<PAGE>
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 March 31, 1997
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 33-72594
(formerly 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
-------- --------
MFS Communications Company, Inc. is a wholly-owned subsidiary of
WorldCom, Inc., and there is no market for the registrant's common stock. As of
May 1, 1997, there was 1 share of the registrant's sole class of common stock
outstanding.
The registrant meets the conditions set forth in General Instruction
H(1)(a) and (b) of Form 10-Q, and is therefore filing this form with the reduced
disclosure format.
<PAGE>
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Part I - Financial Information
------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1. Financial Statements Re the Three Months
Ended March 31, 1997
Consolidated Statement of Operations...............................1
Consolidated Balance Sheets........................................2
Consolidated Statement of Changes in Stockholder's Equity..........3
Consolidated Statement of Cash Flows...............................4
Notes to Consolidated Financial Statements.........................5
Financial Statements Re the Three Months
Ended March 31, 1996
Consolidated Statement of Operations...............................8
Consolidated Statement of Changes in Stockholders' Equity..........9
Consolidated Statement of Cash Flows..............................10
Notes to Consolidated Financial Statements........................11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...................12
Part II - Other Information
---------------------------
Item 6. Exhibits and Reports on Form 8-K..................................16
Signature ..................................................................18
</TABLE>
<PAGE>
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Consolidated Statement of Operations
For the Three Months Ended March 31, 1997
(unaudited)
(dollars in thousands)
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
Revenue $425,935
Costs and expenses:
Cost of sales 203,965
Depreciation and amortization 150,981
General and administrative expenses 151,675
-------
506,621
-------
Loss from operations (80,686)
Other income (expense):
Interest income 8,983
Interest expense (28,327)
Other 3,126
-------
Total other income (expense) (16,218)
-------
Loss before income taxes (96,904)
Income tax benefit 14,712
-------
Net loss $(82,192)
========
</TABLE>
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
1
<PAGE>
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
---- ----
ASSETS (unaudited)
------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................... $ 49,804 $ 209,324
Marketable securities....................................... 57,079 772,510
Accounts receivable......................................... 379,406 317,774
Costs and earnings in excess of billings on
uncompleted contracts...................................... 84,278 95,328
Subordinated demand promissory note from
Worldcom................................................... 302,946 -
Prepaid expenses and other current assets................... 139,912 87,636
Deferred income taxes....................................... 8,210 13,372
----------- -----------
Total current assets...................................... 1,021,635 1,495,944
Networks and equipment, at cost................................ 2,139,998 1,892,523
Less accumulated depreciation and amortization.............. 64,345 -
----------- -----------
Networks and equipment, net............................... 2,075,653 1,892,523
Goodwill, net.................................................. 8,434,075 8,333,669
Other assets, net.............................................. 574,090 699,714
Deferred income taxes.......................................... 229,194 128,479
----------- -----------
Total assets.............................................. $12,334,647 $12,550,329
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
Current liabilities:
Current portion of notes payable
and long-term debt......................................... $ 12,707 $ 12,596
Current portion of capital lease obligations................ 5,453 5,549
Accounts payable............................................ 325,832 459,958
Accrued costs and billings in excess of
revenue on uncompleted contracts........................... 60,669 53,880
Accrued compensation........................................ 19,631 17,491
Other current liabilities................................... 239,139 165,491
----------- -----------
Total current liabilities................................. 663,431 714,965
Notes payable and long-term debt,
less current portion.......................................... 1,412,843 1,477,670
Capital lease obligations, less current portion 30,119 31,046
Other liabilities.............................................. 25,385 25,573
Minority interest.............................................. 12,750 13,489
Commitments and contingencies (Note 8)
Stockholder's equity:
Common stock, $.01 par value. Authorized
and issued 1 share........................................ - -
Additional paid-in capital.................................. 12,440,918 12,440,918
