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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, 1995
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 Number 0-11258
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WORLDCOM, INC.
(Exact name of registrant as specified in its charter)
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Georgia 58-1521612
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
515 East Amite Street, Jackson, Mississippi 39201-2702
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (601) 360-8600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the 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. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 15, 1996 was:
Common Stock, $.01 par value: $ 7,675,991,323
Series 2 6.50% Cumulative Senior Perpetual Convertible Preferred Stock:
$89,450,306
There were 194,043,449 shares of the registrant's Common Stock outstanding as
of March 15, 1996.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement of the registrant for the
registrant's 1996 Annual Meeting of Shareholders, which definitive proxy
statement will be filed with the Securities and Exchange Commission not later
than 120 days after the registrant's fiscal year end of December 31, 1995, are
incorporated by reference into Part III.
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GLOSSARY
ACCESS CHARGES -- Expenses incurred by an IXC and paid to LECs for accessing
the local networks of the LECs in order to originate and terminate long
distance calls and provide the customer connection for private line services.
AT&T -- AT&T COMMUNICATIONS, INC. -- An IXC wholly owned by American Telephone
and Telegraph Company which provides interexchange services and facilities on a
nationwide and international basis.
AT&T DIVESTITURE DECREE -- Entered on August 24, 1982, by the United States
District Court for the District of Columbia. The AT&T Divestiture Decree,
among other things, ordered AT&T to divest its wholly owned BOCs from its Long
Lines Division and manufacturing operations and generally prohibited BOCs from
providing long distance telephone service between LATAs.
BOC -- BELL SYSTEM OPERATING COMPANY -- A local exchange carrier owned by any
of the seven Regional Bell Operating Companies, which are holding companies
established following the AT&T Divestiture Decree to serve as parent companies
for the BOCs.
EQUAL ACCESS -- Connection provided by a LEC permitting a customer to be
automatically connected to the IXC of the customer's choice when the customer
dials "1".
FCC -- Federal Communications Commission.
INBOUND "800" SERVICE -- A service that assesses long distance telephone
charges to the called party.
IXC -- INTEREXCHANGE CARRIER -- A long distance carrier providing services
between local exchanges.
LATAS -- LOCAL ACCESS AND TRANSPORT AREAS -- The approximately 200 geographic
areas defined pursuant to the AT&T Divestiture Decree between which the BOCs
are generally prohibited from providing long distance service.
LEC -- LOCAL EXCHANGE CARRIER -- A company providing local telephone services.
Each BOC is a LEC.
LINE COSTS -- Primarily includes the sum of access charges and transport
charges.
LOCAL EXCHANGE -- A geographic area generally determined by a PUC, in which
calls generally are transmitted without toll charges to the calling or called
party.
MCI -- MCI TELECOMMUNICATIONS CORPORATION -- An IXC which provides
interexchange services and facilities on a nationwide and international basis.
NETWORK SWITCHING CENTER -- A location where installed switching equipment
routes long distance calls and records information with respect to calls such
as the length of the call and the telephone numbers of the calling and called
parties.
OSP -- OPERATOR SERVICE PROVIDER -- Any common carrier or other person
providing any automatic or live assistance to a consumer to arrange for billing
or completion, or both, of a telephone call initiated from an aggregator
location, other than by means of automatic completion of the call with billing
to the originating telephone or completion through an access code used by the
consumer with billing to a previously established account.
PTT - POST TELEPHONE AND TELEGRAPH ADMINISTRATION -- The PTTs, usually
controlled by their governments, provide telephone and telecommunications
services in most foreign countries.
PUC -- PUBLIC UTILITY COMMISSION -- A state regulatory body empowered to
establish and enforce rules and regulations governing public utility companies
and others, such as the Company in many of its state jurisdictions (sometimes
referred to as Public Service Commissions, or PSCs).
RBOC -- REGIONAL BELL OPERATING COMPANY -- Any of seven regional Bell holding
companies which the AT&T Divestiture Decree established to serve as parent
companies for the BOCs.
SPRINT -- SPRINT CORPORATION - An IXC which provides interexchange services and
facilities on a nationwide and international basis.
SUBSCRIBERS -- Commercial and residential customers for which an IXC provides
direct dial long distance telephone service. For operator assisted long
distance telephone service, "Subscribers" refers to owners of pay telephones,
owners of premises on which pay telephones are located, and multi-telephone
facilities such as hotels and hospitals with which an OSP contracts to process
and transmit operator assisted long distance telephone calls.
TARIFF -- The schedule of rates and regulations set by communications common
carriers and filed with the appropriate federal and state regulatory agencies;
the published official list of charges, terms and conditions governing
provision of a specific communications service or facility, which functions in
lieu of a contract between the Subscriber or user and the supplier or carrier.
TRANSPORT CHARGES -- Expenses paid to facilities-based carriers for
transmission between or within LATAs.
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TABLE OF CONTENTS
PART I
Page
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Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . 11
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters . . . . . . . . . . 12
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . 19
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . 19
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . 19
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . 19
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K . . . . . . . . . . . . . . 20
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Index to Financial Statements and Financial Statement Schedule . . . . . . . . . . . . . . . . . . . . . . F-1
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-1
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PART I
ITEM 1. BUSINESS
GENERAL
WorldCom, Inc., a Georgia corporation which conducts business under the name
"LDDS WorldCom" ("WorldCom" or the "Company"), is one of the four largest long
distance telecommunications companies in the United States based on 1994
revenues. The Company provides long distance telecommunications services to
business, consumer and other carrier customers, through its network of fiber
optic cables, digital microwave, and fixed and transportable satellite earth
stations, with service to points throughout the nation and the world. The
products and services provided by WorldCom include: switched and dedicated
long distance products, 800 services, calling cards, operator services,
domestic and international private lines, broadband data services, debit cards,
conference calling, advanced billing systems, enhanced faxed and data
connections, television and radio transmission and mobile satellite
communications.
WorldCom was organized in 1983. Its operations have grown as a result of
management's emphasis on a four-point growth strategy, which includes internal
growth, the selective acquisition of smaller long distance companies with
limited geographic service areas and market shares, the consolidation of
certain third tier long distance carriers with larger market shares, and
international expansion. On September 15, 1993, a three-way merger occurred
whereby (i) Metromedia Communications Corporation, a Delaware corporation
("MCC"), merged with and into Resurgens Communications Group, Inc., a Georgia
corporation ("Resurgens"), and (ii) LDDS Communications, Inc., a Tennessee
corporation ("LDDS-TN"), merged with and into Resurgens (the "Prior Mergers").
At the time of the Prior Mergers, the name of Resurgens, the legal survivor,
was changed to LDDS Communications, Inc. and the separate corporate existences
of LDDS-TN and MCC terminated. For accounting purposes, however, LDDS-TN was
the survivor because the former shareholders of LDDS-TN acquired majority
ownership of the Company. Accordingly, unless otherwise indicated, all
historical information presented herein reflects the operations of LDDS-TN. At
the annual meeting of shareholders held May 25, 1995, shareholders of LDDS
Communications, Inc. voted to change the name of the Company to WorldCom, Inc.,
effective immediately. Information in this document has also been revised to
reflect the stock splits of the Company's common stock. See Note 1 of Notes to
Consolidated Financial Statements.
BUSINESS COMBINATIONS
The Company's emphasis on acquisitions has taken the Company from a small
regional long distance carrier to one of the largest long distance
telecommunications companies in the industry, serving customers domestically
and internationally.
On January 5, 1995, WorldCom completed the acquisition of the network services
operations of Williams Telecommunications Group, Inc. ("WilTel"), a subsidiary
of The Williams Companies, Inc. ("Williams"), for approximately $2.5 billion in
cash (the "WilTel Acquisition"). Through this purchase, the Company acquired a
nationwide common carrier network of approximately 11,000 miles of fiber optic
cable and digital microwave facilities. The funds paid to Williams were
obtained by WorldCom under a new credit facility entered into on December 21,
1994. See Note 4 of Notes to Consolidated Financial Statements.
On December 30, 1994, WorldCom, through a wholly owned subsidiary, merged with
IDB Communications Group, Inc., a Delaware corporation ("IDB"). IDB operates a
domestic and international communications network providing private line and
public switched long distance telecommunications services, facsimile and data
connections, television and radio transmission services, and mobile satellite
communications capabilities. As a result of this merger (the "IDB Merger"),
each share of common stock of IDB was converted into the right to receive
0.476879 shares of WorldCom common stock (the "Common Stock") resulting in the
issuance of approximately 35,881,000 shares of Common Stock. In addition,
WorldCom assumed, on a subordinated basis, jointly and severally with IDB, the
obligations of IDB to pay the principal of and interest on $195.5 million 5%
convertible subordinated notes due 2003, issued by IDB. The IDB Merger was
accounted for as a pooling-of-interests and accordingly, the WorldCom financial
statements for the periods prior to the IDB Merger have been restated to
include the results of IDB for all periods presented.
In 1993, upon effectiveness of the Prior Mergers, each share of the outstanding
common stock of LDDS-TN was converted into the right to receive 0.9595 shares
of Common Stock. The 500,000 shares of LDDS-TN Series B 6.5% Cumulative Senior
Perpetual Convertible Preferred Stock outstanding were converted into 2,000,000
shares of WorldCom Series 2 6.5% Cumulative Senior Perpetual Convertible
Preferred Stock having a liquidation value of $25 per share and a conversion
price of $11.81171 per share (the "Series 2 Preferred Stock"). As a result of
the consummation of the Prior Mergers, Metromedia Company ("Metromedia"), the
sole stockholder of MCC, received 2,758,620 shares of the Common Stock,
10,896,785 shares of WorldCom Series 1 $2.25 Cumulative Senior Perpetual
Convertible Preferred Stock having a liquidation value of $50 per share and a
conversion price of $24.9046875 per share (the "Series 1 Preferred Stock"),
warrants to purchase 5,000,400 shares of the Common Stock at an average price
of $8.35 per share, and $150.0 million in cash. The common stock of Resurgens
was unchanged in the Prior Mergers.
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On August 23, 1995, Metromedia converted its Series 1 Preferred Stock into
21,876,976 shares of Common Stock and exercised warrants to acquire 3,106,976
shares of Common Stock and immediately sold its position of 30,849,548 shares
of Common Stock in a public offering. In connection with the preferred stock
conversion, WorldCom made a non-recurring payment of $15.0 million to
Metromedia, representing a discount to the minimum nominal dividends that would
have been payable on the Series 1 Preferred Stock prior to the September 15,
1996 optional call date of approximately $26.6 million (which amount includes
an annual dividend requirement of $24.5 million plus accrued dividends to such
call date). The Company did not receive any proceeds from the sale of the
shares, but did receive approximately $33.7 million in proceeds from the
exercise of the warrants, which were used to repay certain existing bank debt.
On December 4, 1992, LDDS-TN, through a wholly owned subsidiary, merged with
Advanced Telecommunications Corporation ("ATC"). As a result of this merger
(the "ATC Merger"), each share of common stock of ATC was converted into the
right to receive 0.83 shares of common stock of LDDS-TN. The ATC Merger was
accounted for under the pooling-of-interests method.
The following table sets forth certain data concerning the Company's
acquisitions, during the past five years, of companies with annual revenues
exceeding $50.0 million, other than the IDB Merger and the ATC Merger.
Revenues for Fiscal Year
Preceding Acquisition
Name Acquisition Date (In thousands)
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MidAmerican Communications Corporation July 1991 $ 75,924
AmeriCall and First Phone February 1992 65,028
World Communications, Inc. December 1992 90,602
Dial-Net, Inc. ("Dial-Net") March 1993 69,328
Metromedia Communications Corporation September 1993 368,532
Resurgens Communications Group, Inc. September 1993 151,963
TRT Communications, Inc. ("TRT") September 1993 175,057
Williams Telecommunications Group, Inc. January 1995 921,813
In addition to the acquisitions reflected in the above table, WorldCom and its
predecessors have completed other acquisitions involving companies each with
annual revenues of less than $50.0 million.
COMPANY STRATEGY
The Company follows a four-point growth strategy, consisting of internal
growth, the selective acquisition of smaller long distance companies with
limited geographic service areas and market shares, the consolidation of
certain third tier long distance carriers with larger market shares, and
international expansion.
A decentralized management system allows regional managers responsibility and
authority for the development of area customers. Regional management directs
resources toward attracting new accounts as well as expanding product usage by
current customers.
A predominant share of the Company's total revenues is derived from commercial
customers. Commercial customers typically use higher volumes of
telecommunications services than residential customers and concentrate usage on
weekdays during business hours when rates are highest. Consequently,
commercial customers, on average, generate higher revenues per account than
residential customers.
The Company has become a significant participant in the long distance wholesale
market and intends to pursue opportunities, if any, for continued expansion in
this area. While total revenues in the wholesale market are less than from
commercial customers, expenses are generally reduced in servicing these
customers as the result of fewer invoices, fewer customer service personnel and
a smaller sales force.
The enactment of the Telecommunications Act of 1996 in early February has made
it possible for WorldCom to participate in both the local and long distance
markets. The Company has formed business associations to provide long distance
telecommunications
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services with certain LECs and the Company expects to pursue resale of local
service in those markets where it is both economically and technically
feasible.
In the first quarter of 1996, the Company signed agreements to provide long
distance telecommunications services to GTE Long Distance, Ameritech
Communications, Inc., and Southwestern Bell Mobile Systems, Inc. WorldCom also
entered into an agreement to become a major provider of data telecommunications
services for Electronic Data Systems Corporation ("EDS"), a global information
services company.
Additionally, in response to the changing regulatory environment, WorldCom has
filed applications with PUCs in several states to offer customers local
telephone exchange services, an important capability that will serve as a
complement to the Company's national and international service offerings. To
date, WorldCom has received permission to provide local service on a resale
basis in California, Connecticut, Florida, Illinois and Texas.
SERVICES
GENERAL. The Company is one of the four largest United States based long
distance telecommunications companies in the industry, based on revenues, and
serves its customers domestically and internationally. The products and
services provided by the Company include switched and dedicated long distance
products, 800 services, calling cards, operator services, domestic and
international private lines, broadband data services, debit cards, conference
calling, advanced billing systems, enhanced faxed and data connections,
television and radio transmission, and mobile satellite communications.
DOMESTIC LONG DISTANCE. There are several ways in which a customer can access
the Company's network. In areas where equal access has been made available, a
customer who has selected the Company as its IXC can utilize the Company's
network for interLATA long distance calls through "one plus" dialing of the
desired call destination. Equal access customers can access the Company's
network for interLATA long distance calls and for intraLATA calls where
intraLATA competition has been allowed.
Customers in areas without equal access or customers in equal access areas who
do not select the Company as their IXC can utilize the Company's network for
all their long distance calls through three methods of "dial-up access." They
can dial a local telephone number to access the Company's computerized
switching equipment and then enter a personal authorization code and the area
code and telephone number of the desired call destination. Customers may also
access the Company's network by dialing 10 plus the three digit Carrier
Identification Number belonging to the Company and the area code and telephone
number of the desired call location. High-volume customers can access the
WorldCom network through the use of high-capacity dedicated circuits.
Customer billing is generated internally and through a facilities management
agreement under which EDS performs significant data processing functions. See
Note 6 of Notes to Consolidated Financial Statements.
INTERNATIONAL LONG DISTANCE. The Company offers international private line and
public switched long distance telecommunications services to government,
commercial and carrier organizations worldwide. The Company has over 200
switched voice and private line operating agreements in foreign countries,
thereby making the Company a leading participant in the international
telecommunications market.
Through these operating agreements, international long distance traffic is both
delivered and received. Under these agreements, foreign carriers are
obligated to adhere to the policy of the FCC whereby traffic from the foreign
country is routed to international carriers of which the Company is one, in the
same proportion as traffic carried into the foreign country.
The Company provides permanent and temporary domestic and international private
line services to customers for a number of applications. These applications
generally involve establishing private, international point-to-point
communications links for customers who need special services, such as heavy
data and voice usage, lower cost, and greater security. The Company has
private line operating agreements with 160 foreign countries and is the carrier
for many of the world's most critical communications links, including the
Washington-Moscow hotline and launch control circuits for the NASA Space
Program. The Company also provides international private line services for a
range of financial, airline, commercial and governmental communications
networks.
The Company also offers public switched international telecommunications
services worldwide and provides direct services to approximately 60 foreign
countries. The Company sells telecommunications services to both corporate
customers and to domestic long distance carriers that lack transmission
facilities to locations served by the Company or need more transmission
capacity. Accessing the Company's international switching center via permanent
domestic connections or via dial-up access code, customers can make
international telephone calls.
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Such operations are subject to certain risks such as changes in foreign
government regulations and telecommunications standards, licensing
requirements, tariffs or taxes, and other trade barriers and political and
economic instability. In addition, the Company's revenues and costs of sales
are sensitive to changes in international settlement rates.
OTHER SERVICES. WorldCom provides its billing and collection and operator
services to other IXCs. Due to the time and expense associated with the
negotiation of billing and collection agreements, many IXCs choose not to
establish operator services or to obtain billing and collection agreements.
Using WorldCom's operator services enables IXCs to retain revenues by carrying
operator assisted traffic over their own networks.
In addition, the Company offers a broad range of related services which enhance
customer convenience, add value and provide additional revenue sources.
