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As Filed With The Securities And Exchange Commission On May 16, 1997
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10
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GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR (g) OF
THE SECURITIES EXCHANGE ACT OF 1934
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MFS COMMUNICATIONS COMPANY, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE
(State of Incorporation)
47-0714388
(IRS Employer Identification No.)
11808 Miracle Hills Drive, Omaha, Nebraska
(Address of Principal Executive Offices)
68154
(Zip Code)
(402) 231-3000
(Registrant's Telephone Number, Including Area Code)
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Securities to be registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on Which
Each Class is to be Registered Title of Each Class to be so Registered
- -------------------------------------------------------------------------------
None None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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MFS Communications Company, Inc. is a wholly-owned subsidiary of WorldCom, Inc.
As of May 16, 1997, there was one share of the registrant's sole class of
common stock outstanding.
The registrant meets the conditions set forth in General Instruction I(1)(a)
and (b) of Form 10-K and, therefore, is filing this Form 10 with the reduced
disclosure format contemplated by such General Instruction.
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Item 1. Business.
Incorporated herein by reference to Item 1 of the registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1996, File
No. 33-72594 ("1996 Form 10-K").
Item 2. Financial Information.
Certain information incorporated herein by reference to Item 7 of
the registrant's 1996 Form 10-K and to Item 2 of Part I of the registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 (the "1997
First quarter 10-Q") and certain information omitted under the reduced
disclosure format contemplated by General Instruction I(2)(a) of Form 10-K.
Item 3. Properties.
Incorporated herein by reference to Item 2 of the registrant's 1996
Form 10-K.
Item 4. Security Ownership of Certain Beneficial Owners and Management.
Omitted under the reduced disclosure format contemplated by General
Instruction I(2)(a) of Form 10-K
Item 5. Directors and Executive Officers.
Omitted under the reduced disclosure format contemplated by General
Instruction I(2)(a) of Form 10-K
Item 6. Executive Compensation.
Omitted under the reduced disclosure format contemplated by General
Instruction I(2)(a) of Form 10-K
Item 7. Certain Relationships and Related Transactions.
Omitted under the reduced disclosure format contemplated by General
Instruction I(2)(a) of Form 10-K
Item 8. Legal Proceedings.
Incorporated herein by reference to Item 3 of the registrant's 1996
Form 10-K and Item I of Part II of the registrant's 1997 First Quarter 10-Q.
Item 9. Market Price of and Dividends in the registrant's Common Equity and
Related Stockholder Matters.
Incorporated herein by reference to Item 5 of the registrant's 1996
Form 10-K.
Item 10. Recent Sales of Unregistered Securities
The following shares of MFS Common stock and options to purchase
Common Stock were issued and granted by MFS without registration under the
Securities Act of 1933 in reliance upon the exemption provided by Section 4(2)
thereof and Rule 506 thereunder based on, among other factors, the lack of
general solicitation or general advertising in connection with the issuance and
grant, the number of the recipients of the MFS Common Stock and options, the
level of sophistication and financial resources of these recipients, and the
information available to these recipients:
On March 10, 1994, in connection with the acquisition of Fibernet,
Inc. ("Fibernet"), MFS issued to Fibernet 373,565 shares of MFS Common Stock.
Such shares were distributed to the shareholders of Fibernet.
On November 1, 1994, in connection with the acquisition of Cylix
Communication Corporation ("Cylix"), 177,745 shares of MFS Common Stock were
issued to Cylix. Such shares were distributed to the shareholders of Cylix.
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On January 9, 1995, in connection with the acquisition of Virginia
MetroTel, Inc. ("MetroTel"), 171,368 shares of MFS Common Stock. Such shares
were distributed to the shareholders of MetroTel.
Item 11. Description of Registrant's Securities to be Registered.
The summary of the terms of the stock of MFS set forth below does
not purport to be complete and is subject to and qualified in its entirety by
reference to the Amended and Restated Certificate of Incorporation and By-laws
of MFS.
GENERAL
The aggregate number of shares of capital stock of all classes
which MFS has authority to issue is 425,000,000, of which 400,000,000 shares
are MFS Common Stock, $.01 par value, and 25,000,000 shares are preferred
stock, $.01 par value (the "MFS Preferred Stock"). The issued and outstanding
shares of MFS Common Stock is duly authorized, validly issued, fully paid and
nonassessable. There are no issued and outstanding shares of MFS Preferred
Stock.
COMMON STOCK
Subject to the senior rights of Preferred Stock which may from time
to time be outstanding, holders of MFS Common Stock are entitled to receive
such dividends as may be declared by the Board of Directors out of funds
legally available therefor. Upon dissolution and liquidation, holders of MFS
Common Stock are entitled to a ratable share of the net assets of MFS remaining
after payment to the holders of the MFS Preferred Stock of the full
preferential amounts to which they are entitled. All outstanding share of MFS
Common stock are fully paid and nonassessable.
The holders of MFS Common Stock are entitled to one vote per share
for the election of Directors and on all other matters submitted to a vote of
stockholders. Holders of MFS Common Stock are not entitled to cumulative
voting for the election of Directors. They are not entitled to preemptive
rights.
PREFERRED STOCK
The MFS Preferred Stock has priority over the MFS Common Stock with
respect to dividends and to other distributions, including the distribution of
assets upon liquidation. The MFS Board of Directors is authorized to fix and
determine the terms, limitations and relative rights and preferences of the MFS
Preferred Stock, to establish series of MFS Preferred Stock and to fix and
determine variations as among series. The MFS Board of Directors without
stockholder approval could issue MFS Preferred Stock with voting and conversion
rights which could adversely affect the voting power of the holders of MFS
Common Stock.
MFS currently has no outstanding series of MFS Preferred Stock..
Item 12. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law (the "DGCL")
empowers a Delaware corporation to indemnify any person who was or is a party
or is threatened to be made a party to an threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of such corporation) by
reason of the fact that such person is or was a director, officer, employee or
agent of such corporation, or is or was serving at the request of such
corporation as a director, officer, employee or agent of another corporation or
enterprise. A corporation may, in advance of the final disposition of any
civil, criminal, administrative or investigative action, suit or proceeding,
pay the expenses (including attorneys' fees) incurred by any officer, director,
employee or agent in defending such action, provided that the director or
officer undertake to repay such amount if it shall ultimately be determined
that he or she is not entitled to be
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indemnified by the corporation. A corporation may indemnify such person against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding if he or she acted in good faith and in a
manner he reasonably believed to be in or not opposed to be the interests of
the corporation, and, with respect to any criminal action or proceeding, has no
reasonable cause to believe his or her conduct was unlawful.
A Delaware corporation may indemnify officers and directors in an
action by or in the right of the corporation to procure a judgment in its favor
under the same conditions, except that no indemnification is permitted without
judicial approval if the officer or director is adjudged to be liable to the
corporation. Where an officer or director is successful on the merits or
otherwise in the defense of any action referred to above, the corporation must
indemnify him or her against the expenses (including attorneys' fees) which he
or she actually and reasonably incurred in connection therewith. The
indemnification provided is not deemed to be exclusive of any other rights to
which an officer or director may be entitled under any corporation's by-law,
agreement, vote or otherwise.
In accordance with Section 145 of the DGCL, Article 7 of MFS'
Restated Certificate of Incorporation (the "Restated Certificate") and MFS'
By-laws (the "By-laws") provide that MFS shall indemnify each person who is or
was a director, officer or employee of MFS (including the heirs, executors,
administrators or estate of such person) or is or was serving at the request of
MFS as director, officer or employee of another corporation, partnership, joint
venture, trust or other enterprise, to the fullest extent permitted under
subsections 145(a), (b), and (c) of the DGCL or any successor statute. The
indemnification provided by the Restated Certificate and the By-laws shall not
be deemed exclusive of any other rights to which any of those seeking
indemnification or advancement of expenses may be entitled under any by-law,
agreement, vote of stockholders or disinterested directors or otherwise, both
as to action in his or her official capacity and as to action in another
capacity while holding such office, and shall continue as to a person who has
ceased to be a director, officer, employee or agent and shall inure to the
benefit of the heirs, executors and administrators of such a person. Expenses
(including attorneys' fees) incurred in defending a civil, criminal,
administrative or investigative action, suit or proceeding upon receipt of an
undertaking by or on behalf of the indemnified person to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
MFS. Article 8 of the Restated Certificate provides that a director of MFS
shall not be personally liable to MFS or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to MFS or its stockholders, (i) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) under Section 174 of the DGCL, or (iv) for
any transaction from which the director derived an improper personal benefit.
If the DGCL is amended to authorize corporate action further eliminating or
limiting the personal liability of directors, then the liability of a director
of MFS shall be eliminated or limited to the fullest extent permitted by the
DGCL as so amended.
Section 8.7 of the By-laws provides that MFS may purchase and
maintain insurance on behalf of its directors, officers, employees and agents
against any liabilities asserted against such persons arising out of such
capacities.
Item 13. Financial Statements and Supplemental Data.
Incorporated herein by reference to Item 8 of the registrant's 1996
Form 10-K and Item I of Part I of the registrant's 1997 First
Quarter 10-Q.
Item 14. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
Incorporated herein by reference to Item 9 of the registrant's 1996
Form 10-K.
Item 15. Financial Statements and Exhibits.
(a) Financial Statements. Incorporated by reference to Item 8 of
the registrant's 1996 Form 10-K.
(b) Exhibits.
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EXHIBIT DESCRIPTION
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2.1 Agreement and Plan of Merger, dated as of April 29,
1996, among the Company MFS Global Internet Services,
Inc. and UUNET Technologies, Inc.(1)
2.2 Amended and Restated Agreement and Plan of Merger by and
among the Company, WorldCom, Inc. and HIJ Corp. dated
as of August 25, 1996.(2)
3.1 Restated Certificate of Incorporation.(3)
3.2 Amendment No. 1 to Restated Certificate of
Incorporation.(4)
3.3 Amendment No. 2 to Restated Certificate of
Incorporation.(5)
3.4 Bylaws.(6)
4.1 Indenture for the Company's 9-3/8% Senior Discount Notes
due 2004, between MFS and IBJ Schroeder Bank & Trust
Company, as the Trustee.(7)
4.2 First Supplemental Indenture, dated as of March 31,
1995, amending the Indenture for the Company's 9-3/8%
Senior Discount Notes due 2004.(8)
4.3 Indenture for Senior Debt Securities, dated as of
January 15, 1996 between MFS and IBJ Schroeder Bank
& Trust Company, as the Trustee.(9)
4.4 First Supplemental Indenture, dated as of January 15,
1996, between MFS and IBJ Schroeder Bank and Trust
Company, as Trustee relating to the Company's 8-7/8%
Senior Discount Notes due 2006.(10)
10.1 The Company's 401(K) Plan.(11)
11 Statement computing consolidated net loss per share
applicable to common stockholders.(12)
27.1 Financial Data Schedule.(12)
99.1 The Company's Annual Report on Form 10-K for the year
ended December 31, 1996.
99.2 The Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997.
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(1) Incorporated herein by reference to Exhibit 2.1 to the Registrant's
Current Report on Form 8-K, dated August 12, 1996.
(2) Incorporated herein by reference to Appendix I to the Joint Proxy
Statement/Prospectus dated November 14, 1996 included in WorldCom's
Registration Statement on Form S-4 (File no. 333-16015) originally
filed with the Securities and Exchange Commission on November 14,
1996.
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(3) 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.
(4) 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.
(5) Incorporated herein by reference to Exhibit 3.1 to the Registrant's
Current Report on Form 8-K, dated September 30, 1995.
(6) Incorporated herein by reference to Exhibit 3.2 to the Registrant's
Current Report on Form 8-K, dated September 30, 1995.
(7) Incorporated herein by reference to the Registrant's Current Report
on Form 8-K, dated January 31, 1994.
(8) Incorporated herein by reference to Exhibit No. 10.3 to the
Registrant's Current Report on Form 8-K, dated April 27, 1995.
(9) Incorporated herein by reference to Exhibit No. 4.1 to the Registrant's
Current Report on Form 8-K, dated January 23, 1996.
(10) Incorporated herein by reference to Exhibit No. 4.2 to the Registrant's
Current Report on Form 8-K, dated January 23, 1996.
(11) 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.
(12) Incorporated herein by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1996.
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SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant has duly caused this registration statement to be
signed on its behalf by the undersigned thereunto duly authorized.
MFS COMMUNICATIONS COMPANY, INC.
By: /s/ ROBERT J. LUDVIK
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Robert J. Ludvik
Vice President and Controller
May 16, 1997
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
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<S> <C>
2.1 Agreement and Plan of Merger, dated as of April 29,
1996, among the Company MFS Global Internet Services,
Inc. and UUNET Technologies, Inc.(1)
2.2 Amended and Restated Agreement and Plan of Merger by and
among the Company, WorldCom, Inc. and HIJ Corp. dated
as of August 25, 1996.(2)
3.1 Restated Certificate of Incorporation.(3)
3.2 Amendment No. 1 to Restated Certificate of
Incorporation.(4)
3.3 Amendment No. 2 to Restated Certificate of
Incorporation.(5)
3.4 Bylaws.(6)
4.1 Indenture for the Company's 9-3/8% Senior Discount Notes
due 2004, between MFS and IBJ Schroeder Bank & Trust
Company, as the Trustee.(7)
4.2 First Supplemental Indenture, dated as of March 31,
1995, amending the Indenture for the Company's 9-3/8%
Senior Discount Notes due 2004.(8)
4.3 Indenture for Senior Debt Securities, dated as of
January 15, 1996 between MFS and IBJ Schroeder Bank
& Trust Company, as the Trustee.(9)
4.4 First Supplemental Indenture, dated as of January 15,
1996, between MFS and IBJ Schroeder Bank and Trust
Company, as Trustee relating to the Company's 8-7/8%
Senior Discount Notes due 2006.(10)
10.1 The Company's 401(K) Plan.(11)
11 Statement computing consolidated net loss per share
applicable to common stockholders.(12)
27.1 Financial Data Schedule.(12)
99.1 The Company's Annual Report on Form 10-K for the year
ended December 31, 1996.