Deferred charge............................................. (11,668) (13,332)
Foreign currency adjustment................................. (16,939) -
Accumulated deficit......................................... (2,222,192) (2,140,000)
----------- -----------
Total stockholder's equity................................ 10,190,119 10,287,586
----------- -----------
Total liabilities and stockholder's equity $12,334,647 $12,550,329
=========== ===========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
2
<PAGE>
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholder's Equity
For the Three Months Ended March 31, 1997
(dollars in thousands)
<TABLE>
<CAPTION>
Additional Foreign
Common Paid-in Deferred Currency Accumulated
Stock Capital Charge Adjustment Deficit Total
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1997............ $ - $12,440,918 $(13,332) $ - $(2,140,000) $10,287,586
Amortization of
deferred charge............ - - 1,664 - - 1,664
Foreign currency
adjustment................. - - - (16,939) - (16,939)
Net loss..................... - - - - (82,192) (82,192)
-------- ----------- -------- -------- ----------- -----------
Balance at
March 31, 1997............. $ - $12,440,918 $(11,668) $(16,939) $(2,222,192) $10,190,119
======== =========== ======== ======== =========== ===========
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
3
<PAGE>
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
For the Three Months Ended March 31, 1997
(unaudited)
(dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss $ (82,192)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 150,981
Non cash interest expense 25,888
Other (941)
Changes in assets and liabilities,
net of effects of acquisitions:
Accounts receivable and other current assets (78,102)
Other liabilities (58,560)
--------
Net cash used in operating activities (42,926)
--------
Cash flows from investing activities:
Purchases of networks and equipment (264,687)
Proceeds from maturities and sales of
marketable securities 704,095
Advances to affiliates (317,120)
Additions to deferred costs and other (6,004)
Payments related to WorldCom merger (138,867)
--------
Net cash used in investing activities (22,583)
--------
Cash flows from financing activities:
Payments on long term debt (94,011)
--------
Net cash used in financing activities (94,011)
--------
Net change in cash and cash equivalents (159,520)
Cash and cash equivalents at beginning of period 209,324
--------
Cash and cash equivalents at end of period $ 49,804
=========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
Supplemental schedule of non cash financing and investing activities.
The Company capitalized non-cash interest expense of $2,868 in the three months
ended March 31, 1997, on network construction projects.
4
<PAGE>
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three Months Ended March 31, 1997
(dollars in thousands, except per share data)
1. Organization:
The consolidated financial statements include the accounts of MFS
Communications Company, Inc. ("MFS"), and its majority-owned subsidiaries (the
"Company"). Effective at 11:58 p.m. on December 31, 1996 ("Inception"),
WorldCom, Inc. ("WorldCom") acquired the Company pursuant to the merger (the
"Merger") of HIJ Corp., a wholly-owned subsidiary of WorldCom, with and into
MFS. Upon consummation of the Merger, the Company became a wholly-owned
subsidiary of WorldCom. Pursuant to the merger agreement, each share of the
Company's common stock was converted into the right to receive 2.1 shares of
common stock of WorldCom, and each share of the Company's Series A and Series B
Preferred Stock was converted into the right to receive one share of WorldCom
Series A and Series B Preferred Stock, respectively. Upon the Merger the capital
structure of the Company consists of one share of common stock which is owned by
WorldCom and constitutes all of the issued and outstanding capital stock.
The acquisition of the Company has been accounted for by WorldCom using
the purchase method. The results of applying that method have been pushed down
into the Company's financial statements at the date of the Merger. Accordingly,
the consolidated balance sheet as of December 31, 1996 reflects the allocation
of the purchase price to the Company's assets and liabilities based upon their
estimated fair values. The purchase price allocation for the Merger was based on
estimates and WorldCom will make the final purchase price allocation based upon
final values for certain assets and liabilities. As a result, the final purchase
price allocations may differ from the presented estimate. The excess of cost
over the fair value of net tangible assets, identifiable intangible assets and
in-process research and development of the Company has been recorded as
goodwill. The value assigned to the in-process research and development has been
charged to expense in the consolidated statement of operations for the period
ended December 31, 1996. The results of operations, changes in stockholder's
equity and cashflow information for the three months ended March 31, 1997
reflect activity subsequent to the WorldCom acquisition.
