SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period -------- to --------
Commission file number 0-21594
MFS COMMUNICATIONS COMPANY, INC.
(Exact name of registrant as specified in its charter)
Delaware 47-0714388
(State of Incorporation) (I.R.S. Employer Identification No.)
3555 Farnam Street, Suite 200, Omaha, Nebraska 68131
(Address of principal executive offices) (Zip Code)
402-977-5300
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--------- ---------
The number of shares outstanding of each class of the issuer's common
stock, as of April 17, 1996:
Common Stock ($.01 par value)........... 125,743,708 shares
<PAGE>
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Part I - Financial Information
--------------------------------
Page
Item 1. Financial Statements
Consolidated Statements of Operations..................... 1
Consolidated Balance Sheets............................... 2
Consolidated Statement of Changes in Stockholders' Equity. 4
Consolidated Statements of Cash Flows..................... 5
Notes to Consolidated Financial Statements................ 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............ 12
Part II - Other Information
---------------------------
Item 4. Submission of Matters to a Vote of Security Holders...... 22
Item 6. Exhibits and Reports on Form 8-K......................... 22
Signature........................................................ 23
<PAGE>
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended
(dollars in thousand, March 31,
except per share data) 1996 1995
- - ------------------------------------------------------------------------------
<S> <C> <C>
Revenue $186,316 $118,340
Costs and expenses:
Operating expenses 174,173 119,882
Depreciation and amortization 44,609 29,073
General and administrative expenses 34,892 25,941
------- -------
253,674 174,896
------- -------
Loss from operations (67,358) (56,556)
Other income (expense):
Interest income 5,644 3,292
Interest expense (23,626) (9,628)
Other (784) (916)
------- -------
Total other income (expense) (18,766) (7,252)
------- -------
Loss before income taxes (86,124) (63,808)
Income tax expense (100) (100)
------- -------
Net loss (86,224) (63,908)
Dividends on preferred stock (7,072) -
------- -------
Net loss applicable to common
stockholders $(93,296) $(63,908)
======= =======
Net loss per share applicable to
common stockholders $ (0.75) $ (0.50)
======= =======
</TABLE>
- - -----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
<PAGE>
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
-------- ---------
(unaudited)
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents............... $ 92,588 $ 51,182
Marketable securities................... 368,266 85,715
Accounts receivable..................... 155,702 140,302
Costs and earnings in excess of billings on
uncompleted contracts.................. 48,837 45,142
Other current assets.................... 56,321 51,703
-------- --------
Total current assets.................. 721,714 374,044
Networks and equipment, at cost 1,466,254 1,315,952
Less accumulated depreciation
and amortization....................... (245,321) (213,548)
-------- --------
Networks and equipment, net........... 1,220,933 1,102,404
Goodwill, net............................ 279,970 281,848
Other assets, net........................ 124,594 108,838
--------- --------
Total assets.......................... $2,347,211 $1,867,134
========= ========
</TABLE>
<PAGE>
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
-------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Current portion of notes payable
and long-term debt........................ $ 1,819 $ 1,995
Current portion of capital lease obligations 2,079 1,922
Accounts payable........................... 168,235 172,407
Accrued costs and billings in excess of
revenue on uncompleted contracts.......... 30,808 28,686
Accrued compensation....................... 8,505 6,119
Other current liabilities.................. 56,210 63,328
------ ------
Total current liabilities................ 267,656 274,457
Notes payable and long-term debt,
less current portion....................... 1,255,256 692,059
Capital lease obligations, less current portion 31,098 31,412
Other liabilities........................... 27,328 27,902
Minority interest........................... 11,291 10,972
Commitments and contingencies (Note 7)
Stockholders' equity:
Preferred stock, $.01 par value. Authorized
25,000,000 shares:
Series A, 8% cumulative convertible;
issued 95,000 in 1996 and 1995,
variable liquidation preference......... 1 1
Series B, 7 3/4% cumulative convertible;
issued 15,000,000 in 1996 and 1995,
liquidation preference $1.00 per share
plus unpaid dividends................... 150 150
Common stock, $.01 par value. Authorized
400,000,000 shares; issued 125,619,662 in
1996 and 130,260,228 in 1995 (Note 3)... 1,255 651
Additional paid-in capital............... 1,482,442 1,512,394
Deferred charge.......................... (434) (1,017)
Foreign currency adjustment.............. (875) 45
Unrealized investment gain (loss)........ (647) 204
Accumulated deficit...................... (727,310) (555,221)
-------- --------
754,582 957,207
Treasury stock, 5,800,000 shares, at cost - (126,875)
-------- --------
Total stockholders' equity.............. 754,582 830,332
-------- --------
Total liabilities and stockholders'equity $2,347,211 $1,867,134
======== ========
</TABLE>
- - ------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
<PAGE>
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity
For the Three Months Ended March 31, 1996
(unaudited)
<TABLE>
<CAPTION>
Series A Series B Additional Foreign
Preferred Preferred Common Paid-in Deferred Currency
(dollars in thousands) Stock Stock Stock Capital Charge Adjustment
- - ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $ 1 $ 150 $ 651 $1,512,394 $ (1,017) $ 45
Stock dividend on Series A
Preferred Stock - - 1 7,071 - -
Stock options exercised - - 4 7,138 - -
Amortization of deferred
charge - - - - 583 -
Foreign currency adjustment - - - - - (920)
Change in unrealized
investment gain (loss) - - - - - -
