FORM 10-Q
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 September 30, 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.)
11808 Miracle Hills Drive, Omaha, Nebraska 68154
(Address of principal executive offices) (Zip Code)
402-231-3000
(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 November 6, 1996:
Common Stock ($.01 par value).............. 222,066,879 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 1. Legal Proceedings....................................... 23
Item 4. Submission of Matters to a Vote of Security Holders..... 23
Item 6. Exhibits and Reports on Form 8-K........................ 24
Signature ........................................................ 25
<PAGE>
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
(dollars in thousands September 30 September 30
except per share data) ------------------- ------------------
1996 1995 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $308,022 $153,717 $724,044 $412,062
Costs and expenses:
Operating expenses 272,806 144,559 664,890 403,576
Depreciation and amortization 119,837 37,985 212,425 98,706
General and administrative
expenses 50,901 32,019 119,655 85,743
-------- -------- -------- --------
443,544 214,563 996,970 588,025
-------- -------- -------- ---------
Loss from operations (135,522) (60,846) (272,926) (175,963)
Other income (expense):
Interest income 19,897 3,571 30,688 10,383
Interest expense, net (27,917) (9,422) (78,397) (28,173)
Other (482) (292) (2,109) (1,772)
--------- --------- --------- ---------
Total other income (expense) (8,502) (6,143) (49,818) (19,562)
--------- --------- --------- ---------
Loss before income taxes (144,024) (66,989) (322,744) (195,525)
Income tax expense (100) (250) (300) (450)
--------- --------- --------- ---------
Net loss (144,124) (67,239) (323,044) (195,975)
Dividends on preferred stock (7,460) (7,701) (21,992) (7,701)
--------- --------- --------- ---------
Net loss applicable to common
stockholders $(151,584) $(74,940) $(345,036) $(203,676)
========== ========= ========== ==========
Net loss per share applicable
to common stockholders ($0.79) ($0.58) ($2.34) ($1.58)
======= ======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
<PAGE> 1
<PAGE>
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
(unaudited)
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents............ $ 349,074 $ 51,182
Marketable securities................ 995,667 85,715
Accounts receivable.................. 269,559 140,302
Costs and earnings in excess of billings
on uncompleted contracts........... 91,669 45,142
Other current assets................. 63,494 51,703
---------- ----------
Total current assets 1,769,463 374,044
Networks and equipment, at cost....... 1,950,617 1,315,952
Less accumulated depreciation
and amortization................... (330,878) (213,548)
---------- ----------
Networks and equipment, net...... 1,619,739 1,102,404
Goodwill, net......................... 2,166,397 281,848
Other assets, net..................... 261,188 108,838
---------- ----------
Total assets..................... $5,816,787 $1,867,134
========== ==========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
<PAGE> 2
<PAGE>
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Current portion of notes payable and
long-term debt..................... $ 9,256 $ 1,995
Current portion of capital lease
obligations........................ 4,737 1,922
Accounts payable..................... 255,312 172,407
Accrued costs and billings in excess of
revenue on uncompleted contracts... 53,549 28,686
Accrued compensation................. 21,331 6,119
Other current liabilities............ 107,391 63,328
---------- ----------
Total current liabilities........ 451,576 274,457
Notes payable and long-term debt, less current
portion.............................. 1,354,286 692,059
Capital lease obligations, less
current portion...................... 33,825 31,412
Other liabilities..................... 26,764 27,902
Minority interest..................... 13,311 10,972
Commitments and contingencies (Note 9)
Stockholders' equity:
Preferred stock, $.01 par value. Authorized
25,000,000 shares:
Series A, 8% cumulative convertible;
issued 94,992 in 1996 and 95,000 in 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 221,642,709 in
1996 and 130,260,228 in 1995 (Note 5) 2,216 651
Additional paid-in capital............ 4,911,760 1,512,394
Other................................. 1,172 (768)
Accumulated deficit................... (978,274) (555,221)
---------- ----------
3,937,025 957,207
Treasury stock, 5,800,000 shares,
at cost............................. - (126,875)
---------- ----------
Total stockholders' equity......... 3,937,025 830,332
---------- ----------
Total liabilities and stockholders'
equity............................ $5,816,787 $1,867,134
========== ==========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
<PAGE> 3
<PAGE>
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity
For the Nine Months Ended September 30, 1996
(unaudited)
<TABLE>
<CAPTION>
Series A Series B Additional
Preferred Preferred Common Paid-in Accumulated Treasury
(dollars in thousands) Stock Stock Stock Capital Other Deficit Stock Total
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $ 1 $ 150 $ 651 $1,512,394 $ (768) $(555,221) $(126,875) $ 830,332
Issuance of common stock - - 357 1,280,639 - - - 1,280,996
Issuance of common stock and