2. Basis of Presentation:
The consolidated balance sheet of the Company at December 31, 1996 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.
3. 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.
5
<PAGE>
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three Months Ended March 31, 1997
(dollars in thousands, except per share data)
3. Acquisition of UUNET Technologies, Inc.:--(continued)
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 the 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.
<TABLE>
<CAPTION>
Three months ended
March 31, 1996
--------------------
<S> <C>
Revenue $228,047
Net loss (128,970)
</TABLE>
4. Due from Parent Company:
On March 4, 1997, the Company entered into a Subordinate Demand Promissory
Note with WorldCom. The principal sum of the note is not to exceed $500,000.
Interest on the borrowing bears interest at a rate of .5% per annum plus the
thirty-day LIBOR rate. The principal and accrued interest on the note is payable
on demand, subject to the terms of a WorldCom Subordination Agreement. At March
31, 1997, the Subordinated Demand Promissory Note principal and interest due to
the Company was $302,946. At March 31, 1997, prepaid expenses and other current
assets includes $14,174 of intercompany accounts receivable from WorldCom.
5. Income Taxes:
The income tax benefit of $14,712 for 1997 resulted from the recognition
of tax benefits for the amount of net operating loss carryforwards available for
tax reporting purposes.
6. Notes Payable and Long-Term Debt:
Due to certain conditions related to the change in control of the Company
that occurred as of the Merger, the Company was required to offer to repurchase
all or any part of the 1994 and 1996 Senior Discount Notes as stipulated in the
related indentures. The offer to repurchase the notes expired February 27, 1997,
with $666 of the 1994 Senior Discount Notes and $9,670 of the 1996 Senior
Discount Notes being repurchased. The 1994 and 1996 Senior Discount Notes are
senior unsecured obligations of the Company and are subordinated to all current
and future indebtedness of the Company's subsidiaries, including trade accounts
payable. The notes contain certain covenants which, among other things, restrict
the Company's ability to incur additional 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 another
company.
6
<PAGE>
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three Months Ended March 31, 1997
(dollars in thousands, except per share data)
7. Employee Benefit Plans:
Certain of the Company's employees have received benefits under plans that
have been assumed by WorldCom. A description of those plans follow.
(a) 401(k) Plan:
The Company administers a 401(k) Plan whereby eligible employees may
voluntarily contribute a percentage of compensation. The Company has not
contributed to the plan. Full-time employees who have attained 21 years of age
are eligible to participate.
(b) Stock Option Plans:
Certain employees of the Company have received stock options under plans
that have been assumed by WorldCom. Upon effectiveness of the Merger, the then
outstanding and unexercised options exercisable for shares of the Company's
common stock were converted into options exercisable for shares of WorldCom
common stock having substantially the same terms and conditions as the Company's
options, except that the exercise price and the number of shares issuable upon
exercise were divided and multiplied, respectively, by 2.1.
(c) Shareworks:
Effective October 1995, the Company implemented a new employee benefit
plan which is comprised of a grant plan and a match plan jointly known as
Shareworks. This employee benefit plan was also assumed by WorldCom. The plan
was offered to each domestic employee hired after September 1, 1995, and also
made available to all current employees that choose to be ineligible for future
grants under the Company's Stock Option Plans. 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 will vest after three years with any additional grants vesting immediately
once the initial three year period has been met.
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 will match 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 unamortized compensation expense for the Shareworks plan has been
recorded as a deferred charge in stockholder's equity in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees."
8. Commitments and Contingencies
The Company is involved in legal and regulatory proceedings generally
incidental to its business. In some instances, rulings by regulatory authorities
in some states may result in increased operating costs to the Company. While the
results of these various legal and regulatory matters contain an element of
uncertainty, the Company believes that the probable outcome of any of the legal
or regulatory matters, or all of them combined, should not have a material
adverse effect on the Company's consolidated results of operations or financial
position.