Retirement of treasury stock - - (29) (48,053) - -
Stock compensation plan
additions - - - 4,520 - -
Two-for-one stock split - - 628 (628) - -
Net loss - - - - - -
------ ------- ------- ---------- -------- --------
Balance at March 31, 1996 $ 1 $ 150 $ 1,255 $1,482,442 $ (434) $ (875)
====== ======= ======= ========== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Investment Accumulated Treasury
Gain (Loss) Deficit Stock Total
- - ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1, 1996 $ 204 $ (555,221) $ (126,875) $830,332
Stock dividend on Series A
Preferred Stock - (7,072) - -
Stock options exercised - - - 7,142
Amortization of deferred charge - - - 583
Foreign currency adjustment - - - (920)
Change in unrealized
investment gain (loss) (851) - - (851)
Retirement of treasury stock - (78,793) 126,875 -
Stock compensation plan additions - - - 4,520
Two-for-one stock split - - - -
Net loss - (86,224) - (86,224)
-------- ---------- ---------- ----------
Balance at March 31, 1996 $ (647) $ (727,310) $ - $754,582
======== ========== ========== ==========
- - ----------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
(dollars in thousands) 1996 1995
- - ---------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(86,224) $(63,908)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 44,609 29,073
Non cash interest expense 21,145 9,123
Non cash compensation expense 3,341 -
Loss on sale of securities - 749
Changes in assets and liabilities,
net of effects of acquisitions:
Accounts receivable and other current assets (28,174) (6,548)
Other liabilities (7,114) 10,256
------- --------
Net cash used in operating activities (52,417) (21,255)
-------- --------
Cash flows from investing activities:
Purchases of networks and equipment (148,440) (102,212)
Proceeds from maturities and sales of
marketable securities 106,000 154,931
Purchases of marketable securities (386,602) -
Acquisitions of businesses, excluding cash
acquired - (7,761)
Additions to deferred costs and other (4,854) (4,453)
--------- --------
Net cash provided by (used in)
investing activities (433,896) 40,505
---------- --------
Cash flows from financing activities:
Proceeds from issuance of
long term debt and notes payable 619,713 4,575
Payments of debt financing costs (18,672) -
Payments on long term debt (80,464) (2,663)
Proceeds from exercise of stock options 7,142 1,256
---------- --------
Net cash provided by financing activities 527,719 3,168
---------- --------
Net change in cash and cash equivalents 41,406 22,418
Cash and cash equivalents at beginning of period 51,182 21,518
---------- --------
Cash and cash equivalents at end of period $ 92,588 $ 43,936
========== =========
- - --------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
Supplemental schedule of non cash financing and investing activities.
The Company recognized a common stock dividend valued at $7,072 on its preferred
stock in the first quarter of 1996.
The Company capitalized non-cash interest expense of $3,609 and $3,800 in the
three months ended March 31, 1996 and 1995 respectively, on network construction
projects.
In the first quarter of 1995, the Company purchased the stock of companies that
provide telecommunications services in Richmond, Virginia and Denver, Colorado
for $5,369 in cash and the issuance of stock. In connection with the
acquisitions, liabilities were assumed as follows:
Fair value of tangible assets acquired $6,365
Fair value of intangible assets acquired 5,715
Cash paid for stock (5,369)
Stock issued (5,912)
-----
Liabilities assumed $ 799
======
- - -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
<PAGE>
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
1. Basis of Presentation:
The consolidated balance sheet of MFS Communications Company, Inc. and
Subsidiaries (the "Company") at December 31, 1995 was obtained from the
Company's audited balance sheet as of that date. All other financial
statements contained herein are unaudited and, in the opinion of management,
contain all adjustments necessary for a fair presentation of financial
position and results of operations and cash flows for the periods presented.
Such adjustments consist only of normal recurring items. The Company's
accounting policies and certain other disclosures are set forth in the notes
to the annual consolidated financial statements.
Where appropriate, items within the consolidated financial statements have
been reclassified from the previous year to conform to current year
presentation.
2. Income Taxes:
The income tax expense of $100 for the three months ended March 31, 1996 and
1995 resulted from estimated state and foreign tax liabilites.
3. Capital Stock:
In the first quarter of 1996, the Company retired the shares of common stock
that were held in treasury. The value of the treasury shares reduced common
stock, paid in capital and increased the accumulated deficit upon
retirement.
In addition, the Company's stockholders approved an amendment to the
Company's restated certificate of incorporation to increase the number of
authorized shares of common stock to 400,000,000.
On April 1, 1996 the Board of Directors declared a two-for-one common stock
split. The stock split was effected in the form of a stock dividend that
was payable to stockholders of record on April 16, 1996. The voting and
conversion features of the Company's Series A and Series B preferred stock
were adjusted pursuant to their terms to maintain the proportionate rights
of those preferred stocks. In this report, all per share amounts and
numbers of shares have been restated to reflect the stock split. In
addition, an amount equal to the $.01 par value of the shares outstanding at
March 31, 1996 has been transferred from additional paid in capital to
common stock.
4. Loss Per Share:
Loss per common share has been computed using the weighted average number of
shares outstanding for each period. The number of shares used in computing
loss per share, which have been adjusted due to the two-for-one stock split,
was 125,017,000 for the three months ended March 31, 1996 and 128,729,000
for the three months ended March 31, 1995.