99.2 The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997.
</TABLE>
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(1) Incorporated herein by reference to Exhibit 2.1 to the Registrant's
Current Report on Form 8-K, dated August 12, 1996.
(2) Incorporated herein by reference to Appendix I to the Joint Proxy
Statement/Prospectus dated November 14, 1996 included in WorldCom's
Registration Statement on Form S-4 (File no. 333-16015) originally
filed with the Securities and Exchange Commission on November 14,
1996.
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(3) 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.
(4) 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.
(5) Incorporated herein by reference to Exhibit 3.1 to the Registrant's
Current Report on Form 8-K, dated September 30, 1995.
(6) Incorporated herein by reference to Exhibit 3.2 to the Registrant's
Current Report on Form 8-K, dated September 30, 1995.
(7) Incorporated herein by reference to the Registrant's Current Report
on Form 8-K, dated January 31, 1994.
(8) Incorporated herein by reference to Exhibit No. 10.3 to the
Registrant's Current Report on Form 8-K, dated April 27, 1995.
(9) Incorporated herein by reference to Exhibit No. 4.1 to the Registrant's
Current Report on Form 8-K, dated January 23, 1996.
(10) Incorporated herein by reference to Exhibit No. 4.2 to the Registrant's
Current Report on Form 8-K, dated January 23, 1996.
(11) 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.
(12) Incorporated herein by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1996.
<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____TO_____
Commission File No. 33-72594
(formerly 0-21594)
MFS COMMUNICATIONS COMPANY, INC.
A Delaware Corporation I.R.S. Employer No. 47-0714388
11808 Miracle Hills Drive, Omaha, Nebraska 68154
Telephone Number (402) 231-3000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Registration S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
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 March 15,
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 I(1)(a)
and (b) of Form 10-K, and is therefore filing this form with the reduced
disclosure format.
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DOCUMENTS INCORPORATED BY REFERENCE
Certain Exhibits filed with the Registrant's (i) Registration Statement on Form
S-1 (Registration No. 33-59358), as amended, (ii) Current Report on Form 8-K,
dated January 31, 1994, (iii) Annual Report on Form 10-K for the fiscal year
ended December 31, 1994, (iv) Current Report on Form 8-K, dated September 30,
1995, (v) Current Report on Form 8-K, dated April 27, 1995, (vi) Current Report
on Form 8-K, dated January 23, 1996, (vii) Current Report on Form 8-K, dated
August 12, 1996, and (viii) Appendix I to the Joint Proxy Statement/Prospectus
dated November 14, 1996 included in the Registration Statement on Form S-4
(Registration No. 333-16015) of WorldCom, Inc. originally filed on November 14,
1996, are incorporated by reference into Part IV of this Report on Form 10-K.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
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<C> <C>
PART I
1. Business.......................................................... 1
2. Properties........................................................ 2
3. Legal Proceedings................................................. 2
4. Submission of Matters to a Vote of Security Holders............... 2
PART II
5. Market for Registrant's Common Stock and Related Stockholder
Matters......................................................... 2
6. Selected Financial Data........................................... 2
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 3
8. Financial Statements and Supplementary Data....................... 7
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................ 52
PART III
10. Directors and Executive Officers of the Registrant................ 52
11. Executive Compensation............................................ 52
12. Security Ownership of Certain Beneficial Owners and Management.... 52
13. Certain Relationships and Related Transactions.................... 52
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 53
</TABLE>
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MFS COMMUNICATIONS COMPANY, INC.
PART I
ITEM 1. BUSINESS
MFS Communications Company, Inc. ("MFS" or the "Company") provides
facilities-based communications services and systems to business and
government. MFS is organized as a holding company and operates through its
subsidiaries in two business segments, communications services and network
systems integration services. MFS was founded in 1987 and commenced operations
in 1988. Effective at 11:58 p.m. on December 31, 1996, 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.
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 Network
Access Points ("NAPs") to Internet service providers and (v) a comprehensive
range of Internet-based services. MFS 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 Technologies, Inc. ("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 tailored to meet the needs of 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.
MFS provides network systems integration services primarily through
MFS Network Technologies, Inc. ("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.
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ITEM 2. PROPERTIES
The Company leases space for sales office and/or administrative
facilities, collector node, collocation sites, general storage space, and
equipment rooms for switches and other peripheral equipment. Such leased
properties do not lend themselves to description by character or location.
Although additional space will be leased as networks are expanded, the Company
considers its properties to be adequate for its present and foreseeable
requirements. The Company's fiber optic network includes aerial and underground
cable and conduit which is located on public streets and highways or on
privately owned land. The Company has permission to use these lands pursuant to
governmental consent or lease, permit, easement or other agreement. The Company
owns a corporate headquarters building at 11808 Miracle Hills Drive, Omaha,
Nebraska on a site covering approximately five acres. The building has
approximately 100,000 square feet of office space. The Company also owns an
approximate 10,000 square foot building in Memphis, Tennessee.
ITEM 3. 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
Omitted under the reduced disclosure format pursuant to General
Instruction I(2)(c) of Form 10-K.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company is a wholly-owned subsidiary of WorldCom and there is no
market for the Company's common stock.
ITEM 6. SELECTED FINANCIAL DATA
Omitted under the reduced disclosure format pursuant to General
Instruction I(2)(a) of Form 10-K.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 I(2)(a) of Form 10-K. The following analysis
represents an abbreviated version of management's analysis of the results of
operations for 1996, excluding the effects of the December 31, 1996 acquisition
of the Company described below, as compared to 1995.
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.
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.
3
<PAGE> 7
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>
Year Ended
December 31,
--------------------------
1996 1995
---- ----
<S> <C> <C>
Revenue:
Communications services ............ $ 927,007 $ 498,225
Network systems integration services 187,999 84,969
----------- -----------
Total .......................... $ 1,115,006 $ 583,194
=========== ===========
Loss from operations:
Communications services ............ $(1,768,156) $ (234,055)
Network systems integration services (4,561) (5,250)
----------- -----------
Total .......................... $(1,772,717) $ (239,305)
=========== ===========
</TABLE>
4
<PAGE> 8
YEAR ENDED DECEMBER 31, 1996 VS. YEAR ENDED DECEMBER 31, 1995
Communications Services
Communications services revenue increased to $927.0 million in 1996
from $498.2 million in 1995, an increase of $428.8 million or 86%. The increase
resulted from the acquisition of UUNET as of August 12, 1996, which recorded
$135.1 million of revenue since that date, and from increased market
penetration of all communications services of the Company. Revenue from
international operations increased to $166.3 million in 1996 from $40.4 million
in 1995, reflecting strong sales in the United Kingdom and a growing revenue
base in continental Europe.
Annualized monthly recurring revenue increased to approximately $1,387
million at December 31, 1996 from approximately $625 million at December 31,
1995, an increase of 122%. 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 $512.7 million in
1996 from $244.2 million in 1995, an increase of $268.5 million. The increase
resulted from an increase of $76.6 million related to the acquisition of UUNET
as of August 12, 1996, and from increased market penetration of all
communications services of the Company. Communications services cost of sales
consist 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 $283.6 million in 1996 from $139.9 million in 1995, an increase of
$143.7 million. The increase is primarily related to amortization expense of
approximately $59.4 million on the 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 $498.8 million in 1996 from $348.2 million in 1995, an increase of
$150.6 million. The increase resulted from an increase of $46.5 million related
to the acquisition of UUNET, $21.2 million of costs related to the Merger, and
from increased costs related to the Company's continued growth.
The Company recognized a $1.4 billion charge for in-process research
and development in 1996 related to the acquisition of UUNET. The charge is
based upon a valuation analysis of the technologies of the Internet network
expansion system of UUNET and certain other identified research and development
projects purchased in the acquisition. The Company believes that the efforts to
complete these projects will consist of internally-staffed engineering costs
and further development and construction of the network. These costs are
estimated to be approximately $1.0 billion and will be incurred over the next
five years.
Network Systems Integration Services
Third party revenue from services offered by the Company's network
systems integration segment increased to $188.0 million in 1996 from $85.0
million in 1995 or 121%. 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.
5
<PAGE> 9
Network systems integration cost of sales increased to $174.3 million
in 1996 from $73.6 million in 1995, an increase of $100.7 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 consist of direct costs
associated with the network systems integration projects.
Network systems integration selling, general and administrative
expenses increased to $15.7 million in 1996 from $14.0 million in 1995, an
increase of $1.7 million. The increase reflects the increased number of new
projects in 1996.
Other Income (Expense)
Other income (expense) increased to $(64.8) million of other expense
in 1996 from $(28.0) million of other expense in 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 from the sale of the 1996 Senior Discount Notes and the common stock
offering in 1996.
Income Taxes
The income tax expense of $0.5 million and $0.6 million for 1996 and
1995, respectively, resulted from estimated state and foreign tax liabilities.
Net Loss
Net loss increased to $1,838.0 million in 1996 from $267.9 million in
1995, an increase of $1,570.1 million. The increase resulted primarily from the
write off of acquired research and development and increased depreciation,
amortization and interest expense.
Backlog
The network systems integration and facilities management services
segment had third party backlog of approximately $259 million at December 31,
1996. Backlog consists of firm contracts less revenue recognized to date by the
Company.
Forward-looking Statements
The matters discussed in this Form 10-K 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
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. 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.
6
<PAGE> 10
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants 8
Consolidated Statement of Operations For the
Period Ended December 31, 1996 9
Consolidated Balance Sheet as of December 31, 1996 10
Consolidated Statement of Changes in Stockholder's
Equity For the Period Ended December 31, 1996 11
Consolidated Statement of Cash Flows
For the Period Ended December 31, 1996 12
Notes to Consolidated Financial Statements 13
Reports of Independent Public Accountants 24
Consolidated Statements of Operations For the
Three Years Ended December 31, 1996 26
Consolidated Balance Sheet as of December 31, 1995 27
Consolidated Statements of Changes in Stockholders'
Equity For the Three Years Ended December 31, 1996 29
Consolidated Statements of Cash Flows
For the Three Years Ended December 31, 1996 31
Notes to Consolidated Financial Statements 34
</TABLE>
7
<PAGE> 11
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder and Board of Directors
of MFS Communications Company, Inc.:
We have audited the accompanying consolidated balance sheet of MFS
Communications Company, Inc. and Subsidiaries (a wholly-owned subsidiary of
WorldCom, Inc.) as of December 31, 1996, and the related consolidated statement
of operations, changes in stockholder's equity and cash flows for the period
then ended (see Note 1). These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of MFS
Communications Company, Inc. and Subsidiaries as of December 31, 1996, and the
consolidated results of its operations and its cash flows for the period then
ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Omaha, Nebraska
February 20, 1997
8
<PAGE> 12
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Revenue ............................................... $ --
Costs and expenses:
Cost of sales .................................... --
Selling, general and administrative expenses ..... --
Depreciation and amortization .................... --
Charge for in-process research and development ... 2,140,000
-----------
Total costs and expenses .................... 2,140,000
-----------
Loss before income taxes .............................. (2,140,000)
Income tax benefit .................................... --
-----------
Net loss .............................................. $(2,140,000)
===========
</TABLE>
- ----------------
The accompanying notes are an integral part of the Consolidated Financial
Statements.
9
<PAGE> 13
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
ASSETS
------
<S> <C>
Current assets:
Cash and cash equivalents............................................. $ 209,324
Marketable securities................................................. 772,510
Accounts receivable................................................... 317,774
Costs and earnings in excess of billings on
uncompleted contracts............................................... 95,328
Prepaid expenses and other current assets............................. 87,636
Deferred income taxes................................................. 13,372
-----------
Total current assets............................................... 1,495,944
Networks and equipment, at cost............................................ 1,892,523
Goodwill................................................................... 8,333,669
Other assets............................................................... 699,714
Deferred income taxes...................................................... 128,479
-----------
Total assets........................................................ $12,550,329
===========
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
Current liabilities:
Current portion of notes payable and
long-term debt....................................................... $ 12,596
Current portion of capital lease obligations........................... 5,549
Accounts payable....................................................... 459,958
Accrued costs and billings in excess of revenue
on uncompleted contracts............................................ 53,880
Accrued compensation................................................... 17,491
Other current liabilities.............................................. 165,491
-----------
Total current liabilities........................................... 714,965
Notes payable and long-term debt, less current
portion.................................................................. 1,477,670
Capital lease obligations, less current portion............................. 31,046
Other liabilities........................................................... 25,573
Minority interest........................................................... 13,489
Commitments and contingencies (Note 8)
Stockholder's equity:
Common stock, $.01 par value. Authorized and
issued 1 share in 1996................................................. -
Additional paid-in capital.............................................. 12,440,918
Deferred charge......................................................... (13,332)
Accumulated deficit..................................................... (2,140,000)
-----------
Total stockholder's equity............................................ 10,287,586
-----------
Total liabilities and stockholder's equity............................ $12,550,329
===========
</TABLE>
- ---------------
The accompanying notes are an integral part of the Consolidated Financial
Statements.
10
<PAGE> 14
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE PERIOD ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Additional
Common Paid-in Deferred Accumulated
Stock Capital Charge Deficit Total
------ ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Capitalization of
the Company at
Inception ............ $ -- $ 12,440,918 $ (13,332) $ -- $ 12,427,586
Net loss ................. -- -- -- (2,140,000) (2,140,000)
----- ------------ ------------ ------------ ------------
Balance at
December 31, 1996..... $ -- $ 12,440,918 $ (13,332) $ (2,140,000) $ 10,287,586
===== ============ ============ ============ ============
</TABLE>
- --------------
The accompanying notes are an integral part of the Consolidated Financial
Statements.
