-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U508Jm0Xrzu+FJ/HXKep3KZ+gJni4vpaN987GOf1JyCUiDUUs0JBu64DtLvfsLPL kK/NzT+k8SpJbp34JQsugw== 0000950134-98-009039.txt : 19981118 0000950134-98-009039.hdr.sgml : 19981118 ACCESSION NUMBER: 0000950134-98-009039 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MCI WORLDCOM INC CENTRAL INDEX KEY: 0000723527 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 581521612 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-11258 FILM NUMBER: 98751992 BUSINESS ADDRESS: STREET 1: 515 EAST AMITE ST CITY: JACKSON STATE: MS ZIP: 39201-2702 BUSINESS PHONE: 6013608600 FORMER COMPANY: FORMER CONFORMED NAME: WORLDCOM INC /GA/ DATE OF NAME CHANGE: 19970127 FORMER COMPANY: FORMER CONFORMED NAME: LDDS COMMUNICATIONS INC /GA/ DATE OF NAME CHANGE: 19930916 FORMER COMPANY: FORMER CONFORMED NAME: RESURGENS COMMUNICATIONS GROUP INC DATE OF NAME CHANGE: 19920703 10-Q 1 FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 1998 1 z - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 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 ------------------------------- MCI WORLDCOM, INC. (Exact name of registrant as specified in its charter) ------------------------------- 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 WORLDCOM, INC. ------------------------------------------- (Former Name, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of outstanding shares of the registrant's Common Stock, par value $.01 per share, was 1,833,425,800 on October 31, 1998. - ------------------------------------------------------------------------------- 2 QUARTERLY REPORT ON FORM 10-Q TABLE OF CONTENTS
Page Number ------ PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of September 30, 1998 and December 31, 1997............................. 3 Consolidated Statements of Operations for the three and nine months ended September 30, 1998 and September 30, 1997............................................... 4 Consolidated Statements of Cash Flows for the nine months ended September 30, 1998 and September 30, 1997................................................... 5 Notes to Consolidated Financial Statements........................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................ 23 Item 3. Quantitative and Qualitative Disclosure About Market Risk............ 33 PART II. OTHER INFORMATION Item 1. Legal Proceedings.................................................... 34 Item 2. Changes in Securities and Use of Proceeds............................ 34 Item 3. Defaults Upon Senior Securities...................................... 34 Item 4. Submission of Matters to a Vote of Securities Holders................................................ 34 Item 5. Other Information.................................................... 34 Item 6. Exhibits and Reports on Form 8-K..................................... 34 Signature ..................................................................... 36 Exhibit Index ..................................................................... 37
Page 2 3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements MCI WORLDCOM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited. In Millions of Dollars, Except Share Data)
September 30, December 31, 1998 1997 -------------- -------------- ASSETS Current assets: Cash and cash equivalents $ 944 $ 155 Marketable securities -- 54 Accounts receivable, net of allowance for bad debts of $861 in 1998 and $203 in 1997 6,057 1,241 Income taxes receivable 190 5 Deferred tax asset 476 - Other current assets 993 419 -------------- -------------- Total current assets 8,660 1,874 -------------- -------------- Property and equipment: Transmission equipment 10,388 3,688 Communications equipment 4,459 2,493 Furniture, fixtures and other 5,167 920 Construction in progress 3,763 468 -------------- -------------- 23,777 7,569 Less - accumulated depreciation (1,477) (855) -------------- -------------- 22,300 6,714 -------------- -------------- Goodwill and other intangible assets 46,908 13,882 Deferred tax asset -- 405 Other assets 4,410 721 -------------- -------------- $ 82,278 $ 23,596 ============== ============== LIABILITIES AND SHAREHOLDERS' INVESTMENT Current liabilities: Short-term debt and current maturities of long-term debt $ 4,242 $ 11 Accounts payable 1,911 470 Accrued line costs 3,809 868 Accrued interest 307 119 Deferred tax liability -- 60 Other current liabilities 3,874 546 -------------- -------------- Total current liabilities 14,143 2,074 -------------- -------------- Long-term liabilities, less current portion: Long-term debt 16,032 7,413 Deferred tax liability 1,855 -- Other liabilities 1,901 308 -------------- -------------- Total long-term liabilities 19,788 7,721 -------------- -------------- Commitments and contingencies Minority interests 3,333 -- Company obligated manditorily redeemable preferred securities of subsidiary trust holding solely junior subordinated deferrable interest debentures 750 -- Shareholders' investment: Series A preferred stock, par value $.01 per share; authorized, issued and outstanding: none in 1998 and 94,992 shares in 1997 (variable liquidation preference) -- -- Series B preferred stock, par value $.01 per share; authorized, issued and outstanding: 11,777,262 shares in 1998 and 12,421,858 shares in 1997 (liquidation preference of $1.00 per share plus unpaid dividends) -- -- Preferred stock, par value $.01 per share; authorized: 34,905,008 shares in 1998 and 1997; none issued -- -- Common stock, par value $.01 per share; authorized: 2,500,000,000 shares; issued and outstanding: 1,829,895,614 shares in 1998 and 981,615,661 shares in 1997 18 10 Additional paid-in capital 49,314 15,531 Retained earnings (deficit) (4,915) (1,774) Unrealized holding gain on marketable equity securities 32 34 Treasury stock, at cost, 4,510,211 shares in 1998 and none in 1997 (185) -- -------------- -------------- Total shareholders' investment 44,264 13,801 -------------- -------------- $ 82,278 $ 23,596 ============== ==============
The accompanying notes are an integral part of these statements. Page 3 4 MCI WORLDCOM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited. In Millions of Dollars, Except Per Share Data)
For the Three Months For the Nine Months Ended September 30, Ended September 30, ----------------------------- ---------------------------- 1998 1997 1998 1997 ------------- ------------- ------------- ------------- Revenues $ 3,758 $ 1,911 $ 8,661 $ 5,364 ------------- ------------- ------------- ------------- Operating expenses: Line costs 1,792 965 4,141 2,783 Selling, general and administrative 902 411 1,904 1,200 Depreciation and amortization 469 247 1,099 719 In-process research and development and other charges 3,227 -- 3,725 -- ------------- ------------- ------------- ------------- Total 6,390 1,623 10,869 4,702 ------------- ------------- ------------- ------------- Operating income (loss) (2,632) 288 (2,208) 662 Other income (expense): Interest expense (141) (102) (351) (289) Miscellaneous 14 12 36 33 ------------- ------------- ------------- ------------- Income (loss) before income taxes, minority interests and extraordinary items (2,759) 198 (2,523) 406 Provision for income taxes 174 122 462 261 ------------- ------------- ------------- ------------- Income (loss) before minority interests and extraordinary items (2,933) 76 (2,985) 145 Minority interests 11 -- 11 -- ------------- ------------- ------------- ------------- Net income (loss) before extraordinary items (2,944) 76 (2,996) 145 Extraordinary item (net of income taxes of $78 in 1998 and $0 in 1997) -- -- (129) (3) Distributions on subsidiary trust mandatorily redeemable preferred securities 3 -- 3 -- Preferred dividend requirement -- 7 13 20 ------------- ------------- ------------- ------------- Net income (loss) applicable to common shareholders $ (2,947) $ 69 $ (3,141) $ 122 ============= ============= ============= ============= Earnings (loss) per common share: Net income (loss) applicable to common shareholders before extraordinary items: Basic $ (2.44) $ 0.07 $ (2.77) $ 0.13 ============= ============= ============= ============= Diluted $ (2.44) $ 0.07 $ (2.77) $ 0.13 ============= ============= ============= ============= Extraordinary item $ -- $ -- $ (0.12) $ (0.00) ============= ============= ============= ============= Net income (loss) applicable to common shareholders : Basic $ (2.44) $ 0.07 $ (2.89) $ 0.13 ============= ============= ============= ============= Diluted $ (2.44) $ 0.07 $ (2.89) $ 0.12 ============= ============= ============= =============
The accompanying notes are an integral part of these statements. Page 4 5 MCI WORLDCOM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited. In Millions of Dollars)
For the Nine Months Ended September 30, ----------------------------------- 1998 1997 --------------- --------------- Cash flows from operating activities: Net income (loss) $ (3,125) $ 142 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Extraordinary item 129 3 In-process research and development and other charges 3,725 -- Depreciation and amortization 1,099 719 Provision for losses on accounts receivable 115 77 Provision for deferred income taxes 451 224 Accreted interest on debt 25 114 Change in assets and liabilities, net of effect of business combinations: Accounts receivable (753) (266) Income taxes, net 8 28 Other current assets (147) (115) Accrued line costs (397) 22 Accounts payable and other current liabilities 383 3 Other (34) (7) --------------- --------------- Net cash provided by operating activities 1,479 944 --------------- --------------- Cash flows from investing activities: Capital expenditures (3,267) (2,216) Sale of short-term investments, net 53 839 Acquisitions and related costs (3,049) (494) Increase in intangible assets (96) (98) Proceeds from disposition of long-term assets 146 70 Increase in other assets (270) (177) Decrease in other liabilities (305) (25) --------------- --------------- Net cash used in investing activities (6,788) (2,101) --------------- --------------- Cash flows from financing activities: Principal borrowings on debt, net 5,833 716 Common stock issuance 281 147 Dividends paid on preferred stock (13) (20) Distributions on subsidiary trust mandatorily redeemable preferred securities (3) -- Other -- 6 --------------- --------------- Net cash provided by financing activities 6,098 849 --------------- --------------- Net increase (decrease) in cash and cash equivalents 789 (308) Cash and cash equivalents at beginning of period 155 485 --------------- --------------- Cash and cash equivalents at end of period $ 944 $ 177 =============== ===============
The accompanying notes are an integral part of these statements. Page 5 6 MCI WORLDCOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (A) GENERAL References herein to the "Company" or "MCI WorldCom" refer to MCI WORLDCOM, Inc., a Georgia corporation, and its subsidiaries, which prior to September 15, 1998, was named WorldCom, Inc. ("WorldCom"). The financial statements included herein, are unaudited and have been prepared in accordance with generally accepted accounting principles for interim financial reporting and Securities and Exchange Commission rules and regulations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the financial statements reflect all adjustments (of a normal and recurring nature) which are necessary to present fairly the financial position, results of operations and cash flows for the interim periods. These financial statements should be read in conjunction with the Company's restated financial statements contained in its Current Report on Form 8-K dated May 28, 1998 (filed May 28, 1998). The results for the nine month period ended September 30, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. (B) BUSINESS COMBINATIONS On September 14, 1998, the Company acquired MCI Communications Corporation, a Delaware corporation ("MCI"), pursuant to the merger (the "MCI Merger") of MCI with and into TC Investments Corp. ("Acquisition Subsidiary"), a wholly owned subsidiary of the Company. Upon consummation of the MCI Merger, Acquisition Subsidiary was renamed MCI Communications Corporation. Through the MCI Merger, the Company acquired one of the world's largest and most advanced digital networks, connecting local markets in the United States to more than 280 countries and locations worldwide. As a result of the MCI Merger, each outstanding share of MCI common stock was converted into the right to receive 1.2439 shares of MCI WorldCom common stock, par value $.01 per share (the "Common Stock" or "MCI WorldCom Common Stock") or approximately 755 million MCI WorldCom common shares in the aggregate, and each share of MCI Class A common stock outstanding (all of which were held by British Telecommunications plc ("BT")) was converted into the right to receive $51.00 in cash or approximately $7 billion in the aggregate. The funds paid to BT were obtained by the Company from (i) available cash as a result of the Company's $6.1 billion public debt offering in August 1998 (See Note F); (ii) the sale of MCI's Internet backbone facilities and wholesale and retail Internet business (the "iMCI Business") to Cable and Wireless plc ("Cable & Wireless") for $1.75 billion in cash on September 14, 1998; (iii) the sale of MCI's 24.9% equity stake in Concert Communications Services ("Concert") to BT for $1 billion in cash on September 14, 1998; and (iv) availability under the Company's commercial paper program and credit facilities (See Note F). Upon effectiveness of the MCI Merger, the then outstanding and unexercised options exercisable for shares of MCI common stock were converted into options exercisable for an aggregate of approximately 83 million shares of MCI WorldCom Common Stock having the same terms and conditions as the MCI options, except that the exercise price and the number of shares issuable upon exercise were divided and multiplied, respectively, by 1.2439. The MCI Merger was accounted for as a purchase; accordingly, operating results for MCI have been included from the date of acquisition (See Note E). On August 4, 1998, MCI acquired a 51.79% voting interest and a 19.26% economic interest in Embratel Participacoes S.A., ("Embratel"), Brazil's only facilities-based national communications provider, for approximately $2.3 billion. The purchase price will be paid in local currency installments, of which $916 million was paid on August 4, 1998 with the remainder to be paid in two equal installments over the next two years. Embratel provides interstate long distance and international telecommunications services in Brazil, as well as over 40 other communications services, including leased high-speed data, satellite, Internet, frame and packet-switched services. Operating results for Embratel are consolidated in the accompanying consolidated financial statements and are included from the date of the MCI Merger. Page 6 7 On January 31, 1998, the Company acquired CompuServe Corporation, a Delaware corporation ("CompuServe"), pursuant to the merger (the "CompuServe Merger") of a wholly owned subsidiary of the Company with and into CompuServe. Upon consummation of the CompuServe Merger, CompuServe became a wholly owned subsidiary of MCI WorldCom. As a result of the CompuServe Merger, each share of CompuServe common stock was converted into the right to receive 0.40625 shares of MCI WorldCom Common Stock, or approximately 37.6 million MCI WorldCom common shares in the aggregate. Prior to the CompuServe Merger, CompuServe operated primarily through two divisions: Interactive Services and Network Services. Interactive Services offered worldwide online and Internet access services for consumers, while Network Services provided worldwide network access, management and applications, and Internet service to businesses. The CompuServe Merger was accounted for as a purchase; accordingly, operating results for CompuServe have been included from the date of acquisition. On January 31, 1998, the Company also acquired ANS Communications, Inc., a Delaware corporation ("ANS"), from America Online, Inc. ("AOL") and has entered into five year contracts with AOL under which MCI WorldCom and its subsidiaries provide network services to AOL (collectively, the "AOL Transaction"). As part of the AOL Transaction, AOL acquired CompuServe's Interactive Services division and received a $175 million cash payment from MCI WorldCom. MCI WorldCom retained the CompuServe Network Services ("CNS") division. ANS provides Internet access to AOL and AOL's subscribers in the United States, Canada, the United Kingdom, Sweden and Japan, and also designs, develops and operates high performance wide-area networks for business, research, education and governmental organizations. The AOL Transaction was accounted for as a purchase; accordingly, operating results for ANS have been included from the date of acquisition. On January 29, 1998, MCI WorldCom acquired Brooks Fiber Properties, Inc., a Delaware corporation ("BFP"), pursuant to the merger (the "BFP Merger") of a wholly owned subsidiary of MCI WorldCom with and into BFP. Upon consummation of the BFP Merger, BFP became a wholly owned subsidiary of MCI WorldCom. BFP is a leading facilities-based provider of competitive local telecommunications services, commonly referred to as a competitive local exchange carrier, in selected cities within the United States. BFP acquires and constructs its own state-of-the-art fiber optic networks and facilities and leases network capacity from others to provide long distance carriers ("IXCs"), Internet Service Providers ("ISPs"), wireless carriers and business, government and institutional end users with an alternative to the incumbent local exchange carriers ("ILECs") for a broad array of high quality voice, data, video transport and other telecommunications services. As a result of the BFP Merger, each share of BFP common stock was converted into the right to receive 1.85 shares of Common Stock or approximately 72.6 million MCI WorldCom common shares in the aggregate. The BFP Merger was accounted for as a pooling-of-interests and, accordingly, the Company's financial statements for periods prior to the BFP Merger have been restated to include the results of BFP for all periods presented. The following unaudited pro forma combined results of operations for the Company assumes that the MCI Merger was completed on January 1, 1997 (in millions, except per share data):
For the Nine Months Ended September 30, --------------------------- 1998 1997 --------- --------- Revenues $ 22,950 $ 18,971 Income (loss) before extraordinary items (2,870) (19) Net income (loss) (2,999) (22) Dilutive income (loss) per common share: Income (loss) before extraordinary items (1.61) (0.01) Net income (loss) (1.69) (0.01)
These pro forma amounts represent the historical operating results of MCI combined with those of the Company with appropriate preliminary adjustments which give effect to depreciation, amortization, interest and the common shares issued. These pro forma amounts also do not include amounts with respect to the CompuServe Merger, AOL Transaction or Embratel prior to their respective business combination dates because they are individually, and in the aggregate, not material to MCI WorldCom. These pro forma amounts are not necessarily indicative of operating results which would have Page 7 8 occurred if MCI had been operated by current management during the periods presented because these amounts do not reflect cost savings related to full network optimization and the redundant effect on operating, selling, general and administrative expenses. (C) EARNINGS PER SHARE Earnings per share are calculated in accordance with Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share." The following is a reconciliation of the numerators and the denominators of the basic and diluted per share computations (in millions, except per share data):