Advanced "800" service offers features for caller and customer convenience,
including a variety of call routing and call blocking options, customer
reconfiguration, termination overflow to switched or dedicated lines, Dialed
Number Identification Service (DNIS), real-time Automatic Number Identification
(ANI), and flexible after-hours call handling services. The Company's travel
cards offer worldwide calling services, caller-friendly voice mail with message
waiting signal, message storage and delivery, conference calling, personal
greetings, speed dialing, customer deactivation and reactivation of cards,
customer card, and private-label card options. The Company is also a market
leader for the prepaid calling card which allows a purchaser to pay in advance
for a specific number of long distance minutes. The prepaid calling card is
successful in the collectors market and continues to be a growing source of
revenues for the Company.
The Company outsources the management of its broadcast operations, which
provides radio and television broadcast transmission services for major
network, cable, syndication, pay-per-view, sports and special event
programmers.
The Company also designs, installs, and integrates "turnkey" transmission
facilities and communications networks primarily for international customers.
Services provided include fixed customer premise earth stations, network
management systems, system integration consulting and project management.
TRANSMISSION FACILITIES
Domestically, the Company owns one of four nationwide fiber optic networks in
the country, consisting of more than 15,000 miles of fiber optic cable and
microwave equipment with access to over 50,000 miles of additional fiber optic
network through lease agreements with other carriers. In January 1995, the
Company acquired the majority of this network through the purchase of WilTel,
which owned a network of approximately 11,000 miles of fiber optic cable and
digital microwave facilities with access to approximately 30,000 miles of
additional fiber optic network through lease agreements with other carriers.
Internationally, the Company owns fiber optic facilities on most major
international cable systems in the Pacific and Atlantic Ocean regions,
providing fiber optic cable connections between the United States and the
Pacific Rim and the United States and Europe. WorldCom also owns fiber optic
cable for services to the Commonwealth of Independent States, Latin America and
South America.
Additionally, the Company owns 22 international gateway earth stations and
approximately 50 domestic earth stations, which enable WorldCom to provide
radio, television, private line and public switched telecommunications services
to and from locations throughout the world. WorldCom also owns fixed earth
stations located in 33 metropolitan areas, including seven international
gateway earth stations in San Francisco and Washington D.C., which serve as
central collection points for domestic traffic and connect the network with
international satellites.
The Company's ability to generate profits is largely dependent upon its ability
to optimize the different types of transmission facilities used to process and
complete calls. These facilities are complemented by a least cost routing plan
which is accomplished through digital switching technology and network routing
software. Calls can be routed over fixed cost transmission facilities or
variable cost transmission facilities. Fixed cost facilities, including the
Company's owned networks are typically most cost effective for routes that
carry high volumes of traffic. The Company's expansion has been to contiguous
geographic areas which has enabled the Company to concentrate a significant
portion of its traffic over fixed cost transmission facilities and thereby
achieve an overall lower network cost. In addition, a variety of lease
agreements for fixed and variable cost (usage sensitive) services ensure
diversity in processing calls.
NETWORK SWITCHING
The Company owns or leases computerized network switching equipment that routes
its customers' long distance calls. The Company presently maintains
approximately 50 digital switching centers. The Company's digital switching
equipment is interconnected with digital transmission lines. The Company's
entire switching network utilizes SS7 common channel signaling, which increases
efficiencies by eliminating connect time delays and provides "look ahead"
routing. In addition to networking, the
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Company's switching equipment verifies customers' pre-assigned authorization
codes, records billing data and monitors system quality and performance.
In addition to the switching centers, the Company has a number of other network
facility locations which are known as points of presence. These points of
presence allow the Company to concentrate customers' traffic at locations where
the Company has not installed switching equipment. The traffic is carried to
switching centers over the Company's digital transmission network.
RATES AND CHARGES
LONG DISTANCE. The Company charges customers on the basis of minutes or
partial minutes of usage at rates that vary with the distance, duration and
time of day of the call. The rates charged are not affected by the particular
transmission facilities selected by the Company's network switching centers for
transmission of the call. Additional discounts are available to customers who
generate higher volumes of monthly usage.
Domestic business services are billed in six-second increments; others are
billed in partial minutes rounded to the next minute. Long distance services
are billed in arrears, with monthly billing statements itemizing date, time,
duration and charges; private line services are billed monthly in advance, with
the invoice indicating the number of circuits and applicable rates.
The Company's rates are generally designed to be competitive with those charged
by other long distance carriers. The rates offered by the Company may be
adjusted in the future if other IXCs continue to adjust their rates.
OPERATOR ASSISTED LONG DISTANCE. The Company has billing and collection
services agreements with each of the RBOCs and BOCs, as well as all major
independent telephone companies, under which these companies bill the callers
for operator assisted telephone calls processed and transmitted by the Company.
Since January 1990, the Company has maintained access through a third party to
the billing validation data bases of credit card issuers, the RBOCs and certain
LECs. These data bases enable the Company to verify the validity of charge
cards used by callers to pay for operator assisted long distance telephone
calls. Validation reduces the Company's unbillable and uncollectible call
expense because the operator can verify the validity of credit card numbers and
collect or third party billing instructions before transmitting the call, which
saves network expenses.
MARKETING AND SALES
WorldCom markets its long distance services primarily through a direct sales
force of approximately 1,600 employees worldwide which are targeted at specific
geographic markets. WorldCom markets its operator assisted services through
telemarketing and trade shows. WorldCom's sales force also provides advanced
sales specialization for the data and international marketplaces, including
domestic and international private line services.
In each of its geographic markets, the Company employs full service support
teams that provide its customers with prompt and personal attention. A
customer service representative is assigned to each customer account whose
monthly business exceeds $1,000. With offices nationwide, WorldCom's localized
management, sales and customer support are designed to engender a high degree
of customer loyalty and service quality.
COMPETITION
The Company faces intense competition in providing both domestic and
international long distance telecommunications services. Domestically,
WorldCom competes for interLATA and intraLATA services with AT&T, MCI, Sprint,
the LECs, and other national and regional IXCs, where permissible; and with
respect to operator service, with AT&T and other operator service providers.
Internationally, the Company competes for services with other IXCs, including
AT&T, MCI, and Sprint. Certain of these companies have substantially greater
market share and financial resources than WorldCom, and some of them are the
source of communications capacity used by WorldCom to provide its own services.
For most of the Company's communications services, the factors critical to a
customer's choice of a service provider are cost, ease of use, speed of
installation, quality, reputation and, in some cases, geography, and network
size. WorldCom's objective is to be one of the most responsive service
providers, particularly when providing customized communications services.
WorldCom's array of communications facilities and international relationships,
together with its engineering and operations capability, provide WorldCom with
considerable flexibility in tailoring cost-effective communications services to
meet its customers' requirements. This network allows WorldCom to implement
complex permanent and temporary communications circuits to and from virtually
any location in the world. WorldCom relies on its decentralized management
structure and the local orientation of its operations and personnel to
distinguish itself from larger, less personalized operations. In addition,
WorldCom's understanding of international telecommunications technical and
regulatory issues has often allowed WorldCom to provide prompt solutions to the
diverse
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communications needs of multinational corporations, government entities and
other organizations. No assurance can be given, however, that the Company's
strategies will be successful.
WorldCom expects to encounter continued competition from major domestic and
international communications companies, including AT&T, MCI, and Sprint. In
addition, the Company may be subject to additional competition due to the
enactment of the Telecommunications Act of 1996, the development of new
technologies and increased availability of domestic and international
transmission capacity. The telecommunications industry is in a period of rapid
technological evolution, marked by the introduction of new product and service
offerings and increasing satellite and fiber optic transmission capacity for
services similar to those provided by the Company. The Company cannot predict
which of the many possible future product and service offerings will be
important to maintain its competitive position or what expenditures will be
required to develop and provide such products and services.
REGULATION
The Company operates in a highly regulated industry. The FCC regulates
international communications services and interstate telephone service, and
certain states, through the appropriate regulatory agency, regulate intrastate
telephone service. In addition, the Company is subject to regulation in
various foreign countries in connection with certain overseas business
activities.
The regulation of the telecommunications industry is changing rapidly and the
regulatory environment varies substantially from state to state. There can be
no assurance that future regulatory changes will not have a material adverse
impact on WorldCom. Recent developments include, without limitation, enactment
of legislation that modifies the AT&T Divestiture Decree restrictions on the
provision of long distance services by the BOCs between LATAs as defined in the
AT&T Divestiture Decree, FCC and PUC action changing access rates charged by
LECs and making other related changes to access and interconnection policies,
certain of which could have adverse consequences for the Company; related FCC
and state regulatory proceedings considering additional deregulation of LEC
access pricing; a pending FCC rulemaking on "billed party preference" that
could affect WorldCom's provision of operator services; and various legislative
and regulatory proceedings that would result in new local exchange competition.
On February 8, 1996, President Clinton signed legislation, that: will, without
limitation, permit the BOCs to provide domestic and international long distance
services upon a finding by the FCC that the petitioning BOC has satisfied
certain criteria for opening up its local exchange network to competition and
that its provision of long distance services would further the public interest;
removes existing barriers to entry into local service markets; significantly
changes the manner in which carrier-to-carrier arrangements are regulated at
the federal and state level; establishes procedures to revise universal service
standards; and establishes penalties for unauthorized switching of customers.
The Company cannot predict the effect such legislation will have on the Company
or the industry. However, the Company believes that it is positioned to pursue
business opportunities in the rapidly changing telecommunications market.
FCC REGULATION. As a non-dominant IXC, the Company is not required to obtain a
certificate of public convenience and necessity from the FCC for its domestic
interexchange services. The FCC retains general regulatory jurisdiction over
the sale of interstate telecommunications services by IXCs, including the
requirement that calls be charged on a nondiscriminatory, just and reasonable
basis.
Transmissions from earth stations to all satellites, transmissions from
microwave and other transmitters, reception from international satellites, and
transmission of international traffic by any means, including operator assisted
long distance service, satellite, and undersea cable, must be pursuant to
license or other authorizations issued by the FCC. The Company, or an
affiliate of the Company, has operating authority or has made other
arrangements to transmit and/or receive signals from all locations where it
currently offers satellite transmission and/or reception service.
Although the Company has never had a license application denied by the FCC,
there can be no assurance that it will receive all authorizations or licenses
necessary for new communications services or that delays in the licensing
process will not adversely affect the Company's business. Domestic radio
licenses issued by the FCC are for limited periods not to exceed 10 years. The
Company must seek renewal of such licenses prior to their expiration. The
Company knows of no facts that would result in the denial of any such renewals.
WorldCom monitors compliance with federal, state and local regulations
governing the discharge and disposal of hazardous and environmentally sensitive
materials, including the emission of electromagnetic radiation. WorldCom
believes that it is in compliance with such regulations. However, there can be
no assurance that any such discharge, disposal or emission might not expose
WorldCom to claims or actions that could have a material adverse effect on the
Company's consolidated results of operations or financial position.
In conjunction with its approval of the transfer of control of IDB to the
Company, the FCC indicated that a protest filed by Comsat Corporation raised
sufficient question that there might have been a prior unauthorized transfer of
control of IDB Mobile Communications, Inc. ("IDB Mobile"), an affiliate of IDB,
to Teleglobe Inc., a Canadian corporation ("Teleglobe"), for it to initiate
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an investigation into IDB and Teleglobe's ownership and control of IDB Mobile.
The Company is cooperating with the investigation. Although the Company cannot
predict the outcome of the investigation, it believes that it will not result
in a material adverse effect upon the Company's consolidated results of
operations or financial position.
In October 1988, Judge Harold Greene, who oversees compliance with the AT&T
Divestiture Decree ordered the RBOCs to provide for equal access to the BOC
owned pay telephone long distance markets. The opinion accompanying the
federal court order mandating presubscription of public pay telephones
envisions that presubscription will be an interim measure pending perfection of
a technical system permitting all "0 plus" calls from public payphones to be
automatically routed to the billed party's presubscribed OSP. If implemented,
"billed party preference" could route some previously presubscribed public
traffic away from the Company. However, the technical and economic barriers to
implementation of a "billed party preference" system are such that the RBOCs
have been unable and unwilling to effect its implementation to date. A
rulemaking proceeding is currently being conducted by the FCC on "billed party
preference" to determine whether such a system will be required or if
appropriate alternatives to "billed party preference" exist. The Company
cannot predict the outcome of this proceeding. The Company is unaware of any
other regulatory proceedings related to operator services that could have a
material adverse effect upon its consolidated results of operations or
financial position.
ALIEN OWNERSHIP. The Communications Act of 1934, as amended (the
"Communications Act") prohibits any entity in which more than 20% of the
capital stock is owned of record or voted by noncitizens or a foreign
government or its representative, or which has any officer or director who is
not a U.S. citizen, from receiving or holding a common carrier radio
transmission license (including microwave). The Communications Act also
prohibits subsidiaries of any entity of which more than 25% of the capital
stock is owned by noncitizens, or where more than one-fourth of the directors
or any officers are noncitizens, from receiving or holding common carrier radio
transmission licenses (including microwave), if the FCC finds that the public
interest would be served by the refusal or revocation of the licenses under
those circumstances. The Company's charter restricts aggregate beneficial
ownership of the Common Stock by certain foreign shareholders to 20% of the
total outstanding stock, and subjects excess shares to redemption.
In November 1995, the FCC adopted new rules regarding foreign ownership of U.S.
international common carrier service providers. The FCC will examine whether
"effective competitive opportunities" ("ECO") exist for U.S. carriers in the
destination markets of foreign carriers with market power seeking to enter the
U.S. international services market through an "affiliation" with a U.S.
facilities-based carrier. The FCC defined "affiliation" as an ownership
interest of 25% or more, or a controlling interest. The FCC also reserved the
right to review foreign carrier investment below the 25% threshold where such
investment presents a significant potential impact on competition in the U.S.
market for international services. WorldCom is not aware of any foreign
carrier investment in the Company that would require FCC review under the ECO
test.
STATE REGULATION. The Company's intrastate long distance telecommunications
operations are subject to various state laws and regulations including, in many
jurisdictions, certification requirements. Generally, the Company must obtain
and maintain certificates of public convenience and necessity from regulatory
authorities in most states in which it offers intrastate long distance
services. In most of these jurisdictions the Company must also file and obtain
prior regulatory approval of tariffs for its intrastate offerings. The Company
currently provides intrastate services in each of the 48 contiguous states.
RISK FACTORS
An investment in the Common Stock involves a high degree of risk. Prospective
investors should carefully consider the following risk factors, together with
the other information contained in this Form 10-K, in evaluating the Company
and its business before purchasing shares of Common Stock. In particular,
prospective investors should note that this Form 10-K contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995 and that actual results could differ materially from those contemplated
by such statements. The factors listed below represent certain important
factors the Company believes could cause such results to differ. These factors
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, and the risks set forth below may
affect the Company to a greater extent than indicated.
RISKS OF INCREASED FINANCIAL LEVERAGE; DEBT SERVICE, INTEREST RATE
FLUCTUATIONS, POSSIBLE REDUCTION IN LIQUIDITY, DIVIDEND RESTRICTIONS AND OTHER
RESTRICTIVE COVENANTS. As a result of the WilTel Acquisition and the financing
thereof, the Company has a significantly higher degree of leverage than
previously existed. At December 31, 1995, the Company reported $3.39 billion
of long-term debt (including capital leases and current maturities) and a
long-term debt to equity ratio of 1.55 to 1.
Borrowings under the Company's credit facilities bear interest at rates that
fluctuate with prevailing short-term interest rates. Increases in interest
rates, economic downturns and other adverse developments, including factors
beyond the Company's control, could impair its ability to service its
indebtedness under the credit facilities. In addition, the cash flow required
to service the Company's debt may reduce its ability to fund internal growth,
additional acquisitions and capital improvements. One facility (the
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"Term Principal Debt") of the credit facilities, which totals $1.25 billion,
matures in a single installment on December 31, 1996. The other facility (the
"Revolving Facility Commitment"), which totals $2.16 billion, will be reduced
at the end of each fiscal quarter, commencing on September 30, 1996, in varying
amounts, and must be paid in full on December 31, 2000. In addition, these
credit facilities restrict the payment of cash dividends and otherwise limit
the Company's financial flexibility.
The Company is committed to a priority plan of accelerating operating cash flow
to reduce debt. The Company anticipates that the existing debt balances
including the $1.25 billion Term Principal Debt, which matures December 1996,
will be refinanced with a new revolving commercial bank credit facility with
similar terms. Additional capital availability may be generated through a
combination of commercial bank debt and public market debt. Successful
execution of the refinancings and the priority plan would provide continued
compliance with required operating ratio covenants and would eliminate any type
of equity financing other than equity issued in connection with acquisitions.
No assurance can be given that the Company will achieve its priority plan or
that any refinancing will be available on terms acceptable to WorldCom.
ACQUISITION INTEGRATION. A major portion of the Company's growth in recent
years has resulted from acquisitions, which involve certain operational and
financial risks. Operational risks include the possibility that an acquisition
does not ultimately provide the benefits originally anticipated by management
of the acquiror, while the acquiror continues to incur operating expenses to
provide the services formerly provided by the acquired company. Financial
risks involve the incurrence of indebtedness by the acquiror in order to effect
the acquisition and the consequent need to service that indebtedness. In
addition, the issuance of stock in connection with acquisitions dilutes the
voting power and may dilute certain other interests of existing stockholders.
In carrying out its acquisition strategy, the Company attempts to minimize the
risk of unexpected liabilities and contingencies associated with acquired
businesses through planning, investigation and negotiation, but such unexpected
liabilities may nevertheless accompany acquisitions. There can be no assurance
that the Company will be successful in identifying attractive acquisition
candidates or completing additional acquisitions on favorable terms.