7
<PAGE>
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Consolidated Statement of Operations
For the Three Months Ended March 31, 1996
(unaudited)
(dollars in thousands,
except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Revenue $ 186,316
Costs and expenses:
Cost of sales 105,909
Depreciation and amortization 44,609
General and administrative
expenses 103,156
--------
253,674
--------
Loss from operations (67,358)
Other income (expense):
Interest income 5,644
Interest expense (23,626)
Other (784)
--------
Total other income (expense) (18,766)
--------
Loss before income taxes (86,124)
Income tax expense (100)
--------
Net loss (86,224)
Dividends on preferred stock (7,072)
--------
Net loss applicable to common
stockholders $ (93,296)
=========
Net loss per share applicable to
common stockholders $ (0.75)
=========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
8
<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)
====== ====== ====== ========== ======= =====
Unrealized
Investment Accumulated Treasury
Gain (Loss) Deficit Stock Total
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <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
===== ========= ========= ========
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
9
<PAGE>
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
For the Three Months Ended March 31, 1996
(unaudited)
(dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss $ (86,224)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 44,609
Non cash interest expense 21,145
Non cash compensation expense 3,341
Changes in assets and liabilities,
net of effects of acquisitions:
Accounts receivable and other current assets (28,174)
Other liabilities (7,114)
----------
Net cash used in operating activities (52,417)
----------
Cash flows from investing activities:
Purchases of networks and equipment (148,440)
Proceeds from maturities and sales of
marketable securities 106,000
Purchases of marketable securities (386,602)
Additions to deferred costs and other (4,854)
----------
Net cash used in investing activities (433,896)
----------
Cash flows from financing activities:
Proceeds from issuance of
long term debt and notes payable 619,713
Payments of debt financing costs (18,672)
Payments on long term debt (80,464)
Proceeds from exercise of stock options 7,142
----------
Net cash provided by financing activities 527,719
----------
Net change in cash and cash equivalents 41,406
Cash and cash equivalents at beginning of period 51,182
----------
Cash and cash equivalents at end of period $ 92,588
==========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
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 in the three months
ended March 31, 1996 on network construction projects.
10
<PAGE>
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three Months Ended March 31, 1996
(dollars in thousands, except per share data)
1. Organization:
The consolidated financial statements include the accounts of MFS
Communications Company, Inc. ("MFS"), and its majority-owned subsidiaries (the
"Company"). MFS was incorporated on July 17, 1987 in Delaware and, prior to its
initial public offering in May 1993, was a wholly-owned subsidiary of Kiewit
Diversified Group Inc. ("KDG"), which is a wholly-owned subsidiary of Peter
Kiewit Sons', Inc. ("PKS"). In 1995, pursuant to a planned restructuring, all of
PKS' remaining interest in the Company's capital stock was distributed to
certain PKS stockholders.
Effective at 11:58 p.m. on December 31, 1996 ("Inception"), WorldCom,
Inc. ("WorldCom") acquired the Company pursuant to the merger (the "Merger") of
HIJ Corp., a wholly-owned subsidiary of WorldCom, with and into MFS. Upon
consummation of the Merger, the Company became a wholly-owned subsidiary of
WorldCom. Pursuant to the merger agreement, each share of the Company's common
stock was converted into the right to receive 2.1 shares of common stock of
WorldCom, and each share of the Company's Series A and Series B Preferred Stock
was converted into the right to receive one share of WorldCom Series A and
Series B Preferred Stock, respectively. Subsequent to the Merger, the capital
structure of the Company consists of one share of common stock which is owned by
WorldCom and constitutes all of the issued and outstanding capital stock.
The acquisition of the Company has been accounted for by WorldCom using
the purchase method. Thus, the results of operations for the three months ended
March 31, 1996 reflect the activity of the Company prior to the Merger. The
impact of pushdown accounting reflecting the purchase by WorldCom has been set
forth in the accompanying financial statements for the three months ended
March 31, 1997.