11
<PAGE> 15
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss ........................................ $(2,140,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Non cash charge for in-process research
and development ........................... 2,140,000
-----------
Net cash from operating activities ...... --
-----------
Cash flows from investing activities ............... --
Cash flows from financing activities ............... --
Net change in cash and cash equivalents ............ --
Cash and cash equivalents, beginning of period ..... 209,324
-----------
Cash and cash equivalents, end of year ............. $ 209,324
===========
</TABLE>
- ---------------
The accompanying notes are an integral part of the Consolidated Financial
Statements.
12
<PAGE> 16
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 initial purchase price allocation
for the Merger is based on current 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 reflect only the recording of the charge for
in-process research and development which represents the Company's only
activity for 1996 subsequent to the acquisition by WorldCom. The results of
operations of the Company for the period from Inception to December 31, 1996,
are not indicative of results of operations for a full fiscal year.
The Company operates through its subsidiaries in two business
segments, communications services and network systems integration services. The
communications segment is comprised of the MFS Telecom Companies, which provide
telecommunications services to large business and government customers, the MFS
Intelenet Companies, which provide telecommunications services to small and
medium sized business customers, MFS International, which provides
telecommunications services to business and government customers
internationally and MFS Global Network Services, which manages the Company's
international network platform. With the acquisition of UUNET Technologies,
Inc. ("UUNET") 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a) Principles of Consolidation:
The consolidated financial statements of the Company include the
accounts of all of its majority-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
13
<PAGE> 17
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--(CONTINUED)
(b) Recognition of Revenue:
The Company recognizes revenue on communications services in the month
the related service is provided. Network systems integration revenue is
recognized on the percentage-of-completion method of accounting. Under the
percentage-of-completion method, an estimated percentage for each contract, as
determined by the Company's engineering estimate based on the amount of work
performed, is applied to total estimated profit. Provisions for losses are
recognized on uncompleted contracts when they become known. Claims for
additional revenue are recognized in the period when settled. Revisions in cost
and profit estimates, which are always reasonably possible to occur in the near
term under the percentage-of-completion method, are reflected in the accounting
period in which the facts which require the revision become known.
(c) Cost of Sales:
Cost of sales includes direct third-party costs of providing
communications services, primarily payments to other telecommunications
companies for access and transport charges, and the costs of providing network
systems integration services under the percentage-of-completion method of
accounting.
(d) Classification of Current Assets and Liabilities:
In accordance with industry practice, amounts realizable and payable
under network systems integration contracts which may extend beyond one year
are includable in current assets and liabilities. A one year time period is
used as the basis for classification of all other current assets and
liabilities.
(e) Networks and Equipment:
The networks and equipment are stated at cost as adjusted by the
Merger described in Note 1. Various costs are capitalized during the
installation and expansion of the networks. Provisions for depreciation are
computed using straight-line methods over estimated useful lives beginning in
the year an asset is put into service.
Electronic and related equipment, leasehold improvements, furniture
and office equipment and land and buildings are stated at cost as adjusted by
the Merger described in Note 1. Leasehold improvements primarily consist of
extensions off the network to customer locations. Depreciation is computed
using primarily straight-line methods over the estimated useful lives of the
assets or, for capital leases, the term of the related leases.
Costs of purchased software and certain costs to modify and improve
certain of the Company's computer software are recorded at cost as adjusted by
the Merger described in Note 1 and are being amortized using the straight-line
method over their estimated useful lives.
(f) Intangible Assets:
Goodwill, including goodwill arising from the Merger described in Note
1, is being amortized over periods ranging from five to 40 years from the dates
of acquisition. The Company reviews the carrying amount of goodwill for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. Measurement of any impairment would
include a comparison of estimated future operating cash flows anticipated to be
generated during the remaining life of the goodwill to the net carrying value
of the goodwill.
14
<PAGE> 18
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--(CONTINUED)
(f) Intangible Assets:--(continued)
Intangibles identified in the Merger, including developed technology
and the assembled workforce, will be amortized over five years and 10 years,
respectively. Costs incurred in developing new networks or expanding existing
networks, including network design, negotiation of rights-of-way and obtaining
legal/regulatory authorizations are deferred and amortized over five years.
Costs incurred to obtain access to buildings are deferred by the
Company and amortized over 15 years. Costs incurred to obtain city franchises
are deferred by the Company and amortized over the initial term of the
franchise.
Pre-operating costs represent substantially all nondevelopment costs
incurred during the pre-operating phase of a newly-constructed network and are
amortized over five-year periods commencing with the start of operations.
Costs incurred to implement the Company's program to take advantage of
the opportunities presented by the passage of the Telecommunications Act of
1996 have been deferred and amortized over five years. Costs incurred to
provision service to new customers and new services to current customers has
been deferred and amortized over five years.
The costs of rights-of-way and customer lists obtained in business
acquisitions are being amortized over estimated useful lives of 20 to 25 years
and three years, respectively.
During 1996, the Company recorded a $2.14 billion charge for
in-process research and development related to the Merger. The charge is based
upon a valuation analysis of the technologies of the Company's worldwide
information system, the Internet network expansion system of UUNET and certain
other identified research and development projects purchased in the Merger. At
the date of the Merger, the technological feasibility of the acquired
technology had not yet been established and the technology has no future
alternative uses.
(g) Income Taxes:
As a result of the Merger, the Company is considered the surviving
entity for tax reporting purposes. Accordingly, the Company's consolidated tax
returns will include WorldCom as a subsidiary for tax reporting purposes.
Income taxes will be recognized by each entity within the consolidated group in
proportion to their contribution to consolidated taxable income. The Company
recognizes deferred tax liabilities and assets for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax
bases of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse.
(h) Minority Interest:
The Company has recorded the entire loss of other than wholly-owned
subsidiaries where the loss applicable to the minority interest exceeds the
minority interest in such subsidiaries' equity.
15
<PAGE> 19
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--(CONTINUED)
(i) Translation of Foreign Financial Statements:
Assets and liabilities are translated into U.S. dollars at year-end
exchange rates. Revenues and expenses will be translated using the average
rates of exchange for the period. Gains or losses resulting from foreign
currency translation will be recorded as adjustments to stockholder's equity.
(j) Cash Equivalents:
Cash equivalents generally consist of highly liquid debt instruments
purchased with a maturity of three months or less.
(k) Marketable Securities:
Marketable securities are being carried at fair value.
(l) Financial Instruments:
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of marketable securities and
accounts receivable. Concentrations of credit risk of marketable securities are
limited due to investments in short-term, investment grade securities.
Concentrations of credit risk with respect to accounts receivable are limited
due to the dispersion of the Company's customer base among different industries
and geographic areas and remedies provided by terms of contracts and statutes.
(m) Loss Per Share:
The Company has not presented loss per share for the period from
Inception to December 31, 1996, because of the change in capital structure
described in Note 1.
(n) Estimates in Consolidated Financial Statements:
The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
3. FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to determine the
classification and fair value of each class of financial instruments for which
it is practicable to estimate that value:
(a) Cash and Cash Equivalents:
Cash equivalents generally consist of highly liquid debt instruments
purchased with a maturity of three months or less and are carried at fair value
which approximates cost due to the short maturities.
16
<PAGE> 20
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
3. FINANCIAL INSTRUMENTS:--(CONTINUED)
(b) Marketable Securities:
The Company has classified all marketable securities other than cash
equivalents as available-for-sale. As described in Note 1, at December 31,
1996, the Company recorded its assets and liabilities at estimated fair values,
therefore the amortized cost of the Company's marketable securities equals the
estimated fair value on that date. The amortized costs of the securities to be
used in computing unrealized and realized gains and losses will be determined
by specific identification. Fair values are estimated based on quoted market
prices.
Marketable securities at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Estimated
Fair
Value
---------
<S> <C>
U.S. Treasury and other U.S. government
corporations and agencies debt securities ... $443,175
Corporate debt securities ....................... 329,335
--------
Total marketable securities ..................... $772,510
========
</TABLE>
The estimated fair value of investments in debt securities at December
31, 1996, by contractual maturity are as follows:
<TABLE>
<CAPTION>
Estimated
Fair
Value
---------
<S> <C>
Due within 1 year ............................... $567,082
Due after 1 year through 5 years ................ 200,380
Due after 5 years through 10 years .............. 1,012
Due after 10 years .............................. 4,036
--------
$772,510
========
</TABLE>
There was no sales activity in available-for-sale securities for the
period from Inception to December 31, 1996.
(c) Long-Term Debt:
As described in Note 1, at December 31, 1996, the Company recorded its
assets and liabilities at estimated fair values, therefore the Company's
long-term debt is recorded at estimated fair value. Fair value is estimated
based on the quoted market price for the same or similar issues or on borrowing
rates currently available to the Company for debt with similar terms and
maturities.
17
<PAGE> 21
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
4. NETWORKS AND EQUIPMENT:
Networks and equipment at December 31, 1996 consist of the following:
<TABLE>
<S> <C>
Telecommunications networks ........................... $ 416,598
Electronic and related equipment ...................... 894,014
Leasehold improvements ................................ 182,280
Furniture, office equipment and other ................. 67,427
Land and buildings .................................... 15,356
Computer software ..................................... 43,873
Capitalized lease assets, primarily
electronic equipment ................................ 35,410
Networks-in-progress .................................. 237,565
----------
$1,892,523
==========
</TABLE>
5. OTHER ASSETS:
Other assets at December 31, 1996, including intangibles other than
goodwill, consist of the following:
<TABLE>
<S> <C>
Developed technology .................................. $400,000
Customer list ......................................... 130,023
Deferred development, preoperating and other costs .... 54,462
Assembled workforce ................................... 42,000
Deferred financing costs .............................. 33,363
Other noncurrent assets ............................... 27,613
Rights-of-way ......................................... 12,253
--------
$699,714
========
</TABLE>
There was no amortization of intangible assets and deferred costs for
the period from Inception to December 31, 1996.
6. NOTES PAYABLE AND LONG-TERM DEBT:
Notes payable and long-term debt at December 31, 1996 consist of the
following:
<TABLE>
<S> <C>
1994 Senior Discount Notes, due January 15, 2004 ........ $ 685,838
1996 Senior Discount Notes, due January 15, 2006 ........ 674,520
Vendor Credit Facilities, including interest at variable
rates (approximately 6.75% at December 31, 1996) ...... 80,796
Equipment Finance Agreement with semi-annual installments
including interest at a variable rate (approximately
5.88% at December 31, 1996) collateralized by certain
equipment .............................................. 16,000
Equipment debt with quarterly payments including interest
at a variable rate (7.74% at December 31, 1996) ........ 26,741
Other ................................................... 6,371
----------
1,490,266
Less: Current portion .................................. (12,596)
----------
$1,477,670
==========
</TABLE>
Aggregate annual principal maturities as of December 31, 1996 are as
follows:
<TABLE>
<S> <C>
1997................................................. $12,596
1998................................................. 39,958
1999................................................. 38,943
2000................................................. 36,807
2001................................................. 1,565
</TABLE>
18
<PAGE> 22
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
6. NOTES PAYABLE AND LONG-TERM DEBT:--(CONTINUED)
(a) The 1994 Senior Discount Notes:
The Company issued the 1994 Senior Discount Notes (the "1994 Notes")
in January 1994 and recorded the net proceeds, exclusive of transaction costs,
of approximately $500,000 as long-term debt. The 1994 Notes were issued with an
effective interest rate of 9 3/8%. As described in Note 1, upon the Merger the
liabilities of the Company were adjusted to market value, which changed the
effective interest rate for the 1994 Notes to approximately 8.6%. The Company
is accruing to the principal amount of the 1994 Notes of $788,320 through
January 1999. Cash interest will not accrue on the 1994 Notes prior to January
15, 1999, however, the Company may elect to commence the accrual of cash
interest at any time prior to that date. Commencing July 15, 1999 cash interest
will be payable semi-annually.
On or after January 15, 1999, the 1994 Notes will be redeemable at the
option of the Company, in whole or in part from time to time, at the following
prices (expressed in percentages of the principal amount at the 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.
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
1999....................................................... 103.52%
2000....................................................... 102.34%
2001....................................................... 101.17%
2002 and thereafter........................................ 100.00%
</TABLE>
In addition, 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 Notes as stipulated in the
note agreement. The offer to repurchase the 1994 Notes expired February 27,
1997, with an immaterial amount of the 1994 Notes being repurchased. The 1994
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 1994 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.
(b) The 1996 Senior Discount Notes:
The Company issued the 1996 Senior Discount Notes (the "1996 Notes")
in January 1996 and recorded the net proceeds, exclusive of transaction costs,
of approximately $600,000 as long-term debt. The 1996 Notes were issued with an
effective interest rate of 8 7/8%. As described in Note 1, upon the Merger the
liabilities of the Company were adjusted to market value, which changed the
effective interest rate for the 1996 Notes to approximately 8.4%. The Company
is accruing to the principal amount of the 1996 Notes of $924,000 through
January 2001. Cash interest will not accrue on the 1996 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.
19
<PAGE> 23
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
6. NOTES PAYABLE AND LONG-TERM DEBT:--(CONTINUED)
(b) The 1996 Senior Discount Notes:--(continued)
On or after January 15, 2001, the 1996 Notes will be redeemable at the
option of the Company, in whole or in part from time to time, at the following
prices (expressed in percentages of the principal amount at the 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.
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
2001.......................................... 103.32%
2002.......................................... 102.21%
2003.......................................... 101.11%
2004 and thereafter........................... 100.00%
</TABLE>
In addition, 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 1996 Notes as stipulated in the
note agreement. The offer to repurchase the 1996 Notes expired on February 27,
1997, with an immaterial amount of the 1996 Notes being repurchased. The 1996
Notes are senior unsecured obligations of the Company with a ranking equal to
the 1994 Notes and are subordinated to all current and future indebtedness of
the Company's subsidiaries, including trade accounts payable. The 1996 Notes
contain covenants similar to the 1994 Notes.