For the Three Months For the Nine Months Ended September 30, Ended September 30, ------------------------- -------------------------- 1998 1997 1998 1997 --------- ------------ ---------- ------------ Basic Net income (loss) before extraordinary items $ (2,944) $ 76 $ (2,996) $ 145 Preferred stock dividends and distributions 3 7 16 20 --------- ------------ ---------- ------------ Net income (loss) applicable to common shareholders before extraordinary items $ (2,947) $ 69 $ (3,012) $ 125 ========= ============ ========== ============ Weighted average shares outstanding 1,209 974 1,088 961 ========= ============ ========== ============ Basic earnings (loss) per share $ (2.44) $ 0.07 $ (2.77) $ 0.13 ========= ============ ========== ============ Diluted Net income (loss) applicable to common shareholders before extraordinary items $ (2,947) $ 69 $ (3,012) $ 125 Add back: Preferred stock dividends and distributions -- 7 -- 1 --------- ------------ ---------- ------------ Net income (loss) applicable to common shareholders before extraordinary items $ (2,947) $ 76 $ (3,012) $ 126 ========= ============ ========== ============ Weighted average shares outstanding 1,209 974 1,088 961 Common stock equivalents -- 33 -- 31 Common stock issuable upon conversion of preferred stock -- 34 -- 1 --------- ------------ ---------- ------------ Diluted shares outstanding 1,209 1,041 1,088 993 ========= ============ ========== ============ Diluted earnings (loss) per share $ (2.44) $ 0.07 $ (2.77) $ 0.13 ========= ============ ========== ============
(D) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid by the Company during the nine months ended September 30, 1998 and 1997 amounted to $422.5 million and $136.5 million, respectively. Income taxes paid during the nine months ended September 30, 1998 and 1997 were $24.3 million and $12.0 million, respectively. In conjunction with business combinations during the nine months ended September 30, 1998 and 1997, assumed assets and liabilities were as follows (in millions):
For the Nine Months Ended September 30, --------------------------- 1998 1997 --------- --------- Fair value of assets acquired $ 21,590 $ 64 Excess of cost over net tangible assets acquired 36,866 367 Liabilities paid (assumed) (22,147) 216 Common stock issued (33,260) (153) --------- --------- $ 3,049 $ 494 ========= =========
Page 8 9 (E) IN-PROCESS RESEARCH AND DEVELOPMENT AND OTHER CHARGES In the first quarter of 1998, the Company recorded a pre-tax charge of $69 million for employee severance, alignment charges and direct merger costs associated with the BFP Merger. Additionally, in the third quarter of 1998, the Company recorded a pre-tax charge of $127 million primarily in connection with the MCI Merger. The third quarter charge included severance costs associated with the termination of certain employees which is expected to be completed by the first quarter of 1999. Also included are alignment charges, and other exit activities which include the costs of consolidating and closing facilities, loss on sale or write down of assets and conformance of accounting principles. The Company anticipates completing its plans for alignment and exit activities by the end of the first quarter of 1999. The following table reflects the components of the significant items included as other charges in the accompanying consolidated statements of operations for the nine months ended September 30, 1998 (in millions): BFP direct merger costs $ 17 Severance 21 Alignment and other exit activities 158 ------ $ 196 ====== In connection with the above charges, $43 million, $18 million and $16 million are included in other current liabilities, accrued line costs and other liabilities, respectively, in the accompanying consolidated financial statements as of September 30, 1998. The amount included in other current liabilities also includes $8 million for severance as of September 30, 1998. In connection with recent business combinations, the Company made allocations of the purchase price to acquired in-process research and development ("R&D") totaling $429 million in the first quarter of 1998 related to the CompuServe Merger and AOL Transaction and $3.1 billion in the third quarter of 1998 related to the MCI Merger. The Company used professional appraisal consultants to assess and allocate values to the in-process research and development. These allocations represent the estimated fair value based on risk-adjusted future cash flows related to the incomplete projects. At the date of the respective business combinations, the development of these projects had not yet reached technological feasibility and the R&D in progress had no alternative future uses. Accordingly, these costs were expensed as of the respective acquisition dates. Discounting the net cash flows back to their present value is based on the weighted average cost of capital ("WACC"). The respective business enterprises are comprised of various types of assets, each possessing different degrees of investment risk contributing to the Company's overall WACC. Intangible assets are assessed higher risk factors due to their lack of liquidity and poor versatility for redeployment elsewhere in the business. In the MCI analysis, CompuServe analysis and ANS analysis the implied WACC was 14%, 14.5% and 16.5%, respectively, based on the purchase price paid, assumed liabilities, projected cash flows, and each company's asset mix. Returns on monetary and fixed assets were estimated based on prevailing interest rates. The process for quantifying intangible asset investment risk involved consideration of the uncertainty associated with realizing discernible cash flows over the life of the asset. A discount range of 15.5% to 19% was used for valuing the in-process research and development. These discount rates are higher than the WACC due to the inherent uncertainties surrounding the successful development of the purchased in-process research and development, the useful life of such technology, the profitability levels of such technology, and the uncertainty of technological advances that are unknown at this time. The value of the in-process research and development projects was adjusted to reflect the relative value and contribution of the acquired R&D. In doing so, consideration was given to the R&D's stage of completion, the complexity of the work completed to date, the difficulty of completing the remaining development, costs already incurred and the projected cost to complete the projects. The Company believes that the assumptions used in the forecasts were reasonable at the time of the respective business combination. No assurance can be given, however, that the underlying assumptions used to estimate expected project sales, development costs or profitability, or the events associated with such projects, will transpire as estimated. For these reasons, actual results may vary from the projected results. Page 9 10 Management expects to continue supporting these R&D efforts and believes the Company has a reasonable chance of successfully completing the R&D programs. However, there is risk associated with the completion of the R&D projects and the Company cannot be assured that any will meet with either technological or commercial success. If none of these R&D projects is successfully developed, the sales and profitability of the Company may be adversely affected in future periods. The failure of any particular individual project in-process would not materially impact the Company's financial condition, results of operations or the attractiveness of the overall investment in MCI, CompuServe or ANS. Operating results are subject to uncertain market events and risks, which are beyond the Company's control, such as trends in technology, government regulations, market size and growth, and product introduction or other actions by competitors. The integration and consolidation of MCI, CompuServe and ANS requires substantial management and financial resources. While the Company believes the early results of these efforts are encouraging, the MCI Merger, CompuServe Merger and AOL Transaction necessarily involve a number of significant risks, including potential difficulties in assimilating the technologies and services of these companies and in achieving the expected synergies and cost reduction. A description of the acquired in-process technology and the estimates made by the Company for each business combination is set forth below. MCI The in-process technology acquired in the MCI Merger consisted of seventy significant R&D projects grouped into six categories. The aggregate value assigned to MCI in-process research and development was $3.1 billion. These projects were all targeted at: (1) developing and deploying an all optical network, new architecture of the telephone system using Internet Protocol ("IP") and developing the systems and tools necessary to manage the voice and data traffic; (2) creating new products and services; and (3) developing certain information systems that may enhance the management of MCI WorldCom's products and service offerings. A brief description of the six categories of in-process research and development projects purchased in connection with the MCI Merger is set forth below: o R&D Related to an All Optical Network. These projects involve R&D related to the development of an all optical network. This structure is in contrast to current systems which employ a combination of optics and electronics. New technologies that are in development include: (a) an optical cross connect system for all optical packet transport and sub-second service restoration, (b) a wavelength channel plan for enabling multiple simultaneous transmission channels, (c) projects related to distortion elimination, and (d) next generation optical networking technologies related to the fiber infrastructure. Achievements to date include demonstration of limited-scope prototypes in the laboratory. Remaining efforts include: demonstration of the system on a large scale with commercial traffic, physics research in certain areas, development of algorithms to enable network management, and addressing technology issues related to switching. The amount of R&D costs to date for these projects total $7 million. Estimated costs to complete are $10 million, as follows: 15% during the last quarter of 1998, 48% during the four quarters in 1999, 31% during the four quarters in 2000, and 6% during the four quarters in 2001. The completion of these projects will be difficult, and the risk of these technologies not being completed is rated as medium to high. Failure to complete the R&D would cause the Company's future revenues and profits attributable to the R&D not to materialize as these projects would contribute to differentiating the Company from the competition in the future. Page 10 11 o R&D Related to Data Transmission Service / Other Transmission Efforts. The Company is currently working on a variety of significant efforts related to data management. These new technologies include: (a) new data services to satisfy new capacity requirements and Internet needs, (b) a next generation intelligent network to enable deployment of specific new telecommunications services across multiple networks, (c) a 16 wavelength bi-directional line amplifier to amplify optical signals, (d) multiservice and integrated access platforms and development of new methods for serving ISPs on the local services network, and (e) Andromeda, which is related to specific improvements to Internet operations. Achievements to date include methods for new high speed switching, multicasting, and offering a variety of service levels, as well as architectural design for next generation intelligent networks. Tasks to complete the new technologies include: engineering related to telephone system to utilize IP; solving scalability issues across the infrastructure; and conducting extensive testing of the technologies under development. To date $48 million has been expended to develop these R&D projects. Estimated costs to complete the projects are $132 million, as follows: 9% during the last quarter of 1998, 33% during the four quarters in 1999, 46% during the four quarters in 2000, and 12% during the four quarters in 2001. The completion of these projects will be difficult and the risk of not completing these projects can be characterized as medium to high. Failure to complete the R&D would cause the Company's future revenues and profits attributable to the R&D not to materialize. o Next Generation Tools. The Company's personnel are developing a variety of new tools that are being designed to achieve specific reliability and quality objectives related to the network. Important new development technologies in this category include: (a) reliability and quality engineering tools related to the reliability test and quality control, (b) network design development tools to enable end-to-end network design and modeling capabilities, (c) the Integrated Management Platform Advanced Communications Technology ("IMPACT") project to provide new network management for the networks, (d) the integrated test system to provide a new testing architecture for the Company's local, long distance, and international networks, and (e) an enhanced traffic system and security. Progress to date includes: definition of architectural components, partial development of software algorithms, and limited prototypes for tasks. Remaining efforts include completion of algorithms, prototype development, validation, testing, and development of support systems. To date $84 million has been spent on the R&D projects. Estimated costs to complete are $48 million, as follows: 22% during the last quarter of 1998, 46% during the four quarters in 1999, 23% during the four quarters in 2000, and 9% during the four quarters in 2001. There are significant risks of not being able to complete the prototypes and there is also uncertainty in the timeliness of completion. The aggregate risk level for this category of R&D projects is considered medium to high. Project failure would result in the elimination of the Company's future revenues and profits attributable to the R&D. o Specific New Customer Care Capabilities. These projects involve a series of efforts designed to provide customers with a suite of new services. This includes development of major technologies such as: (a) the virtual data delivery system to engineer new order processing and provisioning capabilities for data services, (b) network automation projects related to capacity and change management, (c) hyperlink to deploy private lines and frame relay circuits utilizing a new methodology, (d) common data platform to create a depository of network management information, and (e) the Talisman project to develop data products for the network MCI One Voice. Achievements to date include design, partial coding, and prototyping. Tasks to complete include: addition of significant features and functionality; additional design, testing and coding; and addressing scalability issues. To date $67 million has been spent on developing this R&D. Estimated costs to complete are $76 million, as follows: 20% during the last quarter of 1998, 50% during the four quarters in 1999, 19% during the four quarters in 2000, and 11% during the four quarters in 2001. There are significant risks in completing the algorithms successfully and on time. The aggregate risk level for this category of R&D projects is considered medium to high. Project failure would eliminate the Company's future revenues and profits attributable to the R&D. o R&D Related to Local Services. This category involves a series of specific projects to create an offering of local services on a national basis. Efforts include: (a) electronic bonding for local service maintenance organizations, (b) elements of an order automation and tracking system, (c) access technology development, and (d) the substantial R&D related to the network optimization enhancement system. Achievements to date include: completion of system definitions, partial coding development, and base functionality developed on certain projects. Tasks to complete include adding features and functionality, module development and testing. To date $53 million has been spent on developing the R&D projects. Estimated costs to complete are $38 million, as follows: 25% during the last quarter of 1998, 43% during the four quarters in 1999, 21% during the four quarters in 2000, and 11% during the four quarters in 2001. Page 11 12 There are significant risks related to developing the interfaces and the required technologies and the complex interconnections. The aggregate risk level for this category of R&D projects is considered medium to high. Failure of the R&D project would eliminate the Company's future revenues and profits attributable to the R&D. o New Products and Services. A series of new products and services are being developed by the Company. These include: (a) video services to design and implement a new terrestrial video distribution network for real-time quality video, (b) distance learning services via an integrated multimedia network platform, (c) fractal compression technology for image compression and encoding to reduce data transmit time and bit losses, and (d) integrated messaging for one number service for telephone, fax, voicemail, Internet, and paging. Progress to date includes: definition, development, and component testing; feasibility and analysis; and development of prototypes. Remaining development includes: design and deployment; resolving issues related to product functionality; and addressing scalability issues across the Company's infrastructure. To date $37 million has been spent on developing the R&D in this category. Estimated costs to complete are $38 million, as follows: 24% during the last quarter of 1998, 43% during the four quarters in 1999, 22% during the four quarters in 2000, and 11% during the four quarters in 2001. There are significant risks in completing the R&D projects, particularly developing the leading edge components, compression technologies, and developing operational support systems. The aggregate risk level for this category of R&D projects is considered medium to high. Project failure would eliminate the Company's future revenues and profits attributable to the R&D. A summary of allocated values by technology/project is as follows (in millions):
Developed In-Process Technology R&D ----------- ----------- All Optical Network $ 200 $ 400 Data Transmission Service/Other 200 300 Next Generation Tools 100 400 New Customer Care Capabilities 800 1,100 Local 200 700 New Products and Services 200 200 ----------- ----------- $ 1,700 $ 3,100 =========== ===========
