rate structures. It also affirmed that
information service providers (including, among others, Internet service
providers ("ISPs")) should not be subject to existing access charges ("ISP
Exemption"). Petitions for reconsideration of, among other things, the access
service and ISP Exemption related actions were filed before the FCC and appeals
taken to various United States Courts of Appeals. On reconsideration, the FCC
in significant part affirmed the access charge and ISP Exemption actions, and
the court appeals have been consolidated before the Eighth Circuit. Also,
several state agencies have started proceedings to address the reallocation of
implicit subsidies contained in
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<PAGE> 48
access rates and retail service rates to state universal service funds. Access
charges are a principal component of the combined companies' telecommunication
expense. Additionally, modification of the ISP Exemption could have an adverse
effect on the combined companies' Internet-related services business. WorldCom
cannot predict either the outcome of these appeals or whether or not the
result(s) will have a material impact upon the consolidated financial position
or results of operations of the combined companies.
The FCC issued on December 24, 1996 a Notice of Inquiry to seek comment on
whether it should consider various actions relating to interstate information
services and the Internet. The FCC recognized that these services and recent
technological advances may be constrained by current regulatory practices that
have their foundations in traditional circuit switched telecommunications
services and technologies. Based upon this and other proceedings, the FCC may
permit telecommunications companies, BOCs or others to increase the scope or
reduce the cost of their Internet access services. WorldCom cannot predict the
effect that the Notice of Inquiry, the Telecom Act or any future legislation,
regulation or regulatory changes may have on the consolidated financial
position or results of operations of the combined companies.
In December 1996, the FCC adopted a new policy that makes it easier for
United States international carriers to obtain authority to route international
public switched voice traffic to and from the United States outside of the
traditional settlement rate and proportionate return regimes. In February 1997,
the United States entered into a World Trade Organization Agreement (the "WTO
Agreement") that should have the effect of liberalizing the provision of
switched voice telephone and other telecommunications services in scores of
foreign countries over the next several years. In June 1997, in order to comply
with United States commitments to the WTO Agreement, the FCC proposed to
implement new rules that would liberalize existing policies regarding (i) the
services that may be provided by foreign affiliated United States international
common carriers, including carriers controlled or more than 25 percent owned by
foreign carriers that have market power in their home markets, and (ii) the
provision of international switched voice services outside of the traditional
settlement rate and proportionate return regimes. The FCC voted on November
25, 1997 to adopt these new rules but has not yet established an effective date
for the rules.
In August 1997, the FCC adopted mandatory settlement rate benchmarks. These
benchmarks are intended to reduce the rates that U.S. carriers pay foreign
carriers to terminate traffic in their home countries. The FCC will also
prohibit a United States carrier affiliated with a foreign carrier from
providing facilities-based service to the foreign carrier's home market until
and unless the foreign carrier has implemented a settlement rate within the
benchmark. The FCC also adopted new rules that will liberalize the provision of
switched services over private lines to World Trade Organization member
countries, by allowing such services on routes where 50% or more of United
States billed traffic is being terminated in the foreign country at or below
the applicable settlement rate benchmark or where the foreign country's rules
concerning provision of international switched services over private lines are
deemed equivalent to United States rules.
Although the FCC's new policies and implementation of the WTO Agreement may
result in lower costs to the combined companies, including MCI, to terminate
international traffic, there is a risk that the revenues that the combined
companies, including MCI, receive from inbound international traffic may
decrease to an even greater degree. The implementation of the WTO Agreement may
also make it easier for foreign carriers with market power in their home
markets to offer United States and foreign customers end-to-end services to the
disadvantage of the combined companies, which may continue to face substantial
obstacles in obtaining from foreign governments and foreign carriers the
authority and facilities to provide such end-to-end services. Further, many
foreign carriers have challenged, in court and at the FCC, the FCC's order
adopting mandatory settlement rate benchmarks. If the FCC's settlement rate
benchmark order were to be overturned, it would accelerate the full-fledged
entry of foreign carriers into the United States and make it far easier for
foreign carriers to route international traffic into the United States at low,
cost-based termination rates, while United States carriers would continue to
have little choice but to route international traffic into most foreign
countries at much higher, above cost, settlement rates.