CONTINGENT LIABILITIES. The Company is subject to a number of legal and
regulatory proceedings, including certain legal proceedings pending against IDB
prior to its merger with a wholly-owned subsidiary of WorldCom on December 30,
1994 (the "IDB Merger"). While the Company believes that the probable outcome
of any of these matters, or all of them combined, will not have a material
adverse effect on the Company's consolidated results of operations or financial
position, no assurance can be given that a contrary result will not be
obtained. See Item 3 - "Legal Proceedings."
In addition to a number of other pending legal proceedings, on May 23, 1994,
Deloitte & Touche LLP ("Deloitte") resigned as IDB's independent auditors.
Deloitte has stated it resigned as a result of events surrounding the release
and reporting of IDB's financial results for the first quarter of 1994. In
submitting its resignation, Deloitte informed IDB management and the Audit
Committee of the IDB Board of Directors that there had been a serious breakdown
in IDB's process of identifying, analyzing and recording IDB's business
transactions which prohibited Deloitte from the satisfactory completion of a
quarterly review, and that Deloitte was no longer willing to rely on IDB
management's representations regarding IDB's interim financial statements. IDB
announced Deloitte's resignation on May 31, 1994. On June 24, 1994, upon the
recommendation of the independent members of IDB's Audit Committee, IDB
retained Arthur Andersen LLP as its new independent auditors. On August 1,
1994, IDB announced that it would restate its reported financial results for
the quarter ended March 31, 1994 to eliminate approximately $6.0 million of
pre-tax income, approximately $5.0 million of which related to a sale of
transponder capacity and approximately $1.0 million of which related to
purchase accounting adjustments and on August 22, 1994, IDB filed Amendment
No.1 on Form 10-Q/A restating its 1994 first quarter results in order to
eliminate previously recorded items. Certain of these items were among those
as to which Deloitte had expressed disagreement. On November 21, 1994, IDB
filed Form 10-Q/A amendments to its reported first and second quarter financial
results making the previously announced changes and reflecting the effect of
IDB's method of accounting for international long distance traffic, thereby
reducing its first quarter net income from $0.12 per share, as originally
reported, to $0.05 per share and, when combined with adjustments for income tax
effects, increasing its second quarter net loss from $0.20 per share, as
originally reported, to $0.27 per share.
IDB is a party to indemnification agreements with IDB's former officers and
directors, certain selling shareholders and certain underwriters. IDB's former
officers and directors are not covered by any applicable liability insurance.
The Company has agreed to provide indemnification to IDB's officers and
directors under certain circumstances pursuant to the agreement relating to the
IDB Merger.
On June 9, 1994, the SEC issued a formal order of investigation concerning
certain matters, including IDB's financial position, books and records and
internal controls and trading in IDB securities on the basis of non-public
information. The SEC has issued subpoenas to IDB and others, including certain
former officers of IDB, in connection with its investigation. The National
Association of Securities Dealers, Inc. ("NASD") and other self-regulatory
bodies have also made inquiries of IDB concerning similar matters.
The U.S. Attorney's Office for the Central District of California has issued
grand jury subpoenas to IDB seeking documents relating to IDB's 1994 first
quarter results, the Deloitte resignation, trading in IDB securities and other
matters, including information
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concerning certain entities in which certain former officers of IDB are
personal investors and transactions between such entities and IDB. IDB has
been informed that a criminal investigation has commenced. The U.S. Attorney's
Office for the Central District of California issued a grand jury subpoena to
the Company arising out of the same investigation seeking certain documents
relating to IDB.
The outcome of any of the foregoing litigation or investigations, or of other
pending legal proceedings, has not been determined. See Item 3 - "Legal
Proceedings" for more information regarding the foregoing litigation and
investigations, as well as other pending legal proceedings.
RISKS OF INTERNATIONAL BUSINESS. As a result of the IDB Merger, the Company
derives substantial revenues by providing international communication services
primarily to customers headquartered in the United States. Such operations are
subject to certain risks such as changes in foreign government regulations and
telecommunication standards, licensing requirements, tariffs or taxes and other
trade barriers and political and economic instability. In addition, such
revenues and costs of sales are sensitive to changes in international
settlement rates. International rates may decrease in the future due to
aggressiveness on the part of existing carriers, aggressiveness on the part of
new entrants into niche markets, the widespread resale of international private
lines, the consummation of joint ventures among large international carriers
that facilitate targeted pricing and cost reductions, and the rapid growth of
international circuit capacity due to the deployment of new transatlantic and
transpacific fiber optic cables.
DEPENDENCE ON AVAILABILITY OF TRANSMISSION FACILITIES. The future
profitability of the Company will be dependent in part on its ability to
utilize transmission facilities leased from others on a cost-effective basis.
The recent acquisitions of WilTel and IDB have reduced the leasing risk through
the ownership of significant domestic and international assets, however, due to
the possibility of unforeseen changes in industry conditions, the continued
availability of leased transmission facilities at historical rates cannot be
assured. See "Item 1 - Business - Transmission Facilities."
REGULATION RISKS. The Company is subject to extensive regulation at the
federal and state levels, as well as in various foreign countries in connection
with certain overseas business activities. The regulatory environment varies
substantially by jurisdiction.
The regulation of the telecommunications industry is changing rapidly and the
regulatory environment varies substantially from state to state. There can be
no assurance that future regulatory changes will not have a material adverse
impact on WorldCom. Recent developments include, without limitation, enactment
of legislation that modifies the AT&T Divestiture Decree restrictions on the
provision of long distance services by the BOCs between LATAs as defined in the
AT&T Divestiture Decree, FCC and PUC action changing access rates charged by
LECs and making other related changes to access and interconnection policies,
certain of which could have adverse consequences for the Company; related FCC
and state regulatory proceedings considering additional deregulation of LEC
access pricing; a pending FCC rulemaking on "billed party preference" that
could affect WorldCom's provision of operator services; and various legislative
and regulatory proceedings that would result in new local exchange competition.
On February 8, 1996, President Clinton signed legislation, that: will, without
limitation, permit the BOCs to provide domestic and international long distance
services upon a finding by the FCC that the petitioning BOC has satisfied
certain criteria for opening up its local exchange network to competition and
that its provision of long distance services would further the public interest;
removes existing barriers to entry into local service markets; significantly
changes the manner in which carrier-to-carrier arrangements are regulated at
the federal and state level; establishes procedures to revise universal service
standards; and establishes penalties for unauthorized switching of customers.
The Company cannot predict the effect such legislation will have on the Company
or the industry.
The Company will need to comply with the applicable laws and obtain the
approval of the regulatory authority of each country in which it provides or
proposes to provide telecommunications services. The laws and regulatory
requirements vary from country to country. Some countries have substantially
deregulated various communications services, while other countries have
maintained strict regulatory regimes. The application procedure can be
time-consuming and costly, and terms of licenses vary for different countries.
Transmissions from earth stations to all satellites, transmissions from
microwave and other transmitters, reception from international satellites, and
transmission of international traffic by any means, including operator assisted
long distance service, satellite, and undersea cable, must be pursuant to
license or other authorizations issued by the FCC. The Company, or an
affiliate of the Company, has operating authority or has made other
arrangements to transmit and/or receive signals from all locations where it
currently offers satellite transmission and/or reception service.
Although the Company has never had a license application denied by the FCC,
there can be no assurance that it will receive all authorizations or licenses
necessary for new communications services or that delays in the licensing
process will not adversely affect the Company's business. Domestic radio
licenses issued by the FCC are for limited periods not to exceed 10 years. The
Company must seek renewal of such licenses prior to their expiration. The
Company knows of no facts that would result in the denial of any
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such renewals. WorldCom monitors compliance with federal, state and local
regulations governing the discharge and disposal of hazardous and
environmentally sensitive materials, including the emission of electromagnetic
radiation. WorldCom believes that it is in compliance with such regulations.
However, there can be no assurance that any such discharge, disposal or
emission might not expose WorldCom to claims or actions that could have a
material adverse effect on the Company's consolidated results of operations or
financial position.
COMPETITION RISKS. The Company faces intense competition in providing both
domestic and international long distance telecommunications services.
Domestically, WorldCom competes for interLATA and intraLATA services with AT&T,
MCI, Sprint, the LECs, and other national and regional IXCs, where permissible;
and with respect to operator service, with AT&T and other operator service
providers. Internationally, the Company competes for services with other IXCs,
including AT&T, MCI, and Sprint. Certain of these companies have substantially
greater market share and financial resources than WorldCom, and some of them
are the source of communications capacity used by WorldCom to provide its own
services.
WorldCom expects to encounter continued competition from major domestic and
international communications companies, including AT&T, MCI, and Sprint. In
addition, the Company may be subject to additional competition due to the
enactment of the Telecommunications Act of 1996, the development of new
technologies and increased availability of domestic and international
transmission capacity.
For example, even though fiber-optic networks, such as that of the Company, are
now widely used for long distance transmission, it is possible that the
desirability of such networks could be adversely affected by changing
technology. The telecommunications industry is in a period of rapid
technological evolution, marked by the introduction of new product and service
offerings and increasing satellite and fiber optic transmission capacity for
services similar to those provided by the Company. The Company cannot predict
which of many possible future product and service offerings will be important
to maintain its competitive position or what expenditures will be required to
develop and provide such products and services.
ANTI-TAKEOVER PROVISIONS. The Amended and Restated Articles of Incorporation
of the Company contain provisions (a) requiring a 70% vote for approval of
certain business combinations with certain 10% stockholders unless approved by
a majority of the continuing Board of Directors or unless certain minimum
price, procedural and other requirements are met; (b) restricting aggregate
beneficial ownership of the capital stock of the Company by foreign
stockholders to 20% of the total outstanding capital stock, and subjecting
excess shares to redemption; and (c) requiring a two-thirds vote of the holders
of the Company's Series 2 Preferred Stock to approve certain extraordinary
transactions or, alternatively, redemption of such stock at a specified
premium. In addition, the Bylaws of the Company (a) contain requirements
regarding advance notice of nomination of directors by stockholders, and (b)
restrict the calling of special meetings by stockholders to those owning shares
representing not less than 40% of the votes to be cast. These provisions may
have an "anti-takeover" effect.
EMPLOYEES
As of March 15, 1996, the Company employed approximately 7,500 full-time
persons. Substantially all of the Company's employees are not represented by
any labor union.
ITEM 2. PROPERTIES
The tangible assets of the Company include a substantial investment in
telecommunications equipment. The aggregate value of the Company's
transmission equipment and communications equipment which include network
switches and customer premise equipment was $1.38 billion and $401.5 million,
respectively, at December 31, 1995. Approximately $390.0 million has been
budgeted for telecommunications equipment purchases in 1996 without regard to
possible future acquisitions, if any.
The Company's rights-of-way for its fiber optic cable and 172 tower microwave
transmission network are typically held under leases, easements, licenses or
governmental permits. All other major equipment and physical facilities are
owned in fee and are operated, constructed and maintained pursuant to
rights-of-way, easements, permits, licenses or consents on or across properties
owned by others.
WilTel has sold to independent entities and leased back its microwave system
and its Kansas City to Los Angeles fiber optic system over primary lease terms
ranging from 15 to 20 years. The leases have renewal options permitting WilTel
to extend the leases for terms expiring during the years 2012 to 2019 and
purchase options based upon the fair market value.
The Company attempts to structure its leases of space for its network switching
centers and rights-of-way for its fiber optic network with initial terms and
renewal options so that the risk of relocation is minimized. The Company
anticipates that prior to termination of any of the leases, it will be able to
renew such leases or make other suitable arrangements.
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WorldCom believes that all of the Company's facilities and equipment are in
good condition and are suitable for their intended purposes.
ITEM 3. LEGAL PROCEEDINGS
IDB RELATED INVESTIGATIONS. On June 9, 1994, the SEC issued a formal order of
investigation concerning certain matters, including IDB's financial position,
books and records and internal controls and trading in IDB securities on the
basis of non-public information. The SEC has issued subpoenas to WorldCom, IDB
and others, including certain former officers of IDB, in connection with its
investigation. The NASD and other self-regulatory bodies have also made
inquiries of IDB concerning similar matters.
The U.S. Attorney's Office for the Central District of California has issued
grand jury subpoenas to IDB seeking documents relating to IDB's first quarter
of 1994 results, the Deloitte & Touche LLP resignation, trading in IDB
securities and other matters, including information concerning certain entities
in which certain former officers of IDB are personal investors and transactions
between such entities and IDB. IDB has been informed that a criminal
investigation has commenced. The U.S. Attorney's Office has issued a grand
jury subpoena to WorldCom arising out of the same investigation seeking certain
documents relating to IDB. See Item 1 - "Business - Risk Factors - Contingent
Liabilities."
AT&T PATENTS. AT&T has claimed that a number of long distance carriers,
including the Company, make unauthorized use of AT&T patents in the provision
of some of the carriers' long distance services. Effective December 15, 1995,
the Company and AT&T entered into a two year patent licensing agreement which,
among other things, released all claims by AT&T against the Company relating to
any alleged patent infringement.
OTHER. On February 8, 1996, President Clinton signed legislation that: will,
without limitation, permit the BOCs to provide domestic and international long
distance services upon a finding by the FCC that the petitioning BOC has
satisfied certain criteria for opening up its local exchange network to
competition and that its provision of long distance services would further the
public interest; removes existing barriers to entry into local service markets;
significantly changes the manner in which carrier-to-carrier arrangements are
regulated at the federal and state level; establishes procedures to revise
universal service standards; and establishes penalties for unauthorized
switching of customers. The Company cannot predict the effect such legislation
will have on the Company or the industry. However, the Company believes that
it is positioned to take advantage of business opportunities in the rapidly
changing telecommunications market.
The Company is involved in other 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
The shares of WorldCom Common Stock are quoted on the Nasdaq National Market.
On May 25, 1995, the Company changed its name to WorldCom, Inc. and its trading
symbol became WCOM. Prior to the name change, the Company's Common Stock was
traded on the Nasdaq National Market under the trading symbol LDDS. The
following table sets forth the high and low sales prices per share of WorldCom
Common Stock as reported on the Nasdaq National Market based on published
financial sources, for the periods indicated.
HIGH LOW
---- ---
1994
----
First Quarter $29.50 $23.25
Second Quarter 25.25 14.00
Third Quarter 25.00 16.50
Fourth Quarter 24.38 16.38
1995
----
First Quarter $26.25 $19.13
Second Quarter 27.38 23.13
Third Quarter 34.13 26.75
Fourth Quarter 35.88 29.75
As of March 15, 1996, there were 194,043,449 shares of Common Stock issued and
outstanding held by 6,406 shareholders of record.
The Company has never paid cash dividends on its Common Stock. The policy of
the Company's Board of Directors has been to retain earnings to provide funds
for the operation and expansion of its business. Also, the Company's credit
facilities restrict the payment of dividends on its Common Stock. See Note 4
of Notes to Consolidated Financial Statements.
PREFERRED STOCK
The Company's Series 2 Preferred Stock has a liquidation value of $25 per
share, a conversion price of $11.81171 per share and pays dividends at the rate
of 6.5% annually, payable quarterly. There is no established public trading
market for the Series 2 Preferred Stock. Except under certain circumstances,
the Series 2 Preferred Stock may not be redeemed by the Company prior to June
5, 1996. Thereafter, the Series 2 Preferred Stock may be redeemed in whole or
in part in integral multiples of $10.0 million, at prices which include
premiums over the liquidation preference of $25 per share, which prices range
from 108% in 1996 declining to 100% on and after June 5, 2002. As of March 15,
1996, there were 1,244,048 shares of the Series 2 Preferred Stock outstanding.
In March 1996, the Company's Board of Directors approved a resolution
authorizing the Company to redeem on June 5, 1996 or such later date as the
president of the Company may determine, all outstanding shares of the Series 2
Preferred Stock, including all accrued and unpaid dividends thereon. See Note
5 of Notes to Consolidated Financial Statements.
ITEM 6. SELECTED FINANCIAL DATA
The following is a summary of selected financial data of the Company as of and
for the five years ended December 31, 1995. The historical financial data as
of December 31, 1995 and 1994 and for the years ended December 31, 1995, 1994,
and 1993 have been derived from the historical financial statements of the
Company, which financial statements have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report included elsewhere
herein. The report of Arthur Andersen LLP on the Consolidated Financial
Statements of the Company as of and for the three years ended December 31, 1995
refers to their reliance on the report of other auditors in rendering an
opinion on those financial statements. This data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Company's Consolidated Financial Statements appearing
elsewhere in this document.