(c) The Vendor Credit Facilities:
In July 1995, the Company established two credit facilities to borrow
up to an aggregate of $120 million for purchases of switching equipment through
mid-1997 (the "Vendor Credit Facilities"). The facilities are collateralized by
the purchased equipment and partially guaranteed by the Swedish Export Credits
Guarantee Board and the equipment manufacturer. Borrowings under the Vendor
Credit Facilities are scheduled to be repaid under various schedules, through
2002. The Company may repay any amounts borrowed under the facilities without
premium or penalty at any time.
The Vendor Credit Facilities provide for interest at a variable rate
and a commitment fee on any unused balances. The Vendor Credit Facilities
contain certain financial covenants and other restrictions similar to the 1994
Notes. Subsequent to year end, the Company determined to pay off the
outstanding balance of the Vendor Credit Facilities.
(d) Equipment Finance Agreement:
In 1996, the Company entered into a $20,000 loan agreement with an
equipment manufacturer and a bank. The loan, which includes interest at a
variable rate, must be used to purchase equipment supplied by the manufacturer.
The loan must be repaid in semi-annual installments of $2,000 started June 20,
1996, and is collateralized by the equipment purchased. The agreement contains
certain financial covenants and restrictions similar to the 1994 Notes.
20
<PAGE> 24
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
6. NOTES PAYABLE AND LONG-TERM DEBT:--(CONTINUED)
(e) Equipment 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 between Microsoft Corporation ("Microsoft")
and UUNET that provides for the purchase of equipment used in the construction
of a network to be used by both parties. Principal and interest, at the higher
of 7.74% or the applicable federal rate at the time of an advance are payable
to Microsoft on each advance quarterly over five years. Borrowings under the
agreement are collateralized by the equipment purchased.
7. LEASES:
Capitalized leases consist primarily of leases of electronic
telecommunications equipment. The Company is also leasing premises under
various operating leases which, in addition to rental payments, require
payments for insurance, maintenance, property taxes and other executory costs
related to the leases. Certain leases provide for adjustments in lease cost
based upon adjustments in the consumer price index and increases in the
landlord's management costs. The lease agreements have various expiration dates
and renewal options through 2014.
Future minimum payments by year and in the aggregate, under the
capital leases and non cancelable operating leases with initial or remaining
terms of one year or more consist of the following at December 31, 1996:
<TABLE>
<CAPTION>
Capital Leases Operating Leases
-------------- ----------------
<S> <C> <C>
1997...................................................... $ 8,595 $51,367
1998...................................................... 7,351 45,577
1999...................................................... 6,349 37,155
2000...................................................... 6,451 31,886
2001...................................................... 6,594 28,511
Subsequent to 2001........................................ 14,930 121,447
-------
Total minimum lease payments.............................. 50,270
Amounts representing interest............................. (13,675)
-------
Present value of future minimum lease
payments............................................... 36,595
Less amounts due in one year.............................. (5,549)
--------
$ 31,046
========
</TABLE>
There was no rent expense under lease agreements for the period from
Inception to December 31, 1996.
8. COMMITMENTS AND CONTINGENCIES:
Under the terms of stockholder agreements, from time to time, minority
stockholders in certain subsidiaries have the option to put shares to the
Company at a purchase price equal to an appraised value of such shares.
The Company has issued standby letters of credit to various city
governmental agencies and building lessors, amounting to approximately $5,453
at December 31, 1996. It is management's belief that the underlying obligations
will be met in the normal course of business without material adverse effect on
the Company's financial position.
The Company is also obligated under rights-of-way and franchise
agreements with various entities for the use of their rights-of-way for the
installation of its telecommunications systems.
21
<PAGE> 25
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
8. COMMITMENTS AND CONTINGENCIES:--(CONTINUED)
Pursuant to an agreement with a joint venture, the Company is
obligated to invest up to $75,000 over the next two years in the form of
capital contributions and to pay $60,000 over the next four years to purchase
an indefeasible right of use for certain undersea capacity between the United
States and Europe that is being constructed by the joint venture. The Company
is also a party to the joint venture.
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.
9. INCOME TAXES:
At December 31, 1996, the Company had net operating loss ("NOL")
carryforwards for income tax purposes of approximately $924,000 which expire in
years 1997 through 2011. The existing NOL carryforwards of the Company can be
used to offset future taxable income of the Company and its tax subsidiaries,
including WorldCom. The consideration of WorldCom's historical and projected
levels of taxable income make the realization of a substantial portion of the
Company's NOL carryforwards more likely than not. A valuation reserve has been
recognized to offset certain deferred tax assets related to net operating loss
carryforwards due to the uncertainty of realizing the benefit of those loss
carryforwards.
The components of deferred taxes at December 31, 1996 are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating losses ....................... $ 347,245
Accrued expenses ........................... 54,966
Other ...................................... 21,421
---------
Total deferred tax assets ................ 423,632
---------
Deferred tax liabilities:
Acquisition intangibles, other than goodwill 216,299
Deferred charges ........................... 12,276
Accumulated depreciation ................... 10,342
---------
Total deferred tax liabilities ........... 238,917
---------
Net deferred tax assets ...................... 184,715
Less: Valuation allowance ................... (42,864)
---------
Net deferred tax assets ...................... $ 141,851
=========
</TABLE>
10. 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.
22
<PAGE> 26
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
10. EMPLOYEE BENEFIT PLANS:--(CONTINUED)
(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."
11. SEGMENT INDUSTRY DATA:
The Company operates in two reportable segments primarily within the
United States: communications services and network systems integration
services. A summary of the Company's identifiable assets by segment at December
31, 1996 is as follows:
<TABLE>
<S> <C>
Communications services ................ $ 12,413,502
Network systems integration services ... 174,199
Intersegment activity .................. (37,372)
------------
Total ............................ $ 12,550,329
============
</TABLE>
23
<PAGE> 27
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder and Board of Directors
of MFS Communications Company, Inc.:
We have audited the accompanying consolidated statements of operations, changes
in stockholders' equity and cash flows of MFS Communications Company, Inc. and
Subsidiaries for the year ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statements of operations, changes in
stockholders' equity and cash flows are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statements of operations, changes in stockholders' equity
and cash flows. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the statements of operations, changes in stockholders' equity
and cash flows, referred to above present fairly, in all material respects, the
consolidated results of operations and cash flows of MFS Communications
Company, Inc. and Subsidiaries for the year ended December 31, 1996, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Omaha, Nebraska
February 20, 1997
24
<PAGE> 28
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
of MFS Communications Company, Inc.
We have audited the accompanying consolidated balance sheet of MFS
Communications Company, Inc. and Subsidiaries as of December 31, 1995, and the
related consolidated statement of operations, changes in stockholders' equity,
and cash flows for each of the two years in the period ended December 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of MFS
Communications Company, Inc. and Subsidiaries as of December 31, 1995, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Omaha, Nebraska
February 14, 1996
25
<PAGE> 29
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Revenue ..................................... $ 1,115,006 $ 583,194 $ 286,747
Costs and expenses:
Cost of sales .......................... 687,034 317,801 149,780
Selling, general and administrative
expenses ............................. 514,558 362,202 199,227
Depreciation and amortization .......... 286,131 142,496 73,869
Charge for in-process research and
development .......................... 1,400,000 -- --
----------- ----------- -----------
Total costs and expenses .......... 2,887,723 822,499 422,876
----------- ----------- -----------
Loss from operations ........................ (1,772,717) (239,305) (136,129)
Other income (expense):
Interest income ........................ 47,733 13,188 24,769
Interest expense ....................... (109,894) (38,606) (40,879)
Other .................................. (2,652) (2,575) (1,065)
----------- ----------- -----------
Total other income (expense) ...... (64,813) (27,993) (17,175)
----------- ----------- -----------
Loss before income taxes .................... (1,837,530) (267,298) (153,304)
Income tax benefit (expense) ................ (500) (600) 2,103
----------- ----------- -----------
Net loss .................................... (1,838,030) (267,898) (151,201)
Dividends on preferred stock ................ (29,429) (15,064) --
----------- ----------- -----------
Net loss applicable to common
stockholders ............................. $(1,867,459) $ (282,962) $ (151,201)
=========== =========== ===========
Net loss per share applicable to common
stockholders ............................. $ (11.22) $ (2.21) $ (1.21)
=========== =========== ===========
</TABLE>
- --------------
The accompanying notes are an integral part of the Consolidated Financial
Statements.
26
<PAGE> 30
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
Current assets:
Cash and cash equivalents ...................... $ 51,182
Marketable securities .......................... 85,715
Accounts receivable ............................ 140,302
Costs and earnings in excess of billings on
uncompleted contracts ........................ 45,142
Prepaid expenses and other current assets ...... 51,703
-----------
Total current assets ........................ 374,044
-----------
Networks and equipment, at cost ..................... 1,315,952
Less accumulated depreciation and amortization ...... (213,548)
-----------
Networks and equipment, net .................... 1,102,404
Other assets, net ................................... 390,686
-----------
Total assets ................................. $ 1,867,134
===========
</TABLE>
- ---------------
The accompanying notes are an integral part of the Consolidated Financial
Statements.
27
<PAGE> 31
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C>
Current liabilities:
Current portion of notes payable and
long-term debt ................................. $ 1,995
Current portion of capital lease obligations ..... 1,922
Accounts payable ................................. 172,407
Accrued costs and billings in excess of revenue
on uncompleted contracts ....................... 28,686
Accrued compensation ............................. 6,119
Other current liabilities ........................ 63,328
-----------
Total current liabilities ..................... 274,457
Notes payable and long-term debt, less current
portion ............................................ 692,059
Capital lease obligations, less current portion ....... 31,412
Other liabilities ..................................... 27,902
Minority interest ..................................... 10,972
Commitments and contingencies (Note 8)
Stockholders' equity:
Preferred stock, $.01 par value. Authorized
25,000,000 shares:
Series A, 8% cumulative convertible;
issued 95,000 in 1995, variable
liquidation preference ....................... 1
Series B, 7 3/4% cumulative convertible;
issued 15,000,000 in 1995,
liquidation preference $1.00 per share
plus unpaid dividends ........................ 150
Common stock, $.01 par value. Authorized
400,000,000 shares; issued 130,260,228 in 1995 ... 651
Additional paid-in capital ........................ 1,512,394
Other ............................................. (768)
Accumulated deficit ............................... (555,221)
-----------
957,207
Treasury stock, 5,800,000 shares, at cost ......... (126,875)
-----------
Total stockholders' equity ...................... 830,332
-----------
Total liabilities and stockholders' equity ...... $ 1,867,134
===========
</TABLE>
- ---------------
The accompanying notes are an integral part of the Consolidated Financial
Statements.