2. Basis of Presentation:
The Company's consolidated 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
and notes thereto have been reclassified from previous years to conform to
current year presentation.
11
<PAGE>
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
Overview
The full Management's Discussion and Analysis of Financial Condition
and Results of Operations is omitted under the reduced disclosure format
pursuant to General Instruction H(2)(a) of Form 10-Q. The following analysis
represents an abbreviated version of management's analysis of the results of
operations for the three months ended March 31, 1997, which were impacted by the
effects of the December 31, 1996 acquisition of the Company described below, as
compared to the 1996 period.
MFS Communications Company, Inc. was founded in 1987 and commenced
operations in 1988. Effective at 11:58 p.m. on December 31, 1996, WorldCom
acquired the Company pursuant to the Merger of HIJ Corp., a wholly-owned
subsidiary of WorldCom, with and into MFS. Upon consummation of the Merger, the
Company became a wholly-owned subsidiary of WorldCom. MFS provides
facilities-based communications services and systems to business and government.
The Company is organized as a holding company and operates through its
subsidiaries in two business segments, communications services and network
systems integration services.
MFS provides communications services domestically and internationally
in the form of: (i) dedicated special access and private line circuits, local
switched service and high speed data communications to large business customers;
(ii) single source integrated local and long distance switched services, high
speed data communications services and facilities management to medium and small
businesses; (iii) local access to long distance companies; (iv) local access,
ATM-based backbone service and interconnection via NAPs to Internet service
providers and (v) a comprehensive range of Internet-based services. The Company
provides communications services by utilizing its international network
platform, which consists of MFS-owned transmission and switching facilities and
network capacity leased from the other carriers primarily in the United States
and Western Europe.
On August 12, 1996, MFS acquired UUNET through a merger of a subsidiary
of MFS with and into UUNET. UUNET is a leading worldwide provider of a
comprehensive range of Internet access options, applications, and consulting
services to businesses and professionals. UUNET's solution has been designed to
address many of the needs of businesses and professionals relating to Internet
use. The UUNET solution is based upon UUNET's high performance, domestic and
international network infrastructure designed specifically to provide reliable
Internet connectivity to businesses with demanding throughput requirements.
UUNET makes available to customers a variety of products and services,
including dedicated and dial-up Internet access, Web server hosting and content
development services, client software and security products and training, all of
which can be integrated by UUNET through its network integration and consulting
services. UUNET enables Internet users to purchase access, applications and
services, including integration services, through a single source. UUNET's
products and services are supported by a technical staff that is highly
experienced in Internet operations and services. UUNET's network operations
center monitors traffic across UUNET's network 24 hours per day, seven days per
week.
12
<PAGE>
MFS provides network systems integration services primarily through MFS
Network Technologies. Initially created to design and build MFS' networks in a
high quality and cost-effective manner, MFS Network Technologies provides
network systems integration services for MFS and third parties which desire to
deploy sophisticated networks, including intelligent transportation systems,
voice and data networks, interactive distance learning networks, security
systems and combined cable television-telephone networks.
Communications Services. The Company's communications services
predominately result in monthly recurring revenues. The Company provides these
services in an expanding number of major metropolitan areas. 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 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.
Results of Operations
The following table presents revenue and loss from operations from each
of the Company's reportable business segments for the periods presented:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
1997 1996
---- ----
<S> <C> <C>
Revenue:
Communications services...................... $373,838 $165,590
Network systems integration services......... 52,097 20,726
------- --------
Total..................................... $425,935 $186,316
======== ========
Loss from operations:
Communications services...................... $(75,683) $(65,994)
Network systems integration services......... (5,003) (1,364)
------- --------
Total..................................... $(80,686) $(67,358)
======== ========
</TABLE>
13
<PAGE>
Three Months Ended March 31, 1997 vs. Three Months Ended March 31, 1996
Communications Services
- -----------------------
Communications services revenue increased to $373.8 million in 1997
from $165.6 million in 1996, an increase of $208.2 million or 126%. The increase
resulted from the acquisition of UUNET as of August 12, 1996, which recorded
$109.8 million of revenue in the first quarter of 1997, and from increased
market penetration of all communications services of the Company. Revenue from
international operations increased to $70.7 million in 1997 from $23.2 million
in 1996, reflecting strong sales in the United Kingdom and a growing revenue
base in continental Europe.