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YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
1995 1994 1993 1992 1991
------ ------- ---------- ---------- ----------
(In thousands, except ratios and per share data)
Operating Results:
Revenues $3,639,875 $2,220,765 $1,474,257 $948,060 $719,214
Operating income 676,048 69,738 238,833 51,983 96,197
Income (loss) before
extraordinary item 267,660 (122,158) 124,321 8,344 39,592
Extraordinary item - - (7,949) (5,800) (1,283)
Net income (loss) 267,660 (122,158) 116,372 2,544 38,309
Preferred dividend
requirement 33,191 27,766 11,683 2,112 -
Earnings (loss) per common share:
Income (loss)
before extraordinary item --
Primary 1.30 (0.95) 0.82 0.06 0.39
Fully diluted 1.28 (0.95) 0.80 0.06 0.38
Net income (loss)--
Primary 1.30 (0.95) 0.76 0.00 0.37
Fully diluted 1.28 (0.95) 0.74 0.00 0.37
Net income before special
dividend payment to Series 1
preferred shareholder:
Primary 1.37 (0.95) 0.76 0.00 0.37
Fully diluted 1.36 (0.95) 0.74 0.00 0.37
Weighted average shares --
Primary 193,449 157,805 137,927 112,653 102,658
Fully diluted 201,495 157,805 140,796 113,053 103,103
Financial position:
Total assets $6,634,571 $ 3,430,192 $ 3,236,718 $ 1,241,278 $ 959,909
Long-term debt 3,391,281 794,001 730,023 448,496 457,767
Shareholders' investment 2,187,286 1,827,170 1,911,800 478,823 347,940
Ratio of earnings to combined
fixed charges and preferred
stock dividends 2.31:1 0.13:1 4.14:1 1.40:1 2.53:1
Deficiency of earnings to combined
fixed charges and preferred
stock dividends $ - $ (78,088) $ - $ - $ -
NOTES TO SELECTED FINANCIAL DATA:
(1) In 1995, Metromedia converted its Series 1 Preferred Stock into
21,876,976 shares of Common Stock and exercised warrants to acquire
3,106,976 shares of Common Stock and immediately sold its position of
30,849,548 shares of Common Stock in a public offering. In connection
with the preferred stock conversion, WorldCom made a non- recurring
payment of $15.0 million to Metromedia, representing a discount to the
minimum nominal dividends that would have been payable on the Series 1
Preferred Stock prior to the September 15, 1996 optional call date of
approximately $26.6 million (which amount includes an annual dividend
requirement of $24.5 million plus accrued dividends to such call
date).
(2) As a result of the IDB Merger and the ATC Merger, the Company
initiated plans to reorganize and restructure its management and
operational organization and facilities to eliminate duplicate
personnel, physical facilities and service capacity, to abandon
certain products and marketing activities, and to take further
advantage of the synergies available
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17
to the combined entities. Also, during the fourth quarter of 1993,
plans were approved to reduce IDB's cost structure and to improve
productivity. Accordingly, in 1994, 1993 and 1992, the Company
charged to operations the estimated costs of such reorganization and
restructuring activities, including employee severance, physical
facility abandonment and duplicate service capacity. These costs
totaled $43.7 million in 1994, $5.9 million in 1993 and $79.8 million
in 1992.
Also, during 1994 and 1992, the Company incurred direct merger costs
of $15.0 million and $7.3 million, respectively, related to the IDB
Merger (in 1994) and the ATC Merger (in 1992). These costs include
professional fees, proxy solicitation costs, travel and related
expenses and certain other direct costs attributable to these mergers.
(3) In connection with certain debt refinancing, the Company recognized in
1993 and 1992 extraordinary items of approximately $7.9 million and
$5.8 million, respectively, net of income taxes, consisting of
unamortized debt discount, unamortized issuance cost and prepayment
fees. See Note 4 of Notes to Consolidated Financial Statements and
"Management's Discussion and Analysis of Financial Condition and
Results of Operations."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis relates to the financial condition and
results of operations of the Company for the three years ended December 31,
1995 after giving effect to the IDB Merger, which was accounted for as a
pooling-of- interests. This information should be read in conjunction with the
"Selected Financial Data" and the Company's Consolidated Financial Statements
appearing elsewhere in this document.
GENERAL
The Company's emphasis on acquisitions has taken the Company from a small
regional long distance carrier to one of the largest long distance
telecommunications companies in the industry, serving customers domestically
and internationally. The Company's operations have grown significantly in each
year of its operations as a result of internal growth, the selective
acquisition of smaller long distance companies with limited geographic service
areas and market shares, the consolidation of certain third tier long distance
carriers with larger market shares, and international expansion.
On January 5, 1995, the Company completed the acquisition of the network
services operations of Williams Telecommunications Group, Inc. ("WilTel"), a
subsidiary of The Williams Companies, Inc. ("Williams"), for approximately $2.5
billion in cash (the "WilTel Acquisition"). Through this purchase, the Company
acquired a nationwide common carrier network of approximately 11,000 miles of
fiber optic cable and digital microwave facilities. The WilTel Acquisition
was accounted for as a purchase transaction for financial reporting purposes.
The funds paid to Williams were obtained by the Company under new credit
facilities entered into on December 21, 1994. See Note 4 of Notes to
Consolidated Financial Statements.
The Company's long distance revenues are derived principally from the number of
minutes of use billed by the Company. Minutes billed are those conversation
minutes during which a call is actually connected at the Company's switch
(except for minutes during which the customer receives a busy signal or the
call is unanswered at its destination). The Company's profitability is
dependent upon, among other things, its ability to achieve line costs that are
less than its revenues. The principal components of line costs are access
charges and transport charges. Access charges are expenses incurred by IXCs
for accessing the local networks of the LECs in order to originate and
terminate calls and payments made to PTTs to complete international calls made
from the U.S. Transport charges are the expenses incurred in transmitting
calls between or within LATAs.
The most significant portion of the Company's line costs is access charges
which are highly regulated. The FCC regulates international communications
services and interstate telephone service and certain states, through the
appropriate regulatory agency, regulate intrastate telephone service.
Accordingly, the Company cannot predict what effect continued regulation and
increased competition between LECs and other IXCs will have on future access
charges. However, the Company believes that it will be able to continue to
reduce transport costs through effective utilization of its network, favorable
contracts with carriers and network efficiencies made possible as a result of
expansion of the Company's customer base by acquisitions and internal growth.
On February 8, 1996, President Clinton signed legislation, that: will, without
limitation, permit the BOCs to provide domestic and international long distance
services upon a finding by the FCC that the petitioning BOC has satisfied
certain criteria for opening up its local exchange network to competition and
that its provision of long distance services would further the public interest;
removes existing barriers to entry into local service markets; significantly
changes the manner in which carrier-to-carrier arrangements are regulated at
the federal and state level; establishes procedures to revise universal service
standards; and, establishes penalties for unauthorized switching of customers.
The enactment of this legislation has made it possible for the Company to form
business associations to provide long distance telecommunications services with
certain LECs and the Company expects to pursue resale of
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18
local service in those markets where it is both economically and technically
feasible. While the effects of this legislation on the Company and the
industry remain uncertain, the Company believes that it is positioned to take
advantage of business opportunities in the rapidly changing telecommunications
marketplace.
In the first quarter of 1996, the Company signed agreements to provide long
distance telecommunications services to GTE Long Distance, Ameritech
Communications, Inc., and Southwestern Bell Mobile Systems, Inc. WorldCom also
entered into an agreement to become a major provider of data telecommunications
services for EDS, a global information services company.
Additionally, in response to the changing regulatory environment, WorldCom has
filed applications with public utility commissions in several states to offer
customers a full range of local telephone exchange services, an important
capability that will serve as a complement to the Company's national and
international service offerings. To date, WorldCom has received permission to
provide local service on a resale basis in California, Connecticut, Florida,
Illinois and Texas.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the Company's
statement of operations as a percentage of its operating revenues.
For the Year Ended December 31,
---------------------------------------
1995 1994 1993
---- ---- ----
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0%
----- ----- -----
Line costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54.7 65.2 59.8
Selling, general and administrative . . . . . . . . . . . . . . . . 18.1 19.4 16.7
Depreciation and amortization . . . . . . . . . . . . . . . . . . . 8.6 7.4 6.9
Direct merger costs, restructuring and other charges . . . . . . . - 4.8 0.4
----- ----- -----
Operating income (expense): . . . . . . . . . . . . . . . . . . . . 18.6 3.1 16.2
Other income (expense):
Interest expense . . . . . . . . . . . . . . . . . . . . . . . (6.8) (2.1) (2.4)
Shareholder litigation settlement . . . . . . . . . . . . . . . - (3.4) -
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . 0.3 0.2 0.5
----- ----- -----
Income (loss) before income taxes and extraordinary item . . . . . 12.1 (2.2) 14.2
Provision for income taxes . . . . . . . . . . . . . . . . . . . . 4.7 3.3 5.8
----- ----- -----
Net income (loss) before extraordinary item . . . . . . . . . . . . 7.4 (5.5) 8.4
Extraordinary item . . . . . . . . . . . . . . . . . . . . . . . . - - (0.5)
----- ----- -----
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . 7.4 (5.5) 7.9
Preferred dividend requirement . . . . . . . . . . . . . . . . . . 1.0 1.3 0.8
----- ----- -----
Net income (loss) applicable to common shareholders . . . . . . . . 6.4% (6.8)% 7.1%
===== ===== =====
YEAR ENDED DECEMBER 31, 1995 VS.
YEAR ENDED DECEMBER 31, 1994:
Revenues for 1995 increased 64% to $3.64 billion on 19.37 billion revenue
minutes as compared to $2.22 billion on 10.97 billion revenue minutes for 1994.
On a pro forma basis, as though the acquisition of WilTel occurred at the
beginning of 1994, revenues and traffic for 1995 increased 19% and 30%,
respectively, compared with pro forma revenues of $3.07 billion on 14.60
billion revenue minutes for 1994. Revenue growth for 1995 was driven by strong
performance from the Company's retail and wholesale switched services offset
insignificantly by declines in operator services revenue. Switched retail
revenues and traffic rose 18% and 22%, respectively. Wholesale revenues and
traffic rose 26% and 47%, respectively. Operator services revenues and traffic
decreased 6% and 15%, respectively, yet represented less than 5% of total
Company revenues for 1995.
Private line revenues for 1995 also reflected positive growth, increasing 21%
over 1994 pro forma results due to growth in commercial Internet business and
other frame relay applications.
Line costs as a percentage of revenues decreased to 54.7% in 1995 compared to
65.2% for 1994. These decreases are attributable to changes in product mix,
rate reductions resulting from favorable contract negotiations and synergies
and economies of scale resulting from network efficiencies achieved from the
assimilation of the IDB Merger and the WilTel Acquisition into the Company's
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operations. Additionally, through the WilTel Acquisition, the Company has been
able to achieve further network efficiencies associated with owning the WilTel
nationwide fiber optic cable network rather than leasing similar capacity from
other providers at a higher cost.
Selling, general and administrative ("SG&A") expenses for 1995 increased to
$660.1 million or 18.1% of revenues as compared to $432.4 million or 19.4% of
revenues for 1994. The increase in selling, general and administrative
expenses results from the Company's expanding operations, primarily through the
WilTel Acquisition and internal growth. The decrease in expense as a
percentage of revenues reflects the assimiliation of recent acquisitions into
the Company's strategy of cost control.
Depreciation and amortization expense for 1995 increased to $311.3 million or
8.6% of revenues from $163.8 million or 7.4% of revenues for 1994. This
increase reflects depreciation and amortization of the additional property and
equipment and goodwill from the WilTel Acquisition.
Interest expense in 1995 was $249.1 million or 6.8% of revenues, as compared to
$47.3 million or 2.1% of revenues in 1994. The increase in interest expense
was due primarily to an increase in the average debt outstanding by the Company
to finance the WilTel Acquisition. Also, higher interest rates were in effect
on the Company's long-term debt, reflecting higher prevailing interest rates in
the market generally. For the year ended December 31, 1995 and 1994, weighted
average annual interest rates were 7.2% and 6.2%, respectively. For the year
ended December 31, 1995 and 1994, weighted average annual levels of borrowing
were $3.51 billion and $795.8 million, respectively.
The effective income tax rate for 1995 was 39% of income before taxes versus a
1994 rate in excess of 100%. The 1995 effective rate of 39% includes the
effect of a $7.0 million decrease in the Company's valuation allowance. The
valuation allowance decreased due to the Company's ability to utilize net
operating losses that management had previously determined would not be
utilized under a "more likely than not" scenario. This is mainly attributable
to the profitability of individual operating units in 1995. The remaining
valuation allowance as of December 31, 1995 is $101.7 million. The unusually
high income tax rate in 1994 was due to permanent items not deductible for tax
purposes as well as a $90.0 million valuation allowance placed on the deferred
tax asset in connection with IDB net operating losses.
In the third quarter of 1995, Metromedia converted its Series 1 Preferred Stock
into 21,876,976 shares of Common Stock and exercised warrants to acquire
3,106,976 shares of Common Stock and immediately sold its position of
30,849,548 shares of Common Stock in a public offering. In connection with the
preferred stock conversion, WorldCom made a non- recurring payment of $15.0
million to Metromedia, representing a discount to the minimum nominal dividends
that would have been payable on the Series 1 Preferred Stock prior to the
September 15, 1996 optional call date of approximately $26.6 million (which
amount includes an annual dividend requirement of $24.5 million plus accrued
dividends to such call date).
Net income applicable to common shareholders was $234.5 million for 1995 versus
a $149.9 million loss in the comparable 1994 period. Operating results for
1995 include the non-recurring payment of $15.0 million to Metromedia.
Excluding this payment, earnings for 1995 would have been $249.5 million or
$1.36 per common share.
YEAR ENDED DECEMBER 31, 1994 VS.
YEAR ENDED DECEMBER 31, 1993:
Revenues increased by 50.6% to $2.22 billion on 10.97 billion revenue minutes
in 1994 from $1.47 billion on 6.94 billion revenue minutes in 1993. The
overall increase in total revenues was primarily attributable to the inclusion
of a full year's revenues from the 1993 acquisitions of Dial-Net, MCC,
Resurgens and TRT and internal growth. See Note 2 of Notes to Consolidated
Financial Statements.
Line costs increased from $881.5 million in 1993 to $1.4 billion in 1994. This
increase is due to increased traffic volumes, partially offset by network
efficiencies and rate reductions resulting from favorable contract
negotiations. As a percentage of revenues, line costs increased to 65.2% in
1994 from 59.8% in 1993. This increase is attributable to the change in
product mix including increased international traffic, which carries higher
line costs. Additionally, IDB's margins decreased in 1994 as IDB was unable to
deliver all of its inbound traffic over its existing facilities and had to use
other carriers at a higher cost to deliver this overflow traffic. Also in
1994, IDB's carrier revenue as a proportion of total international traffic
increased and these rates are typically lower than rates charged to commercial
customers. Certain of these IDB carrier contracts provided either a break even
or negative margin to the Company and accordingly, service to these customers
was discontinued in December 1994.
SG&A increased to $432.4 million in 1994 from $246.1 million in 1993, and as a
percentage of revenues, these expenses increased to 19.4% in 1994 from 16.7% in
1993. The increase in SG&A as a percentage of revenues is attributable to
various IDB-related one-time adjustments which were recorded in 1994. These
adjustments included $40.9 million to adjust the provision for doubtful
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20
accounts receivable, $8.0 million in accounting and legal expenses incurred in
connection with the resignation of IDB's prior auditors and $37.5 million
related to various investment write-downs and other balance sheet accruals.
In 1994, the Company determined that adjustments to certain assets of IDB
Broadcast were appropriate to properly reflect estimated net realizable values.
Accordingly, the Company recorded adjustments of $48.5 million, to reduce the
carrying value of these broadcast assets (primarily intangible assets and
property and equipment) to the Company's best estimate of the net realizable
value. See Note 3 of Notes to Consolidated Financial Statements. Although the
Company continues to offer IDB Broadcast services, such services are not a part
of the Company's core business operations. Accordingly, subsequent to December
31, 1994, the Company sold its simulcasting operations and entered into an
agreement to outsource the management of the remaining IDB Broadcast
operations.
As a result of the IDB Merger, the Company initiated plans to reorganize and
restructure its management and operational organization and facilities.
Accordingly, the Company charged to operations in 1994, the estimated costs of
the IDB Merger and restructuring of $15.0 million and $43.7 million,
respectively. In 1993, plans were approved to reduce IDB's cost structure and
to improve productivity. Such plans included a reduction in the number of
employees and the disposition of certain assets. In connection with this plan,
$5.9 million was charged to operations in 1993. See Note 3 of Notes to
Consolidated Financial Statements.
Depreciation and amortization expense, which includes depreciation of the
Company's call transmission facilities, increased to $163.8 million from $101.9
million in 1993 or 7.4% and 6.9% of revenues in 1994 and 1993, respectively.
The increase in such expenses was due primarily to depreciation and
amortization of the additional property and equipment, customer bases and
goodwill resulting from acquisitions by the Company during 1993.
Interest expense in 1994 was $47.3 million or 2.1% of revenues, as compared to
$35.6 million or 2.4% of revenues in 1993. This decrease as a percentage of
revenues was a result of several factors, including the Company's prepayment of
long-term debt with funds obtained through the public offering of IDB common
stock in May 1993 and the issuance by IDB in August 1993 of $195.5 million of
5% convertible subordinated notes due 2003. Additionally, as some of the
Company's acquisitions were funded by a combination of stock and debt, the
interest expense has not grown as rapidly as the revenues.
In the third quarter of 1994, the Company recorded a $76.0 million charge which
represents an estimated shareholder litigation settlement of $75.0 million and
$1.0 million in related legal costs. This liability was paid by the Company in
April 1995.
The Company recorded a provision for income taxes of $73.8 million on a pretax
loss of $48.3 million in 1994. Although the Company generated a consolidated
pre-tax loss in 1994, permanent items aggregating approximately $113.0 million
resulted in the recognition of taxable income. Also, because the current year
net operating loss ("NOL") generated by IDB prior to the IDB Merger may be
offset only by future taxable income generated at the IDB level of the
Company's operations, the Company believed that only a portion of the current
year NOL could be utilized under a "more likely than not" scenario.
Accordingly, the Company placed a valuation allowance on the deferred tax asset
attributable to approximately $90.0 million of the NOL.