<PAGE>
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
5. Long Term Debt:
(a)Loan Agreement:
On January 2, 1996, the Company entered into a $20,000 loan agreement with
an equipment manufacturer and a bank. The loans under the agreement, which
include interest at a variable rate, will be used to purchase equipment
supplied by the manufacturer. The loans must be repaid in semi-annual
principal installments of $2,000 starting June 20, 1996, subject to certain
adjustments, and are collateralized by the equipment purchased. The
agreement contains certain covenants and restrictions similar to the
Company's Credit Facilities. The Company may prepay any amounts under the
agreement without premium or penalty at any time.
(b)The 1996 Senior Discount Notes:
The Company issued 8 7/8% Senior Discount Notes on January 18, 1996 (the
"1996 Senior Discount Notes") and recorded the net proceeds, exclusive of
transaction costs, of approximately $600,000 as long-term debt. The Company
is accruing to the principal amount of the 1996 Senior Discount Notes of
$924,000 through January 15, 2001. Cash interest will not accrue on the
1996 Senior Discount Notes prior to January 15, 2001, however, the Company
may elect to commence the accrual of cash interest at any time prior to that
date. Commencing July 15, 2001, cash interest will be payable
semi-annually.
The 1996 Senior Discount Notes mature on January 15, 2006. On or after
January 15, 2001, the 1996 Senior Discount Notes will be redeemable at the
option of the Company, in whole at any time or in part from time to time, at
the following prices (expressed in percentages of the principal amount
thereof at stated maturity) if redeemed during the twelve months beginning
January 15 of the years indicated below, in each case together with interest
accrued to the redemption date:
Year Percentage
2001..................... 103.32%
2002..................... 102.21%
2003..................... 101.11%
2004 and thereafter...... 100.00%
In addition, under certain conditions related to a change in control of the
Company, the Company may be required to repurchase all or any part of the
1996 Senior Discount Notes as stipulated in the note agreement. The 1996
Senior Discount Notes are senior unsecured obligations of the Company, with
a ranking equal to the 1994 Senior Discount Notes, and are subordinated to
all current and future indebtedness of the Company's subsidiaries, including
trade payables. The 1996 Senior Discount Notes contain certain covenants
which, among other things, restrict the ability of the Company to incur
debt, create liens, enter into sale and leaseback transactions, pay
dividends, make certain restricted payments, enter into transactions with
affiliates, and sell assets or merge with or into another company.
<PAGE>
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
6. Stock Compensation Programs:
The Company has three stock based compensation programs at March 31, 1996.
The programs are described as follows:
(a)Stock Option Plans:
The 1992 and 1993 Stock Plans authorize, among other things, the grant of
options at not less than 100% of the fair market value at the date of the
option grant. The Compensation Committee of the Board of Directors
administers the stock plans. Options vest over a five-year period and are
generally exercisable up to five years after the grant is completely vested.
No options were granted under the 1992 and 1993 plans during the first
quarter of 1996.
(b)Shareworks:
In 1995 the Company implemented an employee benefit plan which is comprised
of a grant plan and a match plan jointly known as Shareworks. The grant
plan enables the Company to grant shares of the Company's common stock to
eligible employees based upon a percentage of the employee's eligible pay,
up to 5%. The original grant vests after three years with any additional
grants vesting immediately once the initial three year period has been met.
On December 29, 1995, the Company granted approximately 64,000 shares of
stock under this part of the plan.
The match plan allows eligible employees to defer between 1% and 10% of
eligible pay to purchase common stock of the Company at the stock price on
each pay period date. The Company matches the shares purchased by the
employee on a one-for-one basis. The stock which is credited to each
employee's account to match the employee's purchase during any calendar
quarter, vests three years after the end of that quarter. The amount
deferred by employees for purchases of stock from January 1, 1996 through
March 31, 1996 was $1,179.
(c)Shareworks Plus:
In 1996 the Company implemented a new employee stock compensation program
which grants stock options with a four-year life and immediate vesting to
certain key executive employees under a program known as Shareworks Plus.
Under this program, the value received by the employee upon exercise is
determined by the rate of increase in the Company's stock price compared to
the rate of increase in the S&P 500 index, measured from the grant date. If
the Company's common stock price performance is at or below the price
performance of the S&P 500 index, or under certain other circumstances
defined in the program, the value to be received by the employee upon
exercise is $0. If the Company's common stock price performance is above
the price performance of the S&P 500 index the value received by the
employee upon exercise, which will normally be paid in common stock of the
Company, increases. In the first quarter, the first grant of options under
Shareworks Plus was made. Subject to the approval of the Company's
Compensation Committee of the Board of Directors, additional grants will be
made quarterly. Terms of the Shareworks Plus program may be modified from
time to time by the Compensation Committee of the Board of Directors.
<PAGE>
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
6. Stock Compensation Programs:(continued)
In the first quarter of 1996, the Company adopted the accounting provisions
of Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS 123). SFAS 123 encourages entities to adopt
the fair value method of accounting for their stock-based compensation
plans. Under the fair value based method, compensation cost for stock based
compensation plans is measured at the grant date based on the fair value of
the award and is recognized over the service period, which for the Company
is the vesting period. For the Company's Shareworks Plus program, the fair
value was determined using option-pricing models that take into account the
stock price at the grant date, the exercise price, a two year expected life
for the option, an estimated volatility of 30% for the Company's stock
price, no expected dividends, and a risk-free interest rate of 5.27% over
the expected life of the options. For the Company's other stock
compensation plan, Shareworks, the fair value of the match shares was
determined by reference to the market value of the stock that was purchased
by the employee and the fair value of the grant shares was determined by the
market value of the stock at the grant date.