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Competition
Virtually every aspect of the telecommunications industry is extremely
competitive, and WorldCom expects that competition will intensify in the
future. The combined companies (including MCI, CompuServe, ANS and BFP) face
significant competition from carriers and other companies with greater market
share and financial resources. The combined companies compete domestically with
incumbent providers, which have historically dominated local
telecommunications, and with long distance carriers, for the provision of long
distance services. Sometimes the incumbent provider offers both local and long
distance services. The ILECs presently have numerous advantages as a result of
their historic monopoly control over local exchanges. A continuing trend toward
business combinations and alliances in the telecommunications industry may
create significant new competitors to the combined companies. Many of the
combined companies' existing and potential competitors have financial,
personnel and other resources significantly greater than those of the combined
companies. The combined companies also face competition from one or more
competitors in every area of their businesses, including competitive access
providers operating fiber optic networks, in some cases in conjunction with the
local cable television operator. AT&T and Sprint Corporation ("Sprint") have
indicated their intention to offer local telecommunications services in major
United States markets using their own facilities, including in AT&T's case, the
announced acquisition of the facilities and business of Teleport Communications
Group, Inc., or by resale of the local exchange carriers' or other providers'
services. In addition, the combined companies compete with equipment vendors
and installers and telecommunications management companies with respect to
certain portions of their businesses.
Overseas, the combined companies compete with incumbent providers, many of
which still have special regulatory status and the exclusive rights to provide
certain services, and virtually all of which have historically dominated their
local, domestic long distance and international services business. These
incumbent providers have numerous advantages, including existing facilities,
customer loyalty and substantial financial resources. The combined companies
also compete with other service providers, many of which are affiliated with
incumbent providers in other countries. Typically, the combined companies must
devote extensive resources to obtaining regulatory approvals necessary to
operate overseas, and then to obtaining access to and interconnection with the
incumbent's network on a non-discriminatory basis.
The combined companies may also be subject to additional competition due to
the development of new technologies and increased availability of domestic and
international transmission capacity. For example, even though fiber optic
networks, such as that of WorldCom, are now widely used for long distance
transmission, it is possible that the desirability of such networks could be
adversely affected by changing technology. The telecommunications industry is
in a period of rapid technological evolution, marked by the introduction of new
product and service offerings and increasing satellite and fiber optic
transmission capacity for services similar to those provided by the combined
companies. WorldCom cannot predict which of many possible future product and
service offerings will be important to maintain its competitive position or
what expenditures will be required to develop and provide such products and
services.
Under the Telecom Act and ensuing federal and state regulatory initiatives,
barriers to local exchange competition are being removed. The introduction of
such competition, however, also establishes, in part, the predicate for the
BOCs to provide in-region interexchange long distance services, if the
constitutionality of the Telecom Act is upheld. The BOCs are currently allowed
to offer certain "incidental" long distance service in-region and to offer
out-of-region long distance services. Once the BOCs are allowed to offer
in-region long distance services, they could be in a position to offer single
source local and long distance service similar to that being offered by the
combined companies. WorldCom expects that the increased competition made
possible by regulatory reform will result in certain additional pricing and
margin pressures in the domestic telecommunications services business. Such of
the additional pressures as may result from BOC provision of in-region
interexchange long distance services may be accelerated if the ruling of the
United States District Court for the Northern District of Texas on the
constitutionality of the Telecom Act's restrictions is not stayed or ultimately
upheld on appeal.
The combined companies will also compete in offering data communications
services, including Internet access and related services. This is also an
extremely competitive business. WorldCom expects that competition will continue
to intensify in the future. WorldCom believes that the ability of the combined
companies to compete successfully in this arena depends on a number of factors,
including: industry presence; the ability to execute a rapid expansion
strategy; the capacity, reliability and security of its network infrastructure;
ease of access to and navigation on the Internet; the pricing policies of its
competitors and suppliers; the timing of the introduction of new
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products and services by the combined companies and their competitors; the
combined companies' ability to support industry standards; and industry and
general economic trends. The success of the combined companies will depend
heavily upon the combined companies' ability to provide high quality data
communication services, including Internet connectivity and value-added
Internet services, at competitive prices.
Major telecommunications companies have expanded their current services to
compete fully in offering data communication services, including Internet
services, and WorldCom expects additional telecommunications companies to
continue to compete in this arena. WorldCom believes that new competitors,
including large computer hardware, software, media and other technology and
telecommunications companies, will also offer data communications services,
resulting in even greater competition for the combined companies. Certain
companies, including AT&T, GTE Corporation ("GTE"), Intermedia Communications,
Inc., Teleport Communications Group and PSINet, Inc., have obtained or expanded
their Internet access products and services as a result of acquisitions and
strategic investments. Such acquisitions may permit the combined companies'
competitors to devote greater resources to the development and marketing of new
competitive products and services and the marketing of existing competitive
products and services. WorldCom expects these acquisitions and strategic
investments to increase, thus creating significant new competitors to the
combined companies.