stock options for acquisition - - 582 2,113,508 - - - 2,114,090
Stock dividend on Series A
Preferred Stock - - 5 21,211 - (21,216) - -
Stock options exercised - - 21 17,806 - - - 17,827
Amortization of deferred
charge - - - - 1,017 - - 1,017
Foreign currency adjustment - - - - 651 - - 651
Change in unrealized
investment gain (loss) - - - - 214 - - 214
Retirement of treasury stock - - (29) (48,053) - (78,793) 126,875 -
Stock compensation plan
additions - - - 14,884 - - - 14,884
Two-for-one stock split - - 629 (629) - - - -
Other - - - - 58 - - 58
Net loss - - - - - (323,044) - (323,044)
------- ------- ------- --------- ------ --------- --------- ----------
Balance at September 30, 1996 $ 1 $ 150 $2,216 $4,911,760 $ 1,172 $(978,274) $ - $3,937,025
======= ======= ======= ========= ====== ========= ========= ==========
____________________________________________________________________________________________________________________________
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 4
<PAGE>
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
----------------------
(dollars in thousands) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (323,044) $ (195,975)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 212,425 98,706
Non cash interest expense 71,272 26,193
Non cash compensation expense 10,915 -
Loss on sale of investments - 1,272
Changes in assets and liabilities, net
of effects of acquisitions:
Accounts receivable and other assets (155,358) (69,979)
Accounts payable and other liabilities 83,012 24,207
--------- ---------
Net cash used in operating activities (100,778) (115,576)
--------- ---------
Cash flows from investing activities:
Purchases of networks and equipment (533,122) (367,701)
Proceeds from maturities and sales of
marketable securities 411,985 499,795
Purchases of marketable securities (1,306,689) (297,801)
Purchases of minority interest in
subsidiaries - (1,572)
Net cash acquired (used) in acquisitions of
businesses 7,712 (14,858)
Additions to deferred costs and other (20,940) (13,159)
---------- ---------
Net cash used in investing activities (1,441,054) (195,296)
---------- ---------
Cash flows from financing activities:
Proceeds from issuance of long-term debt
and notes payable 633,892 6,075
Proceeds from issuance of common stock 1,280,996 -
Proceeds from issuance of preferred stock - 306,646
Payments on long-term debt, including current
portion (92,991) (3,407)
Proceeds from exercise of stock options 17,827 5,128
---------- ---------
Net cash provided by financing
activities 1,839,724 314,442
---------- ---------
Net change in cash and cash equivalents 297,892 3,570
Cash and cash equivalents at beginning
of period 51,182 21,518
---------- ---------
Cash and cash equivalents at end of period $ 349,074 $ 25,088
========== =========
</TABLE>
Supplemental schedule of non cash financing and investing activities:
The Company recognized common stock dividends on preferred stock of $21,992 and
$7,701 in the nine month periods ended September 30, 1996 and 1995,
respectively. The Company also issued 15,000,000 shares of Series B preferred
stock in exchange for 5,800,000 of the Company's common stock during the third
quarter of 1995.
The Company capitalized non-cash interest expense of $11,108 and $13,857 in the
nine month periods ended September 30, 1996 and 1995, respectively.
In the third quarter of 1996, the Company purchased the stock and stock options
of UUNET Technologies, Inc., for stock and stock options of the Company. In
connection with the acquisition, liabilities were assumed as follows:
Fair value of tangible assets acquired $ 164,005
Fair value of intangible assets acquired 2,076,388
Stock and stock options issued (2,114,090)
----------
Liabilities assumed $ 126,303
==========
______________________________________________________________________________
See accompanying notes to consolidated financial statements.
<PAGE> 5
<PAGE>
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
Supplemental schedule of non cash financing and investing activities:
In the first nine months of 1995, the Company purchased the stock of companies
that provide telecommunications services in Richmond, Virginia, Denver, Colorado
and White Plains, New York for $12,655 in cash and the issuance of stock. In
connection with the acquisitions, liabilities were assumed as follows:
Fair value of tangible assets acquired $11,328
Fair value of intangible assets acquired 13,226
Cash paid for stock (12,655)
Stock issued (5,912)
-------
Liabilities assumed $ 5,987
=======
______________________________________________________________________________
See accompanying notes to consolidated financial statements.
<PAGE> 6
<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.
2. Acquisition of UUNET Technologies, Inc.:
Effective August 12, 1996, the Company purchased the common stock, and
options to purchase the common stock, of UUNET Technologies, Inc. ("UUNET").
UUNET is a provider of a comprehensive range of Internet access services,
applications, and consulting services to businesses, professionals and on-
line service providers. The total cost of the acquisition was approximately
$2,114,090, excluding transaction costs and liabilities assumed. The
Company issued approximately 58.2 million shares of common stock and
approved options to purchase approximately 6.2 million shares of the
Company's common stock in the acquisition.