LIQUIDITY AND CAPITAL RESOURCES
On January 5, 1995, in conjunction with the WilTel Acquisition, the Company
utilized its $3.41 billion long-term credit facilities and repaid all debt
under the Company's previous credit facilities and $123.0 million in senior
notes. Total additional borrowings for 1995 were $2.7 billion. At December
31, 1995, the Company had access to an additional $251.1 million under its
long-term credit facilities. The credit facility is comprised of a $2.16
billion, six-year reducing revolving credit facility (the "Revolving Facility
Commitment") and a $1.25 billion, two-year term facility (the "Term Principal
Debt"). The maximum principal amount permitted to be outstanding under the
Revolving Facility Commitment will be reduced at the end of each fiscal
quarter, commencing September 30, 1996, in varying amounts, and the outstanding
balance must be paid in full on December 31, 2000. The Term Principal Debt
matures in a single installment on December 31, 1996. The Revolving Facility
Commitment and the Term Principal Debt bear interest, payable quarterly, at
variable rates selected by the Company under the terms of the credit
facilities. The Company is permitted to choose from several interest rate
options including: a Base Rate plus applicable margin, the London Interbank
Offering Rate ("LIBOR") plus applicable margin, or, for the Revolving Facility
Commitment only, any Competitive Bid Rate. The applicable margin varies from
0% to 3/8% for Base Rate Borrowings and 1/2% to 1.5% for LIBOR Rate Borrowings
from time to time based upon the lower of a specified financial test or the
Company's long-term debt rating. The credit facilities are unsecured and
require compliance with certain financial and other operating covenants which
require the maintenance of certain minimum operating ratios and which limit,
among other things, the incurrence of additional indebtedness by the Company
and restricts the payment of cash dividends to WorldCom shareholders. See Note
4 to Notes to Consolidated Financial Statements.
In February 1995, to protect against the effect of rising interest rates, the
Company entered into financial hedging agreements with various financial
institutions, in connection with requirements under the credit facilities. The
hedging agreements establish capped fixed rates of interest ranging from 8.25%
to 8.3125% on an aggregate notional value of $1.7 billion. If interest rates
do not reach this cap, the Company's interest rate remains variable. These
contracts range in duration from one to two years with $845.4 million
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21
maturing in each of the years ending 1996 and 1997. The $845.4 million which
matured in 1996, was replaced with a hedging agreement which caps the fixed
interest at 7.43% and matures in 1997.
The Company is committed to a priority plan of accelerating operating cash flow
to reduce debt. The Company anticipates that the existing debt balances
including the $1.25 billion Term Principal Debt, which matures December 1996,
will be refinanced with a new revolving commercial bank credit facility with
similar terms. Additional capital availability may be generated through a
combination of commercial bank debt and public market debt. Successful
execution of the refinancings and the priority plan would provide continued
compliance with required operating ratio covenants and would eliminate any type
of equity financing other than equity issued in connection with acquisitions.
No assurance can be given that the Company will achieve its priority plan or
that any refinancing will be available on terms acceptable to WorldCom.
The Company has historically utilized cash flow from operations to finance
capital expenditures and a mixture of cash flow, debt and stock to finance
acquisitions. The Company will continue to analyze potential acquisitions
utilizing primarily equity financing until the additional leverage from the
WilTel Acquisition is reduced.
For 1995, the Company's cash flow from operations was $615.7 million,
increasing from $246.6 million in 1994 and $159.0 million in 1993. The
increase in cash flow from operations was primarily attributable to cash flow
from acquired operations, internal growth and the sale of the Company's
receivables as noted below.
Cash used in investing activities in 1995 totaled $3.22 billion and included
$2.77 billion for acquisitions and related costs and $355.8 million for capital
expenditures. Primary capital expenditures include purchases of switching,
transmission, communication and other equipment. Current budgeted network
capital expenditures for 1996 total approximately $390.0 million.
Included in cash flows from financing activities are payments of $18.2 million
for preferred dividend requirements and $15.0 million for the non-recurring
payment to Metromedia. All of the Series 1 Preferred Stock was converted by
Metromedia in August 1995 and accordingly, no further dividends will be
required on the Series 1 Preferred Stock. A portion of the Company's Series 2
Preferred Stock was also converted during the third quarter of 1995. The
Series 2 Preferred Stock remaining is expected to be redeemed by the Company
during 1996. Assuming that the redemption of the Series 2 Preferred Stock
occurs, as approved by the Company's Board of Directors, on or about June 5,
1996, the 1996 dividend expense is not anticipated to exceed $1.0 million.
During 1995, the Company amended WilTel's existing $80.0 million receivables
purchase agreement to include certain additional receivables and received
additional proceeds of $215.4 million. The Company used these proceeds to
reduce the outstanding debt under the Company's credit facilities and provide
additional working capital. As of December 31, 1995, the purchaser owned an
undivided interest in a $608.9 million pool of receivables which includes the
$295.4 million sold. The aggregate purchase limit under this agreement was
$300.0 million at December 31, 1995.
In April 1995, an additional $75.0 million was borrowed against the Company's
long-term credit facilities to pay the IDB shareholder litigation settlement
liability, which had been recognized by the Company during the third quarter of
1994.
During 1995, Metromedia exercised its right to purchase a total of 6.2 million
shares of the Company's Common Stock under purchase warrants. Aggregate
proceeds of $64.4 million from these exercises were used to reduce the
outstanding debt under the Company's credit facilities.
Absent significant capital requirements for other acquisitions, the Company
believes that cash flow from operations and funds available under the credit
facilities will be adequate to meet the Company's capital needs for the
remainder of 1996.
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." This Statement establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles and goodwill related to
those assets to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of. This Statement is effective for
financial statements for fiscal years beginning after December 15, 1995.
WorldCom believes that the adoption of this standard will not have a material
effect on the Company's consolidated results of operations or financial
position.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." This Statement establishes financial accounting and reporting
standards for stock-based employee compensation plans and is effective for
fiscal years beginning after December 15, 1995. The Company expects to
continue to apply the accounting provisions of APB Opinion 25 in determining
its net income. However, additional disclosures will be made to disclose the
estimated value of compensation expense under the method established by SFAS
No. 123.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements and notes thereto are included
elsewhere in this report on Form 10-K as follows:
Page
----
Reports of independent public accountants F-2
Consolidated financial statements-
Consolidated balance sheets - December 31, 1995
and 1994 F-4
Consolidated statements of operations for the three
years ended December 31, 1995 F-5
Consolidated statements of shareholders' investment
for the three years ended December 31, 1995 F-6
Consolidated statements of cash flows for the
three years ended December 31, 1995 F-7
Notes to consolidated financial statements F-8
Financial Statement Schedule F-19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
The information required by this Part III will be provided in the Company's
definitive proxy statement for the Company's 1996 annual meeting of
shareholders (involving the election of directors), which definitive proxy
statement will be filed pursuant to Regulation 14A not later than 120 days
following the Company's fiscal year ended December 31, 1995, and is
incorporated herein by this reference to the following extent:
(a) ITEM 10. Directors and Executive Officers of the Registrant -
the information under the captions "ELECTION OF
DIRECTORS - Information About Nominees and Executive
Officers" and "EXECUTIVE COMPENSATION - Compliance
with Section 16 of the Securities Exchange Act of
1934."
(b) ITEM 11. Executive Compensation - the information under the
captions "INFORMATION CONCERNING BOARD OF DIRECTORS -
Compensation of Directors," and "EXECUTIVE
COMPENSATION."
(c) ITEM 12. Security Ownership of Certain Beneficial Owners and
Management - the information under the captions
"PRINCIPAL HOLDERS OF VOTING SECURITIES" and
"SECURITY OWNERSHIP OF MANAGEMENT."
(d) ITEM 13. Certain Relationships and Related Transactions - the
information under the caption "EXECUTIVE COMPENSATION
- Certain Relationships and Related Transactions."
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) 1 and 2
Financial statements and financial statement schedules
See Index to Consolidated Financial Statements and Financial Statement Schedule
on page F-1 hereof.
(a) 3
Exhibits required by Item 601 of Regulation S-K
See Exhibit Index for the exhibits filed as part of or incorporated by
reference into this Report. There are omitted from the exhibits filed with or
incorporated by reference into this Annual Report on Form 10-K certain
promissory notes and other instruments and agreements with respect to long-term
debt of the Company, none of which authorizes securities in a total amount that
exceeds 10% of the total assets of the Company on a consolidated basis.
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, the Company hereby agrees to
furnish to the Securities and Exchange Commission copies of any such omitted
promissory notes or other instruments or agreements as the Commission requests.
(b) Reports on Form 8-K
None.
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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.
WorldCom, Inc.
By: /s/ Scott D. Sullivan
-----------------------------------
Date: March 29, 1996 Scott D. Sullivan,
Chief Financial Officer
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/ Carl J. Aycock Director March 29, 1996
- ----------------------------
Carl J. Aycock
/s/ Max E. Bobbitt Director March 29, 1996
- ----------------------------
Max E. Bobbitt
Director, President
/s/ Bernard J. Ebbers and Chief Executive March 29, 1996
- ---------------------------- Officer
Bernard J. Ebbers
/s/ Francesco Galesi Director March 29, 1996
- ----------------------------
Francesco Galesi
/s/ Stiles A. Kellett, Jr. Director March 29, 1996
- ----------------------------
Stiles A. Kellett, Jr.
/s/ Silvia Kessel Director March 29, 1996
- ----------------------------
Silvia Kessel
/s/ John W. Kluge Director March 29, 1996
- ----------------------------
John W. Kluge
Director March 29, 1996
- ----------------------------
John A. Porter
/s/ Stuart Subotnick Director March 29, 1996
- ----------------------------
Stuart Subotnick
Director,
Principal Financial
/s/ Scott D. Sullivan Officer and Principal March 29, 1996
- ---------------------------- Accounting Officer
Scott D. Sullivan
/s/ Lawrence C. Tucker Director March 29, 1996
- ----------------------------
Lawrence C. Tucker
/s/ Roy A. Wilkens Director March 29, 1996
- ----------------------------
Roy A. Wilkens
21
25
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
Page
----
Reports of independent public accountants F-2
Consolidated financial statements-
Consolidated balance sheets - December 31, 1995
and 1994 F-4
Consolidated statements of operations for the
three years ended December 31, 1995 F-5
Consolidated statements of shareholders' investment
for the three years ended December 31, 1995 F-6
Consolidated statements of cash flows for the
three years ended December 31, 1995 F-7
Notes to consolidated financial statements F-8
Financial Statement Schedule:
II. Valuation and qualifying accounts F-19
Schedules other than the schedule listed above have been omitted because of the
absence of conditions under which they are required or because the information
is included in the financial statements or notes thereto.
F-1
26
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To WorldCom, Inc.
and Subsidiaries:
We have audited the accompanying consolidated balance sheets of WorldCom, Inc.
(a Georgia corporation) and subsidiaries as of December 31, 1995 and 1994, and
the related consolidated statements of operations, shareholders' investment and
cash flows for each of the years in the three-year period ended December 31,
1995. We did not audit the financial statements of IDB Communications Group,
Inc., a company acquired during 1994 in a transaction accounted for as a
pooling-of-interests, for the year ended December 31, 1993. Such statements
are included in the consolidated financial statements of WorldCom, Inc. for the
year ended December 31, 1993, and reflect 23 percent of consolidated total
revenues for that year. These statements were audited by other auditors whose
report has been furnished to us and our opinion, insofar as it relates to the
amounts included for IDB Communications Group, Inc., is based solely upon the
report of the other auditors. 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 audits.
We conducted our audits 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 audits and the report of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
financial statements referred to above present fairly, in all material
respects, the financial position of WorldCom, Inc. and subsidiaries as of
December 31, 1995 and 1994, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 1995,
in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the Index to Financial
Statements and Financial Statement Schedule is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not a
required part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in our audit of the basic
financial statements and, in our opinion, based on our audits and the report of
other auditors, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Jackson, Mississippi,
March 6, 1996.
F-2
27
INDEPENDENT AUDITORS' REPORT
IDB COMMUNICATIONS GROUP, INC.:
We have audited the consolidated statements of operations, shareholders' equity
and cash flows of IDB Communications Group, Inc. for the year ended December
31, 1993 (not presented separately herein). Our audit also included the
financial statement schedule for the year ended December 31, 1993 listed in the
Index to Financial Statements and Financial Statement Schedule (not presented
separately herein). These financial statements and the financial statement
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule 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 audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the results of operations and of cash flow of IDB
Communications Group, Inc. and its subsidiaries for the year ended December 31,
1993 in conformity with generally accepted accounting principles. Also in our
opinion, such financial statement schedule when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
Deloitte & Touche LLP
Los Angeles, California
March 7, 1994
F-3
28
WORLDCOM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars, Except Per Share Data)
December 31,
---------------------------
1995 1994
------------ -----------
ASSETS
Current assets:
Cash and cash equivalents $ 41,679 $ 19,259
Short-term investments - 1,000
Accounts receivable, net of allowance for bad debts of $57,980 and $52,949 at
December 31, 1995 and 1994, respectively 528,763 470,175
Income taxes receivable 17,499 -
Deferred tax asset 16,899 62,687
Other current assets 49,992 51,053
------------ -----------
Total current assets 654,832 604,174
------------ -----------
Property and equipment:
Transmission equipment 1,376,242 472,737
Communications equipment 401,454 307,262
Furniture, fixtures and other 278,716 164,266
------------ -----------
2,056,412 944,265
Less - accumulated depreciation (487,080) (317,598)
------------ -----------
1,569,332 626,667
------------ -----------
Excess of cost over net tangible assets acquired, net of accumulated amortization 4,292,752 2,070,709
Line installation costs, net of accumulated amortization 35,379 28,768
Deferred income taxes - 14,120
Other assets 82,276 85,754
------------ -----------
$ 6,634,571 $ 3,430,192
============ ===========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current liabilities:
Short-term debt and current maturities of long-term debt $ 1,112,853 $ 5,996
Accounts payable 137,342 138,101
Accrued line costs 391,604 258,053
Accrued restructuring costs 5,275 25,837
Shareholder litigation reserve - 75,000
Income taxes payable - 11,940
Other current liabilities 331,738 195,728
------------ -----------
Total current liabilities 1,978,812 710,655
------------ -----------
Long-term liabilities, less current portion:
Long-term debt 2,278,428 788,005
Deferred income taxes payable 26,172 -
Other liabilities 163,873 104,362
------------ -----------
Total long-term liabilities 2,468,473 892,367
------------ -----------
Commitments and contingencies
Shareholders' investment:
Series 1 preferred stock, par value $.01 per share; authorized, issued and
outstanding: none in 1995 and 10,896,785 shares in 1994 (liquidation
preference of $544,839 in 1994) - 109
Series 2 preferred stock, par value $.01 per share; authorized, issued and
outstanding: 1,244,048 in 1995 and 2,000,000 shares in 1994 (liquidation
preference of $31,101 in 1995 and $50,000 in 1994) 12 20
Preferred stock, par value $.01 per share; authorized: 48,755,952 shares in
1995 and 37,103,215 shares in 1994; none issued - -
Common stock, par value $.01 per share; authorized: 500,000,000 shares; issued
and outstanding: 193,242,639 shares in 1995 and 159,643,312 shares in 1994 1,932 1,596
Additional paid-in capital 1,898,310 1,772,882
Retained earnings 287,032 52,563
------------ -----------
Total shareholders' investment 2,187,286 1,827,170
------------ -----------
$ 6,634,571 $ 3,430,192
============ ===========
The accompanying notes are an integral part of these statements.
F-4
29
WORLDCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
For the Year Ended December 31,
--------------------------------------------------
1995 1994 1993
-------------- ------------- -------------
Revenues $ 3,639,875 $ 2,220,765 $ 1,474,257
-------------- ------------- -------------
Operating expenses:
Line costs 1,992,413 1,447,633 881,540
Selling, general and administrative 660,149 432,360 246,105
Depreciation and amortization 311,265 163,828 101,859
Provision to reduce carrying value of certain assets - 48,500 -
Direct merger costs - 15,002 -
Restructuring and other charges - 43,704 5,920
-------------- ------------- -------------
Total 2,963,827 2,151,027 1,235,424
-------------- ------------- -------------
Operating income 676,048 69,738 238,833
Other income (expense):
Interest expense (249,062) (47,303) (35,557)
Shareholder litigation settlement - (76,000) -
Miscellaneous 11,801 5,223 6,644
-------------- ------------- -------------
Income (loss) before income taxes and extraordinary item 438,787 (48,342) 209,920
Provision for income taxes 171,127 73,816 85,599
-------------- ------------- -------------
Net income (loss) before extraordinary item 267,660 (122,158) 124,321
Extraordinary item (net of income taxes of $5,639) - - (7,949)
-------------- ------------- -------------
Net income (loss) 267,660 (122,158) 116,372
Preferred dividend requirement 18,191 27,766 11,683
Special dividend payment to Series 1 preferred shareholder 15,000 - -
-------------- ------------- -------------
Net income (loss) applicable to common shareholders $ 234,469 $ (149,924) $ 104,689
============== ============= =============
Earnings (loss) per common share -
Income (loss) before extraordinary item:
Primary $ 1.30 $ (0.95) $ 0.82
Fully diluted 1.28 (0.95) 0.80
Extraordinary item - - (0.06)
Net income (loss):
Primary 1.30 (0.95) 0.76
Fully diluted 1.28 (0.95) 0.74
Net income (loss) before special dividend payment to
Series 1 preferred shareholder:
Primary 1.37 (0.95) 0.76
Fully diluted 1.36 (0.95) 0.74
The accompanying notes are an integral part of these statements.