28
<PAGE> 32
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Series A Series B Additional
Preferred Preferred Common Paid-in
Stock Stock Stock Capital Other
----- ----- ----- ------- -----
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994 ........ $ -- $ -- $ 614 $ 938,229 $ (6,389)
Issuance of stock for
acquisitions .................... -- -- 23 81,985 --
Stock options exercised ........... -- -- 5 5,611 --
Settlement of deferred purchase
price adjustments ............... -- -- -- 24,514 --
Amortization of deferred
charge .......................... -- -- -- -- 2,333
Foreign currency adjustment ....... -- -- -- -- 723
Change in unrealized investment
gain (loss) ..................... -- -- -- -- (4,995)
Net loss .......................... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1994 ...... -- -- 642 1,050,339 (8,328)
Issuances of stock for
acquisitions and other .......... -- -- 2 6,910 --
Issuance of preferred stock ....... 1 -- -- 306,454 --
Exchange of common stock
for preferred stock ............. -- 150 -- 126,725 --
Stock options exercised ........... -- -- 4 5,844 --
Stock compensation plans
additions ....................... -- -- -- 1,352 --
Amortization of deferred
charge .......................... -- -- -- -- 2,334
Foreign currency adjustment ....... -- -- -- -- (243)
Change in unrealized investment
gain (loss) ..................... -- -- -- -- 5,469
Stock dividend on Series A
Preferred Stock ................. -- -- 3 14,770 --
Net loss .......................... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1995 ...... $ 1 $ 150 $ 651 $1,512,394 $ (768)
<CAPTION>
Accumulated Treasury
Deficit Stock Total
------- ----- -----
<S> <C> <C> <C>
Balance at January 1, 1994 ........ $ (121,349) $ -- $ 811,105
Issuance of stock for
acquisitions .................... -- -- 82,008
Stock options exercised ........... -- -- 5,616
Settlement of deferred purchase
price adjustments ............... -- -- 24,514
Amortization of deferred
charge .......................... -- -- 2,333
Foreign currency adjustment ....... -- -- 723
Change in unrealized investment
gain (loss) ..................... -- -- (4,995)
Net loss .......................... (151,201) -- (151,201)
-------------- ---------- ----------
Balance at December 31, 1994 ...... (272,550) -- 770,103
Issuances of stock for
acquisitions and other .......... -- -- 6,912
Issuance of preferred stock ....... -- -- 306,455
Exchange of common stock
for preferred stock ............. -- (126,875) --
Stock options exercised ........... -- -- 5,848
Stock compensation plans
additions ....................... -- -- 1,352
Amortization of deferred
charge .......................... -- -- 2,334
Foreign currency adjustment ....... -- -- (243)
Change in unrealized investment
gain (loss) ..................... -- -- 5,469
Stock dividend on Series A
Preferred Stock ................. (14,773) -- --
Net loss .......................... (267,898) -- (267,898)
-------------- ---------- ----------
Balance at December 31, 1995 ...... $ (555,221) $ (126,875) $ 830,332
</TABLE>
29
<PAGE> 33
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Series A Series B Additional
Preferred Preferred Common Paid-in
Stock Stock Stock Capital Other
----- ----- ----- ------- -----
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 ......... $1 $ 150 $ 651 $ 1,512,394 $ (768)
Issuance of common stock ............. - -- 357 1,280,113 --
Issuance of common stock and
stock options for acquisitions ..... - -- 582 2,113,508 --
Stock dividend on Series A
Preferred Stock .................... - -- 7 28,282 --
Dividend on Series B Preferred
Stock .............................. - -- -- -- --
Conversion of Series B Preferred
Stock to common .................... - (21) 1 15 --
Redemption of Shareworks Plus
awards (Note 11) ................... - -- -- (120,867) --
Stock options exercised .............. - -- 34 33,977 --
Amortization of deferred charge ...... - -- -- -- 1,017
Foreign currency adjustment .......... - -- -- -- 13,945
Change in unrealized investment
gain (loss) ........................ - -- -- -- 385
Retirement of treasury stock ......... - -- (29) (48,053) --
Stock compensation plan
additions .......................... - -- -- 22,779 --
Two-for-one stock split .............. - -- 629 (629) --
Other ................................ - -- 13 (13) 69
Net loss ............................. - -- -- -- --
-- ------ ------- ----------- ---------
Balance at December 31, 1996 ......... $1 $ 129 $ 2,245 $ 4,821,506 $ 14,648
== ====== ======= =========== =========
<CAPTION>
Accumulated Treasury
Deficit Stock Total
----------- --------- -----------
<S> <C> <C> <C>
Balance at December 31, 1995 ......... $ (555,221) $(126,875) $ 830,332
Issuance of common stock ............. -- -- 1,280,470
Issuance of common stock and
stock options for acquisitions ..... -- -- 2,114,090
Stock dividend on Series A
Preferred Stock .................... (28,289) -- --
Dividend on Series B Preferred
Stock .............................. (187) -- (187)
Conversion of Series B Preferred
Stock to common .................... -- -- (5)
Redemption of Shareworks Plus
awards (Note 11) ................... -- -- (120,867)
Stock options exercised .............. -- -- 34,011
Amortization of deferred charge ...... -- -- 1,017
Foreign currency adjustment .......... -- -- 13,945
Change in unrealized investment
gain (loss) ........................ -- -- 385
Retirement of treasury stock ......... (78,793) 126,875 --
Stock compensation plan
additions .......................... -- -- 22,779
Two-for-one stock split .............. -- -- --
Other ................................ -- -- 69
Net loss ............................. (1,838,030) -- (1,838,030)
----------- --------- -----------
Balance at December 31, 1996 ......... $(2,500,520) $ -- $ 2,338,009
=========== ========= ===========
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
30
<PAGE> 34
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
----------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss .................................................. $(1,838,030) $(267,898) $(151,201)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ......................... 286,131 142,496 73,869
Non cash interest expense ............................. 100,021 35,503 40,212
Non cash compensation expense ......................... 16,742 1,352 --
Non cash charge for in-process research
and development ..................................... 1,400,000 -- --
Deferred income taxes ................................. -- -- (2,163)
Loss on sales of securities ........................... -- 1,271 822
Changes in assets and liabilities, net of acquisitions:
Accounts receivable and other
assets ......................................... (287,898) (94,890) (43,807)
Other liabilities ................................. 173,913 61,458 71,846
----------- --------- ---------
Net cash used in operating activities .......... (149,121) (120,708) (10,422)
----------- --------- ---------
Cash flows from investing activities:
Purchases of network and equipment ........................ (887,951) (506,866) (363,376)
Proceeds from sale-leaseback of equipment ................. -- 40,111 --
Acquisition of businesses, excluding cash
acquired ................................................ (6,263) (15,289) (207,531)
Acquisition of minority interest in
subsidiaries ............................................ -- (1,572) (5,804)
Maturities of marketable securities ....................... 648,723 220,497 281,071
Proceeds from sales of marketable securities .............. -- 348,771 446,429
Purchases of marketable securities ........................ (1,316,690) (295,873) (621,569)
Additions to deferred costs and other ..................... (25,383) (25,432) (16,215)
----------- --------- ---------
Net cash used in investing activities .......... (1,587,564) (235,653) (486,995)
----------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of Series A Preferred
Stock ................................................... -- 306,455 --
Proceeds from issuance of long-term debt
and notes payable ....................................... 699,268 75,475 483,500
Payments on long-term debt and notes payable .............. (98,815) (4,974) (647)
Payment of debt financing costs ........................... (19,920) -- --
Issuances of common stock ................................. 1,280,470 1,000 --
Proceeds from exercise of stock options ................... 34,011 5,848 5,616
Dividend on Series B Preferred Stock and other ............ (187) 2,221 --
----------- --------- ---------
Net cash provided by financing
activities ................................... 1,894,827 386,025 488,469
----------- --------- ---------
Net increase (decrease) in cash and cash
equivalents ................................................ 158,142 29,664 (8,948)
Cash and cash equivalents, beginning of year ................. 51,182 21,518 30,466
----------- --------- ---------
Cash and cash equivalents, end of year ....................... $ 209,324 $ 51,182 $ 21,518
=========== ========= =========
</TABLE>
- ----------------
The accompanying notes are an integral part of the Consolidated Financial
Statements.
31
<PAGE> 35
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUPPLEMENTAL CASH FLOW DISCLOSURES:
1996 1995 1994
------ ------ ----
<S> <C> <C> <C>
Cash paid during the year for interest ......................... $9,413 $2,744 $607
Cash paid during the year for income taxes ..................... $ 692 $ 618 $492
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON CASH FINANCING AND INVESTING ACTIVITIES:
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:
<TABLE>
<S> <C>
Fair value of tangible assets acquired ............... $ 164,005
Fair value of intangible assets acquired ............. 676,388
Fair value of in-process research and development .... 1,400,000
Stock and stock options issued ....................... (2,114,090)
-----------
Liabilities assumed .................................. $ 126,303
===========
</TABLE>
In 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:
<TABLE>
<S> <C>
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
========
</TABLE>
The Company issued dividends of common stock valued at $28,289 and
$14,773 on its Series A Preferred Stock in 1996 and 1995, respectively. The
Company also issued 15,000,000 shares of Series B Preferred Stock in exchange
for 5,800,000 shares of the Company's common stock during 1995. The Company
recognized undeclared dividends of approximately $950 and $291 on its Series B
Preferred Stock in 1996 and 1995, respectively.
The Company capitalized non cash interest expense of $13,815 in 1996,
$18,796 in 1995 and $5,450 in 1994 on network construction projects.
The Company incurred capital lease obligations of $34,593 in 1995 by
entering into sale-leaseback transactions for certain telecommunications
equipment which had previously been acquired.
In 1994, the Company recorded $24,514 of goodwill and additional
paid-in capital related to the settlement of deferred purchase price
adjustments from acquisitions of stock of Chicago Fiber Optic Corporation in
1990 and 1991. The liability for adjustments had been assumed by the Company's
former majority owner in 1993 (see Note 8).
32
<PAGE> 36
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
SUPPLEMENTAL SCHEDULE OF NON CASH FINANCING AND INVESTING ACTIVITIES:
(CONTINUED)
In 1994, the Company purchased the common stock and all stock options
of Centex Telemanagement, Inc. for $202,083. In connection with the
acquisition, liabilities were assumed as follows:
<TABLE>
<S> <C>
Fair value of tangible assets acquired ...... $ 79,483
Fair value of intangible assets acquired .... 193,719
Cash paid for stock ......................... (202,083)
---------
Liabilities assumed ......................... $ 71,119
=========
</TABLE>
In 1994, the Company purchased the common stock of Cylix
Communications Corporation for $2,250 in cash and the issuance of stock. In
connection with the acquisition, liabilities were assumed as follows:
<TABLE>
<S> <C>
Fair value of tangible assets acquired ........ $ 9,417
Fair value of intangible assets acquired ...... 4,843
Cash paid for stock ........................... (2,250)
Stock issued .................................. (5,990)
-------
Liabilities assumed ........................... $ 6,020
=======
</TABLE>
In 1994, the Company purchased the common stock of RealCom Office
Communications, Inc. for $7,250 in cash and the issuance of stock. In
connection with the acquisition, liabilities were assumed as follows:
<TABLE>
<S> <C>
Fair value of tangible assets acquired ...... $ 33,629
Fair value of intangible assets acquired .... 56,075
Cash paid for stock ......................... (7,250)
Stock issued ................................ (53,052)
--------
Liabilities assumed ......................... $ 29,402
========
</TABLE>
The Company issued common stock with a value of $11,954 for other
acquisitions during 1994. In connection with these acquisitions, the Company
assumed liabilities of approximately $6,000, acquired networks and equipment of
approximately $5,000 and recorded goodwill and other intangibles.
The Company issued common stock with a value of $11,012 to acquire the
minority interest of two of its subsidiaries during 1994.
- ---------------
The accompanying notes are an integral part of the Consolidated Financial
Statements.
33
<PAGE> 37
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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. The capital structure of the Company as
of December 31, 1996, 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 reflect the activity
of the Company up to the Merger. The impact of pushdown accounting reflecting
the purchase by WorldCom has been set forth in a separate report for ease of
understanding.
The Company operates through its subsidiaries in two business
segments, communications services and network systems integration services. The
communications segment is comprised of the MFS Telecom Companies, which provide
telecommunications services to large business and government customers, the MFS
Intelenet Companies, which provide telecommunications services to small and
medium sized business customers, MFS International, which provides
telecommunications services to business and government customers
internationally and MFS Global Network Services, which manages the Company's
international network platform. With the acquisition of UUNET Technologies,
Inc. ("UUNET") 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.
Where appropriate, items within the consolidated financial statements
and notes thereto have been reclassified from previous years to conform to
current year presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a) Principles of Consolidation:
The consolidated financial statements of the Company include the
accounts of all of its majority-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
34
<PAGE> 38
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--(CONTINUED)
(b) Recognition of Revenue:
The Company recognizes revenue on communications services in the month
the related service is provided. Network systems integration revenue is
recognized on the percentage-of-completion method of accounting. Under the
percentage-of-completion method, an estimated percentage for each contract, as
determined by the Company's engineering estimate based on the amount of work
performed, is applied to total estimated profit. Provisions for losses are
recognized on uncompleted contracts when they become known. Claims for
additional revenue are recognized in the period when settled. Revisions in cost
and profit estimates, which are always reasonably possible to occur in the near
term under the percentage-of-completion method, are reflected in the accounting
period in which the facts which require the revision become known.
(c) Cost of Sales:
Cost of sales includes direct third-party costs of providing
communications services, primarily payments to other telecommunications
companies for access and transport charges, and the costs of providing network
systems integration services under the percentage-of-completion method of
accounting.
(d) Classification of Current Assets and Liabilities:
In accordance with industry practice, amounts realizable and payable
under network systems integration contracts which may extend beyond one year
are includable in current assets and liabilities. A one-year time period is
used as the basis for classification of all other current assets and
liabilities.
(e) Networks and Equipment:
The networks and equipment are stated at cost. Various costs are
capitalized during the installation and expansion of the networks. Provisions
for depreciation are computed using straight-line methods over estimated useful
lives beginning in the year an asset is put into service.
Electronic and related equipment, leasehold improvements, furniture
and office equipment and land and buildings are stated at cost. Leasehold
improvements primarily consist of extensions off the network to customer
locations. Depreciation is computed using primarily straight-line methods over
the estimated useful lives of the assets or, for capital leases, the term of
the related leases.
Costs of purchased software and certain costs to modify and improve
certain of the Company's computer software are recorded at cost and are being
amortized using the straight-line method over their estimated useful lives.
(f) Intangible Assets:
Goodwill is being amortized over periods ranging from five to 40 years
from the dates of acquisition. The Company reviews the carrying amount of
goodwill for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. Measurement of any impairment
would include a comparison of estimated future operating cash flows anticipated
to be generated during the remaining life of the goodwill to the net carrying
value of the goodwill.
35
<PAGE> 39
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--(CONTINUED)
(f) Intangible Assets:--(continued)
Costs incurred in developing new networks or expanding existing
networks, including network design, negotiation of rights-of-way and obtaining
legal/regulatory authorizations are deferred and amortized over five years.
Costs incurred to obtain access to buildings are deferred by the
Company and amortized over 15 years. Costs incurred to obtain city franchises
are deferred by the Company and amortized over the initial term of the
franchise.
Pre-operating costs represent substantially all nondevelopment costs
incurred during the pre-operating phase of a newly-constructed network and are
amortized over five-year periods commencing with the start of operations.
Costs incurred to implement the Company's program to take advantage of
the opportunities presented by the passage of the Telecommunications Act of
1996 have been deferred and amortized over five years. Costs incurred to
provision service to new customers and new services to current customers has
been deferred and amortized over five years.
The costs of rights-of-way and customer lists obtained in business
acquisitions are being amortized over estimated useful lives of 20 to 25 years
and three years, respectively.
In 1996, the Company recorded a $1.4 billion charge for in-process
research and development related to the acquisition of UUNET. The charge is
based upon a valuation analysis of the technologies of the Internet network
expansion system of UUNET and certain other identified research and development
projects purchased in the acquisition. At the date of the acquisition of UUNET,
the technological feasibility of the acquired technology had not yet been
established and the technology has no future alternative uses.
(g) Income Taxes:
The Company recognizes deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement and tax bases of liabilities and assets using enacted tax
rates in effect for the year in which the differences are expected to reverse.
(h) Minority Interest:
The Company has recorded the entire loss of other than wholly-owned
subsidiaries where the loss applicable to the minority interest exceeds the
minority interest in such subsidiaries' equity.
(i) Translation of Foreign Financial Statements:
Assets and liabilities are translated into U.S. dollars at year-end
exchange rates. Revenues and expenses are translated using the average rates of
exchange for the period. Gains or losses resulting from foreign currency
translation are recorded as adjustments to stockholders' equity.