The acquisition has been accounted for as a purchase and accordingly, the
acquired assets and liabilities have been recorded at their estimated fair
values at the date of the acquisition, and the results of operations have
been included in the accompanying financial statements since the date of
acquisition. The total purchase price in excess of the fair market of the
net assets acquired, including identifiable intangibles, was recorded as
goodwill. The goodwill is being amortized on a straight-line basis over a
5 year life.
The following unaudited pro forma information shows the results of the
Company as though the acquisition occurred as of the beginning of each
period indicated. These results include certain adjustments consistent with
the Company's accounting policies related to amortization of intangible
assets. These results are not necessarily indicative of the results that
actually would have been obtained if the acquisition had been in effect at
the beginning of each period or which may be attained in the future.
Nine months ended
September 30,
-------------------------
1996 1995
Revenue $847,572 $466,871
Net loss (585,333) (527,021)
Loss per share applicable
to common stockholders (3.11) (2.82)
<PAGE> 7
<PAGE>
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
3. Merger Agreement:
The Company and WorldCom, Inc. ("WorldCom") announced the execution of a
merger agreement dated August 25, 1996. According to the terms of the
merger agreement each share of MFS common stock will be exchanged for 2.1
shares of WorldCom common stock and each share of MFS Series A and Series B
preferred stock will be exchanged for shares of WorldCom preferred stock.
WorldCom is one of the largest long distance telecommunications companies in
the United States, offering domestic and international voice, data and video
products and services to business customers, other carriers and the
residential market. The merger is expected to close in late 1996 or early
1997 following approval of various federal, state and local regulatory
authorities. Approval of the shareholders of the Company and WorldCom is
also required.
4. Income Taxes:
The income tax expense of $100 and $250 for the three months ended September
30, 1996 and 1995, respectively, and $300 and $450 for the nine months ended
September 30, 1996 and 1995, respectively, resulted from estimated state and
foreign tax liabilities.
5. 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 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 April 16,
1996 has been transferred from additional paid in capital to common stock.
6. 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 190,697,000 and 147,455,000 for the three and nine month periods ended
September 30, 1996 and 129,319,000 and 129,005,000 for the three and nine
month periods ended September 30, 1995, respectively.
7. 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 are being repaid in semi-annual
principal installments of $2,000 beginning 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.
<PAGE> 8
<PAGE>
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
7. Long Term Debt: (continued)
(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.
(c)UUNET debt:
In connection with the acquisition of UUNET in the third quarter of 1996,
the Company assumed long-term debt of approximately $34,429. This debt is
primarily related to an agreement that provides for the purchase of
equipment used in the construction of a network to be used by Microsoft
Corporation ("Microsoft") and UUNET (see Note 10). Principal and interest,
at the higher of 7.74% or the applicable federal rate at the time of an
advance (6.48% at September 30, 1996) are payable on each advance quarterly
over five years. Borrowings under the agreement are collateralized by the
equipment purchased.
8. Stock Compensation Programs:
The Company has several stock based compensation programs in effect at
September 30, 1996. The programs are described as follows:
(a)Stock Option Plans:
The Company's 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.
Options granted under the 1992 and 1993 plans during the first nine months
of 1996 were not material.
<PAGE> 9
<PAGE>
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
8. Stock Compensation Programs: (continued)
(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 128,000 shares of
stock under this part of the plan. The Company has not granted any shares
during 1996.
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
September 30, 1996 was $3,970.
(c)Shareworks Plus:
In 1996 the Company implemented a new employee stock compensation program
which grants stock awards 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 of the
award 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. The Company granted approximately
1,392,000 awards under this plan during the first nine months of 1996.
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.
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 award, 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 award. 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.
<PAGE> 10
<PAGE>
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
8. Stock Compensation Programs:(continued)
The Company recognized compensation expense of $10,915 related to the
Shareworks and Shareworks Plus programs in the nine month period ended
September 30, 1996. The pro forma impact of adopting the fair value method
of accounting in the nine month period ended September 30, 1995 was
immaterial primarily because the number of options granted in that period
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
approximately 1,392,000 awards during the first nine months of 1996, at
initial exercise prices that range from $26.62 to $37.63. Approximately
337,000 awards were exercised during the nine month period ended September
30, 1996. The fair value of the awards granted was estimated to be $6.50
per award.
(d)UUNET Stock Option Plans:
The Company adopted UUNET's existing stock option plans upon acquisition.
The exercise of options in those plans would result in the issuance of
approximately 6.2 million shares of the Company's common stock. The
effective exercise prices in those plans range from $0.03 to $42.19 per
share.
9. 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 alleged that certain information
was concealed from them, which caused them to sell their shares at an
inadequate price. KDG agreed to indemnify the Company against any claims
asserted by the former stockholders. During July 1996 this lawsuit was
settled with no cost to the Company.
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.