F-5
30
WORLDCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
For the Three Years Ended December 31, 1995
(In Thousands)
Series 1 Preferred Series 2 Preferred Preferred
Stock Stock Stock Common Stock
--------------------- ------------------ ------------------- ------------------
Shares Amount Shares Amount Shares Amount Shares Amount
-------------------------------------------------------------------------------------
Balances, December 31, 1992 - $ - - $ - 534 $ 64,014 116,862 $ 1,169
Exercise of stock options - - - - - - 5,048 50
Conversion of preferred stock - - - - (34) (17,444) 2,937 29
Conversion of preferred stock into
Series 2 Preferred Stock - - 2,000 20 (500) (46,570) - -
Common stock issued - - - - - - 2,253 23
Common stock issued to
repurchase debt - - - - - - 160 2
Tax adjustment resulting from exercise
of stock options - - - - - - - -
Cash for fractional shares - - - - - - (3) -
Shares issued for acquisitions 10,897 109 - - - - 26,197 262
Net income - - - - - - - -
Cash dividends on preferred
stock - - - - - - - -
-------------------------------------------------------------------------------------
Balances, December 31, 1993 10,897 109 2,000 20 - - 153,454 1,535
Exercise of stock options - - - - - - 3,209 32
Common stock issued - - - - - - 2,195 22
Tax adjustment resulting from exercise
of stock options - - - - - - - -
Shares issued for acquisitions - - - - - - 785 7
Net loss - - - - - - - -
Cash dividends on preferred
stock - - - - - - - -
-------------------------------------------------------------------------------------
Balances, December 31, 1994 10,897 109 2,000 20 - - 159,643 1,596
Exercise of stock options - - - - - - 9,483 95
Conversion of Series 1 Preferred Stock (10,897) (109) - - - - 21,877 219
Conversion of Series 2 Preferred Stock - - (756) (8) - - 1,600 16
Tax adjustment resulting from exercise
of stock options - - - - - - - -
Cash for fractional shares - - - - - - - -
Shares issued for acquisitions - - - - - - 640 6
Net income - - - - - - - -
Cash dividends on preferred
stock - - - - - - - -
-------------------------------------------------------------------------------------
Balances, December 31, 1995 - $ - 1,244 $ 12 - $ - 193,243 $ 1,932
=====================================================================================
Additional
Paid-in Retained
Capital Earnings
-------------------------
Balances, December 31, 1992 $ 308,907 $ 104,733
Exercise of stock options 20,174 -
Conversion of preferred stock 17,415 -
Conversion of preferred stock into
Series 2 Preferred Stock 46,550 -
Common stock issued 50,977 -
Common stock issued to
repurchase debt 5,987 -
Tax adjustment resulting from exercise
of stock options 20,770 -
Cash for fractional shares (76) -
Shares issued for acquisitions 1,230,010 -
Net income - 116,372
Cash dividends on preferred
stock - (11,683)
-------------------------
Balances, December 31, 1993 1,700,714 209,422
Exercise of stock options 15,895 -
Common stock issued 22,971 (6,935)
Tax adjustment resulting from exercise
of stock options 15,918 -
Shares issued for acquisitions 17,384 -
Net loss - (122,158)
Cash dividends on preferred
stock - (27,766)
-------------------------
Balances, December 31, 1994 1,772,882 52,563
Exercise of stock options 90,437 -
Conversion of Series 1 Preferred Stock (110) -
Conversion of Series 2 Preferred Stock (8) -
Tax adjustment resulting from exercise
of stock options 22,280 -
Cash for fractional shares (15) -
Shares issued for acquisitions 12,844 -
Net income - 267,660
Cash dividends on preferred
stock - (33,191)
-------------------------
Balances, December 31, 1995 $ 1,898,310 $ 287,032
=========================
The accompanying notes are an integral part of these statements.
F-6
31
WORLDCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
For the Year Ended December 31,
------------------------------------------
1995 1994 1993
------------ ----------- ----------
Cash flows from operating activities:
Net income (loss) $ 267,660 $ (122,158) $ 116,372
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary item - - 7,949
Depreciation 185,702 97,089 64,239
Amortization 125,563 66,739 37,620
Provision for losses on accounts receivable 39,175 58,952 25,231
Provision for shareholder litigation - 76,000 -
Provision to reduce the carrying value of certain assets - 48,500 -
Provision for deferred income taxes 171,463 24,961 53,259
Change in assets and liabilities, net of effect of
business combinations:
Accounts receivable (77,512) (148,053) (79,981)
Income taxes, net (7,160) 21,215 18,362
Other current assets 2,182 (14,739) 3,622
Accrued line costs 63,830 18,629 49,585
Shareholder litigation reserve (75,000) 75,000 -
Accounts payable and other current liabilities (69,684) 26,601 (137,065)
Other (10,539) 17,905 (185)
------------ ----------- ----------
Net cash provided by operating activities 615,680 246,641 159,008
------------ ----------- ----------
Cash flows from investing activities:
Capital expenditures (355,841) (192,162) (83,957)
Sale (purchase) of short-term investments, net 1,000 11,672 (12,672)
Acquisitions and related costs (2,766,355) (91,750) (284,397)
Increase in intangible assets (46,062) (14,877) (17,070)
Proceeds from disposition of other assets 21,294 - -
Increase in other assets (8,171) (8,585) (9,161)
Decrease in other liabilities (62,604) (30,947) (7,379)
Payment for line installation costs (20,949) (11,071) (13,936)
Proceeds from sale of property and equipment 13,676 2,000 6,118
------------ ----------- ----------
Net cash used in investing activities (3,224,012) (335,720) (422,454)
------------ ----------- ----------
Cash flows from financing activities:
Borrowings 2,702,650 77,600 391,050
Principal payments on debt (129,224) (40,707) (126,178)
Common stock issuance 90,532 38,431 71,238
Dividends paid on preferred stock (33,191) (27,766) (11,683)
Other (15) - (5,667)
------------ ----------- ----------
Net cash provided by financing activities 2,630,752 47,558 318,760
------------ ----------- ----------
Net increase (decrease) in cash and cash equivalents 22,420 (41,521) 55,314
Cash and cash equivalents at beginning of period 19,259 60,780 5,466
------------ ----------- ----------
Cash and cash equivalents at end of period $ 41,679 $ 19,259 $ 60,780
============ ----------- ----------
The accompanying notes are an integral part of these statements.
F-7
32
WORLDCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(1) THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES -
DESCRIPTION OF BUSINESS AND ORGANIZATION:
WorldCom, Inc., a Georgia corporation ("WorldCom" or the "Company"), is one of
the four largest long distance telecommunications companies in the United
States, serving customers domestically and internationally. The Company
provides long distance telecommunications services to business, consumer and
other carrier customers, through its network of fiber optic cables, digital
microwave, and fixed and transportable satellite earth stations, with service
to points throughout the nation and the world. The products and services
provided by WorldCom include: switched and dedicated long distance products,
800 services, calling cards, operator services, domestic and international
private lines, broadband data services, debit cards, conference calling,
advanced billing systems, enhanced faxed and data connections, television and
radio transmission, and mobile satellite communications.
THE MERGERS:
On December 30, 1994, WorldCom, Inc., through a wholly owned subsidiary, merged
with IDB Communications Group, Inc., a Delaware corporation ("IDB"), and in
connection therewith issued approximately 35,881,000 shares of WorldCom common
stock, (the "Common Stock"), for all of the outstanding shares of IDB common
stock, (the "IDB Merger"). In addition, WorldCom assumed, on a subordinated
basis, jointly and severally with IDB, the obligations of IDB to pay the
principal of and interest on $195.5 million 5% convertible subordinated notes
due 2003, issued by IDB. The IDB Merger was accounted for as a
pooling-of-interests and, accordingly, the Company's financial statements for
periods prior to the IDB Merger have been restated to include the results of
IDB for all periods presented.
On September 15, 1993, a three-way merger occurred whereby (i) Metromedia
Communications Corporation, a Delaware corporation ("MCC"), merged with and
into Resurgens Communications Group, Inc., a Georgia corporation ("Resurgens"),
and (ii) LDDS Communications, Inc., a Tennessee corporation ("LDDS-TN"), merged
with and into Resurgens (the "Prior Mergers").
At the time of the Prior Mergers, the name of Resurgens, the legal survivor,
was changed to LDDS Communications, Inc., and the separate corporate existences
of LDDS-TN and MCC terminated. For accounting purposes, however, LDDS-TN was
the survivor because the former shareholders of LDDS-TN acquired majority
ownership of the Company. Accordingly, unless otherwise indicated, all
historical information presented herein reflects the operations of LDDS-TN. At
the annual meeting of shareholders held May 25, 1995, shareholders of LDDS
Communications, Inc. voted to change the name of the Company to WorldCom, Inc.,
effective immediately. Information in this document has also been revised to
reflect the stock splits of the Company's Common Stock.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany transactions and balances have
been eliminated in consolidation. Investments in joint ventures and other
equity investments in which the Company owns a 20% to 50% ownership interest,
are accounted for by the equity method. Investments of less than 20% ownership
are recorded at cost.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts for cash, short-term investments, accounts receivable,
notes receivable, accounts payable and accrued liabilities approximate their
fair value. The fair value of the long-term debt is determined based on the
cash flows from such financial instruments discounted at the Company's
estimated current interest rate to enter into similar financial instruments.
At December 31, 1995, the fair value of the 5.0% convertible subordinated notes
was $244.1 million. The recorded amounts for all other long-term debt of the
Company approximate fair values.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost. Depreciation is provided for
financial reporting purposes using the straight-line method over the following
estimated useful lives:
Transmission equipment 5 to 30 years
Communications equipment 5 to 25 years
Furniture, fixtures and other 5 to 30 years
Maintenance and repairs are expensed as incurred. Replacements and betterments
are capitalized. The cost and related reserves of assets sold or retired are
removed from the accounts, and any resulting gain or loss is reflected in
results of operations.
F-8
33
The Company constructs certain of its own transmission systems and related
facilities. All internal costs directly related to the construction of such
facilities, including interest and salaries of certain employees, are
capitalized. Such costs were $14.7 million ($4.9 million in interest), $6.8
million ($1.2 million in interest), and $8.3 million ($3.1 million in interest)
in 1995, 1994, and 1993, respectively.
EXCESS OF COST OVER NET TANGIBLE ASSETS ACQUIRED:
The major classes of intangible assets are summarized below (in thousands):
December 31,
Amortization ---------------------------
Period 1995 1994
------------- ---------- ------------
Goodwill 40 years $4,417,964 $2,076,174
Customer acquisition cost 7 to 10 years 82,539 75,245
Other intangibles 5 years 96,147 61,290
---------- ----------
4,596,650 2,212,709
Less accumulated amortization 303,898 142,000
---------- ----------
$4,292,752 $2,070,709
========== ==========
Intangible assets are amortized using the straight-line method for the periods
noted above.
Goodwill is recognized for the excess of the purchase price of the various
business combinations over the value of the identifiable net assets and
customer bases. See Note 2. Realization of acquisition-related intangibles,
including goodwill, is periodically assessed by the management of the Company
based on the current and expected future profitability and cash flows of
acquired companies and their contribution to the overall operations of
WorldCom.
Customer acquisition costs represent costs incurred as a result of purchase
business combinations and are recorded based upon the estimated value of the
customer bases acquired. See Note 2.
LINE INSTALLATION COSTS:
The Company defers the costs associated with the installation of local access
lines and other network facilities. Amortization of these costs is provided
over five years using the straight-line method. Accumulated amortization on
line installation costs was $41.0 million and $29.5 million as of December 31,
1995 and 1994, respectively.
OTHER LONG-TERM LIABILITIES:
At December 31, 1995 and 1994, other long-term liabilities includes $149.3
million and $80.1 million, respectively, related to estimated costs of closing
duplicate facilities, and other non-recurring duplicative costs expected to be
incurred as the result of various acquisitions and mergers. See Note 2.
RECOGNITION OF REVENUES:
The Company records revenues for long distance telecommunications sales at the
time of customer usage. The Company also performs systems integration services
consisting of design and installation of transmission equipment and systems for
its customers. Revenues and related costs for these services are recorded
under the percentage of completion method.
ACCOUNTING FOR INTERNATIONAL LONG DISTANCE TRAFFIC:
The Company enters into operating agreements with telecommunications carriers
in foreign countries under which international long distance traffic is both
delivered and received. Under these agreements, the foreign carriers are
obligated to adhere to the policy of the Federal Communications Commission
("FCC") whereby traffic from the foreign country is routed to international
carriers, of which the Company is one, in the same proportion as traffic
carried into the foreign country. Mutually exchanged traffic between the
Company and foreign carriers is settled in cash through a formal settlement
policy that generally extends over a six-month period at an agreed upon tariff
rate. Although the Company can estimate the amount of inbound traffic it will
receive, under the FCC's proportional share policy, it generally must wait up
to six months before it actually receives the inbound traffic.
The Company utilizes the net settlement concept that is inherent in the
operating agreements as the basis for its accounting policy for international
long distance traffic. Under this approach, the margin on outbound calls
(recognizing that the proportionate return of the actual inbound call is
received generally on a six-month lag) is normalized to reflect the implicit
overall earning rate concept of the contract. Accordingly, a portion of the
outbound call fee due the foreign carrier is deferred and accounted for as a
cost attributable to the revenue
F-9
34
associated with the inbound call. All costs deferred are expensed six months
later and offset against the revenues recognized upon receipt of return
traffic.
LINE COSTS:
Line costs primarily include right-of-way payments and all payments to local
exchange carriers ("LECs"), interexchange carriers and post telephone and
telegraph administrations ("PTTs") primarily for access and transport charges.
INCOME TAXES:
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. SFAS 109
has as its basic objective the recognition of current and deferred income tax
assets and liabilities based upon all events that have been recognized in the
consolidated financial statements as measured by the provisions of the enacted
tax laws. See Note 9.
EARNINGS PER SHARE:
For the years ended December 31, 1995 and 1993, earnings per share are
calculated based on the weighted average number of shares outstanding during
the period plus the dilutive effect of stock options and warrants determined
using the treasury stock method. For the year ended December 31, 1994,
earnings per share were calculated based on the weighted average number of
shares outstanding during the period. The effect of common stock equivalents
was not considered in the 1994 period because the effect of such options and
warrants would have been anti-dilutive.
Average common shares and common equivalent shares utilized were 193,449,000;
157,805,000; and 137,927,000, respectively, for primary earnings per share and
201,495,000; 157,805,000; and 140,796,000, respectively, for fully diluted
earnings per share, for the years ended December 31, 1995, 1994 and 1993.
STOCK SPLITS:
On December 7, 1992, the Board of Directors authorized a 3-for-2 stock split in
the form of a 50% stock dividend which was distributed on January 14, 1993 to
shareholders of record on December 21, 1992. On November 18, 1993, the Board
of Directors authorized a 2-for-1 stock split in the form of a 100% stock
dividend which was distributed on January 6, 1994, to shareholders of record on
December 7, 1993. Upon effectiveness of the Prior Mergers on September 15,
1993, each share of the outstanding common stock of LDDS-TN was converted into
the right to receive 0.9595 shares of the Common Stock.
All per share data and numbers of common shares have been retroactively
restated to reflect the effect of the stock splits, stock dividends and the
exchange ratio of 0.9595.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS:
The Company considers cash in banks and short-term investments with original
maturities of three months or less as cash and cash equivalents. Highly liquid
investments with original maturities beyond three months are classified as
short-term investments and carried at fair value, which approximates cost.
Short-term investments principally consist of tax exempt municipal bonds and
corporate bonds.
RECENTLY ISSUED ACCOUNTING STANDARDS:
In March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." This Statement establishes accounting standards for
the impairment of long-lived assets, certain identifiable intangibles and
goodwill related to those assets to be held and used and for long-lived assets
and certain identifiable intangibles to be disposed of. This Statement is
effective for financial statements for fiscal years beginning after December
15, 1995. WorldCom believes that the adoption of this standard will not have a
material effect on the Company's consolidated results of operations or
financial position.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." This Statement establishes financial accounting and reporting
standards for stock-based employee compensation plans and is effective for
fiscal years beginning after December 15, 1995. The Company expects to
continue to apply the accounting provisions of APB Opinion 25 in determining
its net income. However, additional disclosures will be made to disclose the
estimated value of compensation expense under the method established by SFAS
No. 123.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that effect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the period reported. Actual results could differ
from those estimates. Estimates are used when accounting for long-term
contracts, allowance for doubtful accounts, depreciation and amortization,
taxes, restructuring reserves and contingencies.
F-10
35
RECLASSIFICATIONS:
Certain consolidated financial statement amounts have been reclassified for
consistent presentation.