The value assigned to purchased in-process technology was determined by estimating the contribution of the purchased in-process technology to developing commercially viable products, estimating the resulting net cash flows from the expected product sales of such products, and discounting the net cash flows to their present value using a risk-adjusted discount rate. Royalty rates used in the valuation of in-process R&D ranged from 1% to 3%. Funding for such projects is expected to be obtained from internally generated sources. Developed technology will be depreciated over 10 years on a straight-line basis. The remaining purchase price included allocations to goodwill and tradename which will be amortized over 40 years on a straight-line basis. Total MCI stand-alone revenues are projected to exceed $34 billion within five years. This level of revenue implies a compound annual growth rate ("CAGR") of approximately 12.3%. Estimated total revenues from the acquired in-process technology peak in the year 2001 and steadily decline in 2002 through 2009 as other new product and service technologies are expected to be introduced by the combined company. These projections are based on management's estimates of market size and growth, expected trends in technology, and the expected timing of new product introductions. These projections, which constitute forward-looking statements, were not made with a view to public disclosure and were based on a variety of estimates and judgments. Actual results may vary materially due to a number of significant risks, including, without limitation, uncertainties regarding future business, economic, competitive, regulatory and financial market conditions and future business decisions, all of which are difficult to predict and many of which are beyond the Company's control. No assurance can be given that such projections will be realized. The Company does not intend to update or supplement these projections in the future. COMPUSERVE AND ANS The in-process technology acquired in the CompuServe Merger and the AOL Transaction consisted of three main R&D efforts underway at CNS and two main R&D efforts underway at ANS. The aggregate value assigned to CompuServe and ANS in-process technology was $429 million. These projects included next generation network technologies and new value-added networking applications, such as application hosting, multimedia technologies and virtual private data networks. A brief description of the in-process research and development projects purchased in connection with the CompuServe Merger and AOL Transaction is set forth below: Page 12 13 o Virtual Private Data Network ("VPDN"). In order to provide competitive VPDN products and services, CNS had undertaken, at the acquisition date, a number of important projects. CNS was developing a new radius-roaming functionality. This capability was intended to allow remote VPDN users to "roam" the country, much like cellular phone users, and access their corporate network without regard for how to initiate a remote connection. CNS was also developing another VPDN adjunct product called the Phone Access Locator. This product, if successful, was to be used by CNS' remote customers to look up local network access point phone numbers. Other VPDN development efforts underway related to voluntary tunneling and development of new packet network technologies. Achievements leading up to the acquisition included completion of certain software specifications and design limited concept testing, and performance verification. Remaining efforts included large-scale design, performance testing, debugging, and quality assurance. Costs to complete this R&D project were projected to be approximately $3 million in 1998 and $4 million in 1999. The risk of not completing these efforts was rated as medium. Project failure would result in the elimination of the Company's future revenues and profits attributable to the R&D. o Network Technologies. At the date of the CompuServe Merger, CNS had undertaken significant projects to develop new IP-based network technologies. These projects involved many separate efforts, including: researching the use of switching and multicast technologies; investigating and testing proprietary switching and routing technology; researching and developing Fast Ethernet and/or Gigabit Ethernet protocols; and developing and testing switches with routing functionality. CNS was also working on a significant effort to enhance workstation-based open systems technologies that contained new functions intended to allow the company to address new market needs. CNS' development work included the testing of new products and the development of new in-house network management solutions. Achievements leading up to the acquisition included completion of certain software and hardware specifications and design. Remaining efforts included large-scale design, performance testing and debugging. Costs to complete this R&D project were projected to be approximately $6 million in 1998 and $8 million in 1999. The risk of not completing these efforts was rated as medium. Project failure would result in the elimination of the Company's future revenues and profits attributable to the R&D. o Application Hosting. At the date of the CompuServe Merger, CNS had undertaken an effort to develop proprietary software, and identify and test third party Web hosting technology in order to provide complex Web and groupware hosting services. As part of this effort, CNS was attempting to develop a new capability in which it would host complex Web sites, without duplicating any development efforts. In addition, CNS was in the process of developing leading-edge electronic commerce solutions for its complex Web hosting product. CNS was also developing proprietary software and testing reporting tools. CNS was also in the process of making substantial enhancements that would result in a new e-mail gateway. Achievements leading up to the acquisition included completion of certain software specifications and design, limited concept testing, and performance verification. Remaining efforts included large-scale design and engineering, performance testing, and debugging. Costs to complete this R&D project were projected to be approximately $1 million in 1998 and $2 million in 1999. The risk of not completing these efforts was rated as medium. Project failure would result in the elimination of the Company's future revenues and profits attributable to the R&D. o Supercore. At the date of the AOL Transaction, Supercore was a significant project involving R&D related to data transmission and VPDN technologies. The Supercore project was intended to provide for the differentiation of connectivity service based on the needs of the transmission. At the time of the acquisition, ANS had made significant progress on this important R&D effort. Achievements leading up to the acquisition included a completed design and limited performance evaluation. Remaining efforts involved large-scale testing and proof of concept. ANS estimated it would spend approximately $12 million in 1998 and $17 million in 1999 to complete R&D projects related to Supercore. The risk of not completing these projects was considered medium to high. Failure to complete the R&D would cause the Company's future revenues and profits attributable to the R&D not to materialize. o Value Added Applications (Security Systems, Application Hosting, and Multimedia Systems). At the date of the AOL Transaction, ANS had a number of R&D projects underway related to security systems, application hosting, and multimedia systems. In connection with a security system product called Interlock, ANS was developing next-generation capabilities to render multiple Local Area Network ("LAN") connections, Simple Network Management Protocol ("SNMP") support, and the selective use of Java and ActiveX protocols. Other R&D efforts were related to distributed firewalls, firewall farm technology, new encryption technologies, and multiple LAN interface capability. A Page 13 14 Windows project involved substantially improving aspects of the server software intended to make it support a Domain Named System ("DNS") cache, firewall functionality, and remote administration. ANS also had several application R&D projects underway that were aimed at the development of a set of software tools, which would culminate in a new complex Web hosting product. ANS' complex Web hosting product was being developed to have near real-time database replication across geographic location, which would allow ANS, if successful, to maintain a company's Web site on several servers. As of the acquisition date, ANS did not offer multimedia services over its network. As a result, ANS was conducting R&D related to four multimedia services: fax over IP, video over IP, voice over IP, and call centers. R&D activity included system and software design, development of prototype systems, and systems testing. The most important R&D efforts related to multimedia systems were development of priority routing. In addition to ANS' security systems, application hosting, and multimedia R&D projects, ANS had undertaken a number of additional R&D efforts to develop technologies that would allow customers to access the system from any platform and to create a new data warehouse. In concert with these efforts, ANS was also addressing the customer's use of reporting, query, and On-Line Analytical Processing ("OLAP") tools. Achievements on the value added applications R&D leading up to the acquisition included the design and development of certain software algorithms, unit testing, and limited system testing. Remaining efforts included additional design work, large-scale testing, significant performance enhancements, and debugging. ANS expected to spend approximately $4 million in 1998 and $5 million in 1999 to complete the value added applications R&D. The risk of not completing these projects was considered to be medium to high. Failure to complete the R&D would cause the Company's future revenues and profits attributable to the R&D not to materialize. The value assigned to purchased in-process technology was determined by estimating the contribution of the purchased in-process technology to developing commercially viable products, estimating the resulting net future cash flows from the expected sales of such products, and discounting the net future cash flows to their present value using a risk-adjusted discount rate. The Company expected to begin generating the economic benefits from the ANS and CNS projects in progress as they were completed in late 1998 and 1999. At the time of valuation, the cost to complete all such projects was approximately $62 million. Funding for completion of the in-process projects was expected to be obtained from internally generated sources. Based on the cost incurred at the acquisition dates and the milestones achieved by ANS and CNS, in aggregate, ANS' projects were estimated to be approximately 80% complete, while CNS' projects were estimated to be approximately 60% complete. The allocation of purchase price for the CompuServe Merger and the AOL Transaction included allocations to developed technologies, assembled work force, customer relationships and tradenames which will be amortized on a straight-line basis over 10 years. Total ANS and CNS stand-alone revenues are projected to exceed $3.5 billion within five years. This level of revenues implied a CAGR of approximately 32%. Estimated total revenues from the acquired in-process technology related to CNS peak in the year 2002 and steadily decline through 2006 as other new product and service technologies are expected to be introduced by the Company. Estimated total revenues from the acquired in-process technology related to ANS peak in the year 2004 and steadily decline through 2006. These projections are based on management's estimates of market size and growth, expected trends in technology, and the expected timing of new product introductions. These projections, which constitute forward-looking statements, were not made with a view to public disclosure and were based on a variety of estimates and judgments. Actual results may vary materially due to a number of significant risks, including, without limitation, uncertainties regarding future business, economic, competitive, regulatory and financial market conditions and future business decisions, all of which are difficult to predict and many of which are beyond the Company's control. No assurance can be given that such projections will be realized. The Company does not intend to update or supplement these projections in the future. (F) LONG-TERM DEBT In connection with the BFP Merger, the Company announced in February 1998 that it had commenced offers offer (the "Tender Offers") to purchase for cash various series of BFP outstanding notes (the "BFP Notes"). Concurrently with the Tender Offers, MCI WorldCom obtained the requisite consents to eliminate certain restrictive covenants and amend certain other provisions of the respective indentures of the BFP Notes. In March 1998, the Company accepted all BFP Notes validly tendered. As of the expiration of the Tender Offers, MCI WorldCom had received valid tenders and consents from holders of approximately $1.1 billion of BFP Notes (over 99% of total outstanding). The funds required to pay all amounts required under the Tender Offers were obtained by MCI WorldCom from available working capital and lines of credit. In connection with the Tender Offers and related refinancings, MCI WorldCom recorded an extraordinary item of $128.7 million, net of income tax benefit of $77.6 million in the first quarter of 1998. On August 6, 1998, MCI WorldCom replaced its existing $3.75 billion and $1.25 billion revolving credit facilities (the "Old Credit Facilities") with $12.0 billion in credit facilities consisting of a $3.75 billion Amended and Restated Facility A Revolving Credit Agreement ("Facility A Loans"), a $1.25 billion Amended and Restated Facility B Term Loan Agreement Page 14 15 ("Facility B Loans") and a new $7 billion 364-Day Revolving Credit and Term Loan Agreement (the "Facility C Loans"). The Facility C Loans, together with the Facility A Loans and Facility B Loans, hereinafter referred to as the "New Credit Facilities." The New Credit Facilities provide liquidity support for the Company's commercial paper program and will be used for other general corporate purposes. The Facility A Loans and the Facility B Loans mature on June 30, 2002. The Facility C Loans have a 364-day term, which may be extended for up to two successive 364-day terms thereafter to the extent of the committed amounts from those lenders consenting thereto, with a requirement that lenders holding at least 51% of the committed amounts consent. Additionally, effective as of the end of such 364-day term, the Company may elect to convert up to $4 billion of the principal debt outstanding under the Facility C Loans from revolving loans to term loans with a maturity date no later than one year after the conversion. The New Credit Facilities bear interest payable in varying periods, depending on the interest period, not to exceed six months, or with respect to any Eurodollar Rate borrowing, 12 months if available to all lenders, at rates selected by the Company under the terms of the New Credit Facilities, including a Base Rate or Eurodollar Rate, plus the applicable margin. The applicable margin for the Eurodollar Rate borrowing varies from 0.35% to 0.75% as to Facility A Loans and Facility B Loans and from 0.225% to 0.450% as to Facility C Loans, in each case based upon the better of certain debt ratings. The New Credit Facilities are unsecured but include a negative pledge of the assets of the Company and its subsidiaries (subject to certain exceptions). The New Credit Facilities require compliance with a financial covenant based on the ratio of total debt to total capitalization, calculated on a consolidated basis. The New Credit Facilities require compliance with certain operating covenants which limit, among other things, the incurrence of additional indebtedness by the Company and its subsidiaries, sales of assets and mergers and dissolutions, which covenants are generally less restrictive than those contained in the Old Credit Facilities and which do not restrict distributions to shareholders, provided the Company is not in default under the New Credit Facilities. The Facility A Loans and the Facility C Loans are subject to annual commitment fees not to exceed 0.25% and 0.12%, respectively, of any unborrowed portion of the facilities. Subsequent to September 30, 1998, the Company elected to repay the Facility B Loans and cancel the facility commitment of $1.25 billion. The funds used to repay Facility B Loans were obtained by the Company from availability under the Company's New Credit Facilities and commercial paper program. The Company approved the issuance of commercial paper notes in the aggregate principal amount not to exceed $10.0 billion, which notes have a maturity not to exceed 364 days from the date of issuance. The Company maintains unused credit facilities equal to 100% of the commercial paper notes outstanding. As of September 30, 1998, $2.74 billion was outstanding under the commercial paper program. On August 11, 1998, the Company completed a public debt offering of $6.1 billion principal amount of debt securities. The net proceeds of $6.04 billion were used to pay down commercial bank debt, finance the approximately $7 billion payment to BT and for general corporate purposes. The public debt offering consisted of $1.5 billion principal amount of 6.125% Notes Due 2001 (the "Notes Due 2001"), which mature August 15, 2001, $600 million principal amount of 6.25% Notes Due 2003 (the "Notes Due 2003"), which mature on August 15, 2003, $2.25 billion principal amount of 6.40% Notes Due 2005 (the "Notes Due 2005"), which mature August 15, 2005 and $1.75 billion principal amount of 6.95% Notes Due 2028 (the "Notes Due 2028" and collectively with the Notes Due 2001, the Notes Due 2003 and the Notes Due 2005, the "Notes"). The Notes bear interest payable semiannually in arrears on February 15 and August 15 of each year, commencing February 15, 1999. The Notes are redeemable, as a whole or in part, at the option of the Company, at any time or from time to time, at respective redemption prices equal to the greater of (i) 100% of the principal amount of the Notes to be redeemed or (ii) the sum of the present values of the Remaining Scheduled Payments (as defined therein) plus (a) 10 basis points for the Notes Due 2001, (b) 15 basis points for the Notes Due 2003 and the Notes Due 2005, or (c) 20 basis points for the Notes Due 2028, plus in the case of each of clause (i) and (ii), accrued interest to the date of redemption. At the time of the MCI Merger, MCI had outstanding $1.44 billion of MCI Senior Debentures with rates ranging from 7.125% to 8.25% and maturing from January 2023 through June 2027 (the "MCI Senior Debentures"), and $2.66 billion of MCI Senior Notes with rates ranging from 6.125% to 7.5% and maturing from March 1999 through April 2012 (the "MCI Senior Notes"). Additionally, MCI had outstanding a $1.34 billion note payable in annual local currency installments over the next two years as a result of MCI's purchase of Embratel on August 4, 1998, and other debt including, without limitation, capital leases. Page 15 16 The following table sets forth the long-term debt of the Company before and after consideration of Embratel as of September 30, 1998 (in millions):
Excluding Embratel Embratel Consolidated ------------ --------- ------------ Commercial paper and credit facilities borrowings $ 3,968 $ -- $ 3,968 6.125% Notes Due 2001 1,500 -- 1,500 6.25% Notes Due 2003 600 -- 600 6.40% Notes Due 2005 2,250 -- 2,250 6.95% Notes Due 2028 1,750 -- 1,750 7.55% Senior Notes Due 2004 600 -- 600 7.75% Senior Notes Due 2007 1,100 -- 1,100 7.75% Senior Notes Due 2027 300 -- 300 9.375% Senior Notes Due 2004 680 -- 680 8.875% Senior Notes Due 2006 667 -- 667 MCI Senior Debentures 1,444 -- 1,444 MCI Senior Notes 2,657 -- 2,657 Note payable due in annual installments through 2000 -- 1,342 1,342 Other debt and capital leases (maturing through 2006) 868 548 1,416 ------------ --------- --------- 18,384 1,890 20,274 Less: Short-term debt and current maturities (4,125) (117) (4,242) ------------ --------- --------- $ 14,259 $ 1,773 $ 16,032 ============ ========= =========
(G) COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES OF THE COMPANY In connection with the MCI Merger, the Company acquired $750 million aggregate principal amount of 8% Cumulative Quarterly Income Preferred Securities, Series A, representing 30 million shares outstanding ("preferred securities") due June 30, 2026 which were previously issued by MCI Capital I, a wholly owned Delaware statutory business trust (the "Trust"). The Trust exists for the sole purpose of issuing the preferred securities and investing the proceeds in the Company's 8% Junior Subordinated Deferrable Interest Debentures, Series A ("Subordinated Debt Securities") due June 30, 2026, the only assets of the Trust. Holders of the preferred securities are entitled to receive preferential cumulative cash distributions from the Trust on a quarterly basis, provided the Company has not elected to defer the payment of interest due on the Subordinated Debt Securities to the Trust. The Company may elect this deferral from time to time, provided that the period of each such deferral does not exceed five years. The preferred securities are subject to mandatory redemption, in whole or in part, upon repayment of the Subordinated Debt Securities at maturity or earlier in an amount equal to the amount of Subordinated Debt Securities maturing or being repaid. In addition, in the event the Company terminates the Trust, the Subordinated Debt Securities will be distributed to the then holders of the preferred securities of the Trust. The Trust assets had an estimated fair market value of $773.2 million at September 30, 1998. The Company and MCI have executed various guarantee agreements and supplemental indentures which agreements, when taken together with the issuance of the Subordinated Debt Securities, constitute a full, irrevocable, and unconditional guarantee by the Company and MCI of all of the Trust's obligations under the preferred securities (the "Guarantee"). A Guarantee Agreement and Supplement No. 1 thereto covers payment of the preferred securities' quarterly distributions and payments on maturity or redemption of the preferred securities, but only in each case to the extent of funds held by the Trust. If the Company does not make interest payments on the Subordinated Debt Securities held by the Trust, the Trust will have insufficient funds to pay such distributions. The obligations of the Company and MCI under the Guarantee and the Subordinated Debt Securities are subordinate and junior in right of payment to all senior debt of the Company and MCI, respectively. Page 16 17 (H) PREFERRED STOCK In May 1998, the Company exercised its option to redeem all of the outstanding Series A 8% Cumulative Convertible Preferred Stock (the "Series A Preferred Stock") and related Depositary Shares. Prior to the redemption date, substantially all of the holders of Series A Preferred Stock elected to convert the preferred stock into Common Stock, resulting in the issuance of approximately 32.7 million shares of Common Stock. (I) COMPREHENSIVE INCOME Effective January 1, 1998, MCI WorldCom adopted SFAS No. 130 "Reporting Comprehensive Income." This statement requires the reporting of comprehensive income in addition to net income from operations. Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income. The following table reflects the calculation of comprehensive income (loss) for MCI WorldCom for the three and nine months ended September 30, 1998 and 1997 (in millions):