10. Network Agreement:
UUNET and Microsoft are parties to an agreement (the "Microsoft Agreement")
for the development, operation and maintenance of a high speed dial-up and
ISDN TCP/IP access network (the "Dial-Up Network"). Microsoft is obligated
to reimburse UUNET for the cost of the facilities and maintaining and
operating the Dial-Up Network, as well as pay a management fee. The initial
term of the Microsoft Agreement expires in March 2000, and it may be
extended by Microsoft for an additional five-year term. UUNET also entered
into a loan agreement with Microsoft which allows UUNET to borrow funds to
finance the purchase of equipment for the construction of the Dial-Up
Network (see Note 7). UUNET owns the network equipment, subject to
Microsoft's security interest. UUNET controls and operates the Dial-Up
Network and is able to sell a portion of the Dial-Up Network capacity to
other customers. Revenues of the Company for the third quarter of 1996
include $18,239 related to this agreement.
<PAGE> 11
<PAGE>
MFS COMMMUNICATIONS 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, communications
services and network systems integration. The communications services segment
is comprised of the MFS Telecom Companies, which provide telecommunications
services to large customers, the MFS Intelenet Companies, which provide
telecommunications services to small and medium sized customers, MFS
International, which provides telecommunications services to customers
internationally, and MFS Global Network Services, which manages the Company's
network platform. With the acquisition of UUNET Technologies, Inc. ("UUNET" and
with its subsidiaries, the "UUNET Companies") on August 12, 1996, the Company
also provides Internet-related communications services to customers. 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 $1.3 billion common stock offering in July 1996.
Communications Services. The Company's communication services include
integrated local and long-distance telecommunication services as well as special
access, private line and high speed data communications services and Internet
access, among others. These services predominantly result in monthly recurring
revenues. The Company provides these services in an expanding number of major
metropolitan areas. As of October, 1996, the Company provides services on its
networks, through the resale of services, or has network operations under
development in 57 major metropolitan areas in the United States and abroad.
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 and Internet
access facilities. These costs vary based on the specific type of circuit or
facilities nstalled and the location.
The MFS Telecom Companies
- -------------------------
Through the MFS Telecom Companies, the Company provides dedicated special access
and private line services to businesses 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.
The Company also 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. This service is provided using
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.
<PAGE> 12
<PAGE>
The MFS Intelenet Companies
- ---------------------------
Through the MFS Intelenet Companies, 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 predominantly 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,
Frankfurt, Paris, Stockholm, Zurich, Milan and Hong Kong and is preparing to
provide service in Tokyo and Amsterdam.
UUNET Companies
- ---------------
Through the UUNET Companies, the Company provides a full range of Internet
access options, applications and other services, including Web server hosting,
client software and security products, to businesses, professionals and on-line
service providers, both in the United States and internationally. The Company
provides these services utilizing a network that provides both dedicated and
dial-up internet access. The Company will incur additional capital costs to
support the expansion of the network in the United States and internationally.
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 communications services segment. Anticipated sales growth in the
communications 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> 13
<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 presented:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Communications services... $245,043 $131,432 $599,036 $352,299
Network systems integration
services................. 62,979 22,285 125,008 59,763
------- ------- ------- -------
Total.................. $308,022 $153,717 $724,044 $412,062
======== ======== ======== ========
Loss from operations:
Communications services... $(134,043) $(58,940) $(269,408) $(171,721)
Network systems integration
services................ (1,479) (1,906) (3,518) (4,242)
------- ------ -------- --------
Total.................. $(135,522) $(60,846) $(272,926) $(175,963)
========= ======== ========= =========
EBITDA:(1)
Communications services... $(11,010) $(21,621) $(48,570) $(74,817)
Network systems integration
services................ (645) (1,240) (1,016) (2,439)
------- ------- ------- -------
Total................. $(11,655) $(22,861) $(49,586) $(77,256)
======== ======== ======== ========
(1) EBITDA consists of earnings (losses) before interest, income taxes,
depreciation, amortization, non cash stock-based compensation and other non-
operating income or expenses. 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 September 30, 1996 vs. Three Months Ended September 30, 1995
Communications Services
- -----------------------
Communications services revenue increased to $245.0 million in the three
months ended September 30, 1996 from $131.4 million in the three months ended
September 30, 1995, an increase of $113.6 million or 86%. Revenues for each of
the key elements of the communications segment were as follows, in millions:
1996 1995 Increase
---- ---- --------
MFS Telecom Companies $ 74.3 $ 51.2 $ 23.1
MFS Intelenet Companies 85.0 68.9 16.1
MFS International 43.0 11.3 31.7
UUNET Companies 42.7 - 42.7
------ ------ ------
$245.0 $131.4 $ 113.6
------ ------ -------
The increase resulted from the acquisition of UUNET as of August 12, 1996, and
from increased market penetration of all communications services of the Company.
The especially large increase in revenues, measured on a percentage basis, from
MFS International reflect strong sales in the United Kingdom and a growing
revenue base in continental Europe.