(2) BUSINESS COMBINATIONS -
On January 5, 1995, WorldCom completed the acquisition of Williams
Telecommunications Group, Inc. ("WilTel"), a subsidiary of The Williams
Companies, Inc. ("Williams"), for approximately $2.5 billion in cash (the
"WilTel Acquisition"). Through this purchase, the Company acquired a
nationwide common carrier network of approximately 11,000 miles of fiber optic
cable and digital microwave facilities. The funds paid to Williams were
obtained by WorldCom under a new credit facility entered into on December 21,
1994. See Note 4.
In 1993, upon effectiveness of the Prior Mergers, each share of the outstanding
common stock of LDDS-TN was converted into the right to receive 0.9595 shares
of Common Stock. The 500,000 shares of LDDS-TN Series B 6.5% Cumulative Senior
Perpetual Convertible Preferred Stock outstanding were converted into 2,000,000
shares of WorldCom Series 2 6.5% Cumulative Senior Perpetual Convertible
Preferred Stock having a liquidation value of $25 per share and a conversion
price of $11.81171 per share (the "Series 2 Preferred Stock"). As a result of
the consummation of the Prior Mergers, Metromedia Company ("Metromedia"), the
sole stockholder of MCC, received 2,758,620 shares of the Common Stock,
10,896,785 shares of WorldCom Series 1 $2.25 Cumulative Senior Perpetual
Convertible Preferred Stock having a liquidation value of $50 per share and a
conversion price of $24.9046875 per share (the "Series 1 Preferred Stock"),
warrants to purchase 5,000,400 shares of the Common Stock, and $150.0 million
in cash. The common stock of Resurgens was unchanged in the Prior Mergers.
For accounting purposes, LDDS-TN was the survivor because the former
shareholders of LDDS-TN acquired majority ownership of the Company. The Prior
Mergers have been accounted for as purchases, and the excess purchase price
over net tangible assets acquired has been recorded based upon an estimate of
fair values of assets acquired and liabilities assumed.
The Company has acquired other long distance companies offering similar or
complementary services to those offered by the Company. Such acquisitions have
been accomplished through the purchase of the outstanding stock or assets of
the acquired entity for cash, notes, shares of the Company's common stock, or a
combination thereof. The cash portion of acquisition costs has generally been
financed through the Company's bank loan agreements. See Note 4.
Most of the acquisitions have been accounted for as purchases and resulted in
an excess of the purchase costs over the net tangible assets acquired. These
costs, composed primarily of goodwill, are amortized over 40 years using the
straight-line method. The results of those purchased businesses have been
included since the dates of acquisition. Business combinations which have been
accounted for as poolings-of-interests have been included in all periods
presented. The table below sets forth information concerning certain other
recent acquisitions which were accounted for as purchases.
Purchase Price Allocation of Excess Costs
--------------------------------- Over Tangible Assets Acquired
Shares Issued -------------------------------
Acquisition ------------------- Customer
Acquired Entity Date Cash Number Value Acquisition Cost Goodwill
- --------------- -------------- ------ ------ ------ ---------------- --------
(In thousands)
Dial-Net, Inc. March 1993 $ 31,200 2,746 $ 50,095 $ 10,139 $ 91,255
("Dial-Net")
MCC/Resurgens September 1993 150,000 * 1,097,915 - 1,269,105
TRT Communications, Inc. ("TRT") September 1993 1,000 6,760 79,000 - 39,000
Williams Telecommunications Group, Inc. January 1995 2,500,000 - - - 2,216,909
("WilTel")
- -----------------------------------------
* See the second paragraph of Note 2 for a description of the common and
preferred shares and warrants issued.
In addition to those acquisitions listed above, the Company or its predecessors
completed several smaller acquisitions during 1993 through 1995.
The following unaudited pro forma combined results of operations for the
Company assume that the WilTel Acquisition as well as the 1993 acquisitions of
Dial-Net, Resurgens, MCC and TRT were completed on January 1, 1993.
F-11
36
For the Year Ended December 31,
-------------------------------
1994 1993
---------- ----------
(In thousands, except per share data)
Revenues $3,067,994 $2,631,740
Loss before extraordinary item (202,933) (3,385)
Loss applicable to common
shareholders (202,933) (11,334)
Loss per common share:
Loss before extraordinary item (1.29) (0.02)
Net loss (1.29) (0.08)
These pro forma amounts represent the historical operating results of these
acquired entities combined with those of the Company with appropriate
adjustments which give effect to interest expense, amortization and the common
shares issued. These pro forma amounts are not necessarily indicative of
operating results which would have occurred if Dial-Net, Resurgens, MCC, TRT
and the WilTel Acquisition had been operated by current management during the
periods presented because these amounts do not reflect full network
optimization and the synergistic effect on operating, selling, general and
administrative expenses.
(3) DIRECT MERGER COSTS, RESTRUCTURING AND OTHER CHARGES -
RESTRUCTURING AND OTHER CHARGES:
As a result of the IDB Merger, the Company initiated plans to reorganize and
restructure its management and operational organization and facilities to
eliminate duplicate personnel, physical facilities and service capacity, to
abandon certain products and marketing activities, and to take further
advantage of the synergies available to the combined entities. Accordingly,
the Company charged to operations during the fourth quarter of 1994, the
estimated costs of such reorganization and restructuring activities, including
employee severance, physical facility abandonment, and duplicate service
capacity.
During 1993, plans were approved to reduce IDB's cost structure and to improve
productivity. Such plans included a reduction in the number of employees and
the disposition of certain assets.
The following table reflects the components of the significant items shown as
restructuring and other charges in 1994 and 1993 (in thousands):
For the Year Ended December 31,
-----------------------------------
1994 1993
--------- --------
Severance costs $ 18,702 $ 691
Duplicate facilities and other restructuring 13,990 -
Provision for settlement of certain legal issues 8,000 -
Reduction in carrying amount of certain assets 2,423 4,954
Other 589 275
---------- --------
$ 43,704 $ 5,920
======== =======
As of December 31, 1995 and 1994, the accompanying consolidated financial
statements reflect $5.3 million and $25.8 million, respectively, in accrued
restructuring costs and $5.6 million and $14.7 million, respectively, in other
long- term liabilities, in connection with the IDB Merger.
DIRECT MERGER COSTS:
During 1994, the Company recorded direct merger costs of $15.0 million related
to the IDB Merger. These costs included professional fees, proxy solicitation
costs, travel and related expenses and certain other direct costs attributable
to these mergers.
PROVISION TO REDUCE THE CARRYING VALUE OF CERTAIN ASSETS:
During 1994 several events occurred which caused the Company to evaluate the
realization of its investment in the assets of IDB Broadcast. These events
included a proposed but never consummated sale of IDB Broadcast at amounts
significantly below book value, and the continued emergence of
telecommunications as the core business of IDB (making IDB Broadcast a non-core
operation). These factors, combined with broad economic factors adversely
impacting broadcast assets in general, have caused a decline in the value of
the Company's investment in these assets.
The Company has assessed the impact of these factors relative to its ability to
recover the recorded values of these assets, and determined that such values
should be reduced. Accordingly, the Company recorded adjustments of $48.5
million, to reduce the carrying value of these
F-12
37
broadcast assets (primarily intangible assets and property and equipment) to
the Company's best estimate of the net realizable value. During 1995, the
Company sold its simulcasting operations and entered into an agreement to
outsource the management of the remaining IDB Broadcast operations.
(4) LONG-TERM DEBT -
Long-term debt outstanding consists of the following (in thousands):
December 31,
-----------------------
1995 1994
---------- ---------
Reducing revolving credit agreements $3,171,500 $ 468,850
Convertible subordinated notes 195,500 195,500
Senior notes - 123,000
Other debt (maturing through 2000) 24,281 6,651
---------- ---------
3,391,281 794,001
Less: Short-term debt and current maturities 1,112,853 5,996
---------- ---------
$2,278,428 $ 788,005
========== =========
In December 1994, WorldCom entered into new credit facilities to finance the
WilTel Acquisition, refinance WorldCom's existing credit facilities and provide
additional working capital. The credit facility is comprised of a $2.16
billion, six-year reducing revolving credit facility (the "Revolving Facility
Commitment") and a $1.25 billion, two-year term facility (the "Term Principal
Debt"). The maximum principal amount permitted to be outstanding under the
Revolving Facility Commitment will be reduced at the end of each fiscal
quarter, commencing September 30, 1996, in varying amounts, and the outstanding
balance must be paid in full on December 31, 2000. The Term Principal Debt
matures in a single installment on December 31, 1996. The Revolving Facility
Commitment and the Term Principal Debt bear interest, payable quarterly, at
variable rates selected by the Company, under the terms of the credit
facilities. The Company is permitted to choose from several interest rate
options including: a Base Rate plus applicable margin, the London Interbank
Offering Rate ("LIBOR") plus applicable margin, or, for the Revolving Facility
Commitment only, any Competitive Bid Rate. The applicable margin varies from
0% to 3/8% for Base Rate Borrowings and 1/2% to 1.5% for LIBOR Rate Borrowings
from time to time based upon the lower of a specified financial test or
WorldCom's long-term debt rating. The credit facility is unsecured and
requires compliance with certain financial and other operating covenants which
limit, among other things, the incurrence of additional indebtedness by
WorldCom and restricts the payment of cash dividends to WorldCom's
shareholders. The credit facility is also subject to an annual commitment fee
not to exceed 0.375% of any unborrowed portion of the credit facility.
The $3.41 billion credit facility was utilized by the Company on January 5,
1995, in conjunction with the WilTel Acquisition and all debt outstanding under
WorldCom's previous credit facilities and the $123.0 million in senior notes
was repaid. For the year ended December 31, 1995, the weighted average
interest rate under the credit facilities was 7.3%. The aggregate principal
repayments and reductions required in each of the years ending December 31,
1995 through December 31, 2000 and thereafter are as follows (in thousands):
1996 $1,112,853
1997 300,868
1998 513,738
1999 500,783
2000 767,539
Thereafter 195,500
----------
$3,391,281
==========
In February 1995, in the event of rising interest rates, the Company entered
into financial hedging agreements with various financial institutions, in
connection with requirements under the credit facility. The hedging agreements
establish capped fixed rates of interest ranging from 8.25% to 8.3125% on an
aggregate notional value of $1.7 billion. If interest rates do not reach this
cap, the Company's interest rate remains variable. These contracts range in
duration from one to two years with $845.4 million maturing in each of the
years ending 1996 and 1997. The $845.4 million which matured in 1996 was
replaced with a hedging agreement which caps the fixed rate of interest at
7.43% and matures in 1997.
On August 20, 1993, IDB issued $195.5 million of convertible subordinated notes
(the "Notes"), proceeds of which were approximately $189.6 million net of
direct fees and expenses. Interest on the Notes is payable semiannually on
February 15 and August 15 of each year at an interest rate of 5% per annum.
The Notes are convertible at the option of the holder at anytime prior to
maturity into WorldCom Common Stock at approximately $38.07 per share. The
Notes include certain anti-dilution rights and rights with regard to certain
changes in control. At its option, the Company may redeem the Notes at any
time after August 1996, but will incur a redemption premium which ranges from
103.5% in 1996 declining to 100% on the maturity date. The Notes mature and
are due in full on August 15, 2003.
F-13
38
IDB used the proceeds of this issue, together with the proceeds of a May 1993
common stock issuance to repay and defease substantially all of its then
existing debt. The repayment and defeasance of this debt resulted in an
extraordinary charge of $7.9 million, net of income tax benefit of $5.6
million, which represents payment of debt redemption premiums and the write-off
of unamortized debt issuance costs.
(5) PREFERRED STOCK -
As a result of the Prior Mergers, 10,896,785 shares of the Series 1 Preferred
Stock were issued to Metromedia, the sole stockholder of MCC. Also in 1993,
the IDB convertible preferred stock issued in connection with the acquisition
of World Communications, Inc. was converted into common stock of IDB.
In May 1992, the Company issued 500,000 shares of no par, 6.5% cumulative
senior perpetual convertible preferred stock for $50 million. The net proceeds
of the issue ($46.6 million after issuance costs) were used to reduce
outstanding indebtedness. These shares were converted into 2,000,000 shares of
the Series 2 Preferred Stock upon effectiveness of the Prior Mergers.
The Series 2 Preferred Stock has a liquidation value of $25 per share, a
conversion price of $11.81171 per share and pays dividends at the rate of 6.5%
annually, payable quarterly. There is no established public trading market for
the Series 2 Preferred Stock. Except under certain circumstances, the Series 2
Preferred Stock may not be redeemed by the Company prior to June 5, 1996.
Thereafter, the Series 2 Preferred Stock may be redeemed in whole or in part in
integral multiples of $10.0 million, at prices which include premiums over the
liquidation preference of $25 per share, which prices range from 108% in 1996
declining to 100% on and after June 5, 2002.
In March 1996, the Company's Board of Directors approved a resolution
authorizing the Company to redeem on June 5, 1996 or such later date as the
president of the Company may determine, all outstanding shares of the Series 2
Preferred Stock, including all accrued and unpaid dividends thereon.
In August 1995, Metromedia converted its Series 1 Preferred Stock into
21,876,976 shares of WorldCom Common Stock. In connection with the preferred
stock conversion, WorldCom made a non-recurring payment of $15.0 million to
Metromedia, representing a discount to the minimum nominal dividends that would
have been payable on the Series 1 Preferred Stock prior to the September 15,
1996 optional call date of approximately $26.6 million (which amount includes
an annual dividend requirement of $24.5 million plus accrued dividends to such
call date).
The holders of the Series 2 Preferred Stock generally have the right to vote
together as a single class with holders of Common Stock based on one vote for
each share of Common Stock issuable upon conversion of the respective series of
preferred stock. The approval of the holders of two-thirds of the shares of
Series 2 Preferred Stock is required for certain extraordinary transactions or,
alternatively, such shares must be redeemed at a specified premium.
(6) LEASES AND OTHER COMMITMENTS -
The Company leases office facilities and certain equipment under noncancellable
operating leases having initial or remaining terms of more than one year. In
addition, the Company leases a right-of-way from a railroad company under a
fifteen-year lease with three fifteen-year renewal options. Rental expense
under these operating leases was $45.1 million, $30.9 million, and $29.9
million in 1995, 1994 and 1993, respectively.
In prior years, WilTel sold to independent entities and leased back its
microwave system and its Kansas City to Los Angeles fiber optic system over
primary lease terms ranging from 15 to 20 years. The leases have renewal
options permitting the Company to extend the leases for terms expiring during
the years 2012 to 2019 and purchase options based upon the fair market value.
The annual lease commitments pursuant to the sale-leaseback are included below
under the heading Telecommunication Facilities.
At the end of 1995, minimum lease payments under noncancellable operating
leases and commitments were as follows (in thousands):
MINIMUM LEASE PAYMENTS
-------------------------------------------------
OFFICE
FACILITIES AND TELECOMMUNICATION
YEAR EQUIPMENT FACILITIES TOTAL
---- --------- ---------- -----
1996 $ 43,442 $ 53,963 $ 97,405
1997 37,539 37,495 75,034
1998 33,904 35,519 69,423
1999 28,962 29,792 58,754
2000 22,047 29,519 51,566
F-14
39
Certain of the Company's facility leases include renewal options, and all
leases include provisions for rent escalation to reflect increased operating
costs and/or require the Company to pay certain maintenance and utility costs.
WorldCom also has agreements with a company that installs, operates and
maintains certain WorldCom data processing, telecommunications and billing
systems. The agreements expire in 2000 and are renewable on an annual basis
thereafter. The agreements require minimum annual payments of approximately
$16.6 million.
During 1995, the Company amended WilTel's existing $80.0 million receivables
purchase agreement to include certain additional receivables and received
additional proceeds of $215.4 million. The Company used these proceeds to
reduce the outstanding debt under the Company's credit facilities and provide
additional working capital. As of December 31, 1995, the purchaser owned an
undivided interest in $608.9 million pool of receivables which includes the
$295.4 million sold. The aggregate purchase limit under this agreement was
$300.0 million at December 31, 1995.
(7) CONTINGENCIES -
IDB RELATED INVESTIGATIONS. On June 9, 1994, the SEC issued a formal order of
investigation concerning certain matters, including IDB's financial position,
books and records and internal controls and trading in IDB securities on the
basis of non-public information. The SEC has issued subpoenas to WorldCom, IDB
and others, including certain former officers of IDB, in connection with its
investigation. The NASD and other self-regulatory bodies have also made
inquiries of IDB concerning similar matters.
The U.S. Attorney's Office for the Central District of California has issued
grand jury subpoenas to IDB seeking documents relating to IDB's first quarter
of 1994 results, the Deloitte & Touche LLP resignation, trading in IDB
securities and other matters, including information concerning certain entities
in which certain former officers of IDB are personal investors and transactions
between such entities and IDB. IDB has been informed that a criminal
investigation has commenced. The U.S. Attorney's Office has issued a grand
jury subpoena to WorldCom arising out of the same investigation seeking certain
documents relating to IDB.
AT&T PATENTS. AT&T has claimed that a number of long distance carriers,
including the Company, make unauthorized use of AT&T patents in the provision
of some of the carrier's long distance services. Effective December 15, 1995,
the Company and AT&T entered into a two year patent licensing agreement which,
among other things, released all claims by AT&T against the Company relating to
any alleged patent infringement.
OTHER. On February 8, 1996, President Clinton signed legislation that: will,
without limitation, permit the BOCs to provide domestic and international long
distance services upon a finding by the FCC that the petitioning BOC has
satisfied certain criteria for opening up its local exchange network to
competition and that its provision of long distance services would further the
public interest; removes existing barriers to entry into local service markets;
significantly changes the manner in which carrier-to-carrier arrangements are
regulated at the federal and state level; establishes procedures to revise
universal service standards; and, establishes penalties for unauthorized
switching of customers. The Company cannot predict the effect such legislation
will have on the Company or the industry. However, the Company believes that
it is positioned to take advantage of business opportunities in the rapidly
changing telecommunications market.
The Company is involved in other 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.