(j) Cash Equivalents:
Cash equivalents generally consist of highly liquid debt instruments
purchased with a maturity of three months or less.
36
<PAGE> 40
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--(CONTINUED)
(k) Marketable Securities:
Marketable securities are being carried at fair value.
(l) Financial Instruments:
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of marketable securities and
accounts receivable. Concentrations of credit risk of marketable securities are
limited due to investments in short-term, investment grade securities.
Concentrations of credit risk with respect to accounts receivable are limited
due to the dispersion of the Company's customer base among different industries
and geographic areas and remedies provided by terms of contracts and statutes.
(m) Loss Per Share:
The weighted average number of shares outstanding for the years ended
December 31, 1996, 1995 and 1994 were 166,432,000, 127,786,000 and
124,874,000, respectively.
(n) Estimates in Consolidated Financial Statements:
The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
(o) Stock-Based Compensation:
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.
3. FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to determine the
classification and fair value of each class of financial instruments for which
it is practicable to estimate that value:
(a) Cash and Cash Equivalents:
Cash equivalents generally consist of highly liquid debt instruments
purchased with a maturity of three months or less and are carried at fair value
which approximates cost due to the short maturities.
(b) Marketable Securities:
The Company has classified all marketable securities other than cash
equivalents as available-for-sale. The amortized costs of the securities used
in computing unrealized and realized gains and losses are determined by
specific identification. Fair values are estimated based on quoted market
prices. Net unrealized gains and losses are reported as a separate component of
stockholders' equity. The Company has not invested in derivative financial
instruments.
37
<PAGE> 41
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
3. FINANCIAL INSTRUMENTS:--(CONTINUED)
(b) Marketable Securities:--(continued)
Marketable securities at December 31, 1995 were as follows:
<TABLE>
<CAPTION>
Unrealized Unrealized Estimated
Amortized Holding Holding Fair
Cost Gain Loss Value
---- ---- ---- --------
<S> <C> <C> <C> <C>
U.S. Treasury and other U.S. ....
government corporations and
agencies debt securities ..... $48,652 $204 $- $48,856
Corporate debt securities ....... 36,859 6 6 36,859
------- ---- -- -------
Total marketable securities ..... $85,511 $210 $6 $85,715
======= ==== == =======
</TABLE>
Sales activity in available-for-sale securities is summarized as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Proceeds from sale of available-for-sale
securities .......................... $ -- $348,771 $446,429
Gross realized gains ................... -- -- 137
Gross realized losses .................. -- 1,271 959
</TABLE>
(c) Long-Term Debt:
The fair value of the Company's long-term debt is estimated based on
the quoted market price for the same or similar issues or on borrowing rates
currently available to the Company for debt with similar terms and maturities.
The fair market value of the Company's long-term debt was $732,003 at December
31, 1995.
4. NETWORKS AND EQUIPMENT:
Networks and equipment at December 31, 1995 consisted of the
following:
<TABLE>
<S> <C>
Telecommunications networks ............$ 287,719
Electronic and related equipment ....... 628,609
Leasehold improvements ................. 106,012
Furniture, office equipment and other .. 36,225
Land and buildings ..................... 11,656
Computer software ...................... 37,516
Capitalized lease assets, primarily
electronic equipment ................. 34,593
Networks-in-progress ................... 173,622
----------
$1,315,952
==========
</TABLE>
Amortization expense on capitalized lease assets was $4,884 and
$254 for the years ended December 31, 1996 and 1995, respectively.
Accumulated amortization was $254 at December 31, 1995.
38
<PAGE> 42
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
5. OTHER ASSETS:
Other assets at December 31, 1995 consisted of the following:
<TABLE>
<S> <C>
Goodwill ....................................................... $ 297,970
Customer list .................................................. 67,200
Deferred development, preoperating and other costs ............. 56,635
Deferred financing costs ....................................... 23,699
Rights-of-way .................................................. 15,069
Other noncurrent assets ........................................ 989
---------
461,562
Less accumulated amortization .................................. (70,876)
---------
$ 390,686
=========
</TABLE>
Amortization of intangible assets and deferred costs was $102,657 in
1996, $41,946 in 1995 and $25,419 in 1994.
6. NOTES PAYABLE AND LONG-TERM DEBT:
Notes payable and long-term debt at December 31, 1995 consisted of the
following:
<TABLE>
<S> <C>
9 3/8% Senior Discount Notes, due January 15, 2004 .... $ 596,648
Credit Facilities, including interest at a variable
rate ................................................. 65,000
Vendor Credit Facilities, including interest at a
variable rate ........................................ 4,400
Notes Payable to bank, including interest at prime plus
1.85% maturing in 1999, collateralized by certain
equipment of a subsidiary ............................ 20,000
Note Payable to credit corporation, with quarterly
payments including interest at LIBOR plus 2.5% through
March 31, 2000 ....................................... 3,967
Equipment Finance Agreement with monthly payments
including interest at 9.27% through March 31, 1999,
collateralized by certain subsidiary assets .......... 3,988
Other ................................................. 51
--------
694,054
Less: Current portion ................................ (1,995)
--------
$692,059
========
</TABLE>
(a) The Senior Discount Notes:
The Company issued the Senior Discount Notes (the "1994 Senior
Discount Notes") on January 19, 1994 and recorded the net proceeds, exclusive
of transaction costs, of approximately $500,000 as long-term debt. The Company
is accruing to the principal amount of the 1994 Senior Discount Notes of
$788,320 through January 1999. Cash interest will not accrue on the 1994 Senior
Discount Notes prior to January 15, 1999, however, the Company may elect to
commence the accrual of cash interest at any time prior to that date.
Commencing July 15, 1999 cash interest will be payable semi-annually.
39
<PAGE> 43
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
6. NOTES PAYABLE AND LONG-TERM DEBT:--(CONTINUED)
(a) The Senior Discount Notes:--(continued)
On or after January 15, 1999, the 1994 Senior Discount Notes will be
redeemable at the option of the Company, in whole or in part from time to time,
at the following prices (expressed in percentages of the principal amount at
the 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.
<TABLE>
<CAPTION>
Year Percentage
- ---- ----------
<S> <C>
1999 ................... 103.52%
2000 ................... 102.34%
2001 ................... 101.17%
2002 and thereafter .... 100.00%
</TABLE>
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 1994 Senior Discount Notes as stipulated in the note agreement. The 1994
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 1994 Senior Discount 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.
(b) The Credit Facilities:
In April 1995, the Company reached agreement with a syndicate of
commercial banks for an aggregate of $250,000 of revolving credit facilities
(the "Credit Facilities"). The Credit Facilities were canceled during 1996.
(c) The Vendor Credit Facilities:
In July 1995, the Company established two credit facilities to borrow
up to an aggregate of $120 million for purchases of switching equipment through
mid-1997 (the "Vendor Credit Facilities"). The facilities are collateralized by
the purchased equipment and partially guaranteed by the Swedish Export Credits
Guarantee Board and the equipment manufacturer. Borrowings under the Vendor
Credit Facilities will be repaid under various schedules, through 2002. The
Company may repay any amounts borrowed under the facilities without premium or
penalty at any time.
The Vendor Credit Facilities provide for interest at a variable rate
and a commitment fee on any unused balances. The Vendor Credit Facilities
contain certain financial covenants and other restrictions similar to the 1994
Senior Discount Notes.
(d) The Notes Payable:
In April 1995, the Company extended the maturity dates on the Notes
Payable to bank from 1995 to 1999. During 1996 this Note Payable was paid off.
In connection with an acquisition in 1995, the Company assumed the Note Payable
to credit corporation.
40
<PAGE> 44
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
7. LEASES:
Capitalized leases consist primarily of leases of electronic
telecommunications equipment. The Company is also leasing premises under
various operating leases which, in addition to rental payments, require
payments for insurance, maintenance, property taxes and other executory costs
related to the leases. Certain leases provide for adjustments in lease cost
based upon adjustments in the consumer price index and increases in the
landlord's management costs.
Rent expense under lease agreements was $44,242 in 1996, $27,150 in
1995 and $17,789 in 1994.
8. COMMITMENTS AND CONTINGENCIES:
Under the terms of stockholder agreements, from time to time, minority
stockholders in certain subsidiaries have the option to put shares to the
Company at a purchase price equal to an appraised value of such shares.
The Company has issued standby letters of credit to various city
governmental agencies and building lessors, amounting to approximately $5,453
at December 31, 1996. It is management's belief that the underlying obligations
will be met in the normal course of business without material adverse effect on
the Company's financial position.
The Company is also obligated under rights-of-way and franchise
agreements with various entities for the use of their rights-of-way for the
installation of its telecommunications systems.
Pursuant to an agreement with a joint venture, the Company is
obligated to invest up to $75,000 over the next two years in the form of
capital contributions and to pay $60,000 over the next four years to purchase
an indefeasible right of use for certain undersea capacity between the United
States and Europe that is being constructed by the joint venture. The Company
is also a party to the joint venture.
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, 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. In 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.
9. INCOME TAXES:
Loss before income taxes is comprised of a loss of approximately
$1,812,000, $251,000 and $139,000 from domestic operations and approximately
$26,000, $16,000 and $14,000 from foreign operations in 1996, 1995 and 1994,
respectively.
41
<PAGE> 45
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
9. INCOME TAXES:--(CONTINUED)
Income tax benefit (expense) consists of the following:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
----- ------- -------
Current
U.S. Federal ....... $ -- $ -- $ --
State and other .... (500) (600) (60)
----- ------- -------
(500) (600) (60)
----- ------- -------
Deferred
U.S. Federal ....... -- -- 2,163
State .............. -- -- --
----- ------- -------
-- -- 2,163
----- ------- -------
$(500) $ (600) $ 2,103
===== ======= =======
</TABLE>
The actual income tax benefit (expense) differs from the "expected"
income tax benefit (computed by applying the U.S. federal corporate tax rate of
35% in 1996, 1995 and 1994 to loss before income taxes) as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
Federal income tax benefit at
statutory rate ........................ $ 643,135 $ 93,554 $ 53,656
Non-deductible write off of research and
development ........................... (490,000) -- --
Unutilized tax benefit due to net
operating loss ........................ (135,220) (91,157) (49,680)
Goodwill amortization .................. (17,412) (2,713) (1,676)
State income taxes and other ........... (1,003) (284) (197)
--------- -------- --------
$ (500) $ (600) $ 2,103
========= ======== ========
</TABLE>
A valuation reserve has been recognized to offset deferred tax assets
due to the uncertainty of realizing the benefit of the loss carryforwards.
The components of deferred taxes as of December 31, 1995 were as
follows:
<TABLE>
Deferred tax assets:
<S> <C>
Net operating losses ....................... $ 155,338
Other ...................................... 14,523
---------
Total deferred tax assets ................ 169,861
---------
Deferred tax liabilities:
Deferred charges ........................... 8,552
Accumulated depreciation ................... 13,880
Acquisition intangibles, other than goodwill 11,621
---------
Total deferred tax liabilities ........... 34,053
---------
Net deferred tax assets ...................... 135,808
Less: Valuation allowance ................... (135,808)
---------
Net deferred tax liabilities ................. $ --
=========
</TABLE>
10. STOCKHOLDERS' EQUITY:
As discussed in Note 1 the Company's capital structure changed as of
the Merger to include only one share of common stock owned by WorldCom. Each
previously outstanding 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. Following is a discussion of stockholders' equity prior to the
Merger.
42
<PAGE> 46
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
10. STOCKHOLDERS' EQUITY:--(CONTINUED)
(a) Treasury Stock and Stock Split:
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.
(b) Series A Preferred Stock:
In May 1995, the Company issued 9,500,000 Depositary Shares (the
"Depositary Shares"), each representing a one one-hundredth interest in a share
of Series A 8% cumulative convertible preferred stock (the "Series A Preferred
Stock"), in a public offering. The proceeds of the offering, net of expenses,
was $306,455. The Depositary Shares were mandatorily convertible into an
aggregate of 19,000,000 shares of common stock. The Depositary Shares were also
redeemable at the option of the Company into shares of common stock on or after
May 31, 1998 at a ratio that would have varied depending upon certain factors,
including the market price of the common stock at the time of redemption and
the status of dividend payments. The Depositary Shares were also convertible at
the option of the holder at any time at a rate of 163.94 shares of common stock
for each share of Series A Preferred Stock (equivalent to a conversion price of
$20.43 per share of common stock), subject to certain adjustments.
The Depositary Shares were entitled to receive dividends, when, as,
and if they are declared by the Board of Directors, accruing at the rate of
$2.68 per share per annum, payable quarterly in arrears on each February 28,
May 31, August 31 and November 30. Dividends were payable in cash or in shares
of common stock, at the election of the Company. Certain of the Company's debt
agreements restrict the Company's ability to pay cash dividends, and as a
result, the Company paid all dividends in common stock.
The Depositary Shares were entitled to vote on the basis of .1000 of a
vote for each Depositary Share held (equivalent to 10 votes for each share of
Series A Preferred Stock). The Series A Preferred Stock had a liquidation
preference equal to the greater of (i) the sum of (a) $3,350 per share and (b)
all accrued and unpaid dividends thereon to the date of liquidation and (ii)
the value of the shares of the Company's common stock into which such Series A
Preferred Stock were convertible on the date of liquidation.
43
<PAGE> 47
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
10. STOCKHOLDERS' EQUITY:--(CONTINUED)
(c) Series B Preferred Stock:
Pursuant to a planned restructuring of PKS' ownership in the Company's
capital stock, on September 30, 1995, the Company issued 15,000,000 shares of
Series B, 7 3/4% cumulative convertible preferred stock (the "Series B
Preferred Stock") to a wholly-owned subsidiary of PKS in exchange for 5,800,000
shares of the Company's common stock, which were retired. Also pursuant to that
restructuring, PKS purchased $1,000 of the Company's common stock and then
distributed all of its shares of the Company's common stock and the shares of
Series B Preferred Stock to certain of its stockholders. The Series B Preferred
Stock received by PKS' stockholders were subject to certain restrictions
regarding sale or transfer through September 30, 2001. The common stock
received and the Series B Preferred Stock issued in the exchange have been
accounted for based upon the market value of the common stock on September
30, 1995.