<PAGE> 14
<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 $45.5 million in the three months ended September 30, 1996 and $33.9 million
in the three months ended September 30, 1995, an increase of $11.6 million, or
34%. 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 communications 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 $1,175
million at September 30, 1996 from approximately $565 million at September 30,
1995, an increase of 108%. The increase reflects the sales of additional
services to current and new customers in existing and new markets and the
acquisition of UUNET. Monthly recurring revenue represents monthly service
charges billable to communications 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.
Communications services operating expenses increased to $212.4 million or
86% of segment revenue in the three months ended September 30, 1996 from $125.3
million or 95% of segment revenue in the three months ended September 30, 1995,
an increase of $87.1 million. The change includes an increase of $64.5 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 $22.6 million relates to increased rent, utilities and other costs
incurred to support the increased revenue base. Communication services
operating expenses consist of costs associated directly with network operations,
including salaries, sales commissions and related employee benefits, purchased
local and long distance service costs, rent expense, right-of-way fees and other
network costs.
Communications services depreciation and amortization expense increased to
$119.3 million in the three months ended September 30, 1996 from $37.3 million
in the three months ended September 30, 1995, an increase of $82.0 million.
The increase is primarily related to amortization expense of approximately $60
million on the intangible assets recorded in the UUNET acquisition and to the
expanded fixed asset base of the Company's networks.
Communications services general and administrative expenses increased to
$47.4 million in the three months ended September 30, 1996 from $27.8 million in
the three months ended September 30, 1995, an increase of $19.6 million or 71%.
The change is primarily due to an increase of $7.9 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.
Communications EBITDA loss decreased to $(11.0) million in the three months
ended September 30, 1996 from $(21.6) million in the three months ended
September 30, 1995. EBITDA in 1996 and 1995 for each of the key elements of the
telecommunications segment were as follows, in millions:
1996 1995 Change
---- ---- ------
MFS Telecom Companies $ 12.5 $ 7.1 $ 5.4
MFS Intelenet Companies (20.9) (18.3) (2.6)
MFS International (6.2) (10.4) 4.2
UUNET Companies 3.6 - 3.6
------ ------ ------
$(11.0) $(21.6) $ 10.6
------ ------ ------
<PAGE> 15
<PAGE>
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 increase in EBITDA loss
at MFS Intelenet reflects the additional costs incurred to expand the integrated
local and long distance telecommunications service markets including normal
increases in operating expenses offset by the additional EBITDA margins provided
by increased revenues resulting from a sales strategy that emphasized the
provision of local switch services in connection with the implementation of the
Telecommunications Act of 1996. The decrease in EBITDA loss at MFS
International reflects the additional EBITDA margins provided by increased
revenues partially offset by the additional costs incurred to expand the
Company's international service, particularly in new markets.
The Base Cities Competitive Access Operations produced EBITDA of $24.7
million before parent company allocations in the three months ended September
30, 1996 and $16.5 million in the three months ended September 30, 1995, an
increase of $8.2 million, or 50%. 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 Services
- ------------------------------------
Third party revenue from services offered by the Company's network systems
integration segment increased to $63.0 million in the three months ended
September 30, 1996 from $22.3 million or 183%. The increase is due to an
increase in the number of new projects, including a contract to provide design
and construction services for a wireless personal communications system.
Network systems integration operating expenses increased to $60.4 million
in the three months ended September 30, 1996 from $19.3 million in the three
months ended September 30, 1995, an increase of $41.1 million or 213%. 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 Intelligent Transportation Systems ("ITS") service projects. Network systems
integration operating expenses consist of direct costs associated with the
network systems integration projects.
Network systems integration general and administrative expenses decreased
to $3.5 million in the three months ended September 30, 1996 from $4.2 million
in the three months ended September 30, 1995, a decrease of $0.7 million. The
decrease reflects decreases across several expense categories including legal
and professional services and travel and entertainment costs.
Network systems integration EBITDA loss decreased to $(0.6) million in the
three months ended September 30, 1996 from $(1.2) million in the three months
ended September 30, 1995. This resulted primarily from the decrease in general
and administrative costs noted above.
Other Income (Expense)
- ----------------------
Other income (expense) increased to $(8.5) million of other expense in the
three months ended September 30, 1996 from $(6.1) million of other expense in
the three months ended September 30, 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 and $.25 million for the three months
ended September 30, 1996 and 1995, respectively, resulted from estimated state
and foreign tax liabilities.
<PAGE> 16
<PAGE>
Net Loss
- --------
Net loss increased to $144.1 million in the three months ended September
30, 1996 from $67.2 million in the three months ended September 30, 1995, an
increase of $76.9 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 $184 million at
September 30, 1996. Backlog consists of firm contracts less revenue recognized
to date by the Company.