Annualized monthly recurring revenue increased to approximately $1.5
billion at March 31, 1997 from approximately $700 million at March 31, 1996, an
increase of 121%. 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 cost of sales increased to $151.9 million in
1997 from $88.1 million in 1996, an increase of $63.8 million. A significant
portion of the increase related to the acquisition of UUNET, and increased
market penetration of all communications services of the Company. Communications
services cost of sales consists of direct third-party costs of providing
communications services, primarily payments to other telecommunications
companies for access and transport charges.
Communications services depreciation and amortization expense increased
to $150.4 million in 1997 from $44.0 million in 1996, an increase of $106.4
million. The increase is primarily related to amortization expense on the
intangible assets recorded in the acquisition of the Company by WorldCom, and to
a lesser extent amortization of intangible assets recorded in the UUNET
acquisition and to the expanded fixed asset base of the Company's networks.
Communications services selling, general and administrative expenses
increased to $147.3 million in 1997 from $99.5 million in 1996, an increase of
$47.8 million. The increase primarily related to UUNET expenses and from
increased costs related to the Company's continued growth.
Network Systems Integration Services
- ------------------------------------
Third party revenue from services offered by the Company's network
systems integration segment increased to $52.1 million in 1997 from $20.7
million in 1996 or 151%. The increase is due to an increase in the number of new
projects, including contracts to provide design and construction services for a
wireless personal communications system and a fiber-optic network along the
trans-Alaska pipeline.
Network systems integration cost of sales increased to $52.1 million in
1997 from $17.8 million in 1996, an increase of $34.3 million. The increase is
primarily due to the increased level of costs related to the projects noted
above, including the continuing development and investment in ITS service
projects. Network systems integration cost of sales consists of direct costs
associated with the network systems integration projects.
Network systems integration selling, general and administrative
expenses increased to $4.4 million in 1997 from $3.7 million in 1996, an
increase of $0.7 million. The increase reflects the increased number of new
projects.
14
<PAGE>
Other Income (Expense)
- ----------------------
Other income (expense) decreased to $(16.2) million of other expense in
1997 from $(18.8) million of other expense in 1996. The change in other expense
resulted primarily from increased interest expense in 1997, offset by increased
interest income and increased other income.
Income Taxes
- ------------
The income tax benefit of $14.7 million for 1997 resulted from the
recognition of tax benefits for the amount of net operating loss carryforwards
available for tax reporting purposes.
Backlog
- -------
The network systems integration and facilities management services
segment had third party backlog of approximately $245 million at March 31, 1997.
Backlog consists of firm contracts less revenue recognized to date by the
Company.
Forward-looking Statements
The matters discussed in this Form 10-Q contain forward-looking
statements, within the meaning of the Private Securities Litigation Reform Act
of 1995, that involve risks and uncertainties including risk of changing market
conditions, competitive and regulatory risk associated with the telecom-
unications 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. These risks and uncertainties are not intended to represent
a complete list of the general or specific risks that may affect the Company. It
should be recognized that other risks may be significant, presently or in the
future.