For the Three Months For the Nine Months Ended September 30, Ended September 30, ----------------------- ------------------- 1998 1997 1998 1997 --------- --------- --------- ------- Net income (loss) applicable to common shareholders $ (2,947) $ 69 $ (3,141) $ 122 --------- --------- --------- ------- Other comprehensive income (loss): Foreign currency translation gains (losses) 24 1 15 (20) Unrealized holding gains (losses): Unrealized holding gains (losses) during the period (22) (1) (39) 8 Reclassification adjustment for losses included in net (income) loss 49 -- 36 -- --------- --------- --------- ------- Other comprehensive income (loss) before income taxes 51 -- 12 (12) Income tax expense (benefit) (10) -- 1 (3) --------- --------- --------- ------- Other comprehensive income (loss) 41 -- 13 (15) --------- --------- --------- ------- Comprehensive income (loss) applicable to common shareholders $ (2,906) $ 69 $ (3,128) $ 107 ========= ========== ========= =======
(J) PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS MCI MCI has a noncontributory defined benefit pension plan (the "MCI Plan") and a supplemental pension plan (the "Supplemental Plan"), and the Western Union International, Inc. ("WUI"), a subsidiary of MCI, has a defined benefit pension plan (the "WUI Plan"). Collectively, these plans cover substantially all MCI employees who work 1,000 hours or more in a year. The MCI Plan and the Supplemental Plan provide pension benefits that are based on the employee's compensation for each year of service prior to retirement. The WUI Plan provides pension benefits based on the employee's compensation for each year of service after 1990 and prior to retirement. MCI's policy is to fund the MCI Plan and the WUI Plan in accordance with the funding requirements of the Employee Retirement Income Security Act of 1974 and within the limits of allowable tax deductions. The assets of the plans are primarily invested in corporate equities, government securities, and corporate debt securities. The information for the pension plans' assets and obligations consists of (dollars in millions): Page 17 18 CHANGE IN BENEFIT OBLIGATION Benefit obligation at January 1, 1998 $ 563 Service cost 54 Interest cost 31 Actuarial loss 35 Benefits paid (25) Assumption change 81 -------- Benefit obligation at September 30, 1998 $ 739 CHANGE IN PLAN ASSETS Fair value at January 1, 1998 $ 494 Actual return on plan assets (3) Employer contributions 63 Benefits paid (25) -------- Fair value of assets at September 30, 1998 529 -------- Accrued benefit cost $ (210) ======== WEIGHTED AVERAGE ACTUARIAL ASSUMPTIONS: Discount rate 6.00% Expected return on plan assets 9.00% Rate of compensation increase 5.75%
Annual service cost is determined using the Projected Unit Credit actuarial method, and prior service cost is amortized on a straight-line basis over the average remaining service period of employees. The MCI Plan accumulated benefit obligation exceeds the fair value of assets by $108 million. There is no additional minimum pension liability required to be recognized. Retirement benefits, under the MCI Plan, are calculated by first establishing an initial balance for each participant based on the present value of benefits earned through 1995. For service after 1995, participants accrue benefits based on a specific percentage of annual salary and earn interest credits based on the prior year's balance at a specific interest rate. Employees who are age 50 or older and have at least five years of service as of December 31, 1995, will have their benefits continue to accrue under a previous formula through the year 1998. Effective January 1, 1999, no future compensation credits will be earned by participants. Participant account balances will continue to accrue interest credits at a specified rate. EMBRATEL Embratel sponsors a contributory defined benefit pension plan and a post-retirement benefit plan, both managed by the Fundacao Embratel de Seguridade Social ("Telos"). Approximately 97% of Embratel's employees are covered by these plans. The pension benefit is generally defined as the difference between (i) 90% of the retiree's average salary during the last 36 months indexed to the date of retirement and (ii) the value of the retirement pension paid by the Brazilian social security system. For retired employees, the initial pension payment is subsequently adjusted upwards to recognize cost of living increases and productivity awards granted to active employees. In addition to the pension supplements, post-retirement health care and life insurance benefits are provided to eligible pensioners and their dependents. Contributions to the Embratel plans are based on actuarial studies prepared by independent actuaries under Brazilian regulations. The actuarial studies are revised periodically to identify whether adjustments to the contributions are necessary. The information for the defined benefit pension and post-retirement plans' assets and obligations, converted to U.S. dollars and prepared in accordance with U.S. generally accepted accounting principles consists of (dollars in millions): Page 18 19
Pension Benefits Other Benefits ---------------- -------------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at January 1, 1998 $ 1,231 $ 265 Service cost 34 7 Interest cost 53 12 Actuarial loss (48) (7) Benefits paid (22) (2) Assumption change (182) -- --------- ----------- Benefit obligation at September 30, 1998 $ 1,066 $ 275 CHANGE IN PLAN ASSETS Fair value at January 1, 1998 $ 550 $ 29 Actual return on plan assets (20) -- Employer contributions 31 4 Employee contributions 19 -- Benefits paid (22) (2) --------- ----------- Fair value of assets at September 30, 1998 $ 558 $ 31 FUNDED STATUS $ (508) $ (244) Unrecognized net actuarial (gain) loss (212) 88 Unrecognized transition liability 276 -- --------- ----------- Accrued benefit cost $ (444) $ (156) ========= =========== WEIGHTED AVERAGE ACTUARIAL ASSUMPTIONS: Discount rate 6.00% 6.00% Expected return on plan assets 9.00% 9.00% Rate of compensation increase 3.25%
The defined benefit pension plan has an accumulated benefit obligation in excess of fair value of assets of $345 million. There is no additional minimum pension liability to be recognized. Health care cost trend rates of increase were projected at annual rates excluding inflation ranging from 6.48% in 1998 to 2.00% in 2047. The effect of a one percentage point increase in the assumed health care cost trend rates would increase the accumulated post-retirement benefit obligation at September 30, 1998 by $63 million and the aggregate service and interest cost components by $7 million on an annual basis. The effect of a one percentage point decrease in the assumed health care cost trend rate would reduce the post-retirement benefit obligation by $51 million and reduce the total service and interest cost component by $6 million. Embratel has created a new defined contribution plan (the "new plan"), through Telos, which is in the regulatory review process with the Brazilian government. Government approval of the new plan is anticipated by the end of 1998. Once government approval of the new plan is received, all newly hired employees of Embratel will automatically enter the new plan and entry into the existing Embratel pension and post-retirement plans will be frozen. Current Embratel employees have been given the option to migrate from the existing defined benefit pension and post-retirement benefit plans to the new plan. The option expires on December 31, 1998 and was effective on January 1, 1999. The new plan will provide an employer match on employee contributions based on certain limits, transfer of the defined benefit account balance, employee directed investment, and a lump sum payment from the post-retirement plan, which can be used to assist with medical coverage in the future. Any employees not electing to migrate to the new plan will remain in the existing plans and will not have a future opportunity to move to the new plan. (K) CONTINGENCIES The Company is involved in legal and regulatory proceedings generally incidental to its business and has included accrued Page 19 20 loss contingencies in other liabilities for certain of these matters. The Company does not expect that the results in these lawsuits and proceedings will have a material adverse effect on the Company's consolidated results of operations or financial position. FEDERAL REGULATION. In implementing the Telecommunications Act of 1996 (the "Telecom Act"), the Federal Communications Commission ("FCC") established nationwide rules designed to encourage new entrants to participate in the local services markets through interconnection with the ILECs, resale of ILECs' retail services and use of individual and combinations of unbundled network elements. These rules set the groundwork for the statutory criteria governing entry of the Bell Operating Companies (the "BOCs") into the long distance market. Appeals of the FCC order adopting these rules were consolidated before the United States Court of Appeals for the Eighth Circuit (the "Eighth Circuit"). The Eighth Circuit found constitutional challenges to certain practices implementing cost provisions of the Telecom Act that were ordered by certain Public Utility Commissions ("PUCs") to be premature, but vacated significant portions of the FCC's nationwide pricing rules, and vacated an FCC rule requiring that unbundled network elements be provided on a combined basis. In response to requests by the Solicitor General, on behalf of the FCC, and certain other parties, including MCI WorldCom, the United States Supreme Court has agreed to review the decision of the Eighth Circuit. The case is under consideration by the Court and a decision is expected before June 1999. Certain BOCs have also raised constitutional challenges to provisions of the Telecom Act restricting BOC provision of long distance services, manufacturing of telecommunications equipment, electronic publishing and alarm monitoring services. On December 31, 1997, the United States District Court for the Northern District of Texas (the "Texas Federal District Court") ruled that these restrictions violate the Bill of Attainder Clause of the U.S. Constitution. The decision only applied to SBC Corporation, US West Communications Group, and Bell Atlantic Corporation. At the request of various parties, on February 11, 1998 the Texas Federal District Court issued a stay of its decision pending appeal. AT&T Corp., MCI, the Department of Justice, the FCC and other parties appealed the decision to the United States Court of Appeals for the Fifth Circuit (the "Fifth Circuit"). On September 4, 1998, the Fifth Circuit reversed the decision of the Texas Federal District Court and upheld the constitutionality of the challenged provisions. On October 19, 1998, SBC Corporation, US West Communications Group and Bell Atlantic Corporation filed petitions requesting the U.S. Supreme Court review the Fifth Circuit decision. The Supreme Court has not yet acted on the request. BellSouth Corporation ("BellSouth") also raised the Bill of Attainder issue in its appeal before the United States Court of Appeals for the D.C. Circuit of the FCC's denial of BellSouth's application to provide access long distance service in South Carolina. A decision in that case is pending. MCI WorldCom cannot predict either the ultimate outcome of these or future challenges to the Telecom Act, any related appeals of regulatory or court decisions, or the eventual effect on its businesses or the industry in general. The FCC has denied applications filed by a Regional Bell Operating Company ("RBOC") seeking authority to provide inter local access transport area ("interLATA") long distance service. In its denial of an Ameritech Corporation ("Ameritech") application and a BellSouth application, the FCC provided detailed guidance to applicants regarding the obligations of the applicants, the format of future applications, the content of future applications, and the review standards that it will apply in evaluating any future applications. The National Association of Regulatory Utility Commissioners and several state regulatory commissions have appealed jurisdictional aspects of that Ameritech application denial to the Eighth Circuit. On January 22, 1998, the Eighth Circuit granted the various appeals and held that the FCC does not have jurisdiction to consider pricing issues when deciding RBOC interLATA long distance applications. The Solicitor General, on behalf of the FCC and certain other parties, including MCI WorldCom, has asked the U.S. Supreme Court to review the Eighth Circuit's decision. The Supreme Court has yet to act on the petitions. MCI WorldCom cannot predict either the outcome of these appeals, or the BOCs' willingness to abide by these FCC guidelines, or the timing or outcome of future applications submitted to the FCC. Additionally, the FCC issued a Notice of Proposed Rulemaking seeking to allow the RBOCs to establish separate subsidiaries to provide enhanced data services. Other RBOCs have filed or announced their intention to file applications at the FCC for authority to provide interLATA services. Additionally, the FCC and several PUCs are considering a proposal that would allow BOCs electing to create separate wholesale network and retail organizations to enter the long distance market on an accelerated basis. MCI WorldCom cannot predict the outcome of these proceedings or whether the outcome will have a material impact upon its consolidated financial position or results of operations. On May 7, 1997, the FCC announced that it would issue a series of orders that will reform Universal Service Subsidy allocations and adopted various reforms to the existing rate structure for interstate access services provided by the ILECs that are designed to reduce access charges, over time, to more economically efficient levels and rate structures. It also affirmed that information service providers (including, among others, ISPs) should not be subject to existing access charges Page 20 21 ("ISP Exemption"). Petitions for reconsideration of, among other things, the access service and ISP Exemption related actions were filed before the FCC and appeals taken to various United States Courts of Appeals. On reconsideration, the FCC in significant part affirmed the access charge and ISP Exemption actions and the court appeals have been consolidated before the Eighth Circuit. On August 18, 1998, the Eighth Circuit denied all appeals. Also, several state agencies have started proceedings to address the reallocation of implicit subsidies contained in the access rates and retail service rates to state universal service funds. Access charges are a principal component of MCI WorldCom's telecommunication expense. Additionally, modification of the ISP Exemption could have an adverse effect on the Company's Internet-related services business. MCI WorldCom cannot predict either the outcome of these appeals or whether or not the result(s) will have a material impact upon its consolidated financial position or results of operations. The FCC issued on December 24, 1996 a Notice of Inquiry to seek comment on whether it should consider various actions relating to interstate information services and the Internet. The FCC recognized that these services and recent technological advances may be constrained by current regulatory practices that have their foundations in traditional circuit switched telecommunications services and technologies. Based upon this and other proceedings, the FCC may permit telecommunications companies, BOCs, or others to increase the scope or reduce the cost of their Internet access services. MCI WorldCom cannot predict the effect that the Notice of Inquiry, the Telecom Act or any future legislation, regulation or regulatory changes may have on its consolidated financial position or results of operations. INTERNATIONAL. In December 1996, the FCC adopted a new policy that makes it easier for United States international carriers to obtain authority to route international public switched voice traffic to and from the United States outside of the traditional settlement rate and proportionate return regimes ("alternative traffic routing"). In August 1998, the FCC proposed to modify its rules to make it even easier for U.S. international carriers to engage in alternative traffic routing. In February 1997, the United States entered into a World Trade Organization Agreement (the "WTO Agreement") that should have the effect of liberalizing the provision of switched voice telephone and other telecommunications services in scores of foreign countries over the next several years. The WTO Agreement became effective in February 1998. In order to comply with United States commitments to the WTO Agreement, the FCC implemented new rules in February 1998 that liberalize existing policies regarding (i) the services that may be provided by foreign affiliated United States international common carriers, including carriers controlled or more than 25 percent owned by foreign carriers that have market power in their home markets, and (ii) the provision of alternative traffic routing. The new rules make it much easier for foreign affiliated carriers to enter the United States market for the provision of international services. In August 1997, the FCC adopted mandatory settlement rate benchmarks. These benchmarks are intended to reduce the rates that United States carriers pay foreign carriers to terminate traffic in their home countries. The FCC will also prohibit a United States carrier affiliated with a foreign carrier from providing facilities-based service to the foreign carrier's home market until and unless the foreign carrier has implemented a settlement rate within the benchmark. The FCC also adopted new rules that will liberalize the provision of switched services over private lines to World Trade Organization member countries, by allowing such services on routes where 50% or more of United States billed traffic is being terminated in the foreign country at or below the applicable settlement rate benchmark or where the foreign country's rules concerning provision of international switched services over private lines are deemed equivalent to United States rules. Although the FCC's new policies and implementation of the WTO Agreement may result in lower out-payments by MCI WorldCom to terminate international traffic, there is a risk that the in-payment that MCI WorldCom will receive from inbound international traffic may decrease to an even greater degree. The implementation of the WTO Agreement may also make it easier for foreign carriers with market power in their home markets to offer United States and foreign customers end-to-end services to the disadvantage of MCI WorldCom, which may continue to face substantial obstacles in obtaining from foreign governments and foreign carriers the authority and facilities to provide such end-to-end services. Further, many foreign carriers have challenged, in court and at the FCC, the FCC's order adopting mandatory settlement rate benchmarks. If the FCC's settlement rate benchmark order was overturned, it could accelerate the full-fledged entry of foreign carriers into the United States, and make it more advantageous for foreign carriers to route international traffic