Nine Months Ended September 30, 1996 vs. Nine Months Ended September 30, 1995
Communications Services
- -----------------------
Communications services revenue increased to $599.0 million in the nine
months ended September 30, 1996 from $352.3 million in the nine months ended
September 30, 1995, an increase of $246.7, or 70%. Revenues for each of the key
elements of the telecommunications segment were as follows, in millions:
1996 1995 Increase
---- ---- --------
MFS Telecom Companies $205.8 $136.7 $ 69.1
MFS Intelenet Companies 249.1 192.4 56.7
MFS International 101.4 23.2 78.2
UUNET Companies 42.7 - 42.7
------ ------ ------
$599.0 $352.3 $246.7
------ ------ ------
The increase resulted from increased market penetration of all communications
services of the Company and from the acquisition of UUNET. The especially large
increase in revenues, measured on a percentage basis, from MFS International
reflect strong sales in the United Kingdom and a growing revenue base in
continental Europe.
The Base Cities Competitive Access Operations produced revenue of $127.2
million in the nine months ended September 30, 1996 and $93.7 million in the
nine months ended September 30, 1995, an increase of $33.5 million, or 36%. The
increase in revenue from these operations resulted primarily from increased
market penetration in these cities. 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.
Communications services operating expenses increased to $549.5 million or
92% of segment revenue in the nine months ended September 30, 1996 from $351.4
million or 100% of segment revenue in the nine months ended September 30, 1995,
an increase of $198.1 million. The change includes an increase of $141.6
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 $56.5 million relates to increased rent, utilities and other costs
incurred to support the increased revenue base.
Communications services depreciation and amortization expense increased to
$210.6 million in the nine months ended September 30, 1996 from $96.9 million in
the nine months ended September 30, 1995, an increase of $113.7 million. The
increase is primarily related to amortization expense of approximately $60
million on the intangible assets recorded in the UUNET acquisition and to the
expanded fixed asset base of the Company's networks.
<PAGE> 17
<PAGE>
Communications services general and administrative expenses increased to
$108.3 million in the nine months ended September 30, 1996 from $75.7 million in
the nine months ended September 30, 1995, an increase of $32.6 million or 43%.
The change is primarily due to an increase of $17.6 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.
Communications EBITDA loss decreased to $(48.6) million in the nine months
ended September 30, 1996 from $(74.8) million in the nine months ended September
30, 1995. EBITDA in 1996 and 1995 for each of the key elements of the
telecommunications segment were as follows, in millions:
1996 1995 Change
---- ---- ------
MFS Telecom Companies $ 35.9 $ 15.7 $ 20.2
MFS Intelenet Companies (64.1) (60.4) (3.7)
MFS International (24.0) (30.1) 6.1
UUNET Companies 3.6 - 3.6
------ ------ ------
$(48.6) $(74.8) $ 26.2
------ ------ ------
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 increase in EBITDA loss
at MFS Intelenet reflects the additional costs incurred to expand the integrated
local and long distance telecommunications service markets including normal
increases in operating expenses offset by the additional EBITDA margins provided
by increased revenues resulting from a sales strategy that emphasized the
provision of local switch services in connection with the implementation of the
Telecommunications Act of 1996. The decrease in EBITDA loss at MFS
International reflects the additional EBITDA margins provided by increased
revenues partially offset by the additional costs incurred to expand the
Company's international service, particularly in new markets.
The Base Cities Competitive Access Operations produced EBITDA of $67.6
million before parent company allocations in the nine months ended September 30,
1996 and $43.8 million in the nine months ended September 30, 1995, an increase
of $23.8 million, or 54%. 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 $125.0 million in the nine months ended
September 30, 1996 from $59.8 million in the nine months ended September 30,
1995, an increase of $65.2 million or 109%. The increase is due to an increase
in the number of new projects, including a contract to provide design and
construction services for a wireless personal communications system.
Network systems integration operating expenses increased to $115.4 million
in the nine months ended September 30, 1996 from $52.2 million in the nine
months ended September 30, 1995, an increase of $63.2 million or 121%. 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 general and administrative expenses increased
to $11.3 million in the nine months ended September 30, 1996 from $10.0 million
in the nine months ended September 30, 1995, an increase of $1.3 million. The
increase reflects the increased third party work noted above.
<PAGE> 18
<PAGE>
Network systems integration EBITDA loss decreased to $(1.0) million in the
nine months ended September 30, 1996 from $(2.4) million in the nine months
ended September 30, 1995. This resulted from the increased margins realized
from the increase in third party work noted above.
Other Income (Expense)
- ----------------------
Other income (expense) increased to $(49.8) million of other expense in the
nine months ended September 30, 1996 from $(19.6) million of other expense in
the nine months ended September 30, 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 $.3 million and $.45 million for the nine months
ended September 30, 1996 and 1995, respectively, resulted from estimated state
and foreign tax liabilities.
Net Loss
- --------
Net loss increased to $323.0 million in the nine months ended September 30,
1996 from $196.0 million in the nine months ended September 30, 1995, an
increase of $127.0 million. The increase resulted primarily from increased
depreciation, amortization and interest expense.