(8) EMPLOYEE BENEFIT PLANS -
STOCK OPTION PLANS:
The Company has several stock option plans under which options to acquire up to
30.3 million shares may be granted to directors, officers and certain employees
of the Company. Terms and conditions of the Company's options, including
exercise price and the period in which options are exercisable, generally are
at the discretion of the Compensation and Stock Option Committee of the Board
of Directors; however, no options are exercisable for more than 10 years after
date of grant. As of December 31, 1995, 24.8 million options had been granted
under these plans, and 5.1 million options were fully exercisable.
Additional information regarding options and warrants granted and outstanding
is summarized below:
F-15
40
Number of Exercise
Options Price
------------ -------------------
Balance, December 31, 1992 7,787,354 $ 0.29 - $ 10.85
Granted to employees/directors 2,665,875 17.46 - 30.13
Assumed in connection with acquisition 5,986,934 1.76 - 8.00
Granted in connection with acquisition 5,200,400 7.75 - 23.25
Exercised (5,650,547) 1.45 - 17.46
Expired or canceled (28,571) 0.29 - 26.46
----------
Balance, December 31, 1993 15,961,445 0.59 - 30.13
Granted to employees/directors 1,750,710 17.75 - 19.25
Granted in connection with acquisition 61,550 22.02 - 23.00
Exercised (3,209,233) 0.59 - 17.88
Expired or canceled (167,417) 1.76 - 8.00
----------
Balance, December 31, 1994 14,397,055 0.59 - 30.13
Granted to employees/directors 6,431,438 20.69 - 33.88
Granted in connection with acquisition 1,152,002 18.39 - 21.91
Exercised (9,482,517) 0.59 - 30.13
Expired or canceled (895,890) 3.17 - 30.13
----------
Balance, December 31, 1995 11,602,088 $ 0.67 - $ 33.88
==========
401(K) PLANS:
The Company and its subsidiaries offer its qualified employees the opportunity
to participate in one of its defined contribution retirement plans qualifying
under the provisions of Section 401(k) of the Internal Revenue Code. Each
employee may contribute on a tax deferred basis a portion of annual earnings
not to exceed $9,240. The Company matches individual employee contributions up
to a maximum level which in no case exceeds 6% of the employee's compensation.
Expenses recorded by the Company relating to its 401(k) plans were $3.6
million, $3.1 million, and $2.2 million for the years ended December 31, 1995,
1994, and 1993, respectively.
(9) INCOME TAXES -
The Company accounts for income taxes in accordance with SFAS No. 109
"Accounting for Income Taxes." When SFAS No. 109 was adopted, the cumulative
effect of this change in accounting principle was not material to the Company.
The provision for income taxes is composed of the following (in thousands):
1995 1994 1993
--------- ------- --------
Current $ (336) $48,855 $ 32,340
Deferred 171,463 24,961 53,259
-------- ------- --------
Total provision for income taxes $171,127 $73,816 $ 85,599
======== ======= ========
The following is a reconciliation of the provisions for income taxes to the
expected amounts using the statutory rate:
1995 1994 1993
---- ---- ----
Expected statutory amount 35.0% (35.0)% 35.0 %
Nondeductible amortization of excess of
cost over net tangible assets acquired 4.5 37.1 3.8
State income taxes 2.9 5.7 2.0
Effect of Company Owned Life Insurance (0.4) (3.4) (0.6)
Direct merger, restructuring and other charges - 20.7 -
Writedown of assets - 26.1 -
Valuation allowance (1.6) 96.6 -
Other (1.4) 4.9 0.6
---- ----- ----
Actual tax provision 39.0% 152.7 % 40.8 %
==== ===== ====
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes and the impact of available
net operating loss carryforwards.
F-16
41
At December 31, 1995, the Company had unused net operating loss ("NOL")
carryforwards of approximately $447.0 million which expire in various amounts
during the years 2000 through 2009. These NOL carryforwards which include
$90.0 million generated by IDB in 1994 are primarily attributable to the
preacquisition operations of acquired companies. These NOL carryforwards
result in a deferred tax asset of approximately $168.1 million at December 31,
1995. A valuation allowance of $101.7 million has been established related to
deferred tax assets due to the uncertainty of realizing the full benefit of the
NOL carryforwards. In evaluating the amount of valuation allowance needed, the
Company considers the acquired companies' prior operating results and future
plans and expectations. The utilization period of the NOL carryforwards and
the turnaround period of other temporary differences are also considered.
Approximately $168.1 million of the Company's deferred tax assets are related
to preacquisition NOL carryforwards or temporary differences attributable to
entities acquired in transactions accounted for as purchases. Accordingly, any
future reductions in the valuation allowance related to such deferred tax
assets will result in a corresponding reduction in goodwill. If, however,
subsequent events or conditions dictate an increase in the valuation allowance
attributable to such deferred tax assets, income tax expense for the period of
the increase will be increased accordingly.
The following is a summary of the significant components of the Company's
deferred tax assets and liabilities as of December 31, 1995 and 1994 (in
thousands).
December 31,
--------------------------------------------------------
1995 1994
------------------------- -------------------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
Allowance for bad debts $ 22,767 $ - $ 7,740 $ -
Fixed assets - (56,129) - (35,926)
Intangible assets - (30,777) - -
Leases 3,796 - 3,981 -
Line installation costs - (13,303) - (10,817)
Accrued liabilities 6,790 - 19,164 -
NOL carryforwards 168,057 - 192,309 -
Restructuring and other charges - - 11,339 -
Other 3,093 (11,888) 10,604 (8,571)
--------- --------- -------- ---------
204,503 (112,097) 245,137 (55,314)
Valuation allowance (101,679) - (113,016) -
--------- --------- --------- ---------
$ 102,824 $(112,097) $ 132,121 $ (55,314)
========= ========= ========= =========
In 1995, the valuation allowance decreased by $11.3 million due to the
Company's ability to utilize net operating losses that management had
previously determined would not be utilized under a "more likely than not"
scenario. This is mainly attributable to the profitability of individual
operating units in 1995. Accordingly, the valuation allowance was reduced
resulting in reductions to goodwill and the provision for income taxes of $4.3
million and $7.0 million, respectively.
(10) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
Interest paid by the Company during the years ended December 31, 1995, 1994 and
1993 amounted to $224.3 million, $48.5 million, and $35.7 million,
respectively. Income taxes paid, net of refunds, during the years ended
December 31, 1995, 1994 and 1993 were $7.3 million, $12.8 million, and $10.6
million, respectively.
In conjunction with business combinations during the years ended December 31,
1995, 1994, and 1993 (see Note 2), assets acquired, liabilities assumed and
common stock issued were as follows (in thousands):
December 31,
---------------------------------------------
1995 1994 1993
------ ------ ------
Fair value of assets acquired $ 805,482 $ 13,522 $ 503,449
Excess of cost over net
tangible assets acquired 2,301,567 157,934 1,401,290
Liabilities assumed (327,844) (62,322) (389,961)
Common and treasury
stock issued (12,850) (17,384) (1,230,381)
----------- ---------- ------------
Cash paid $2,766,355 $ 91,750 $ 284,397
========== ========== ============
F-17
42
(11) UNAUDITED QUARTERLY FINANCIAL DATA -
Quarter Ended
---------------------------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
-------- ------- ------------ -----------
1995 1994 1995 1994 1995 1994 1995 1994
---- ---- ---- ---- ---- ---- ---- ----
(in thousands, except per share data)
Revenues $865, 035 $523,895 $894,719 $555,318 $933,560 $ 568,558 $946,561 $572,994
Operating income (loss) 150,538 76,313 162,755 56,748 177,811 25,062 184,944 (88,385)
Net income (loss) 53,963 40,091 61,815 19,812 72,613 (111,756) 79,269 (70,305)
Preferred dividend
requirement 6,939 6,938 6,936 6,952 3,811 6,938 505 6,938
Special dividend
payment to Series 1
preferred shareholder - - - - 15,000 - - -
Earnings (loss) per
common share:
Primary $0.28 $0.20 $0.33 $0.08 $0.29 $ (0.75) $0.40 $ (0.49)
Fully diluted 0.28 0.20 0.32 0.08 0.29 (0.75) 0.40 (0.49)
Earnings (loss) per
common share before
special dividend
payment to Series 1
preferred shareholder:
Primary $0.28 $0.20 $0.33 $0.08 $0.37 $ (0.75) $0.40 $ (0.49)
Fully diluted 0.28 0.20 0.32 0.08 0.37 (0.75) 0.40 (0.49)
In August 1995, Metromedia converted its Series 1 Preferred Stock into
21,876,976 shares of WorldCom Common Stock. In connection with the preferred
stock conversion, WorldCom made a non-recurring payment of $15.0 million to
Metromedia, representing a discount to the minimum nominal dividends that would
have been payable on the Series 1 Preferred Stock prior to the September 15,
1996 optional call date of approximately $26.6 million (which amount includes
an annual dividend requirement of $24.5 million plus accrued dividends to such
call date).
In the fourth quarter of 1994, the Company undertook restructuring and
reorganizational activities in connection with the IDB Merger. As a result,
direct merger costs of $15.0 million and restructuring charges of $43.7 million
were charged to operations. See Note 3.
In the third quarter of 1994, the Company recorded a $76.0 million charge
related to a shareholder litigation settlement. See Note 7. Also, in the
third and fourth quarters of 1994, the Company recorded adjustments of $35.0
million and $13.5 million, respectively, related to the write-down of certain
IDB Broadcast assets. See Note 3.
F-18
43
WORLDCOM, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
Additions
------------------------------- Deductions
Balance at Charged to Costs ------------
Beginning of and From Purchase Accounts Balance at
Description Period Expenses Transactions Written Off End of Period
----------- ---------------- ----------- -------------- ------------ -------------
Allowance for doubtful accounts:
Accounts Receivable
1995 $52,949 $39,175 $22,042 $56,186 $57,980
1994 26,613 58,952 1,090 33,706 52,949
1993 12,338 25,231 26,750 37,706 26,613
F-19
44
EXHIBIT INDEX
Exhibit Description Page
------- ----------- ----
No.
---
2.1 Agreement and Plan of Merger by and among IDB Communications Group, Inc., 123 Corp. and
the Company dated as of August 1, 1994 (incorporated herein by reference to Exhibit 2.1
to the Quarterly Report on Form 10-Q filed by the Company (File No. 0-11258) for the
quarter ended September 30, 1994)*
2.2 Stock Purchase Agreement by and among the Company, The Williams Companies, Inc. and WTG
Holdings, Inc., dated as of August 22, 1994 (incorporated herein by reference to Exhibit
2.2 to the Quarterly Report on Form 10-Q filed by LDDS (File No. 0-11258) for the quarter
ended September 30, 1994)*
2.3 Amendment Number 1 to the Stock Purchase Agreement by and among the Company, The Williams
Companies, Inc. and WTG Holdings, Inc., dated as of December 27, 1994 (incorporated
herein by reference to Exhibit 2.3 to LDDS' Current Report on Form 8-K dated December 30,
1994 (File No. 0-11258))
4.1 Amended and Restated Articles of Incorporation of the Company (including preferred stock
designations) as of September 15, 1993, as amended by Articles of Amendment dated May 26,
1994, as amended by Articles of Amendment dated May 25, 1995. ______
4.2 Bylaws of the Company (incorporated herein by reference to Exhibit 3(ii) to Amendment No.
1 to the Company's Registration Statement on Form S-3 (File No. 33-67340))
4.3 Stock Purchase Agreement between LDDS Communications, Inc., a Tennessee corporation
("LDDS-TN"), and The 1818 Fund, L.P., dated as of March 20, 1992 (incorporated herein by
reference to Exhibit 4.1 to the Quarterly Report on Form 10-Q filed by LDDS-TN (File No.
0-7116) for the quarter ended March 31, 1992)
4.4 Registration Rights Agreement between LDDS-TN and The 1818 Fund, L.P., dated as of May 6,
1992 (incorporated herein by reference to Exhibit 4.5 to the Quarterly Report on Form 10-
Q filed by LDDS-TN (File No. 0-7116) for the quarter ended June 30, 1992)
4.5 Agreement to Amend Stock Purchase Agreement and Registration Rights Agreement and to
Exchange Preferred Stock between LDDS-TN and The 1818 Fund, L.P., dated as of July 17,
1992 (incorporated herein by reference to LDDS-TN's Registration Statement on Form S-4
(File No. 33-49798))
4.6 Amendment to Stock Purchase Agreement and Registration Rights Agreement between LDDS-TN
and The 1818 Fund, L.P., dated as of September 1, 1993 (incorporated herein by reference
to Exhibit 4.5 to the Company's Registration Statement on Form S-3 (File No. 33-69122))
4.7 Registration Rights Agreement, dated as of December 4, 1992, between LDDS-TN and ALLTEL
Corporation (incorporated herein by reference to Exhibit 4.7 of the Company's Transition
Report on Form 10-K, as amended, for the period from December 31, 1992 to June 30, 1993
(File No. 1-10415) (the "Transition Report I"))
4.8 First Amendment to Registration Rights Agreement, dated as of September 14, 1993, between
LDDS-TN and ALLTEL Corporation (incorporated herein by reference to Exhibit 4.8 of the
Transition Report I)
4.9 Form of Option expiring July 7, 1996 (incorporated herein by reference to Exhibit 4.2 to
LDDS-TN's Registration Statement on Form S-3 (File No. 33-46556))
4.10 Agreement to Issue Warrants between Resurgens and John D. Phillips, dated June 30, 1989,
together with related form of Common Stock Purchase Warrant (incorporated herein by
reference to Exhibit 10.4 to Resurgens' Current Report on Form 8-K dated July 28, 1989
(File No. 1-10415))
4.11 Stock Registration Agreement among Resurgens, John D. Phillips and certain other holders
of Warrants, dated June 30, 1989 (incorporated herein by reference to Exhibit 10.6 to
Resurgens' Current Report on Form 8-K dated July 28, 1989 (File No. 1-10415))
4.12 Form of Selling Stockholder Agreement between Resurgens and certain Selling Stockholders,
dated 1993 (incorporated herein by reference to Exhibit 4.16 of the Company's Transition
Report on Form 10-K for the period from June 30, 1993 to December 31, 1993 (File No. 1-
10415) (the "Transition Report II"))
4.13 Form of First Amendment to Selling Stockholder Agreement between Resurgens and certain
Selling Stockholders, dated September 13, 1993 (incorporated herein by reference to
Exhibit 4.17 of the Transition Report I)
E-1
45
Exhibit Description Page
------- ----------- ----
No.
---
10.1 Credit Agreement among the Company, NationsBank of Texas, N.A., (Managing Agent and
Administrative Agent), The Bank of Nova Scotia, Credit Lyonnais Cayman Island Branch,
First Union National Bank of North Carolina, The First National Bank of Chicago and the
Long-Term Credit Bank of Japan, Limited (Agents) and the Lenders named therein (Lenders)
dated as of December 21, 1994 (incorporated herein by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K, dated December 30, 1994 (File No. 0-11258))
10.2 Agreement between LDDS-TN and MCI Telecommunications Corporation, effective as of
September 13, 1991 (incorporated herein by reference to the exhibits to LDDS-TN's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1991, as amended under
cover of Form 8 on February 3, 1992 (File No. 0-7116))
10.3 Amendment dated July 29, 1994, to the agreement between the Company and MCI
Telecommunications Corporation (incorporated herein by reference to Exhibit 10.2 to the
Quarterly Report on Form 10-Q filed by the Company (File No. 1-10415) for the quarter
ended June 30, 1994)
10.4 Amended and Restated Agreement for Information Technology Services between the Company
and Electronic Data Systems Corporation ("EDS"), dated December 8, 1993 ("EDS Agreement")
(incorporated herein by reference to Exhibit 10.5 of the Transition Report II) *
10.5 Amendment No. 1 to the EDS Agreement dated December 8, 1993 (incorporated herein by
reference to Exhibit 10.6 of the Transition Report II)
10.6 LDDS Communications, Inc. Second Amended and Restated 1990 Stock Option Plan
(incorporated herein by reference to LDDS-TN's Proxy Statement used in connection with
LDDS-TN's 1993 Annual Meeting of Shareholders (File No. 0-7116)) (compensatory plan)
10.7 LDDS Communications, Inc. 1988 Nonqualified Stock Option Plan (incorporated herein by
reference to the exhibits to LDDS-TN's Registration Statement on Form S-4 (File No. 33-
29051)) (compensatory plan)
10.8 LDDS Annual Performance Bonus Plan (incorporated by reference to the Company's Proxy
Statement used in connection with the Company's 1994 Annual Meeting of Shareholders (File
No. 1-10415)) (compensatory plan)
10.9 LDDS 1995 Special Performance Bonus Plan (incorporated herein by reference to Appendix E
to the Prospectus in the Company's Amendment No. 2 to Registration Statement on Form S-4
(File No. 33-56543)) (compensatory plan)
10.10 Employment Agreement between the Company and Gregory A. LeVert, dated December 5, 1994 ______
(compensatory plan)
10.11 Employment Agreement between The Williams Companies, Inc., Williams Telecommunications ______
Group, Inc. and Roy A. Wilkens dated as of January 1, 1990 as amended January 9, 1991 and
January 1, 1994 (compensatory plan)*
11.1 Computation of Per Share Earnings ______
12.1 Statement regarding computation of ratio of earnings to combined fixed charges and ______
preferred stock dividends.
21.1 Subsidiaries of the Company ______
23.1 Consent of Arthur Andersen LLP ______
23.2 Consent of Deloitte & Touche LLP ______
27.1 Financial Data Schedule ______
___________________________________________
* The Registrant hereby agrees to furnish supplementally a copy of any
omitted schedules to this Agreement to the Securities and Exchange
Commission upon its request.
E-2