into the United States at low, cost-based termination rates, while United States carriers would continue to have little choice but to route international traffic into most foreign countries at much higher, above cost, settlement rates. LITIGATION. On November 4, 1996, and thereafter, and on August 25, 1997, and thereafter, MCI and all of its directors, including the two directors who were also executive officers of MCI and the three directors elected by BT, were named as Page 21 22 defendants in a total of 15 complaints filed in the Court of Chancery in the State of Delaware. BT was named as a defendant in 13 of the complaints. The complaints were brought by alleged stockholders of MCI, individually and purportedly as class actions on behalf of all other stockholders of MCI. In general, the complaints allege that MCI's directors breached their fiduciary duty in connection with the MCI BT Merger Agreement, dated November 3, 1996 (the "MCI BT Merger Agreement") that BT aided and abetted those breaches of duty, that BT owes fiduciary duties to the other stockholders of MCI and that it breached those duties in connection with the MCI BT Merger Agreement. The complaints seek damages and injunctive and other relief. On or about October 8, 1997, all of MCI's directors, including the two MCI directors who were also executive officers of MCI and the three MCI directors elected by BT, were named as defendants in a purported derivative complaint filed in the Court of Chancery in the State of Delaware. BT and Tadworth Corporation were also named as defendants, and MCI was named as a nominal defendant. The plaintiff, derivatively and on behalf of MCI, alleges breach of fiduciary duty by the MCI directors and aiding and abetting those breaches of duty by BT in connection with the MCI BT Merger Agreement and WorldCom's exchange offer. The complaint seeks injunctive relief, damages and other relief. One of the purported stockholder class actions pending in Delaware Chancery Court has been amended and plaintiffs in four of the other purported stockholder class actions have moved to amend their complaints to name WorldCom and Acquisition Subsidiary, as additional defendants. They generally allege that the defendants breached their fiduciary duties to stockholders in connection with the MCI Merger and the agreement to pay a termination fee to WorldCom, and allege discrimination in favor of BT in connection with the MCI Merger. They seek, inter alia, damages and injunctive relief prohibiting the consummation of the MCI Merger and the payment of the inducement fee to BT. Three complaints were filed in the Federal District Court in Washington, D.C., as class actions on behalf of purchasers of MCI shares. The three cases were consolidated on April 1, 1998. On or about May 8, 1998, the plaintiffs in all three cases filed a consolidated amended complaint alleging, on behalf of purchasers of MCI's shares between July 11, 1997 and August 21, 1997, inclusive, that MCI and certain of its officers and directors failed to disclose material information about MCI, including that MCI was renegotiating the terms of the MCI BT Merger Agreement. The consolidated amended complaint seeks damages and other relief. The Company and the other defendants have moved to dismiss the consolidated amended complaint. On May 7, 1998, GTE Corporation and three of its subsidiaries filed suit in the U.S. District Court for the District of Columbia against MCI and WorldCom. The complaint alleges that the MCI Merger would have the effect of substantially lessening competition or tending to create a monopoly, and thereby violate section 7 of the Clayton Act, with respect to the markets for Internet backbone services, facilities to extend the reach of the Internet backbone, wholesale and retail long distance services and international calling services. The complaint requests declaratory and injunctive relief. At a scheduling conference on July 10, 1998, the District Court set a trial date of May 10, 1999. On or about October 14, 1998, GTE filed an amended complaint seeking declaratory and injunctive relief and damages, and on October 21, 1998, MCI and WorldCom moved to dismiss the amended complaint in its entirety. The Company believes that all of the complaints are without merit, and based on information currently available, the Company presently does not expect that the above actions will have a material adverse effect on the Company's consolidated results of operations or financial position. (L) RECLASSIFICATIONS Revenues and line costs for prior periods reflect a classification change for inbound international settlements which are now being treated as an offset to line costs instead of revenues. Previously, both MCI and WorldCom classified foreign post telephone and telegraph administration ("PTT") settlements on a gross basis with the outbound settlement reflected as line cost expense and the inbound settlement reflected as revenue. This change better reflects the way in which the business is operated because the Company actually settles in cash through a formal net settlement process that is inherent in the operating agreements with foreign carriers. Page 22 23 (M) RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. This statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires a company to formally document, designate and assess the effectiveness of transactions that receive hedge accounting. This statement is effective for fiscal years beginning after September 15, 1999, but may be implemented as of the beginning of any fiscal quarter after issuance (that is, fiscal quarters beginning September 16, 1998 and thereafter). This statement cannot be applied retroactively. SFAS No. 133 must be applied to (a) derivative instruments and (b) certain derivative instruments embedded in hybrid contracts that were issued, acquired, or substantively modified after December 31, 1997 (and, at the Company's election, before January 1, 1998). The Company has not yet quantified the effects of adopting SFAS No. 133 on the financial statements and has not determined the timing of or method of our adoption of this statement. However, this statement could increase volatility in earnings and other comprehensive income. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This Management's Discussion and Analysis of Financial Condition and Results of Operations may be deemed to include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve risk and uncertainty, including financial, regulatory environment and trend projections and the outcome of year 2000 efforts, as well as any statements preceded by, followed by, or that include the words "intends," "estimates," "believes," "expects," "anticipates," "should," "could" or similar expressions, and other statements contained herein regarding matters that are not historical facts. Although the Company believes that its expectations are based on reasonable assumptions, it can give no assurance that its expectations will be achieved. The important factors that could cause actual results to differ materially from those in the forward-looking statements herein (the "Cautionary Statements") include, without limitation: (1) the Company's degree of financial leverage; (2) risks associated with debt service requirements and interest rate fluctuations; (3) risks associated with year 2000 uncertainties; (4) acquisitions and the integration thereof; (5) risks of international business; (6) dependence on availability of transmission facilities; (7) regulation risks including the impact of the Telecom Act; (8) contingent liabilities; (9) the impact of competitive services and pricing; and (10) other risks referenced from time to time in the Company's filings with the SEC, including the Company's Prospectus Supplement dated August 7, 1998. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Statements. The Company does not undertake any obligation to release publicly any revisions to such forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. The following discussion and analysis relates to the financial condition and results of operations of the Company for the three and nine month periods ended September 30, 1998 and 1997 after giving effect to the BFP Merger, which was accounted for as a pooling-of-interests. The information should be read in conjunction with the restated consolidated financial statements and notes thereto contained herein and in the Company's Current Report on Form 8-K dated May 28, 1998 (filed May 28, 1998) and with Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. Unless otherwise defined, capitalized terms used herein have the meanings assigned to them in the Notes to Consolidated Financial Statements contained herein. Page 23 24 GENERAL The Company is one of the largest telecommunications companies in the United States, serving local, long distance and Internet 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 other telecommunications companies and international expansion. On September 14, 1998, the Company, through a wholly owned subsidiary, merged with MCI. Through the MCI Merger, the Company acquired one of the world's largest and most advanced digital networks, connecting local markets in the United States to more than 280 countries and locations worldwide. As a result of the MCI Merger, each share of MCI common stock was converted into the right to receive 1.2439 shares of MCI WorldCom Common Stock or approximately 755 million MCI WorldCom common shares in the aggregate, and each share of MCI Class A common stock outstanding (all of which were held by BT) was converted into the right to receive $51.00 in cash or approximately $7 billion in the aggregate. The funds paid to BT were obtained by the Company from (i) available cash as a result of the Company's $6.1 billion public debt offering in August 1998; (ii) the sale of MCI's iMCI Business to Cable & Wireless for $1.75 billion in cash on September 14, 1998; (iii) the sale of MCI's 24.9% equity stake in Concert to BT for $1 billion in cash on September 14, 1998; and (iv) availability under the Company's New Credit Facilities and commercial paper program. The MCI Merger was accounted for as a purchase; accordingly, operating results for MCI have been included from the date of acquisition. On August 4, 1998, MCI acquired a 51.79% voting interest and a 19.26% economic interest in Embratel, Brazil's only facilities-based national communications provider, for approximately $2.3 billion. The purchase price will be paid in local currency installments of which $916 million was paid on August 4, 1998 with the remainder to be paid in two equal installments over the next two years. Embratel provides interstate long distance and international telecommunications services, as well as over 40 other communications services, including leased high-speed data, satellite, Internet, frame and packet-switched services. Operating results for Embratel are included from the date of the MCI Merger. On January 31, 1998, MCI WorldCom, through a wholly owned subsidiary, merged with CompuServe. As a result of the CompuServe Merger, each share of CompuServe common stock was converted into the right to receive 0.40625 shares of MCI WorldCom Common Stock, or approximately 37.6 million MCI WorldCom common shares in the aggregate. Prior to the CompuServe Merger, CompuServe operated primarily through two divisions: Interactive Services and Network Services. Interactive Services offered worldwide online and Internet access services for consumers, while Network Services provided worldwide network access, management and applications, and Internet service to businesses. The CompuServe Merger was accounted for as a purchase; accordingly, operating results for CompuServe have been included from the date of acquisition. On January 31, 1998, MCI WorldCom also acquired ANS from AOL, and has entered into five year contracts with AOL under which MCI WorldCom and its subsidiaries will provide network services to AOL. As part of the AOL Transaction, AOL acquired CompuServe's Interactive Services Division and received a $175 million cash payment from MCI WorldCom. MCI WorldCom retained the CNS division. ANS provides Internet access to AOL and AOL's subscribers in the United States, Canada, the United Kingdom, Sweden and Japan, and also designs, develops and operates high performance wide-area networks for business, research, education and governmental organizations. The AOL Transaction was accounted for as a purchase, accordingly, operating results for ANS have been included from the date of acquisition. On January 29, 1998, MCI WorldCom, through a wholly owned subsidiary, merged with BFP. BFP is a leading facilities-based provider of competitive local telecommunications services, commonly referred to as a competitive local exchange carrier, in selected cities within the United States. BFP acquires and constructs its own state-of-the-art fiber optic networks and facilities and leases network capacity from others to provide IXCs, ISPs, wireless carriers and business, government and institutional end users with an alternative to the ILECs for a broad array of high quality voice, data, video transport and other telecommunications services. As a result of the BFP Merger, each share of BFP common stock was converted into the right to receive 1.85 shares of Common Stock or approximately 72.6 million MCI WorldCom common shares in the aggregate. The BFP Merger was accounted for as a pooling-of-interests and, accordingly, the Company's financial statements for periods prior to the BFP Page 24 25 Merger have been restated to include the results of BFP for all periods presented. The Company's strategy is to become a fully integrated communications company that would be well positioned to take advantage of growth opportunities in global telecommunications. Consistent with this strategy, the Company believes that transactions such as the MCI Merger, the CompuServe Merger and the AOL Transaction enhance the combined entity's opportunities for future growth, create a stronger competitor in the changing telecommunications industry, allow provision of end-to-end bundled service over global networks, and provide the opportunity for significant cost savings and operating efficiencies for the combined organization. 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 and the most significant portion of the Company's line costs is access charges, which are highly regulated. The FCC revised its rules regarding access charges in a manner that will, over time, revamp the access rate element structure and, over the near term, reduce the overall access revenues collected by the ILECs. The FCC's rate element restructuring is intended to align costs with the manner in which they are incurred by the ILECs. As a result, the usage based system has been replaced with a system composed of a combination of flat rate charges and usage based charges. The FCC has also implemented subsidy systems for local telephone services and services to schools, libraries, and hospitals. The subsidy systems will result in additional charges being placed on all telecommunications providers, which charges may be directly recovered from the end users. In addition, various state regulatory agencies are considering adoption of subsidy systems that could cause rate adjustments to the access services obtained by the Company and to retail rates. The Company cannot predict what effect continued regulation and increased competition between LECs and other IXCs will have on future access charges or the Company's business. 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. 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 Three Months For the Nine Months Ended September 30, Ended September 30, -------------------- ------------------- 1998 1997 1998 1997 ----- ---- ----- ---- Revenues...................................................... 100% 100% 100% 100% Line costs.................................................... 47.7 50.5 47.8 51.9 Selling, general and administrative........................... 24.0 21.5 22.0 22.4 Depreciation and amortization................................. 12.5 12.9 12.7 13.4 In-process research and development and other charges......... 85.9 -- 43.0 -- ----- ---- ----- ---- Operating income (loss)....................................... (70.0) 15.1 (25.5) 12.3 Other income (expense): Interest expense.......................................... (3.8) (5.3) (4.1) (5.4) Miscellaneous............................................. 0.4 0.6 0.4 0.6 ----- ---- ----- ---- Income (loss) before income taxes, minority interests and extraordinary items......................................... (73.4) 10.4 (29.2) 7.6 Provision for income taxes.................................... 4.6 6.4 5.3 4.9 ----- ---- ----- ---- Net income (loss) before, minority interests extraordinary items....................................................... (78.0) 4.0 (34.5) 2.7 Minority interests............................................ 0.3 -- 0.1 -- Extraordinary item............................................ -- -- (1.5) (0.1) Distribution on subsidiary trust mandatorily redeemable preferred securities 0.1 -- - -- Preferred dividend requirement................................ -- 0.4 0.2 0.4 ----- ---- ----- ---- Net income (loss) applicable to common shareholders........... (78.4)% 3.6% (36.3)% 2.3% ===== ==== ===== ====
Page 25 26 THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 VS. THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 Revenues for the three months ended September 30, 1998 increased 97% to $3.8 billion as compared to $1.9 billion for the three months ended September 30, 1997. For the nine months ended September 30, 1998, revenues increased 61% to $8.7 billion versus $5.4 billion for the same period of the prior year. The increase in total revenues is attributable to the MCI Merger, the CompuServe Merger and the AOL Transaction as well as internal growth. Results for the three and nine month periods ended September 30, 1998 include 16 days of MCI and Embratel operations. Prior year results have been restated to reflect the BFP Merger, which was accounted for as a pooling-of-interests. Actual reported revenues by category and associated revenue increases for the three and nine months ended September 30, 1998 and 1997 reflect the following increases by category (dollars in millions):
Three Months Ended September 30, Nine months Ended September 30, -------------------------------------- ------------------------------------- Actual Actual Percent Actual Actual Percent 1998 1997 Change 1998 1997 Change ------- ------- ------ ------- -------- ------ REVENUES Voice $ 1,877 $ 1,028 83 $ 4,247 $ 2,972 43 Data 735 419 75 1,768 1,160 52 International 301 195 54 802 515 56 Embratel 174 -- 100 174 -- 100 Internet 589 147 301 1,507 384 292 ------- ------- ------- -------- COMMUNICATION SERVICES 3,676 1,789 106 8,498 5,031 69 Other 82 122 (33) 163 333 (51) ------- ------- ------- -------- TOTAL REVENUES $ 3,758 $ 1,911 97 $ 8,661 $ 5,364 61 ======= ======= ======= ========
The following table provides supplemental detail for MCI WorldCom revenues. Since actual results only reflect 16 days of operations for MCI and Embratel, the pro forma results are more indicative of internal growth for the combined company. The pro forma revenue increases for the three and nine months ended September 30, 1998 and 1997 reflect the following increases by category (dollars in millions):
Three Months Ended September 30, Nine months Ended September 30, --------------------------------------- ---------------------------------------- Pro Forma Pro Forma Percent Pro Forma Pro Forma Percent 1998 1997 Change 1998 1997 Change ------- ------- ------- -------- -------- ------- REVENUES Voice $ 4,907 $ 4,462 10 $ 14,483 $ 13,291 9 Data 1,520 1,147 33 4,211 3,295 28 International 302 195 55 802 515 56 Embratel 930 507 83 2,422 1,510 60 Internet 589 343 72 1,588 917 73 ------- ------- -------- -------- COMMUNICATION SERVICES 8,248 6,654 24 23,506 19,528 20 Other 358 477 (25) 1,323 1,486 (11) ------- ------- -------- -------- TOTAL REVENUES $ 8,606 $ 7,131 21 $ 24,829 $ 21,014 18 ======= ======= ======== ========