Liquidity and Capital Resources
The Company's total assets have increased to $5.8 billion at September 30,
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 $1.3 billion common stock
offering in July 1996. The Company's current assets at September 30, 1996 of
$1,769.5 million, including cash and marketable securities aggregating $1,344.7
million, exceeded current liabilities of $451.6 million, providing working
capital of $1,317.9 million. Network and equipment, net of depreciation,
comprise $1.6 billion of total assets.
The Company's operating activities used net cash of $100.8 million in the
nine months ended September 30, 1996 and $115.6 million in the nine months ended
September 30, 1995. The decrease in cash used by operating activities reflects
improvement in the margins that the Company is generating as it grows its
businesses, increased interest income, and an increase in liabilities, partially
offset by an increase in cash used to support increased levels of accounts
receivable and other assets.
In order to finance the Company's operations and network development, 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,
- -proceeds from 8 7/8% Senior Discount Notes in the first quarter of 1996 and,
- -proceeds from a public offering of common stock in July 1996.
<PAGE> 19
<PAGE>
Proceeds from these financing transactions that occurred in the nine month
periods ended September 30, 1996 and 1995 resulted in net cash provided by
financing activities of $1,839.7 million and $314.4 million, respectively.
During the first nine months of 1996, the Company's capital expenditures,
including the acquisitions of businesses, were $525.4 million compared to $384.1
million in the first nine months of 1995. The capital expenditures are
primarily for the construction or expansion of networks and the purchase of
related equipment. Net cash used in all investing activities was $1,441.1
million in the first nine months of 1996 including the investment of the
proceeds from the July 1996 common stock offering, and $195.3 million in the
first nine months 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 and transoceanic 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 the 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
including certain of the Internet-related initiatives, will, together with
currently anticipated expenditures, result in total average annual capital
expenditures of approximately $1.0 billion to $1.3 billion over the period of
implementation, which the Company expects to be up to four years. Since a
significant portion of the Company's capital expenditures are success-based
(that is, related directly to revenue growth), actual capital expenditures may
vary significantly from the above range depending on the level of incremental
sales. This range is also subject to a number of factors, including the pace
and extent of network development, 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 available liquidity at September 30, 1996 will be
used to fund the initial capital expenditures of these initiatives. The Company
expects to fund the balance of its capital requirements through existing
resources, internally generated funds and additional debt or equity financing as
appropriate.
Other Matters
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> 20
<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.
The Company and WorldCom, Inc. ("WorldCom") announced the execution of a
merger agreement dated August 25, 1996. According to the terms of the merger
agreement each share of MFS common stock will be exchanged for 2.1 shares of
WorldCom common stock and each share of MFS Series A and Series B preferred
stock will be exchanged for shares of WorldCom preferred stock. WorldCom is one
of the largest long distance telecommunications companies in the United States,
offering domestic and international voice, data and video products and services
to business customers, other carriers and the residential market. The merger is
expected to close in late 1996 or early 1997 following approval of various
federal, state and local regulatory authorities. Approval of the shareholders
of the Company and WorldCom is also required.
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, had not previously recognized
compensation cost for many of their stock compensation plans.
The Company adopted the fair value based method of SFAS 123 in the first
quarter of 1996. 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 award 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 has granted approximately 1,392,000 awards under the new plan
in the first nine months of 1996 and anticipates that additional grants may be
made on a quarterly basis. The amount of non cash stock-based compensation
expense recorded in the nine month period ended September 30, 1996, as measured
under SFAS 123, was $10,915. The Company believes that these charges may
continue in 1996 and thereafter. The amount of the non-cash charge will be
dependent upon a number of factors, including the number of options and awards
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> 21
<PAGE>
Forward-looking Statements
The matters discussed in this Form 10Q contain forward-looking statements
that involve risks and uncertainties including risk of changing market
conditions, competitive and regulatory risk associated with the
telecommunications and Internet industries, the impact of competitive services
and pricing, the impact of the Telecommunications Act of 1996, and other risks
detailed from time to time in the Company's filings with the Securities and
Exchange Commission.
<PAGE> 22
<PAGE>
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
-----------------
On March 4, 1994, several of the former minority stockholders of MFS
Telecom, Inc., a subsidiary of the Company, filed a lawsuit against Kiewit
Diversified Group Inc., the Company and its chief executive officer in the
United States District Court for the Northern District of Illinois, Case No.
94C-1381, captioned Arthur Brantman et al. v. MFS Communications Company,
Inc. et al. Plaintiffs alleged that MFS fraudulently concealed material
information about its plans from them, causing them to sell their shares at
an inadequate price and further alleged damages of at least $100 million.
On July 9, 1996 this lawsuit was settled with no cost to the Company.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) The regular annual meeting of stockholders of the registrant was held August
10, 1996.