As the combined companies continue to expand data communications operations
outside of the United States, the combined companies will be forced to compete
with and buy services from incumbent providers, many of which are
government-owned and/or still have special regulatory status and the exclusive
rights to provide certain essential services. The combined companies will also
encounter competition from companies whose operating styles are substantially
different from those that they usually encounter. For example, in Europe,
WorldCom's subsidiaries compete directly with: (1) telecommunications
companies, such as BT, Deutsche Telecom and others; (2) global
telecommunications alliances such as Global One (Deutsche Telekom AG, France
Telecom and Sprint) and others; and (3) other Internet access providers, such
as Demon Internet Limited. Foreign competitors may also possess a better
understanding of their local markets and may have better working relationships
with, or control of, local telecommunications companies. There can be no
assurance that the combined companies can obtain similar levels of local
knowledge, and failure to obtain that knowledge could place the combined
companies at a serious competitive disadvantage.
Anti-Takeover Provisions
The WorldCom Second Amended and Restated Articles of Incorporation (the
"WorldCom Articles") contain provisions (a) requiring a 70% vote for approval
of certain business combinations with certain 10% shareholders unless approved
by a majority of the continuing members of the WorldCom Board of Directors or
unless certain minimum price, procedural and other requirements are met; (b)
restricting aggregate beneficial ownership of the capital stock of WorldCom by
foreign shareholders to 20% of the total outstanding capital stock, and
subjecting excess shares to redemption; and (c) authorizing WorldCom's Board of
Directors to issue preferred stock in one or more classes without any action on
the part of shareholders. In addition, WorldCom has entered into the Rights
Agreement between WorldCom and The Bank of New York, as Rights Agent, dated as
of August 25, 1996, as amended (the "WorldCom Rights Agreement"), which would
cause substantial dilution to a person or group that attempts to acquire
WorldCom on terms not approved by WorldCom's Board of Directors. Further, the
WorldCom Restated Bylaws (a) contain requirements regarding advance notice of
nomination of directors by shareholders and (b) restrict the calling of special
meetings by shareholders to those owning shares representing not less than 40%
of the votes to be cast. These provisions, including the WorldCom Rights
Agreement, may have an "anti-takeover" effect.
ITEM 7(c). EXHIBITS.
See Exhibit Index.
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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.
Date: January 27, 1998 By: /s/ Scott D. Sullivan
------------------------------------
Scott D. Sullivan
Chief Financial Officer
<PAGE> 52
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
2.1 Amended and Restated Agreement and Plan of Merger by and among WorldCom, Inc. ("WorldCom"), BV
Acquisition, Inc. and Brooks Fiber Properties, Inc. ("BFP"), dated as of October 1, 1997
(incorporated herein by reference to Exhibit 2.1 to BFP's Current Report on Form 8-K dated October
1, 1997 (filed October 6, 1997)(File 0-28036))*
2.2 Purchase and Sale Agreement by and among America Online, Inc., ANS Communications, Inc. and
WorldCom dated as of September 7, 1997 (incorporated herein by reference to Exhibit 2.4 to
WorldCom's Current Report on Form 8-K dated September 7, 1997 (filed September 17, 1997) (File 0-
11258))*
2.3 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))*
2.4 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))*
2.5 Agreement and Plan of Merger by and among WorldCom, H&R Block, Inc., H&R Block Group, Inc.,
CompuServe Corporation and Walnut Acquisition Company L.L.C., dated as of September 7, 1997
(incorporated herein by reference to Exhibit 2.1 to WorldCom's Current Report on Form 8-K dated
September 7, 1997 (filed September 17, 1997) (File 0-11258))*
2.6 Stockholders Agreement by and among H&R Block, Inc., H&R Block Group, Inc., and WorldCom dated as
of September 7, 1997 (incorporated herein by reference to Exhibit 2.2 to WorldCom's Current Report
on Form 8-K dated September 7, 1997 (filed September 17, 1997) (File 0-11258))*
2.7 Standstill Agreement by and among H&R Block, Inc., H&R Block Group, Inc. and WorldCom, dated as of
September 7, 1997 (incorporated herein by reference to Exhibit 2.3 to WorldCom's Current Report on
Form 8-K dated September 7, 1997 (filed September 17, 1997) (File 0-11258))*
</TABLE>
* The Registrant hereby agrees to furnish supplementally a copy of any
omitted schedules to this Form 8-K/A to the Securities and Exchange
Commission upon its request.