Pro forma results for the prior periods reflect a classification change for inbound international settlements which are now being treated as an offset to line costs instead of revenues. Previously, both MCI and WorldCom classified foreign PTT settlements on a gross basis with the outbound settlement reflected as line cost expense and the inbound settlement reflected as revenue. This change better reflects the way in which the business is operated because the Company actually settles in cash through a formal net settlement process that is inherent in the operating agreements with foreign carriers. The following discusses the pro forma revenue increases for the three and nine month periods ended September 30, 1998 as compared to pro forma revenues for the comparable prior year periods. The pro forma revenues assume that the MCI Merger, CompuServe Merger and the AOL Transaction occurred at the beginning of 1997. Changes in actual revenues are shown in the Consolidated Statements of Operations and the foregoing tables and, as noted above, primarily reflect the MCI Merger, CompuServe Merger, AOL Transaction and the internal growth of the Company. Page 26 27 Voice (formerly domestic switched) revenues for the third quarter experienced a 10% pro forma year-over-year increase driven by a gain of 15% in traffic. For the nine month period ended September 30, 1998, voice revenues increased 9% over the prior year pro forma amount on a 17% increase in traffic. Strong long distance volume gains in domestic commercial sales channels, combined with an increasing mix of local services, were the primary contributors to this increase. Local voice revenues grew 87% in the third quarter of 1998 versus the same period of the prior year. For the nine months ended September 30, 1998 local voice revenues experienced a 97% pro forma year over year increase. Voice revenues include both long distance and local domestic switched revenues. While the Company continues to show significant percentage gains in switched local, it is still a relatively small component of total Company revenues. Pro forma data (formerly domestic private line) revenues for the three and nine month periods ended September 30, 1998 increased 33% and 28%, respectively. The revenue growth for data services continues to be driven by significant commercial end-user demand for high-speed data and by Internet-related growth on both a local and long-haul basis. This growth is not only being fueled by connectivity demands, but applications are becoming more strategic, far reaching and complex; additionally, bandwidth consumption is driving an acceleration in growth for higher capacity circuits. Data includes both long distance and local dedicated bandwidth sales. Rapidly growing demand for high-speed data access as well as data transport has contributed to a 43% pro forma year over year local data revenue growth for the third quarter of 1998 and a 46% pro forma year over year increase for the nine month period. As of September 30, 1998, the Company had approximately 16 million domestic local voice grade equivalents and approximately 38,000 buildings connected over its high-capacity circuits. Local route miles of connected fiber are in excess of 8,000 and domestic long distance route miles are in excess of 45,000. Pro forma International revenues - those revenues originating outside of the United States - for the third quarter of 1998 were $302 million, an increase of 55% as compared with $195 million for the same pro forma period of the prior year. For the nine month period ended September 30, 1998, pro forma international revenues increased 56% to $802 million versus $515 million for the same pro forma period of the prior year. In July 1998, the pan-European network was commissioned for service and now provides MCI WorldCom the capability to connect from end-to-end over 5,000 buildings in Europe with over 33,000 buildings in the U.S. - all over its own high-capacity circuits. In Europe, the Company has over 900 route miles of local fiber and over 1,700 long distance route miles. Additionally, plans were announced to build national networks in the United Kingdom, France and Germany. Pro Forma Embratel revenues increased to $930 million for the three months ended September 30, 1998 versus $507 million for the same period of the prior year. For the nine months ended September 30, 1998 revenues increased to $2.4 billion from $1.5 billion in the same period of the prior year. These increases principally reflect the implementation of a new interconnection regime among Embratel and Brazil's three regional fixed-line operators, effective April 1, 1998. Under this new regime, Embratel has begun receiving remittances from the fixed-line operators for switched services provided to end-customers. Embratel has also begun paying interconnection charges associated with this service to the regional fixed-line operators. In addition to such charges, Embratel is required to pay a supplemental per-minute charge for interconnection through June 30, 2001. The publicly stated intent of the new regime was to minimally impact the profitability of Embratel and the three fixed-line operators. Embratel results are consolidated with those of the Company due to the Company's 51.79% voting interest and 19.26% economic interest in Embratel. Pro forma Internet revenues for the three and nine month periods ended September 30, 1998 increased 72% and 73%, respectively, over the prior year pro forma amounts. Growth is being driven by both dial up and dedicated connectivity to the Internet as more and more business customers migrate their data networks and applications to Internet-based technologies. Additionally, Internet revenues growth is partially attributable to the acquired customer contract for which profit margins have been reflected at market rates as of the date of acquisition. The remaining term of the acquired contract and associated amortization to reflect market rates is 52 months. MCI's Internet revenues have been excluded from the above table, due to the divestiture of the iMCI Business on September 14, 1998. Pro forma other revenues for the third quarter of 1998 were $358 million, down 25% as compared with the pro forma third quarter of 1997. For the nine month period ended September 30, 1998, pro forma other revenues decreased 11% to $1.3 billion versus $1.5 billion for the same pro forma period of the prior year. The year over year decline reflects the negative impact of eliminating certain lines of operation and the Canadian currency translation effects. The following discusses the results of operations for the three and nine months ended September 30, 1998, as compared to the comparable prior year periods. Line costs as a percentage of revenues for the third quarter of 1998 were 47.7% as compared to 50.5% reported for the same period of the prior year. On a year-to-date basis, line costs as a percentage of revenues decreased to 47.8% as compared to 51.9% reported for the same period of the prior year. Line costs for the three and nine month periods ended September 30, 1998 include a $37 million one-time merger-related charge for unfavorable contracts. Overall decreases are attributable to changes in the product mix and synergies and economies of scale resulting from network efficiencies achieved from the assimilation of CNS and ANS into the Company's operations and were offset in part by universal service fund costs recorded for the first nine months of 1998. Additionally, access charge reductions beginning in July 1997 reduced total line cost expense by approximately $84 million for the first nine months in 1998. While access Page 27 28 charge reductions were primarily passed through to the customer, line costs as a percentage of revenues was positively affected by more than half a percentage point for both the three and nine months ended September 30, 1998. The Company anticipates that line costs as a percentage of revenues will continue to decline as a result of synergies and economies of scale resulting from network efficiencies achieved from the assimilation of MCI, CNS, ANS and BFP into the Company's operations. Additionally, local revenues are increasing rapidly and line costs related to local are primarily fixed in nature - leading to lower line costs as a percentage of revenues. Selling, general and administrative expenses for the third quarter of 1998 were $902 million or 24.0% of revenues as compared to $411 million or 21.5% of revenues for the third quarter of 1997. For the nine months ended September 30, 1998, this expense was $1.9 billion or 22.0% of revenues compared to the $1.2 billion or 22.4% of revenues for 1997. The increase in selling, general and administrative expenses as a percentage of revenues for the three month period ended September 30, 1998 includes MCI for 16 days and reflects the Company's expanding operations, primarily through the MCI Merger. The increase is also attributable to a one-time merger-related charge of $21 million for the adjustment of certain asset carrying values. The Company's goal is to achieve additional selling, general and administrative synergies in connection with the MCI Merger as the result of the assimilation of MCI into the Company's strategy of cost control. Depreciation and amortization expense for the third quarter of 1998 increased to $469 million or 12.5% of revenues from $247 million or 12.9% of revenues for the third quarter of 1997. On a year-to-date basis, this expense increased to $1.1 billion or 12.7% of revenues from $719 million or 13.4% of revenues for the comparable 1997 period. These increases reflect increased amortization associated with the MCI Merger, CompuServe Merger and AOL Transaction and additional depreciation related to capital expenditures. As a percentage of revenues, these costs decreased due to the higher revenue base. In the first quarter of 1998 the Company recorded a pre-tax charge of $69 million for employee severance, alignment charges and direct merger costs associated with the BFP Merger. Additionally, in the third quarter of 1998, the Company recorded a pre-tax charge of $127 million primarily in connection with the MCI Merger. The third quarter charge included severance costs associated with the termination of certain employees which is expected to be completed by the first quarter of 1999. Also included are alignment charges, and other exit activities which include the costs of consolidating and closing facilities, loss on sale or write down of assets and conformance of accounting principles. (See Note E) In connection with recent business combinations, the Company made allocations of the purchase price to acquired in-process technology totaling $429 million in the first quarter of 1998 related to the CompuServe Merger and AOL Transaction and $3.1 billion in the third quarter of 1998 related to the MCI Merger (See Note E). Interest expense in the third quarter of 1998 was $141 million or 3.8% of revenues, as compared to $102 million or 5.3% of revenues reported in the third quarter of 1997. For the nine months ended September 30, 1998, interest expense was $351 million or 4.1% of revenues, as compared to $289 million or 5.4% of revenues for the first nine months of 1997. The increase in interest expense is attributable to higher debt levels as the result of higher capital expenditures, the 1997 and 1998 fixed rate debt financings and the MCI Merger, offset by lower interest rates as a result of the Tender Offers, the 1998 fixed rate debt financings and slightly lower rates in effect on the Company's variable rate long-term debt. For the three months ended September 30, 1998 and 1997, weighted average annual interest rates on the Company's long-term debt were 7.03% and 7.99%, respectively, while weighted average annual levels of borrowings were $11.9 billion and $6.0 billion, respectively. For the nine months ended September 30, 1998 and 1997, weighted average annual interest rates on the Company's total long-term debt were 7.12% and 7.75%, respectively, while weighted average annual levels of borrowing were $9.74 billion, and $5.61 billion, respectively. The Company recorded a tax provision of $174 million and $462 million, respectively, for the three and nine month periods ended September 30, 1998 on a pretax loss of $2.76 billion and $2.52 billion, respectively. Although the Company generated a consolidated pre-tax loss for the three and nine months ended September 30, 1998, permanent non-deductible items aggregating approximately $3.2 billion and $3.8 billion, respectively, resulted in the recognition of taxable income. Included in the permanent non-deductible items was the $3.53 billion charge for in-process research and development related to the MCI Merger, CompuServe Merger and AOL Transaction. In the first quarter of 1998, the Company recorded an extraordinary item totaling $128.7 million, net of income tax benefit of $77.6 million. The charge was recorded in connection with the Tender Offers and related refinancings of outstanding debt of BFP discussed below. In the second quarter of 1997 the Company recognized an extraordinary loss of $2.9 million related to the early extinguishment of secured indebtedness. For the quarter ended September 30, 1998, the Company reported a net loss of $2.9 billion as compared to net income of $69 million reported in the third quarter of 1997. Diluted loss per common share was $2.44 compared to diluted earnings per common share of $0.07 per share for the comparable 1997 period. Page 28 29 For the nine months ended September 30, 1998, the Company reported a net loss of $3.1 billion or $2.89 per share compared to net income of $122 million or $0.12 per share for the prior year period. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 1998, the Company's total debt was $20.27 billion, an increase of $12.85 billion from December 31, 1997 primarily due to the acquisition of MCI debt, including Embratel debt and the related cost to finance the Embratel investment, financing of the approximately $7 billion payment to BT and increased capital expenditures. In connection with the BFP Merger, the Company announced in February 1998 that it had commenced the Tender Offers to purchase for cash various series of outstanding BFP Notes. Concurrently with the Tender Offers, MCI WorldCom obtained the requisite consents to eliminate certain restrictive covenants and amend certain other provisions of the respective indentures of the BFP Notes. In March 1998, the Company accepted all BFP Notes validly tendered. As of the expiration of the Tender Offers, MCI WorldCom had received valid tenders and consents from holders of approximately $1.1 billion of BFP Notes (over 99% of total outstanding). The funds required to pay all amounts required under the Tender Offers were obtained by MCI WorldCom from available working capital and lines of credit. In connection with the Tender Offers and related refinancings, MCI WorldCom recorded an extraordinary item of $128.7 million, net of income tax benefit of $77.6 million in the first quarter of 1998. On August 6, 1998, MCI WorldCom replaced its Old Credit Facilities with $12.0 billion in New Credit Facilities consisting of $3.75 billion of Facility A Loans, $1.25 billion of Facility B Loans and $7 billion of Facility C Loans. The New Credit Facilities provide liquidity support for the Company's commercial paper program and will be used for other general corporate purposes. The Facility A Loans and the Facility B Loans mature on June 30, 2002. The Facility C Loans have a 364-day term, which may be extended for up to two successive 364-day terms thereafter to the extent of the committed amounts from those lenders consenting thereto, with a requirement that lenders holding at least 51% of the committed amounts consent. Additionally, effective as of the end of such 364-day term, the Company may elect to convert up to $4 billion of the principal debt outstanding under the Facility C Loans from revolving loans to term loans with a maturity date no later than one year after the conversion. The New Credit Facilities bear interest payable in varying periods, depending on the interest period, not to exceed six months, or with respect to any Eurodollar Rate borrowing, 12 months if available to all lenders, at rates selected by the Company under the terms of the New Credit Facilities, including a Base Rate or Eurodollar Rate, plus the applicable margin. The applicable margin for the Eurodollar Rate borrowing varies from 0.35% to 0.75% as to Facility A Loans and Facility B Loans and from 0.225% to 0.450% as to Facility C Loans, in each case based upon the better of certain debt ratings. The New Credit Facilities are unsecured but include a negative pledge of the assets of the Company and its subsidiaries (subject to certain exceptions). The New Credit Facilities require compliance with a financial covenant based on the ratio of total debt to total capitalization, calculated on a consolidated basis. The New Credit Facilities require compliance with certain operating covenants which limit, among other things, the incurrence of additional indebtedness by the Company and its subsidiaries, sales of assets and mergers and dissolutions, which covenants are generally less restrictive than those contained in the Old Credit Facilities and which do not restrict distributions to shareholders, provided the Company is not in default under the New Credit Facilities. The Facility A Loans and the Facility C Loans are subject to annual commitment fees not to exceed 0.25% and 0.12%, respectively, of any unborrowed portion of the facilities. Subsequent to September 30, 1998, the Company elected to repay the Facility B Loans and cancel the facility commitment of $1.25 billion. The funds used to repay Facility B Loans were obtained by the Company from availability under the Company's New Credit Facilities and commercial paper program. The Company approved the issuance of commercial paper notes in the aggregate principal amount not to exceed $10.0 billion, which notes have a maturity not to exceed 364 days from the date of issuance. The Company maintains unused credit facilities equal to 100% of the commercial paper notes outstanding. At September 30, 1998, $2.74 billion was outstanding under the commercial paper program. As of September 30, 1998, the Company had available liquidity of $8.96 billion under its New Credit Facilities and Page 29 30 commercial paper program and from available cash. After the Facility B Loans were repaid, available liquidity was reduced by $1.25 billion. On August 11, 1998, the Company completed a public debt offering of $6.1 billion principal amount of debt securities with interest rates ranging from 6.125% to 6.95% and maturing from August 2001 to August 2028. The net proceeds of $6.04 billion were used to pay down commercial bank debt, finance the approximately $7 billion payment to BT and for general corporate purposes. The notes bear interest payable semiannually in arrears on February 15 and August 15 of each year, commencing February 15, 1999. The Notes are redeemable, as a whole or in part, at the option of the Company, at any time or from time to time, at respective redemption prices equal to the greater of (i) 100% of the principal amount of the Notes to be redeemed or (ii) the sum of the present values of the Remaining Scheduled Payments (as defined therein) plus (a) 10 basis points for the Notes Due 2001, (b) 15 basis points for the Notes Due 2003 and the Notes Due 2005, or (c) 20 basis points for the Notes Due 2028, plus in the case of each of clause (i) and (ii) accrued interest to the date of redemption. At the time of the MCI Merger, MCI had outstanding $1.44 billion of MCI Senior Debentures with rates ranging from 7.125% to 8.25% and maturing from January 2023 through June 2027, and $2.66 billion of MCI Senior Notes with rates ranging from 6.125% to 7.5% and maturing from March 1999 through April 2012. Additionally, MCI had outstanding a $1.34 billion note payable in annual local currency installments over the next two years as a result of MCI's purchase of Embratel on August 4, 1998, and other debt including, without limitation, capital leases. In connection with the MCI Merger, the Company also acquired $750 million aggregate principal amount of 8% Cumulative Quarterly Income Preferred Securities, Series A, representing 30 million shares outstanding (preferred securities) due June 30, 2026 which were previously issued by the Trust. The Trust exists for the sole purpose of issuing the preferred securities and investing the proceeds in the Company's Subordinated Debt Securities due June 30, 2026, the only assets of the Trust. For the nine months ended September 30, 1998, the Company's cash flow from operations was $1.48 billion, increasing 57% from $944 million in the comparable period for 1997. The increase in cash flow from operations was primarily attributable to internal growth and synergies and economies of scale resulting from network efficiencies and selling, general and administrative cost savings achieved from the assimilation of recent acquisitions into the Company's operations. In 1998, the Company's existing receivables purchase agreement generated additional proceeds of $72 million, bringing the total amount outstanding to $489 million. The Company used these proceeds to reduce outstanding debt under the Company's existing credit facilities. As of September 30, 1998, the purchaser owned an undivided interest in a $1.2 billion pool of receivables. Cash used in investing activities for the nine months ended September 30, 1998 totaled $6.79 billion and included capital expenditures of $3.27 billion and acquisition and related costs of $3.05 billion. Primary capital expenditures include purchases of switching, transmission, communication and other equipment. The Company anticipates that approximately $1.9 billion will be spent during the remainder of 1998 for transmission and communications equipment, construction and other capital expenditures. Acquisition and related costs includes the costs associated with the MCI Merger, CompuServe Merger and AOL Transaction. Included in cash flows from financing activities are payments of $12.7 million for the Series A Preferred Stock dividend and $0.7 million for the Series B preferred dividend requirements. The Company has never paid cash dividends on its Common Stock. Dividends on the Series B Convertible Preferred Stock of MCI WorldCom ("MCI WorldCom Series B Preferred Stock") accrue at the rate per share of $0.0775 per annum and are payable in cash. Dividends will be paid only when, as and if declared by the Board of Directors of the Company. The Company anticipates that dividends on the MCI WorldCom Series B Preferred Stock will not be declared but will continue to accrue. Upon conversion, accrued but unpaid dividends are payable in cash or shares of MCI WorldCom Common Stock at the Company's election. In May 1998, the Company exercised its option to redeem all of the outstanding Series A Preferred Stock and related Depositary Shares. Prior to the redemption date, substantially all of the holders of Series A Preferred Stock elected to convert the preferred stock into Common Stock, resulting in the issuance of approximately 32.7 million shares of Common Stock. Page 30 31 In connection with the MCI Merger, MCI WorldCom paid BT $51.00 in cash without interest for each of the shares of MCI Class A Common Stock it owned, or approximately $7 billion in the aggregate. Additionally, MCI WorldCom paid BT a fee of $465 million to induce BT to terminate the previously signed BT/MCI Merger Agreement and to enter into the BT Agreement. MCI WorldCom funded the commitment through a combination of available cash from the August 1998 public debt offering and proceeds from the sale of the iMCI Business and MCI's investment in Concert and availability unde the Company's New Credit Facilities and commercial paper program. Increases in interest rates on MCI WorldCom's variable rate debt would have an adverse effect upon MCI WorldCom's reported net income and cash flow. MCI WorldCom believes that the combined operations of MCI WorldCom, CNS, ANS, and MCI will generate sufficient cash flow to service MCI WorldCom's debt and capital requirements; however, economic downturns, increased interest rates and other adverse developments, including factors beyond MCI WorldCom's control, could impair its ability to service its indebtedness. In addition, the cash flow required to service MCI WorldCom's debt may reduce its ability to fund internal growth, additional acquisitions and capital improvements. The development of the businesses of MCI WorldCom and the installation and expansion of its domestic and international networks will continue to require significant capital expenditures. Failure to have access to sufficient funds for capital expenditures on acceptable terms or the failure to achieve capital expenditure synergies may require MCI WorldCom to delay or abandon some of its plans, which could have a material adverse effect on the success of MCI WorldCom. The Company has historically utilized a combination of cash flow from operations and debt to finance capital expenditures and a mixture of cash flow, debt and stock to finance acquisitions. The Company expects to experience increased capital intensity due to network expansion and merger related expenses as noted above and believes that funding needs in excess of internally generated cash flow and the Company's New Credit Facilities and commercial paper program will be met by accessing the debt markets. The Company believes that MCI WorldCom, following the MCI Merger, CompuServe Merger and the AOL Transaction will generate sufficient cash flow to adequately fund the capital requirements of these businesses. As a result of the MCI Merger, the CompuServe Merger and the AOL Transaction, the Company believes that the operating and capital synergies from the integration of these acquisitions into MCI WorldCom's operations will further enhance the cash flow contribution for the Company. Absent significant capital requirements for other acquisitions, the Company believes that cash flow from operations and available liquidity, including the Company's New Credit Facilities and commercial paper program and available cash will be more than adequate to meet the Company's capital needs for the remainder of 1998. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. This statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires a company to formally document, designate and assess the effectiveness of transactions that receive hedge accounting. This statement is effective for fiscal years beginning after September 15, 1999, but may be implemented as of the beginning of any fiscal quarter after issuance (that is, fiscal quarters beginning September 16, 1998 and thereafter). This statement cannot be applied retroactively. SFAS No. 133 must be applied to (a) derivative instruments and (b) certain derivative instruments embedded in hybrid contracts that were issued, acquired, or substantively modified after December 31, 1997 (and, at the Company's election, before January 1, 1998). The Company has not yet quantified the effects of adopting SFAS No. 133 on the financial statements and has not determined the timing of or method of our adoption of this statement. However, this statement could increase volatility in earnings and other comprehensive income. Page 31 32 Year 2000 Readiness Disclosure Due to their extensive use of computer technology, both MCI and WorldCom began developing strategic plans in 1996 to address their respective year 2000 issues. Since the MCI Merger, the Company has been melding these strategies. The Company's year 2000 compliance plan is an ongoing program in which remediation strategies are being implemented by the Company's business organizations to address noncompliant computer and network systems and technology. The Company has a central organization that has overall responsibility for coordinating the implementation of this strategy. The remediation strategies followed by the Company's business organizations generally involve a sequence of steps that include (i) identifying computer hardware, software and network components and equipment potentially impacted by year 2000 problems; (ii) analyzing the date sensitivity of those elements; (iii) developing plans for remediation where necessary; (iv) converting non-compliant code or equipment (or, in some cases, replacing or decommissioning systems); (v) testing, and (vi) deploying and monitoring remediation solutions. These steps will vary to meet the particular needs of a business organization and, in some cases, will overlap. Testing, for example, may be performed at several stages of the remediation process. The Company has substantially completed its efforts to identify and assess year 2000 computer issues, and its business organizations are in the process of developing remediation plans, converting noncompliant code or equipment, and replacing or decommissioning systems, and testing. The Company has targeted year 2000 compliance for the majority of its mission-critical systems, including network and customer interfacing systems, on or before March 31, 1999. The remaining mission-critical systems, and non-mission critical systems, are targeted for compliance by June 30, 1999, with full deployment of the remediation solutions throughout the Company's network targeted for no later than September 30, 1999. As part of its year 2000 plan, the Company is seeking confirmation from its domestic and foreign interconnecting carriers (collectively, the "Interconnecting Carriers") and major communications equipment vendors (the "Primary Vendors") that they are developing and implementing plans to become year 2000 compliant. The Company has contacted these carriers and vendors, and will continue to do so, but has not yet received enough information from certain domestic and foreign carriers to assess their year 2000 readiness. The Company has received information from its Primary Vendors regarding their year 2000 readiness. This information indicates the Primary Vendors have documented plans to become year 2000 compliant. Like all major telecommunication carriers, the Company's ability to provide service is dependent on its Interconnecting Carriers and Primary Vendors. The Company intends to prepare contingency plans to address potential year 2000 related business interruptions that may occur on January 1, 2000 or thereafter. The Company anticipates that these contingency plans will primarily address potential year 2000 problems due to failures to remediate major systems successfully, and potential failure of the Company's Interconnecting Carriers' and Primary Vendors' year 2000 compliance efforts. The Company plans to complete preparation and implementation of its contingency plans by December 31, 1999. Failure to meet this target could materially impact the Company's operations. To achieve its year 2000 compliance plan, the Company is utilizing both internal and external resources to identify, correct or reprogram, and test its systems for year 2000 compliance. The Company expects to incur internal labor as well as consulting and other expenses related to infrastructure and facilities enhancements necessary to prepare its systems for the year 2000. The Company's use of internal resources to achieve its year 2000 compliance plan has not had a material adverse effect on its ability to develop new products and services or to maintain and upgrade, if necessary, its existing products and services. The year 2000 costs incurred by the MCI and WorldCom for the nine months ended September 30, 1998, which have been included in selling, general and administrative expenses for that period, were approximately $116 million. This level of expenditures is consistent with the planned expenditures for the period. The Company expects to incur approximately $384 million in expenses over the next five quarters to support its year 2000 compliance initiatives. The costs of the Company's year 2000 remediation efforts are based upon management's best estimates, which require assumptions about future events, availability of resources and personnel, third-party remediation actions, and other factors. There are no assurances that these estimates will be Page 32 33 accurate, and actual amounts may differ materially based on a number of factors, including the availability and cost of resources to undertake remediation activities and the scope and nature of the work required to complete remediation. Due to the inherent uncertainties concerning year 2000 remediation efforts, and the potential impact of actions by third parties, the Company cannot predict its most reasonably likely worst case scenario. The failure to correct a material year 2000 problem could result in an interruption in, or a failure of, normal business activities and operations. Such failures could materially and adversely affect the Company's results of operations, liquidity and financial condition. The Company is unable to determine at this time whether the consequences of year 2000 failures will have a material impact on the Company's results of operations, liquidity or financial condition due to the general uncertainty inherent in the year 2000 problem, resulting in part from the uncertainty of the year 2000 readiness of its Interconnecting Carriers and Primary Vendors, and other suppliers, as well as uncertainties related to the Company's ongoing remediation program. The Company's year 2000 compliance plan is expected to reduce significantly the Company's level of uncertainty about the year 2000 problem and, in particular, about the year 2000 compliance and readiness of its Interconnecting Carriers and Primary Vendors. The Company believes that, with the implementation of new business systems, its Interconnecting Carriers and Primary Vendors year 2000 readiness, and completion of the year 2000 compliance plan as scheduled, it will maintain normal operations. Statements concerning year 2000 issues which contain more than historical information may be considered forward-looking statements (as that term is defined in the Private Securities Litigation Reform Act of 1995), which are subject to risks and uncertainties. Actual results may differ materially from those expressed in the forward-looking statements, and readers are cautioned that the Company's year 2000 discussion should be read in conjunction with the company's statement on forward-looking statements which appears at the beginning of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. EURO CONVERSION On January 1, 1999, certain member countries of the European Union are scheduled to establish fixed conversion rates between their existing currencies and the European Union's common currency ("Euro"). The transition period for the introduction of the Euro will be between January 1, 1999 to December 31, 2000. All of the final rules and regulations have not yet been identified by the European Commission with regard to the Euro. The Company is currently evaluating methods to address the many issues involved with the introduction of the Euro, including the conversion of information technology systems, recalculating currency risk, recalibrating derivatives and other financial instruments, strategies concerning continuity of contracts, and impacts on the processes for preparing taxation and accounting records. At this time, the Company has not yet determined the cost related to addressing this issue and there can be no assurance as to the effect of the Euro on the consolidated financial statements. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company believes its market risk exposure with regard to its marketable equity securities is limited to changes in quoted market prices for such securities. Based upon the composition of the Company's marketable equity securities at September 30, 1998, the Company does not believe a hypothetical 10 percent adverse change in quoted market prices would be material to net income. The Company's policy is to manage interest rates through the use of a combination of fixed and variable rate debt. Currently, the Company does not use derivative financial instruments to manage its interest rate risk. The Company has minimal cash flow exposure due to general interest rate changes for its fixed rate, long-term debt obligations. The Company does not believe a hypothetical 10% adverse change in the Company's variable rate debt obligations would be material to the Company's results of operations. Although the Company conducts business in foreign countries, foreign currency transaction gains and losses were not material to the Company's results of operations for the nine months ended September 30, 1998. Accordingly, the Company was not subject to material foreign currency exchange rate risk from the effects that exchange rate movements of foreign currencies would have on the Company's future costs or on future cash flows it would receive from its foreign subsidiaries. To date, the Company has not entered into any significant foreign currency forward exchange contracts or other derivative financial instruments to hedge the effects of adverse fluctuations in foreign currency exchange rates. The Company is evaluating the future use of such financial instruments as well as the effect of the Euro conversion, described above, on the Company's operations. Page 33 34 PART II. OTHER INFORMATION Item 1. Legal Proceedings There have been no material changes in the legal proceedings reported in the Company's Annual Report on Form 10-K for the year ended December 31, 1997, except as may be reflected in the discussion under Note K of the Notes to Consolidated Financial Statements in Part I, Item 1, above. Item 2. Changes in Securities and Use of Proceeds In connection with the MCI Merger, the Company and MCI have executed certain agreements constituting a full, irrevocable and unconditional guarantee by the Company and MCI of all of the obligations of MCI Capital I, a wholly-owned Delaware statutory business trust, with respect to its 8% Cumulative Quarterly Income Preferred Securities, Series A. See Note G of the Notes to Consolidated Financial Statements contained in Part I, Item 1, above. Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to a Vote of Securities Holders None Item 5. Other Information In September 1998, the Company amended and restated its Bylaws to, among other things, adopt advance notice provisions relating to proposals of business and nominations of directors at meetings of shareholders. The amended and restated Bylaws were described in and filed as an exhibit to the Company's Current Report on Form 8-K dated September 14, 1998 (filed September 29, 1998). Item 6. Exhibits and Reports on Form 8-K A. Exhibits See Exhibit Index B. Reports on Form 8-K (i) Current Report on Form 8-K dated September 14, 1998 (filed September 29, 1998) reporting under Item 2, Acquisition or Disposition of Assets, among other things, information related to the MCI Merger, and the Company's amended and restated Bylaws to, among other things, adopt advance notice provisions relating to proposals of business and nominations of directors at meetings of shareholders and under Item 7(a), Financial Statements of Businesses Acquired, the following financial statements: MCI Communications Corporation and Subsidiaries - for the three and six month periods ended June 30, 1997 and 1998 (unaudited) Consolidated Income Statements Consolidated Balance Sheets Consolidated Statements of Cash Flows Consolidated Statements of Stockholders' Equity Notes to Interim Condensed Consolidated Financial Statements Management's Discussion and Analysis of Financial Condition and Results of Operations Page 34 35 (ii) Current Report on Form 8-K dated July 23, 1998 (filed July 24, 1998), reporting under Item 5, Other Events, certain portions of WorldCom's second quarter 1998 press release (iii) Current Report on Form 8-K dated August 4, 1998 (filed August 4, 1998), reporting under Item 5, Other Events, among other things, information regarding MCI's announcement that it had entered into a letter agreement with Cable & Wireless to sell the iMCI Business, WorldCom's announcement of negotiations for the New Credit Facilities and certain portions of MCI's second quarter 1998 press release. (iv) Current Report on Form 8-K dated August 6, 1998 (filed August 6, 1998) reporting under Item 5, Other Events, among other things, certain information regarding the MCI Merger and under Item 7(b), Pro Forma Information, the following financial information: WorldCom, Inc. - For the three months ended March 31, 1998 and for the fiscal year ended December 31, 1997: Pro Forma Condensed Combined Financial Statements Pro Forma Condensed Combined Balance Sheet as of March 31, 1998 Pro Forma Condensed Combined Statement of Operations for the three months ended March 31, 1998 Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 1997 Notes to Pro Forma Condensed Combined Financial Statements (v) Current Report on Form 8-K dated August 6, 1998 (filed August 7, 1998), reporting under Item 5, Other Events, information regarding the Company's $6.1 billion public debt offer in August 1998 and the New Credit Facilities. Page 35 36 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report on Form 10-Q to be signed on its behalf by Scott D. Sullivan, thereunto duly authorized to sign on behalf of the registrant and as the principal financial officer thereof. MCI WORLDCOM, INC. By: /s/ SCOTT D. SULLIVAN -------------------------------- Scott D. Sullivan Dated: November 16, 1998 Chief Financial Officer Page 36 37 EXHIBIT INDEX