The Company recognized compensation expense of $396 related to the
Shareworks plan and $2,945 related to the Shareworks Plus program in the
first quarter of 1996. The pro forma impact of adopting the fair value
method of accounting in the first quarter of 1995 was immaterial primarily
because the number of options granted in the first quarter of 1995 under the
1992 and 1993 Stock Option Plans were not material and the fact that the
Shareworks and Shareworks Plus programs were not yet implemented. During
the initial phase-in period, the effects of applying SFAS 123 for
recognizing compensation cost may not be representative of the effects on
reported net loss or income for future quarters or years because the options
in the Stock Option Plans and the match and grant shares made under the
Shareworks program vest over several years and additional awards will be
made in the future.
Under the Company's Shareworks Plus program, the Company granted 453,004
options during the first quarter of 1996, at an initial exercise price of
$26.62. A total of 55,930 options were exercised during the quarter. The
fair value of the options granted was estimated to be $6.50 per share.
7. Commitments and Contingencies:
In 1994, several former stockholders of MFS Telecom, a subsidiary of the
Company, filed a lawsuit against the Company, the Company's former majority
stockholder, Kiewit Diversified Group, Inc. ("KDG"), and the Company's chief
executive officer regarding the sale of their shares of MFS Telecom to the
Company in September 1992. The plaintiffs allege that certain information
was concealed from them, which caused them to sell their shares at an
inadequate price. KDG has agreed to indemnify the Company against any
claims asserted by the former stockholders.
The Company is also involved in various other claims and regulatory
proceedings incidental to its business. Management believes that any
resulting liability beyond that provided should not materially affect the
Company's financial position, results of operations or cash flows.
<PAGE>
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
8. Subsequent Event - Merger Agreement:
On April 30, 1996, the Company announced that it had executed a merger
agreement with UUNET Technologies, Inc. ("UUNET"). Under the terms of the
agreement, which includes a fixed conversion ratio, each share of UUNET
stock will be converted into 1.777776 shares of the Company's common stock
on a post-split basis. The transaction value is approximately $2 billion
based on the Company's stock price at the date of the announcement. The
merger agreement was unanimously approved by the Board of Directors of
each company and the transaction will be recommended by each board to its
shareholders. In addition, shareholders of UUNET owning approximately 62
percent of the outstanding shares and shareholders of the Company owning
approximately 12 percent of the outstanding shares have committed to vote
in favor of the transaction.
The Company anticipates that a substantial portion of the purchase price
will be allocated to intangible assets including goodwill and expects to
amortize those intangible assets over a period of up to five years. The
actual allocation of the purchase price and determination of useful lives
will be made after further evaluation.
<PAGE>
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company was founded in 1987 and commenced operations in 1988. The
Company operates through its subsidiaries in two business segments,
telecommunications services and network systems integration. The
telecommunications services segment is comprised of the MFS Telecom
Companies, which provide services to large customers through MFS Telecom
and MFS Datanet, the MFS Intelenet Companies, which provide services to
small and medium sized customers through MFS Intelenet, MFS International,
which provides services to customers internationally and MFS Global Network
Services, which manages the Company's network platform. The network
systems integration segment provides services primarily through MFS Network
Technologies. The Company's growth was funded by capital contributions
from its former majority stockholder, Kiewit Diversified Group, Inc.
("KDG"), until an initial public offering in 1993. Since that public
offering, the Company has funded its growth through a combination of debt
and equity financing including, most recently, a $600 million debt offering
in January 1996 of 8 7/8% Senior Discount Notes (the "1996 Senior Discount
Notes").
Telecommunications Services. The Company's telecommunications services
predominately result in monthly recurring revenues. The Company provides
these services in an expanding number of major metropolitan areas. As of
April, 1996, the Company provides services on its networks, or through the
resale of services, or has network operations under development in 52 major
metropolitan areas primarily in the United States and Europe.
The development of the Company's businesses and the installation and
expansion of its networks require significant expenditures, a substantial
portion of which is incurred before the realization of revenues. These
expenditures, together with the associated early operating expenses, result
in negative cash flow until an adequate customer base is established. As
this customer base grows, incremental revenues are added with minimal
additional expense, providing significant contributions to cash flow. The
Company also incurs ongoing capital expenditures with respect to both
existing and new networks which are directly related to the installation
of new revenue producing circuits. These costs vary based on the specific
type of circuit installed and the location of the customer.
The MFS Telecom Companies
-------------------------
Through MFS Telecom, the Company provides dedicated special access and
private line service to business and government end users. These services
are provided primarily over digital fiber optic telecommunications networks
that the Company has either installed or acquired and subsequently
expanded. The networks also establish a platform that can be used to
provide additional enhanced voice, data and video services to its
customers. MFS Telecom also offers local switched services to its
customers in several areas utilizing the Company's integrated switching
platform.
<PAGE>
Through MFS Datanet, the Company provides high-speed data communications
services to business and government users over an international ATM network
which the Company believes to be the most advanced in the world. MFS
Datanet uses the Company's networks for customers located in buildings
where the Company already provides special access, private line or switched
services, requiring significantly less capital expenditures because data
communications customers can, to a certain extent, utilize existing fiber
optic networks, electronics and building equipment rooms. The Company will
incur additional capital costs for the installation of new revenue
producing circuits. The level of costs may vary based upon the type of
circuit installed and the location of the customer.