(b) At the annual meeting, the stockholders:
(i) approved the issuance of the Company's common stock in connection with
either the Agreement and Plan of Merger between the Company and UUNET
Technologies, Inc. ("UUNET") or a Stockholder Option, Voting and Proxy
Agreement between the Company and certain stockholders of UUNET. The
issuance was approved by a vote of the stockholders as follows:
Affirmative votes 181,198,824
Negative votes 612,693
Abstentions 184,467
Broker non-votes 22,747,116
(ii) voted to re-elect four directors of the Company. Each nominee for
director was elected by a vote of the stockholders as follows:
Affirmative Negative Votes
Votes Votes Withheld
----------- -------- --------
James Q. Crowe 202,912,949 1,830,152 -
Royce J. Holland 202,890,589 1,852,512 -
R. Douglas Bradbury 202,914,455 1,828,646 -
William J. Grewcock 202,646,961 2,096,140 -
The following directors have terms of office that continued after the
meeting: Howard Gimbel, Richard R. Jaros, Robert E. Julian, David C.
McCourt, Ronald W. Roskens, Walter Scott, Jr., Kenneth E. Stinson and
Michael B. Yanney.
(iii) adopted amendments to the MFS 1993 Stock Plan. The amendments were
approved by a vote of the stockholders as follows:
Affirmative votes 168,648,692
Negative votes 29,750,673
Abstentions 1,488,175
Broker non-votes 4,855,561
<PAGE> 23
<PAGE>
(iv) adopted amendments to the MFS 1995 Deferred Stock Purchase Plan. The
amendments were approved by a vote of the stockholders as follows:
Affirmative votes 195,745,108
Negative votes 3,776,335
Abstentions 1,501,142
Broker non-votes 3,730,516
(v) ratified the appointment by the Board of Directors of Coopers &
Lybrand L.L.P. as independent auditors of the Company for the 1996 fiscal
year. The appointment was ratified by a vote of the stockholders as
follows:
Affirmative votes 202,407,040
Negative votes 2,166,136
Abstentions 169,925
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
11 Statement regarding computation of net loss per share applicable to common
shareholders.
(b) A report on Form 8-K, dated August 1, 1996, was filed reporting
under Item 5 the Company's results of operations for the 2nd
quarter of 1996 in the form of a press release.
A report on Form 8-K, dated August 12, 1996, was filed reporting
under Item 2 that the Company had completed the acquisition of
UUNET Technologies, Inc.
A report on Form 8-K, filed August 26, 1996, reported under Item 5 that the
Company had executed an agreement and plan of merger with WorldCom, Inc.
<PAGE> 24
<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.
/s/ R. Douglas Bradbury
-------------------------------------
Dated: November 12, 1996 R. Douglas Bradbury
Chief Financial Officer
<PAGE> 25
</TABLE>
Exhibit 11
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
SCHEDULE COMPUTING CONSOLIDATED NET LOSS PER SHARE
APPLICABLE TO COMMON SHAREHOLDERS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
---- ---- ---- ----
Common shares outstanding
- -------------------------
<S> <C> <C> <C> <C>
Common shares outstanding at
beginning of period (1) 126,824,589 129,029,524 130,260,228 128,306,436
Add issuances 94,818,120 778,680 97,182,481 1,501,768
Less treasury share - (5,800,000) (5,800,000) (5,800,000)
----------- ----------- ----------- -----------
Common shares outstanding at
end of period 221,642,709 124,008,204 221,642,709 124,008,204
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
---- ---- ---- ----
Net loss per share applicable to
- --------------------------------
common shareholders
- -------------------
<S> <C> <C> <C> <C>
Weighted average number of
common shares outstanding 190,697,000 129,319,000 147,455,000 129,005,000
=========== =========== =========== ===========
Net loss $(144,124) $(67,239) $(323,044) $(195,975)
Dividends on preferred stock (7,460) (7,701) (21,992) (7,701)
-------- ------- -------- --------
Net loss applicable to common
shareholders $(151,584) $(74,940) $(345,036) $(203,676)
======== ======= ======== ========
Net loss per share applicable
to common shareholders $ (0.79) $ (0.58) $ (2.34) $ (1.58)
======== ======== ======== ========
_______________________________________________________________________________________
(1) All share data has been stated reflecting the common stock split in 1996.
</TABLE>
<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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 349074
<SECURITIES> 995667
<RECEIVABLES> 269559
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1769463
<PP&E> 1950617
<DEPRECIATION> 330878
<TOTAL-ASSETS> 5816787
<CURRENT-LIABILITIES> 451576
<BONDS> 1354286
0
151
<COMMON> 2216
<OTHER-SE> 3934659
<TOTAL-LIABILITY-AND-EQUITY> 5816787
<SALES> 0
<TOTAL-REVENUES> 724044
<CGS> 0
<TOTAL-COSTS> 664890
<OTHER-EXPENSES> 212425
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 78397
<INCOME-PRETAX> (322744)
<INCOME-TAX> (300)
<INCOME-CONTINUING> (323044)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (323044)
<EPS-PRIMARY> (2.34)
<EPS-DILUTED> (2.34)
</TABLE>