15
<PAGE>
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
---------------------------
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
A. Exhibits
See Exhibit Index
B. Reports on Form 8-K
(i) Current Report on Form 8-K dated December 31, 1996 (filed
January 15, 1997), reporting under Item 1, Changes in Control
of Registrant, Item 2, Acquisition or Disposition of Assets,
and Item 7, Financial Statements and Exhibits, incorporating
pro forma financial information to Item 7(b) of WorldCom's
Current Report on Form 8-K/A, dated August 25, 1996 (filed
November 20, 1996)(File no. 0-11258)
(ii) Current Report on Form 8-K dated January 20, 1997 (filed
January 24, 1997), reporting under Item 4, Changes in
Registrant's Certifying Accountant and Item 7(e), Exhibits
16
<PAGE>
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
Exhibit Index
<TABLE>
<CAPTION>
Exhibit no. Description
----------- -------------------------------
<C> <S>
3.1 Restated Certificate of Incorporation./1/
3.2 Amendment No. 1 to Restated Certificate of Incorporation./2/
3.3 Amendment No. 2 to Restated Certficate of Incorporation./3/
3.4 By-laws./4/
11 Statement computing consolidated net loss per share applicable to common stockholders.
27.1 Financial Data Schedule.
</TABLE>
- ------------------------------------------------
/1/Incorporated herein by reference to the Registrant's Registration
Statement on Form S-1 (File no. 33-59358) as amended, originally filed with the
Securities and Exchange Commission on March 11, 1993.
/2/Incorporated herein by reference to Exhibit 3.2 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended December 31,
1994, as filed with the Securities and Exchange Commission on March 31, 1995.
/3/Incorporated herein by reference to Exhibit 3.1 to the
Registrant's Current Report on Form 8-K, dated September 30, 1995.
/4/Incorporated herein by reference to Exhibit 3.2 to the
Registrant's Current Report on Form 8-K, dated September 30, 1995.
17
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report on Form 10-Q to be signed on its behalf
by Robert J. Ludvik, thereunto duly authorized to sign on behalf of the
registrant and as the chief accounting officer thereof.
MFS COMMUNICATIONS COMPANY, INC.
Dated: May 15, 1997 By: /s/ Robert J. Ludvik
--------------------
Robert J. Ludvik
Chief Accounting Officer
18
<PAGE>
Exhibit 11
MFS COMMUNICATIONS COMPANY, INC.AND SUBSIDIARIES
SCHEDULE COMPUTING CONSOLIDATED NET LOSS PER SHARE
APPLICABLE TO COMMON STOCKHOLDERS
For the Three Months Ended March 31, 1996
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Common shares outstanding/(1)/
- -------------------------
<S> <C>
Common shares outstanding at beginning of period 130,260,228
Add issuances 1,159,434
Less retirement of treasury stock (5,800,000)
----------
Common shares outstanding at end of period 125,619,662
===========
<CAPTION>
Net loss per share applicable to common
- ---------------------------------------
stockholders
- ------------
<S> <C>
Weighted average number of common shares
outstanding 125,017,000
Net loss $ (86,224)
Dividends on preferred stock (7,072)
--------
Net loss applicable to common
stockholders $ (93,296)
=========
Net loss per share applicable to
common stockholders $ (0.75)
=========
</TABLE>
- ------------------------------------------------------------------------------
(1) All share data has been stated reflecting the common stock split in 1996.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS AND RELATED NOTES AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 49,804
<SECURITIES> 57,079
<RECEIVABLES> 411,503
<ALLOWANCES> (32,097)
<INVENTORY> 0
<CURRENT-ASSETS> 1,021,635
<PP&E> 2,139,998
<DEPRECIATION> (64,345)
<TOTAL-ASSETS> 12,334,647
<CURRENT-LIABILITIES> 663,431
<BONDS> 1,442,962
0
0
<COMMON> 0
<OTHER-SE> 10,190,119
<TOTAL-LIABILITY-AND-EQUITY> 12,334,647
<SALES> 425,935
<TOTAL-REVENUES> 425,935
<CGS> 203,965
<TOTAL-COSTS> 506,621
<OTHER-EXPENSES> (12,109)
<LOSS-PROVISION> 6,647
<INTEREST-EXPENSE> 28,327
<INCOME-PRETAX> (96,904)
<INCOME-TAX> 14,712
<INCOME-CONTINUING> (82,192)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (82,192)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