The MFS Intelenet Companies
---------------------------
Through MFS Intelenet, the Company provides a single source for integrated
local and long distance telecommunications services and facilities
management to small and medium sized businesses. By utilizing its existing
networks and facilities, the Company minimizes capital expenditures for
transmission facilities. However, significant capital costs have been and
will be incurred for switching equipment, equipment maintained at customer
locations and additional building wiring costs.
MFS International
-----------------
Through MFS International, the Company provides telecommunication services
to business and government users in several major European metropolitan
areas as well as outbound international service from the United States and
Europe. The Company is offering services over its networks, or through
resale of international telecommunications services in London, England,
Frankfurt, Germany, Paris, France, Stockholm, Sweden and Zurich,
Switzerland and has announced plans to provide service in Hong Kong.
MFS Global Network Services
---------------------------
Through MFS Global Network Services, the Company manages the operation of
its network and future network development in order to offer the services
described above in a cost effective manner.
The incurrence of significant initial development and roll out expenses in
advance of anticipated future revenues will continue to affect the
operating results of the telecommunications services segment. Anticipated
sales growth in the telecommunication services segment will also continue
to drive increasing deployment of electronic equipment required to initiate
customer service.
Network Systems Integration Services. The Company, primarily through MFS
Network Technologies, designs, engineers, develops and manages the
installation of the Company's new fiber optic networks and network
expansions. In 1991, the Company began to offer network systems integration
services to third parties. These services have been characterized by
significant revenues concentrated in a relatively small number of large
projects for third parties. In 1993, the Company also began to offer
services related to Intelligent Transportation Systems ("ITS"). The
Company recognizes revenue based upon the amount of network systems
integration services performed. The amount of the Company's network
systems integration services performed can vary on a quarterly basis
depending upon individual customer contract requirements.
<PAGE>
Results of Operations
The following table presents revenue, loss from operations and EBITDA from
each of the Company's reportable business segments for the periods
indicated:
<TABLE>
<CAPTION>
Three Months Ended
March 31
------------------
1996 1995
---- ----
<S> <C> <C>
Revenue:
Telecommunications services............... $165,590 $103,788
Network systems integration............... 20,726 14,552
------- -------
Total.................................... $186,316 $118,340
======= =======
Loss from operations:
Telecommunications services............... $(65,994) $(55,349)
Network systems integration.............. (1,364) (1,207)
------- -------
Total.................................... $(67,358) $(56,556)
======= =======
EBITDA (1):
Telecommunications services............... $(18,838) $(26,872)
Network systems integration............... (570) (611)
------- -------
Total.................................... $(19,408) $(27,483)
======= =======
</TABLE>
(1) EBITDA consists of earnings (loss) before interest, income taxes,
depreciation, amortization and non cash stock-based compensation recorded
under SFAS 123. EBITDA is commonly used in the communications industry to
analyze companies on the basis of operating performance. EBITDA is not
intended to represent cash flow for the periods. See Consolidated
Statements of Cash Flows.
Three Months Ended March 31, 1996 vs. Three Months Ended March 31, 1995
Telecommunications Services
---------------------------
Telecommunications services revenue increased to $165.6 million in the
three months ended March 31, 1996 from $103.8 in the three months ended
March 31, 1995, an increase of $61.8, or 60%. Revenues for each of the key
elements of the telecommunications segment were as follows:
1996 1995 Increase
---- ---- --------
MFS Telecom Companies $ 62.9 $ 40.0 $ 22.9
MFS Intelenet Companies 79.5 58.9 20.6
MFS International 23.2 4.9 18.3
---- ---- --------
$165.6 $103.8 $ 61.8
------ ------ --------
The increases resulted from increased market penetration of all
telecommunications services of the Company. The especially large increase
in revenues, measured on a % basis, from MFS International reflect strong
sales in the United Kingdom and a growing revenue base in continental
Europe.
<PAGE>
Since the end of 1993 the Company has separately tracked the MFS
Telecom results of operations for the 14 network cities and expansions that
were materially complete at year end 1993 (the "Base Cities Competitive
Access Operations"). These Base Cities Competitive Access Operations
produced revenue of $39.6 million in the three months ended March 31, 1996
and $28.8 million in the three months ended March 31, 1995, an increase of
$10.8 million, or 38%. The increase in revenue from these operations
resulted primarily from increased market penetration in these cities. Due
to a modification of the Company's internal organization within the
telecommunications services segment it will become increasingly less
meaningful to separate the Base Cities Competitive Access Operations from
other operations because of the increasing commonality of revenues and
costs within Base Cities Competitive Access Operations, expansions and
types of services. For this reason, the Company may discontinue separate
disclosure for these Base Cities Competitive Access Operations in the
future. The Company continues to review other modifications to its
financial disclosures which the Company believes will provide more
meaningful information about its activities.
Annualized monthly recurring revenue increased to approximately $700
million at March 31, 1996 from approximately $430 million at March 31,
1995, an increase of 63%. The increase reflects the sales of additional
services to current and new customers in existing and new markets. Monthly
recurring revenue represents monthly service charges billable to
telecommunications services customers as of the last day of the period
indicated, but excludes non-recurring revenues for certain one-time
services, such as installation fees or equipment charges.
Telecommunications services operating expenses increased to $156.4
million or 94% of segment revenue in the three months ended March 31, 1996
from $107.5 million or 104% of segment revenue in the three months ended
March 31, 1995, an increase of $48.9 million. The change includes an
increase of $41.5 million in circuit charges, including local and long
distance service costs, and personnel costs necessary to support the
Company's growth. The remaining increase of $7.4 million relates to
increased rent, utilities and other costs incurred to support the increased
revenue base. Telecommunication services operating expenses consist of
costs associated directly with network operations, including salaries,
sales commissions and related employee benefits, rent expense, right-of-way
fees, other network costs and local and long distance service costs.