The Series B Preferred Stock was convertible into shares of common
stock at any time after the first anniversary of the date of issuance at a
conversion price of $21.563 (an effective conversion rate of 0.0463768 shares
of common stock for each share of Series B Preferred Stock). Dividends on the
Series B Preferred Stock accrue at the rate of 7 3/4% per annum and were
payable in cash. Shares of Series B Preferred Stock were also redeemable at the
option of the Company at any time after September 30, 2001 at a redemption price
of $1.00 per share, plus accrued and unpaid dividends.
Each share of Series B Preferred Stock had the right to ten votes on
all matters presented to the Company's stockholders, however the shares were
subject to an irrevocable proxy that had been granted to the Secretary and
Assistant Secretary of the Company on all matters other than the election of
directors and matters as to which holders of the Series B Preferred Stock voted
as a separate class. The proxy required the Secretary and Assistant Secretary
of the Company to vote all of the shares of Series B Preferred Stock in
proportion to the vote of the holders of the Company's common stock. The Series
B Preferred Stock had a liquidation preference over Junior Stock, as defined,
of $1.00 per share, plus an amount equal to unpaid dividends thereon, including
accrued dividends, whether or not declared.
(d) Common Stock Warrants:
The Company entered into an agreement on June 8, 1993 to issue
1,500,000 common stock warrants to an investment bank in consideration for the
provision of financial advisory services to the Company over a three-year
period. The warrants vested quarterly through June 7, 1996, and were
exercisable at $13.125 per share during the five-year period following the date
each portion vested and became exercisable. The fair value of the warrants as
of June 8, 1993 has been accounted for within stockholders' equity as
additional paid-in capital, with an offsetting deferred charge to equity and
was amortized over the three-year vesting period.
44
<PAGE> 48
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
11. EMPLOYEE BENEFIT PLANS:
The Company had several stock-based and other compensation programs in
effect during 1996. The Company recognized compensation expense of $16,742
related to these programs in 1996. The programs are described as follows:
(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:
The Company's 1992 and 1993 Stock Plans, which were assumed by
WorldCom in the Merger, authorized 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 Company registered 32,000,000 shares for the grant of options or other
awards under the two plans. The Compensation Committee of the Board of
Directors administered the stock plans. Options vest over a five-year period
and were generally exercisable up to five years after the grant was completely
vested.
The Company utilized the fair value based accounting provisions of
SFAS 123 for 1996. For the Company's 1992 and 1993 Stock Plans, the fair value
was determined using option-pricing models that take into account the stock
price at the grant date, the exercise price, a five year expected life for the
options, an estimated volatility of 30% for the Company's stock price, no
expected dividends, and a risk-free interest rate of 6.21% over the expected
life of the options. The fair value of the options granted was estimated to be
$9.97 per option. Because the options granted in 1996 were predominantly issued
near the end of the year, the expense recognized was immaterial. Due to the
Merger, it is anticipated that the Company will conform with the accounting
principles of its parent, which utilizes the accounting provisions of
Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock
Issued to Employees," for all future periods. Under APB 25 it is anticipated
that no compensation expense will be recorded in the future related to these
plans.
A summary of the changes in the Company's 1992 and 1993 Stock Plans
for the years ended December 31, 1996, 1995 and 1994, is presented below:
<TABLE>
<CAPTION>
1996 1995 1994
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 20,942,268 13.99 16,718,584 $ 10.44 13,013,096 $ 7.86
Granted 2,777,161 54.01 5,783,996 23.68 5,165,396 16.10
Assumed in acquisition 6,310,120 19.34 -- -- -- --
Exercised (3,963,644) 8.57 (817,462) 7.19 (935,452) 6.02
Canceled or forfeited (2,264,962) 21.06 (742,850) 14.69 (524,456) 11.05
---------- ---------- ----------
Outstanding at end of year 23,800,943 20.50 20,942,268 13.99 16,718,584 10.44
========== ========== ==========
Options exercisable at year end 7,630,085 6,862,462 4,946,600
Weighted average fair value of
option granted during the year $ 9.97 $ 4.26
</TABLE>
45
<PAGE> 49
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
11. EMPLOYEE BENEFIT PLANS:--(CONTINUED)
(b) Stock Option Plans:--(continued)
For the year ended December 31, 1995, the Company utilized the
accounting principles of APB 25 in accounting for its plans. Accordingly, no
compensation cost had been recognized for its stock option plans. Had
compensation costs for the Company's plans been determined based on the fair
value at the grant dates for awards under those plans consistent with the fair
value method of SFAS 123, the Company's net loss would have been $269,806 for
1995 and its loss per common share would have been $2.23. The fair value was
determined using option-pricing models that take into account the stock price
at the grant date, the exercise price, a five year expected life for the
options, an estimated volatility of 30% for the Company's stock price, no
expected dividend and a risk free interest rate that ranged from 5.38% to
7.88%.
(c) 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. The
Company granted approximately 100,000 and 128,000 shares of stock during
December of 1996 and 1995, respectively. The Company is recognizing
compensation expense based on the market value of the shares granted at the
grant date.
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 during 1996 and 1995 was $6,037 and $1,352, respectively. The Company
is recognizing compensation expense for the match shares over the vesting
period based on the market value of the shares at each pay period date.
(d) 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
would normally be paid in common stock of the Company, increases.
46
<PAGE> 50
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
11. EMPLOYEE BENEFIT PLANS:--(CONTINUED)
(d) Shareworks Plus:--(continued)
The Company utilizes the fair value based accounting provisions of
SFAS 123 for 1996. 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 awards. The fair value of the awards granted was estimated to be
$6.50 per award. Due to the Merger, in the future the Company will conform with
the accounting principles of its parent which utilizes the accounting
provisions of APB 25.
Under the Company's Shareworks Plus program, the Company granted
approximately 1,970,000 awards during 1996, at a weighted average exercise
price of $35.32. Approximately 609,000 awards were exercised during 1996 at a
weighted average exercise price of $31.92. As a result of the Merger, each
holder of an unexercised award is entitled to receive the value of each award
in cash in accordance with the award's original terms. Accordingly, the Company
recognized a liability of $120,867 and reduced paid-in capital at the end of
1996 to reflect this obligation.
(e) UUNET Stock Option Plans:
The Company adopted UUNET's existing stock option plans upon
acquisition, however, no further grants under these programs were made. Upon
the Merger these plans were assumed by WorldCom.
12. ACQUISITIONS:
Effective August 12, 1996, the Company purchased the common stock, and
options to purchase the common stock, of 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 consolidated financial statements since the date of
acquisition. The total purchase price in excess of the fair market value of the
net tangible assets acquired, identifiable intangibles, and in-process research
and development was recorded as goodwill. The value assigned to the in-process
research and development has been charged to expense in the statement of
operations. The goodwill is being amortized on a straight-line basis over a
five year life.
47
<PAGE> 51
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
12. ACQUISITIONS:--(CONTINUED)
The following unaudited pro forma information shows the results of the
Company as though the acquisition of UUNET 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 and
exclude the impact of non-recurring charges related to the acquisition such as
the write off of in-process research and development. 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>
Year ended
December 31,
1996 1995
---- ----
<S> <C> <C>
Revenue .................... $ 1,238,533 $ 672,096
Net loss ................... $ (529,588) $(438,946)
Loss per share applicable to
common stockholders ...... $ (2.77) $ (2.44)
</TABLE>
In 1995, the Company acquired all of the issued and outstanding shares
of capital stock of companies that provided telecommunications services in
Richmond, Virginia, Denver, Colorado and White Plains, New York. The total cost
of the acquisitions was approximately $18,567, excluding transaction costs and
liabilities assumed. The cost of one of these acquisitions included the
issuance of 342,720 shares of the Company's common stock valued at $5,912. The
effect on the Company's operations as a result of these acquisitions was not
significant.
Effective November 14, 1994, the Company purchased all the outstanding
stock of RealCom Office Communications, Inc. ("RealCom"). RealCom was a Shared
Tenant Services company that provided telecommunications services, including
long distance, equipment and outsourcing. The total cost of the acquisition was
approximately $60,302, excluding transaction costs and liabilities assumed.
Included in the cost of the acquisition were 2,720,606 shares of the Company's
common stock valued at $53,052.
Effective November 1, 1994, the Company purchased all the outstanding
stock of Cylix Communications Corporation ("Cylix"). Cylix provided data
communications services by providing connectivity for IBM compatible hosts to
remote sites. The total cost of the acquisition was approximately $8,240,
excluding transaction costs and liabilities assumed. Included in the cost of
the acquisition were 355,490 shares of the Company's common stock valued at
$5,990.
Effective May 18, 1994, the Company purchased the common stock and all
stock options of Centex Telemanagement, Inc. ("Centex"). Centex provided
telecommunications management services for small and medium-sized businesses.
The total cost of the acquisition was approximately $202,083, excluding
transaction costs and liabilities assumed.
In the first quarter of 1994, the Company acquired all of the issued
and outstanding shares of a company that provided telecommunications services
in Rochester, Albany and Buffalo, New York and acquired cable and various
rights-of-way agreements from a company which provided the base for the
Company's network in St. Louis, Missouri.
48
<PAGE> 52
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
12. ACQUISITIONS:--(CONTINUED)
These acquisitions have been accounted for as purchases and
accordingly, the acquired assets and liabilities were recorded at their
estimated fair values at the date of the acquisition, and the results of
operations have been included in the accompanying consolidated financial
statements since the dates of acquisition. The total purchase price in excess
of the fair market value of the net assets acquired was recorded as goodwill.
The goodwill is being amortized on a straight-line basis over a 40-year life.
The following unaudited pro forma information shows the results of the
Company as though the acquisitions in 1994 occurred as of the beginning of that
year. These results include certain adjustments consistent with the Company's
accounting policies related to revenue recognition and amortization of
intangible assets. These results are not necessarily indicative of the results
that actually would have been attained if the acquisitions had been in effect
at the beginning of the year or which may be attained in the future.
<TABLE>
<CAPTION>
Year Ended
December 31, 1994
-----------------
<S> <C>
Revenue .................. $ 421,925
Net loss ................. $(176,483)
Loss per common and common
equivalent share ....... $ (2.76)
</TABLE>
In 1994, the Company recorded $24,514 of additional goodwill relating
to the settlement of a deferred purchase price adjustment that arose prior to
1994. In April 1990, the Company acquired 80% of the voting stock of Chicago
Fiber Optic Corporation, now doing business as Metropolitan Fiber Systems of
Chicago, Inc. ("MFS Chicago"). The acquisition was accounted for as a purchase.
A portion of the purchase price of the stock acquired was to be based upon the
fair market value of MFS Chicago in April 1993. During 1991, the Company
acquired an additional 10% of the voting stock of MFS Chicago for a deferred
purchase price based upon the MFS Chicago fair market value as of April 1993.
The deferred purchase price associated with these purchases of MFS Chicago
stock was assumed by KDG, the Company's majority stockholder at that time,
without recourse to the Company in 1993 and was settled in the first quarter of
1994. The Company recorded the settlement as goodwill and a capital
contribution by KDG.
The Company also acquired the interest of certain minority
shareholders of its subsidiaries during 1995 and 1994.
13. RELATED PARTY TRANSACTIONS:
The Company incurred expense for services provided by a former
affiliate as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Administrative services ... $ -- $600 $1,200
Office lease expense ...... 152 365 364
Aircraft expense .......... 1,405 325 477
Insurance expense ......... -- 125 287
</TABLE>
An officer of the Company is a partner in a law firm that provides
legal services to the Company. The Company paid legal fees to this firm of
approximately $8,320 in 1996, $6,063 in 1995 and $2,854 in 1994.
49
<PAGE> 53
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
14. SEGMENT INDUSTRY DATA:
The Company operates in two reportable segments primarily within the
United States: communications services and network systems integration
services. A summary of the Company's operations by industry follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Revenue:
Communications services ....... $ 927,007 $ 498,225 $ 228,707
Network systems integration ... 310,634 221,986 155,869
Intersegment activity ......... (122,635) (137,017) (97,829)
----------- ----------- -----------
Total ..................... $ 1,115,006 $ 583,194 $ 286,747
=========== =========== ===========
Operating loss:
Communications services ....... $(1,768,156) $ (234,055) $ (131,216)
Network systems integration ... (4,561) (5,250) (4,913)
----------- ----------- -----------
Total ..................... (1,772,717) (239,305) (136,129)
----------- ----------- -----------
Interest expense, net ............... (62,161) (25,418) (16,110)
Unallocated expense ................. (2,652) (2,575) (1,065)
----------- ----------- -----------
Loss before income taxes ............ $(1,837,530) $ (267,298) $ (153,304)
=========== =========== ===========
Identifiable assets:
Communications services ....... $ 1,793,958 $ 1,540,675
Network systems integration ... 106,088 81,053
Intersegment activity ......... (32,912) (37,182)
----------- -----------
Total ..................... $ 1,867,134 $ 1,584,546
=========== ===========
Capital expenditures:
Communications services ....... $ 885,159 $ 504,568 $ 359,188
Network systems integration ... 2,792 2,298 4,188
----------- ----------- -----------
Total ..................... $ 887,951 $ 506,866 $ 363,376
=========== =========== ===========
Depreciation and amortization:
Communications services ....... $ 283,565 $ 139,947 $ 72,209
Network systems integration ... 2,566 2,549 1,660
----------- ----------- -----------
Total ..................... $ 286,131 $ 142,496 $ 73,869
=========== =========== ===========
</TABLE>
50
<PAGE> 54
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
15. QUARTERLY SUMMARY OF OPERATIONS (UNAUDITED):
The following table presents unaudited quarterly operating results for the
first quarter of 1995 through the fourth quarter of 1996. The operating results
for the third quarter of 1996 reflect the write off of $1,400,000 related to
acquired research and development costs in the acquisition of UUNET. The
Company believes that all necessary adjustments have been included in the
amounts stated below to present fairly the quarterly results when read in
conjunction with the Consolidated Financial Statements and notes thereto.