Telecommunications services depreciation and amortization expense
increased to $44.0 million in the three months ended March 31, 1996 from
$28.5 million in the three months ended March 31, 1995, an increase of
$15.5 million or 54%. The increase is primarily related to the expanded
fixed asset base of the Company s networks which includes increasing
amounts of electronic equipment with depreciable lives that are shorter
than the Company's other major fixed asset categories.
Telecommunications services general and administrative expenses
increased to $31.2 million in the three months ended March 31, 1996 from
$23.2 million in the three months ended March 31, 1995, an increase of $8.0
million or 34%. The change is primarily due to an increase of $7.2 million
in personnel costs. Management of the Company expects general and
administrative services to continue to increase during 1996 as the Company
expands its services.
<PAGE>
Telecommunications EBITDA loss decreased to $(18.8) million in the
three months ended March 31, 1996 from $(26.9) million in the three months
ended March 31, 1995. EBITDA in 1996 and 1995 for each of the key elements
of the telecommunications segment were as follows:
1996 1995 Change
---- ---- ------
MFS Telecom Companies $ 11.9 $ 3.5 8.4
MFS Intelenet Companies (20.8) (21.1) 0.3
MFS International (9.9) (9.3) (0.6)
----- ----- -----
$(18.8) $(26.9) $8.1
----- ----- -----
The increase at the MFS Telecom Companies reflects the high incremental
margins inherent in the dedicated special access and private line services
primarily provided over the Company's own facilities. The small decrease
in EBITDA loss at MFS Intelenet reflects the additional EBITDA margins
provided by increased revenues resulting from a sales strategy that
emphasized the provision of local switch services in advance of the
implementation of the Telecommunications Act of 1996 offset by the
additional costs incurred to expand the integrated local and long distance
telecommunications service markets including normal increases in operating
expenses. The small increase in EBITDA loss at MFS International reflects
the additional EBITDA margins provided by increased revenues offset by the
additional costs incurred to expand the Company's international service,
particularly in new markets.
The Base Competitive Access Operations produced EBITDA of $20.5
million before parent company allocations in the three months ended March
31, 1996 and $12.8 million in the three months ended March 31, 1995, an
increase of $7.7 million, or 60%. For reasons noted earlier, the Company
may discontinue separate disclosure for these Base Cities Competitive
Access Operations in the future. The Company continues to review other
modifications to its financial disclosures which the Company believes will
provide more meaningful information about its activities.
Network Systems Integration
---------------------------
Third party revenue from services offered by the Company's network
systems integration segment increased to $20.7 million in the three months
ended March 31, 1996 from $14.6 million in the three months ended March 31,
1995, an increase of $6.1 million or 42%. The increase is primarily due
to an increase in the amount of revenue recognized from projects involving
Intelligent Transportation Systems ("ITS") services and to a lesser extent
other network systems integration projects.
Network systems integration operating expenses increased to $17.8
million in the three months ended March 31, 1996 from $12.4 million in the
three months ended March 31, 1995, an increase of $5.4 million or 44%. The
increase is primarily due to the increased level of operating expenses
related to the projects noted above, including the continuing development
and investment in ITS service projects. Network systems integration
operating expenses consist of direct costs associated with the network
systems integration projects.
<PAGE>
Network systems integration general and administrative expenses
increased to $3.7 million in the three months ended March 31, 1996 from
$2.8 million in the three months ended March 31, 1995, an increase of $.9
million or 32%. The increase reflects the increased third party work noted
above.
Network systems integration EBITDA loss was $(.6) million in the three
months ended March 31, 1996 which matches the EBITDA loss for the three
months ended March 31, 1995. This resulted from the increased operating
and general and administrative expenses offsetting increased revenues.
Other Income (Expense)
---------------------
Other income (expense) increased to $18.8 million of other expense in
the three months ended March 31, 1996 from $7.3 million of other expense in
the three months ended March 31, 1995. The increase in other expense
resulted primarily from additions to interest expense incurred in
connection with the issuance of the 1996 Senior Discount Notes. This
increase was partially offset by increased interest income from the
investment of the proceeds of the 1996 Senior Discount Notes.
Income Taxes
------------
The income tax expense of $.1 million for the three months ended March
31, 1996 and 1995, resulted from estimated state and foreign tax
liabilities.
Net Loss
--------
Net loss increased to $86.2 million in the three months ended March 31,
1996 from $64.0 million in the three months ended March 31, 1995, an
increase of $22.2 million. The increase resulted primarily from increased
depreciation, amortization and interest expense.
Backlog. The network systems integration and facilities management
services segment had third party backlog of approximately $198 million at
March 31, 1996. Backlog consists of firm contracts less revenue recognized
to date by the Company.
<PAGE>
Liquidity and Capital Resources
The Company's total assets have increased from $5.0 million at
December 1988 to $2.3 billion at March 31, 1996. The Company's growth was
funded by capital contributions from its former majority stockholder, KDG,
until an initial public offering in 1993. Since that public offering, the
Company has funded its growth through a combination of debt and equity
financing including, most recently, a debt offering in January 1996 of
8 7/8% Senior Discount Notes (the "1996 Senior Discount Notes"). The
Company's current assets of $721.7 million, including cash and marketable
securities aggregating $460.9 million, exceeded current liabilities of
$267.7 million, providing working capital of $454.0 million. Network and
equipment, net of depreciation, comprise $1.2 billion of total assets.
The Company's operating activities used net cash of $52.4 million in
the three months ended March 31, 1996 and $21.3 million in the three months
ended March 31, 1995. The increase in cash used by operating activities
was primarily due to the increased loss from operations incurred expanding
the Companies services and an increase in cash used supporting increased
levels of accounts receivable and other assets which is partially offset
by increased depreciation, amortization and non cash interest expense.
In late 1993, the Company announced its intention to accelerate the
expansion of its customer base, service offerings and existing networks.
Between 1993 and 1995, in connection with regulatory, legislative and
competitive changes in the United States and abroad, the Company took
several steps to accelerate its network development, including deployment
of additional switches. In 1995, the Company also experienced greater than
anticipated levels of demand in the United States, especially for the
capital intensive local and long distance services offered by the MFS
Intelenet Companies and the Internet access and wide area network (WAN)
service offered by the MFS Telecom Companies' special access and private
line businesses. The Company's current plans include significant levels
of capital expenditures in order to obtain increased revenue from providing
more of these services.
To fund this network development, including the acceleration and
growing demand noted above, the Company has utilized a variety of financing
vehicles including:
capital contributions from its former majority shareholder,
proceeds from its initial public offering and a follow-on
public offering in 1993,
proceeds from 9 3/8% Senior Discount Notes in 1994,
availability of proceeds from various revolving credit facilities
arranged in 1994 and 1995,
proceeds from a public offering of Depositary Shares which
represent an interest in preferred stock of the Company, in 1995,
sale-leaseback transactions in 1995 and early 1996, and recently,
proceeds from 8 7/8% Senior Discount Notes in the first
quarter of 1996.
At March 31, 1996, the Company had approximately $840 million of
available liquidity, including cash, marketable securities and unused lines
of credit.
<PAGE>
During the first quarter of 1996, the Company's capital expenditures,
which are primarily for the construction of networks and the purchase of
related equipment, were $153 million, including acquisitions and deferred
costs, compared to $114 million in the first quarter of 1995.
On May 7, 1996 the Company announced that it intends to undertake
certain initiatives designed to take advantage of opportunities created by
changes in telecommunications laws and the rapid development of
Internet-based communications networks. These initiatives involve
increasing the number of cities served, expanding its networks in existing
cities, constructing or acquiring its own intercity high capacity network,
accelerating central office interconnection, deployment of additional
switches, and providing high-speed local Internet access.
Expenditures for the initiatives are subject to the Company's review
of a number of factors including cost of any additional capital required,
technological developments and market conditions. In addition, each
initiative may be implemented in whole or in part, and independently of any
other initiative, ensuring that the Company retains maximum financial and
operating flexibility. The Company anticipates that implementation of
these initiatives will result in an increase in annual capital expenditures
of approximately $500 million which, together with currently anticipated
expenditures, is expected to bring total capital expenditures to
approximately $1 billion per year over the period of implementation which
the Company estimates to be four years. This estimate is subject to a
number of factors, including levels of incremental sales, as well as
regulatory actions by state, federal and international authorities, which,
individually or in the aggregate, could cause material changes in capital
expenditure requirements. The Company expects to fund additional capital
requirements through existing resources, internally generated funds and
additional debt or equity financing as appropriate.
Merger with UUNET Technologies, Inc.
The Company announced that it has executed a merger agreement with
UUNET Technologies, Inc. ("UUNET"). Under the terms of the agreement,
which includes a fixed conversion ratio, each share of UUNET stock will be
converted into 1.777776 share of MFS common stock on a post-split basis.
The transaction value is approximately $2 billion based on the Company's
stock price at the date of the announcement. The Company intends to
utilize purchase accounting to record the transaction. The merger
agreement was unanimously approved by the Board of Directors of each
company and the transaction will be recommended by each board to its
shareholders. In addition, shareholders of UUNET owning approximately 62
percent of the outstanding shares and shareholders of MFS owning
approximately 12 percent of the outstanding shares have committed to vote
in favor of the transaction.
Other Matters
As evidenced by the merger agreement noted above the Company from time
to time evaluates acquisitions in pursuit of its business strategy, either
as an alternative to constructing networks, adding customers, or to the
introduction of services that compliment existing and/or planned services.
Such acquisitions may be significant in size and could use a substantial
portion of the Company's available cash.
<PAGE>
From time to time, the Company has had discussions with other
communications entities concerning the establishment of possible strategic
relationships, including transactions involving substantial acquisitions,
combinations and equity investments in the Company or one of its
subsidiaries. In addition, certain acquisitions may provide the Company
with the opportunity to acquire an established customer base. The Company
intends to consider appropriate opportunities to establish strategic
relationships.
Accounting for Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
Accounting for Stock-Based Compensation. SFAS 123 encourages entities to
adopt a fair value based method of accounting for employee stock
compensation plans, however it also allows an entity to continue to measure
compensation cost for those plans using the intrinsic value based method
of accounting. Under the intrinsic value based method, many companies,
including MFS, have not recognized compensation cost for many of their
stock compensation plans.