Results of operations for any particular quarter are not necessarily indicative
of results of operations for a full year or predictive of future periods.
<TABLE>
<CAPTION>
1995 1996
------------------------------------------ -------------------------------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th
-------- -------- -------- -------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Communications services........... $103,788 $117,079 $131,432 $145,926 $165,590 $188,403 $245,043 $327,971
Network systems integration....... 14,552 22,926 22,285 25,206 20,726 41,303 62,979 62,991
-------- -------- -------- -------- -------- -------- ---------- --------
Total......................... 118,340 140,005 153,717 171,132 186,316 229,706 308,022 390,962
Loss from operations.................. (56,556) (58,561) (60,846) (63,342) (67,358) (70,046) (1,496,256) (139,057)
Other expense, net.................... (7,252) (6,167) (6,143) (8,431) (18,766) (22,550) (8,502) (14,995)
Loss before income taxes.............. (63,808) (64,728) (66,989) (71,773) (86,124) (92,596) (1,504,758) (154,052)
Income tax expense.................... (100) (100) (250) (150) (100) (100) (100) (200)
Net loss.............................. (63,908) (64,828) (67,239) (71,923) (86,224) (92,696) (1,504,858) (154,252)
Loss per share applicable
to common stockholders............. (.50) (.50) (.58) (.63) (.75) (.79) (7.93) (.73)
</TABLE>
51
<PAGE> 55
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
On December 31, 1996, WorldCom acquired MFS pursuant to the merger
(the "Merger") of HIJ Corp., a wholly-owned subsidiary of WorldCom, with and
into MFS. Upon consummation of the Merger, MFS became a wholly-owned subsidiary
of WorldCom. The Merger was effected pursuant to an Amended and Restated
Agreement and Plan of Merger dated as of August 25, 1996, by and among
WorldCom, MFS and HIJ Corp.
On January 20, 1997, MFS engaged Arthur Andersen LLP ("Arthur
Andersen") to perform the audit of the books and accounts of MFS and its
subsidiaries for fiscal year ended December 31, 1996. Prior to the Merger,
Arthur Andersen was the certifying accountant of WorldCom, which, for
accounting purposes, was the surviving corporation in the Merger. Coopers &
Lybrand L.L.P. ("Coopers & Lybrand") was dismissed pursuant to resolutions of
the Board of Directors as of January 20, 1997. Coopers & Lybrand's reports on
the financial statements of MFS for the fiscal years ended December 31, 1995
and 1994, did not contain an adverse opinion or a disclaimer of opinion, nor
were they qualified or modified as to uncertainty, audit scope, or accounting
principles.
To the knowledge of management, during the fiscal years December 31,
1995 and 1994, and the subsequent period through the date of dismissal, there
were no disagreements with Coopers & Lybrand on any matter of accounting
principles, practices, financial statement disclosure, or auditing scope or
procedure which, if such agreement was not resolved to the satisfaction of
Coopers & Lybrand, would have caused it to make a reference to the subject
matter of such disagreements in connection with the report on the financial
statements.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Omitted under the reduced disclosure format pursuant to General
Instruction I(2)(c) of Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Omitted under the reduced disclosure format pursuant to General
Instruction I(2)(c) of Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Omitted under the reduced disclosure format pursuant to General
Instruction I(2)(c) of Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Omitted under the reduced disclosure format pursuant to General
Instruction I(2)(c) of Form 10-K.
52
<PAGE> 56
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Page
(a)(1) The Company's Financial Statements and Selected Quarterly Financial
Data are contained in Item 8.
(2) All Financial Statement Schedules are omitted because they are not
applicable, immaterial, or the required information is shown in
the financial statements or notes thereto.
(b) There were no reports on Form 8-K filed during the quarter ended
December 31, 1996.
(c) List of Exhibits:
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
2.1 Agreement and Plan of Merger, dated as of April 29,
1996, among the Company, MFS Global Internet Services,
Inc. and UUNET Technologies, Inc.1
2.2 Amended and Restated Agreement and Plan of Merger by
and among the Company, WorldCom, Inc. and HIJ Corp.
dated as of August 25, 1996.2
3.1 Restated Certificate of Incorporation.3
3.2 Amendment No. 1 to Restated Certificate of
Incorporation.4
3.3 Amendment No. 2 to Restated Certificate of
Incorporation.5
</TABLE>
- --------------
(1) Incorporated herein by reference to Exhibit 2.1 to the Registrant's
Current Report on Form 8-K, dated August 12, 1996.
(2) Incorporated herein by reference to Appendix I to the Joint Proxy
Statement/Prospectus dated November 14, 1996 included in
WorldCom's Registration Statement on Form S-4 (File no. 333-16015)
originally filed with the Securities and Exchange Commission on
November 14, 1996.
(3) 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.
(4) 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.
(5) Incorporated herein by reference to Exhibit 3.1 to the Registrant's
Current Report on Form 8-K, dated September 30, 1995.
53
<PAGE> 57
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C> <C>
3.4 By-laws.(6)
4.1 Indenture for the Company's 9-3/8% Senior Discount Notes
due 2004, between MFS and IBJ Schroeder Bank & Trust
Company, as the Trustee.(7)
4.2 First Supplemental Indenture, dated as of March 31,
1995, amending the Indenture for the Company's 9-3/8%
Senior Discount Notes due 2004.(8)
4.3 Indenture for Senior Debt Securities, dated as of
January 15, 1996, between MFS and IBJ Schroeder Bank
and Trust Company, as Trustee.(9)
4.4 First Supplemental Indenture, dated as of January 15,
1996, between MFS and IBJ Schroeder Bank and Trust
Company, as Trustee, relating to the Company's 8-7/8%
Senior Discount Notes due 2006.(10)
10.1 The Company's 401(k) Plan.(11)
11 Statement computing consolidated net loss per share
applicable to common stockholders.
27.1 Financial Data Schedule.
</TABLE>
- ----------------
(6) Incorporated herein by reference to Exhibit 3.2 to the Registrant's
Current Report on Form 8-K, dated September 30, 1995.
(7) Incorporated by reference to the Registrant's Current Report on Form
8-K, dated January 31, 1994.
(8) Incorporated herein by reference to Exhibit No. 10.3 to the
Registrant's Current Report on Form 8-K, dated April 27, 1995.
(9) Incorporated by reference to Exhibit No. 4.1 to the Registrant's
Current Report on Form 8-K, dated January 23, 1996.
(10) Incorporated by reference to Exhibit No. 4.2 to the Registrant's
Current Report on Form 8-K, dated January 23, 1996.
(11) 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.
54
<PAGE> 58
SIGNATURES
Pursuant to the requirements of Section 13 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.
By: /s/ Scott D. Sullivan
----------------------------------
Scott D. Sullivan
Chief Financial Officer
March 31, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/ James Q. Crowe Chairman of the Board
- ------------------------------ and Chief Executive
Officer March 31, 1997
/s/ Richard R. Jaros Director March 31, 1997
- ------------------------------
/s/ Robert J. Ludvik Vice President and
- ------------------------------ Controller (Principal
Accounting Officer) March 31, 1997
/s/ David McCourt Director March 31, 1997
- ------------------------------
/s/ Walter Scott, Jr. Director March 31, 1997
- ------------------------------
/s/ John W. Sidgmore Director March 31, 1997
- ------------------------------
/s/ Scott D. Sullivan Chief Financial Officer
- ------------------------------ (Principal Financial
Officer) March 31, 1997
/s/ Michael B. Yanney Director March 31, 1997
- ------------------------------
55
<PAGE> 59
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS TO BE FILED PURSUANT TO
SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT.
The Registrant has not furnished an annual report or proxy material to security
holders covering the Registrant's last fiscal year.
56
<PAGE> 60
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
11 Statement computing consolidated net loss per
share applicable to common stockholders.
27.1 Financial Data Schedule
</TABLE>
<PAGE> 61
EXHIBIT 11
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
SCHEDULE COMPUTING CONSOLIDATED NET LOSS PER SHARE
APPLICABLE TO COMMON STOCKHOLDERS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Common shares outstanding
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Shares outstanding at
beginning of period1 124,460,228 128,306,436 122,897,416
Add issuances 100,050,302 1,953,792 5,409,020
----------- ----------- -----------
224,510,530 130,260,228 128,306,436
Less treasury shares - (5,800,000) -
----------- ------------ -----------
Shares outstanding at
end of period 224,510,530 124,460,228 128,306,436
=========== =========== ===========
</TABLE>
Net loss per share applicable
to common stockholders
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Weighted average number
of common shares
outstanding 166,432,000 127,786,000 124,874,000
============ ============ ============
Net loss $ (1,838,030) $ (267,898) $ (151,201)
Dividends on preferred stock (29,429) (15,064) -
------------ ------------ ------------
Net loss applicable to
common stockholders $ (1,867,459) $ (282,962) $ (151,201)
============ ============ =============
Net loss per share applicable
to common stockholders $ (11.22) $ (2.21) $ (1.21)
============ ============ =============
</TABLE>
- ----------------
(1) All share data has been stated reflecting the common stock split in 1996.
<PAGE> 62
[ARTICLE] 5
[LEGEND]
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MFS COMMUNICATIONS COMPANY, INC. AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
[/LEGEND]
[MULTIPLIER] 1,000
<TABLE>
<S> <C> <C>
[PERIOD-TYPE] OTHER YEAR
[FISCAL-YEAR-END] DEC-31-1996 DEC-31-1996
[PERIOD-START] DEC-31-1996 JAN-01-1996
[PERIOD-END] DEC-31-1996 DEC-31-1996
[CASH] 209,324 209,324
[SECURITIES] 772,510 772,510
[RECEIVABLES] 317,774 317,774
[ALLOWANCES] 0 0
[INVENTORY] 0 0
[CURRENT-ASSETS] 1,495,944 1,495,944
[PP&E] 1,892,523 1,892,523
[DEPRECIATION] 0 0
[TOTAL-ASSETS] 12,550,329 12,550,329
[CURRENT-LIABILITIES] 714,965 714,965
[BONDS] 1,508,716 1,508,716
[PREFERRED-MANDATORY] 0 0
[PREFERRED] 0 0
[COMMON] 0 0
[OTHER-SE] 10,287,586 10,287,586
[TOTAL-LIABILITY-AND-EQUITY] 12,550,329 12,550,329
[SALES] 0 1,115,006<F1>
[TOTAL-REVENUES] 0 1,115,006
[CGS] 0 687,034
[TOTAL-COSTS] 2,140,000<F1> 2,887,723
[OTHER-EXPENSES] 0 (45,081)
[LOSS-PROVISION] 0 0
[INTEREST-EXPENSE] 0 109,894
[INCOME-PRETAX] (2,140,000) (1,837,530)
[INCOME-TAX] 0 (500)
[INCOME-CONTINUING] (2,140,000) (1,838,030)
[DISCONTINUED] 0 0
[EXTRAORDINARY] 0 0
[CHANGES] 0 0
[NET-INCOME] (2,140,000) (1,867,459)
[EPS-PRIMARY] 0 (11.22)
[EPS-DILUTED] 0 0
<FN>
<F1>
</FN>
</TABLE>
<PAGE> 1
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> 2
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I - FINANCIAL INFORMATION
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> 3
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(unaudited)
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------
<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.
<PAGE> 4
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
------
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.
<PAGE> 5
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.
<PAGE> 6
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(unaudited)
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- ------------------------------------------------------------------------------
<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.
<PAGE> 7
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.
<PAGE> 8
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.
<PAGE> 9
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.
<PAGE> 10
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(unaudited)
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
- ------------------------------------------------------------------------------
<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.
<PAGE> 11
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(unaudited)
<TABLE>
<CAPTION>
SERIES A SERIES B ADDITIONAL FOREIGN
PREFERRED PREFERRED COMMON PAID-IN DEFERRED CURRENCY
(DOLLARS IN THOUSANDS) STOCK STOCK STOCK CAPITAL CHARGE ADJUSTMENT
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $ 1 $ 150 $ 651 $ 1,512,394 $ (1,017) $ 45
Stock dividend on Series A
Preferred Stock -- -- 1 7,071 -- --
Stock options exercised -- -- 4 7,138 -- --
Amortization of deferred
charge -- -- -- -- 583 --
Foreign currency adjustment -- -- -- -- -- (920)
Change in unrealized
investment gain (loss) -- -- -- -- -- --
Retirement of treasury stock -- -- (29) (48,053) -- --
Stock compensation plan
additions -- -- -- 4,520 -- --
Two-for-one stock split -- -- 628 (628) -- --
Net loss -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance at March 31, 1996 $ 1 $ 150 $ 1,255 $ 1,482,442 $ (434) $ (875)
=========== =========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
UNREALIZED
INVESTMENT ACCUMULATED TREASURY
GAIN (LOSS) DEFICIT STOCK TOTAL
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <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.
<PAGE> 12
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(unaudited)
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- -----------------------------------------------------------------------
<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.
<PAGE> 13
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.
<PAGE> 14
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.
<PAGE> 15
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>
<PAGE> 16
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.
<PAGE> 17
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
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. 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.
<PAGE> 18
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
<PAGE> 19
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
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)
31 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.
<PAGE> 20
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
<PAGE> 21
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
==============
NET LOSS PER SHARE APPLICABLE TO COMMON
- ---------------------------------------
STOCKHOLDERS
- ------------
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.