The Company believes that the fair value method of accounting more
appropriately reflects the substance of the transaction between an entity
that issues stock options, or other stock-based instruments, and its
employees; that is, an entity has granted something of value to an employee
(the stock option or other instrument) generally in return for their
continued employment and services. The Company believes that the value of
the instrument granted to employees should be recognized in financial
statements because nonrecognition implies that either the instruments have
no value or that they are free to employees, neither of which is an
accurate reflection of the substance of the transaction. Although the
recognition of the value of the instruments results in compensation expense
in an entity's financial statements, the expense differs from other common
forms of compensation expenses in that these charges typically will not be
settled in cash, but rather through issuance of common stock.
The Company has introduced certain changes to its stock-based
compensation plans, including a new option plan for key executive employees
which ultimately have value to the employee only if the Company's stock
price outperforms the S&P 500. The Company granted approximately 227,000
options under the new option plan on January 1, 1996, and anticipates that
additional grants will be made on a quarterly basis. The Company believes
that the adoption of the standard will result in material non-cash charges
to operations in 1996 and thereafter. The amount of the non-cash charge
will be dependent upon a number of factors, including the number of options
granted and the fair value estimated at the time of grant.
Effects of Inflation
Inflation has not had a significant effect on Company operations.
However, there can be no assurance that inflation will not have a material
effect on the Company's operations in the future.
<PAGE>
Forward-looking Statements
The matters discussed in this Form 10Q contain forward-looking
statements that involve risks and uncertainties including risks associated
with the telecommunications and Internet industries, the impact of
competitive services and pricing, the impact of the Telecommunications Act
of 1996, the successful and timely completion of the UUNET Technologies,
Inc. merger, and other risks detailed from time to time in the Company's
filings with the Securities and Exchange Commission.
<PAGE>
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) A special meeting of stockholders of the registrant was held on
March 23,1996.
(b) At the special meeting, the stockholders:
(i) adopted an amendment to the Certificate of Designation for its
Series B Convertible Preferred Stock to provide for the adjustment
of the voting rights of such preferred stock in the event the
Company shall at any time prior to March 23, 1999, take any action
that subdivides (whether by stock dividend, stock split or
otherwise) the Company's outstanding shares of common stock into a
greater number of shares. The amendment was approved by a vote of
the stockholders as follows:
Common Stock Series A Preferred Stock
------------ ------------------------
Affirmative votes 43,984,059 521,884
Negative votes 850,868 5,320
Abstentions 200,804 76
Broker non-votes 5,195,468 177,608
(The Company's Series B preferred stock were voted in proportion
to the pro rata number of common stock voting in each category.)
(ii) adopted an amendment to the Company's Restated Certificate of
Incorporation to increase the number of authorized shares of the
Company's common stock from 200,000,000 to 400,000,000. The
amendment was approved by a vote of the stockholders as follows:
Common Stock Series A Preferred
------------ ------------------
Affirmative votes 48,323,911 695,053
Negative votes 1,714,734 9,775
Abstentions 192,554 60
(The Company's Series B preferred stock were voted in proportion
to the pro rata number of common stock voting in each category.)
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11 Schedule computing computation of net loss per share applicable to
common stockholders
27 Financial Data Schedule
(b) A report on Form 8-K, dated January 23, 1996, was filed reporting
under Item 5 that the Company executed on Indenture and a First
Supplemental Indenture related to the Company's 1996 Senior
Discount Notes.
<PAGE>
SIGNATURE
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 thereunto duly authorized.
MFS COMMUNICATIONS COMPANY, INC.
Dated: May 8, 1996 /s/ Robert J. Ludvik
-------------------------------
Robert J. Ludvik
Chief Accounting Officer
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
SCHEDULE COMPUTING CONSOLIDATED NET LOSS PER SHARE
APPLICABLE TO COMMON STOCKHOLDER
(dollars in thousands, except per share data)
COMMON SHARES OUTSTANDING
Three months ended March 31,
1996 1995
Common shares outstanding at
beginning of period (1) 130,260,228 128,306,436
Add issuances 1,159,434 546,188
Less retirement of treasury stock (5,800,000) -
----------- -----------
Common shares outstanding at
end of period 125,619,662 128,852,624
============ ===========
NET LOSS PER SHARE APPLICABLE TO
COMMON STOCKHOLDERS
Three months ended March 31,
1996 1995
Weighted average number of common
shares outstanding 125,017,000 128,729,000
=========== ===========
Net loss $ (86,224) $ (63,908)
Dividends on preferred stock (7,072) -
------------ -----------
Net loss applicable to common
stockholders $ (93,296) $ (63,908)
============ ==========
Net loss per share applicable to
common stockholders $ (0.75) $ (0.50)
============ ===========
- - -------------------------------------------------------------------------
(1) All share data has been stated reflecting the common stock split in
1996.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10Q AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10Q.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 92,588
<SECURITIES> 368,266
<RECEIVABLES> 155,702
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 721,714
<PP&E> 1,466,254
<DEPRECIATION> 245,321
<TOTAL-ASSETS> 2,347,211
<CURRENT-LIABILITIES> 267,656
<BONDS> 1,255,256
0
151
<COMMON> 1,255
<OTHER-SE> 753,176
<TOTAL-LIABILITY-AND-EQUITY> 2,347,211
<SALES> 0
<TOTAL-REVENUES> 186,316
<CGS> 0
<TOTAL-COSTS> 174,173
<OTHER-EXPENSES> 44,609
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,626
<INCOME-PRETAX> (86,124)
<INCOME-TAX> 100
<INCOME-CONTINUING> (86,224)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (86,224)
<EPS-PRIMARY> (.75)
<EPS-DILUTED> 0
</TABLE>