Exhibit No. Description - ----------- ----------- 1.1 Underwriting Agreement dated August 6, 1998, between WorldCom, Inc. ("WorldCom") and Salomon Brothers Inc and the other firms named therein, acting severally on behalf of themselves as Managers and Underwriters and on behalf of the other several Underwriters, if any, named in the Terms Agreement (incorporated herein by reference to Exhibit 1.1 to the Company's Current Report on Form 8-K dated August 6, 1998 (filed August 7, 1998) (File No. 0-11258)) 1.2 Terms Agreement, dated August 6, 1998, between WorldCom, and Salomon Brothers Inc and the other firms named therein, acting severally on behalf of themselves as Managers and Underwriters and on behalf of the other several Underwriters named therein (incorporated herein by reference to Exhibit 1.2 to the Company's Current Report on Form 8-K dated August 6, 1998 (filed August 7, 1998) (File No. 0-11258)) 2.1 Agreement and Plan of Merger dated as of November 9, 1997 among WorldCom, TC Investments Corp. and MCI Communications Corporation (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K dated November 9, 1997 (filed November 12, 1997) (File No. 0-11258))* 2.2 Agreement dated as of November 9, 1997 among British Telecommunications plc, WorldCom and MCI Communications Corporation (incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K dated November 9, 1997 (filed November 12, 1997) (File No. 0-11258))* 2.3 Agreement and Plan of Merger, dated as of September 7, 1997, by and among H&R Block, Inc., H&R Block Group, Inc., CompuServe Corporation, WorldCom, and Walnut Acquisition Company, L.L.C. (incorporated herein by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K dated September 7, 1997 (File No. 0-11258))* 2.4 Purchase and Sale Agreement by and among America Online, Inc., ANS Communications, Inc. and WorldCom, dated as of September 7, 1997 (incorporated herein by reference to Exhibit 2.4 to the Company's Current Report on Form 8-K dated September 7, 1997 (File No. 0-11258))* 2.5 Amended and Restated Agreement and Plan of Merger dated as of October 1, 1997 by and among WorldCom, BV Acquisition, Inc. and Brooks Fiber Properties, Inc. (incorporated by reference to Exhibit 2.1 to WorldCom's Registration Statement on Form S-4 (File No. 333-43253))* 4.1 Second Amended and Restated Articles of Incorporation of MCI WORLDCOM, Inc. (including preferred stock designations), as amended as of September 15, 1998 (incorporated herein by reference to Exhibit 4.1 of MCI WorldCom's Post-Effective Amendment No. 1 on Form S-8 to Registration Statement on Form S-4, No. 333-36901 (filed September 14, 1998)) 4.2 Restated Bylaws of MCI WORLDCOM, Inc. (incorporated by reference to Exhibit 3.2 to the Company's Current Report on Form 8-K dated September 14, 1998 (filed September 29, 1998)) (File No. 0-11258) 4.3 Form of 6.125% Notes Due 2001 (incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated August 6, 1998 (filed August 7, 1998) (File No. 0-11258))
38
Exhibit No. Description ----------- ----------- 4.4 Form of 6.250% Notes Due 2003 (incorporated herein by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K dated August 6, 1998 (filed August 7, 1998) (File No. 0-11258)) 4.5 Form of 6.400% Notes Due 2005 (incorporated herein by reference to Exhibit 4.3 to the Company's Current Report on Form 8-K dated August 6, 1998 (filed August 7, 1998) (File No. 0-11258)) 4.6 Form of 6.950% Notes Due 2028 (incorporated herein by reference to Exhibit 4.4 to the Company's Current Report on Form 8-K dated August 6, 1998 (filed August 7, 1998) (File No. 0-11258)) 4.7 Senior Indenture dated March 1, 1997 by and between WorldCom and The Chase Manhattan Bank, as successor trustee to Mellon Bank N.A. (incorporated herein by reference to Exhibit 4.6 to WorldCom's Quarterly Report on Form 10-Q for the period ended March 31, 1997 (File No. 0-11258)) 4.8 Supplemental Indenture No. 3 to the Junior Subordinated Indenture dated as of November 12, 1998, among MCI WORDLCOM, Inc., MCI Communications Corporation and Wilmington Trust Company 4.9 Supplement No. 1 to the Guarantee Agreement dated as of November 12, 1998 among MCI WORLDCOM, Inc., MCI Communications Corporation (as guarantor) and Wilmington Trust Company (as trustee) 4.10 Trust Agreement Guarantee dated as of November 12, 1998, among Wilmington Trust Company, the administrative trustee thereto, MCI Communications Corporation and MCI WORLDCOM, Inc. 4.11 Expense Agreement Guarantee dated as of November 12, 1998, between MCI WORLDCOM, Inc. and MCI Capital I, a Delaware business trust 4.12 Junior Subordinated Indenture between MCI Communications Corporation and Wilmington Trust Company, as Debenture Trustee (incorporated by reference to Exhibit 4.01 of MCI's Registration Statement on Form S-3, Registration No. 333-02693) 4.13 Form of Amended and Restated Trust Agreement among MCI Communications Corporation, as Depositor, Wilmington Trust Company, as Property Trustee and Delaware Trustee, and the Administrative Trustees named therein (incorporated by reference to Exhibit 4.10 of MCI's Registration Statement on Form S-3, Registration No. 333-02593) 4.14 Form of Guarantee Agreement between MCI Communications Corporation, as Guarantor, and Wilmington Trust Company, as Trustee (incorporated by reference to Exhibit 4.12 of MCI's Registration Statement on Form S-3, Registration No. 333-02593) 4.15 Form of Supplemental Indenture between MCI Communications Corporation and Wilmington Trust Company, as Debenture Trustee (incorporated by reference to Exhibit 4.13 of MCI's Registration Statement on Form S-3, Registration No. 333-02593) 10.1** Amended and Restated Facility A Revolving Credit Agreement among WorldCom (borrower), NationsBank, N.A. (Arranging Agent and Administrative Agent), NationsBanc Montgomery Securities LLC (Lead Arranger), Bank of America NT & SA, Barclays Bank PLC, The Chase Manhattan Bank, Citibank, N.A., Morgan Guaranty Trust Company of New York, and Royal Bank of Canada (Co-Syndication Agents) and the lenders named therein dated as of August 6, 1998 (incorporated herein by reference to Exhibit 10.1 to WorldCom's Current Report on Form 8-K dated August 6, 1998 (filed August 7, 1998) (File No. 0-11258))
39
Exhibit No. Description ----------- ----------- 10.2 Amended and Restated Facility B Term Loan Agreement among WorldCom (borrower), NationsBank, N.A. (Arranging Agent and Administrative Agent), NationsBanc Montgomery Securities LLC (Lead Arranger), Bank of America NT & SA, Barclays Bank PLC, The Chase Manhattan Bank, Citibank, N.A., Morgan Guaranty Trust Company of New York, and Royal Bank of Canada (Co-Syndication Agents) and the lenders named therein dated as of August 6, 1998 (incorporated herein by reference to Exhibit 10.2 to WorldCom's Current Report on Form 8-K dated August 6, 1998 (filed August 7, 1998) (File No. 0-11258)) 10.3 364-Day Revolving Credit and Term Loan Agreement among WorldCom (borrower), NationsBank, N.A. (Arranging Agent and Administrative Agent), NationsBanc Montgomery Securities LLC (Lead Arranger), Bank of America NT & SA, Barclays Bank PLC, The Chase Manhattan Bank, Citibank, N.A., Morgan Guaranty Trust Company of New York, and Royal Bank of Canada (Co-Syndication Agents) and the lenders named therein dated as of August 6, 1998 (incorporated herein by reference to Exhibit 10.3 to WorldCom's Current Report on Form 8-K dated August 6, 1998 (filed August 7, 1998) (File No. 0-11258)) 10.4 MCI 1979 Stock Option Plan as amended and restated (incorporated by reference to Exhibit 10(a) to MCI's Annual Report on Form 10-K for the fiscal year ended December 31, 1988 (File No. 0-6457)) (compensatory plan)*** 10.5 Supplemental Retirement Plan for Employees of MCI Communications Corporation and Subsidiaries, as amended (incorporated by reference to Exhibit 10(b) to MCI's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (File No. 0-6457)) (compensatory plan)*** 10.6 Description of Executive Life Insurance Plan for MCI Communications Corporation and Subsidiaries (incorporated by reference to "Remuneration of Officers" in MCI's Proxy Statement for its 1992 Annual Meeting of Stockholders (File No. 0-6457)) (compensatory plan)*** 10.7 MCI Communications Corporation Executive Incentive Compensation Plan (incorporated by reference to Exhibit 10(e) to MCI's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (File No. 0-6457)) (compensatory plan)*** 10.8 Amendment No. 1 to MCI Communications Corporation Executive Incentive Compensation Plan (incorporated by reference to Exhibit 10(e) to MCI's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-6457)) (compensatory plan)*** 10.9 1988 Directors' Stock Option Plan of MCI (incorporated by reference to Exhibit D to MCI's Proxy Statement for its 1989 Annual Meeting of Stockholders (File No. 0-6457)) (compensatory plan)*** 10.10 Amendment No. 1 to the 1988 Directors' Stock Option Plan of MCI (incorporated by reference to Appendix D to MCI's Proxy Statement for its 1996 Annual Meeting of Stockholders (File No. 0-6457)) (compensatory plan)*** 10.11 Amendment No. 2 to 1988 Directors' Stock Option Plan of MCI (incorporated by reference to Exhibit 10(i) to MCI's Annual Report on Form 10-K for the fiscal year ended December 31, 1996) (File No. 0-6457)) (compensatory plan)*** 10.12 Amendment No. 3 to 1988 Directors' Stock Option Plan of MCI (incorporated by reference to Exhibit 10(j) to MCI's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-6457)) (compensatory plan)***
40
Exhibit No. Description ----------- ----------- 10.13 Stock Option Plan of MCI (incorporated by reference to Exhibit C to MCI's Proxy Statement for its 1989 Annual Meeting of Stockholders (File No. 0-6457)) (compensatory plan)*** 10.14 Amendment No. 1 to the Stock Option Plan of MCI (incorporated by reference to Exhibit 10(1) to MCI's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-6457)) (compensatory plan)*** 10.15 Amendment No. 2 to the Stock Option Plan of MCI (incorporated by reference to Appendix B to MCI's Proxy Statement for its 1996 Annual Meeting of Stockholders (File No. 0-6457)) (compensatory plan)*** 10.16 Amendment No. 3 to the Stock Option Plan of MCI (incorporated by reference to Exhibit 10(n) to MCI's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-6457)) (compensatory plan)*** 10.17 Amendment No. 4 to the Stock Option Plan of MCI (incorporated by reference to Exhibit 10(o) to MCI's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-6457)) (compensatory plan)*** 10.18 Amendment No. 5 to the Stock Option Plan of MCI (incorporated by reference to Exhibit 10(p) to MCI's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-6457)) (compensatory plan)*** 10.19 Board of Directors Deferred Compensation Plan of MCI (incorporated by reference to Exhibit 10(i) to MCI's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (File No. 0-6457)) (compensatory plan) 10.20 The Senior Executive Incentive Compensation Plan of MCI (incorporated by reference to Appendix A to MCI's Proxy Statement for its 1996 Annual Meeting of Stockholders (File No. 0-6457)) (compensatory plan) 10.21 Amendment No. 1 to the Senior Executive Incentive Compensation Plan of MCI (incorporated by reference to Exhibit 10(s) to MCI's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-6457)) (compensatory plan) 10.22 Executive Severance Policy (incorporated by reference to Exhibit 10(a) to MCI's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 (File No. 0-6457)) (compensatory plan) 10.23 Form of employment agreement, effective as of November 2, 1996, between MCI and certain executive officers of MCI (incorporated by reference to Exhibit 10(u) to MCI's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-6457)) (compensatory plan) 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. **No other long-term debt instruments are filed since the total amount of securities authorized under any such instrument does not exceed ten percent of the total assets of the Company and its subsidiaries on a consolidated basis. The Company agrees to furnish a copy of such instruments to the Securities and Exchange Commission upon request. ***Pursuant to this plan, the common stock of the Company was substituted for common stock of MCI. EX-4.8 2 SUPPLEMENTAL INDENTURE NO. 3 - JR SUBORDINATED 1 EXHIBIT 4.8 SUPPLEMENTAL INDENTURE NO. 3 TO THE JUNIOR SUBORDINATED INDENTURE DATED AS OF MAY 29, 1996, BETWEEN MCI COMMUNICATIONS CORPORATION AND WILMINGTON TRUST COMPANY, TRUSTEE FOR JUNIOR SUBORDINATED DEBT SECURITIES THIS SUPPLEMENTAL INDENTURE NO. 3 ("Supplemental Indenture No. 3") to the Junior Subordinated Indenture, dated as of May 29, 1996 (including this Supplemental Indenture No. 3 and all other indentures supplemental thereto, the "Indenture"), between MCI Communications Corporation, a Delaware corporation and wholly-owned subsidiary of the Guarantor (as hereinafter defined) ("MCI" or the "Company") (formerly known as TC Investments Corp.), with an office at 1801 Pennsylvania Avenue, N.W., Washington, D.C. 20006, and Wilmington Trust Company, a Delaware banking corporation duly organized and existing under the laws of the State of Delaware, as trustee under the Indenture (the "Trustee"), is entered into as of November 12, 1998, by and among the Trustee, MCI and MCI WORLDCOM, Inc., a Georgia corporation ("MCI WorldCom" or the "Guarantor"). WHEREAS, the Indenture provides for the issuance of unsecured subordinated debt securities (the "Securities") of MCI from time to time in one or more series; and WHEREAS, the First Supplemental Indenture, dated as of May 29, 1996, provides for the establishment of a series of Securities known as the 8.00% Junior Subordinated Deferrable Interest Debentures, Series A (the "Debentures"); and WHEREAS, MCI Capital I, a Delaware statutory business trust (the "Trust"), has issued $750,000,000 aggregate liquidation amount of its 8.00% Cumulative Quarterly Income Preferred Securities, Series A (the "Preferred Securities"), representing undivided beneficial interests in the assets of the Trust, to the public, and $23,195,000 aggregate liquidation amount of its Common Securities to MCI, and has invested the proceeds of such 2 issuance in $773,195,000 aggregate principal amount of the Debentures; and WHEREAS, pursuant to Supplemental Indenture No. 2 to the Indenture, the Company assumed the due and punctual payment of the principal of (and premium, if any) and interest (including any Additional Interest) on all the Securities and the performance of certain covenants more specifically described therein; and WHEREAS, the Guarantor desires, as of the date hereof, to unconditionally and irrevocably guarantee, on a subordinated basis, the full and punctual payment of principal of (and premium, if any), and interest (including any Additional Interest) on the Securities when due (after the passing of any applicable cure periods available to the Company), whether at maturity, by acceleration, by redemption or otherwise, and all other monetary obligations of the Company under the Indenture (including obligations to the Trustee) and the Securities, and the full and punctual performance within applicable grace periods of all other obligations of the Company under the Indenture and the Securities; and WHEREAS, Section 901(7) of the Indenture allows the Company and the Trustee to enter into one or more indentures supplemental thereto, without the consent of any Holders, provided that such action shall not materially adversely affect the interest of the Holders of the Debentures or the holders of the Preferred Securities; NOW, THEREFORE, in consideration of the mutual covenants and promises set forth herein and other good and valuable consideration, the adequacy and receipt of which are hereby acknowledged, the parties agree to amend the Indenture as follows: ARTICLE I. The following sections of this Supplemental Indenture No. 3 supplement the Indenture with respect to the Securities issued thereunder: Section 1. Definitions. (a) Article I, Section 101 of the Indenture is hereby supplemented, to add the following definitions: "Guarantee" shall have the meaning ascribed thereto in Section 2 hereof. "Guarantee Payment" shall have the meaning ascribed thereto in Section 2 hereof. "Guarantor" means MCI WORLDCOM, Inc., a Georgia corporation, formerly known as WorldCom, Inc. - 2 - 3 "Guarantor Senior Debt" means the principal of (and premium, if any) and interest, if any (including, without limitation, interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to the Guarantor whether or not such claim for post-petition interest is allowed in such proceeding), on Debt of the Guarantor, whether incurred on or prior to the date of this Supplemental Indenture No. 3 or thereafter incurred, unless, in the instrument creating or evidencing the same or pursuant to which the same is outstanding, it is expressly provided that such obligations are not superior in right of payment to the Securities or to other Debt of the Guarantor which is pari passu with, or subordinated to, the Securities, provided, however, that Guarantor Senior Debt shall not be deemed to include (a) any Debt of the Guarantor which, when incurred and without respect to any election under Section 1111(b) of the Bankruptcy Reform Act of 1978, was without recourse to the Guarantor, (b) any Debt of the Guarantor to any of its Subsidiaries, other than Debt to a Subsidiary the proceeds of which the Guarantor used to pay Guarantor Senior Debt (c) any Debt to any employee of the Guarantor, (d) any liability for taxes, or (e) any Debt or other monetary obligations to trade creditors created or assumed by the Guarantor or any of its Subsidiaries in the ordinary course of business in connection with the obtaining of goods, materials or services. Section 2. The Guarantee. (a) The Guarantor irrevocably and unconditionally guarantees, on a subordinated basis as set forth herein (the "Guarantee") to each Holder of Securities and to the Trustee and its successors and assigns, (i) the full and punctual payment of principal of (and premium, if any) and interest (including any Additional Interest), on the Securities when due (after the passing of any applicable cure periods available to the Company), whether at maturity, by acceleration, by redemption or otherwise, and all other monetary obligations of the Company under the Indenture (including obligations to the Trustee) and the Securities (any such payment, a "Guarantee Payment") and (ii) the full and punctual performance within applicable grace periods of all other obligations of the Company under the Indenture and the Securities. (b) The Guarantor further agrees that the Guarantee constitutes a guarantee of payment, performance and compliance and not merely of collection. (c) The obligations of the Guarantor to make any payment hereunder may be satisfied by causing the Company to make such payment. (d) The Guarantor also agrees to pay any and all costs and expenses (including reasonable attorneys' fees) incurred by the Trustee or any Holder of Securities in enforcing any of their respective rights under the Guarantee. - 3 - 4 Section 3. Waiver of Notice and Demand. The Guarantor hereby waives notice of acceptance of the Guarantee and of any liability to which it applies or may apply, presentment, demand for payment, any right to require a proceeding first against the Trustee, the Company or any other Person before proceeding against the Guarantor, protest, notice of nonpayment, notice of dishonor, notice of redemption and all other notices and demands. Section 4. Obligations Not Affected. The obligations, covenants, agreements and duties of the Guarantor under the Guarantee shall in no way be affected or impaired by reason of the happening from time to time of any of the following: (a) the release or waiver, by operation of law or otherwise, of the performance or observance by the Company of any express or implied agreement, covenant, term or condition under the Indenture relating to the Securities to be performed or observed by the Company; (b) the extension of time for the payment by the Company of all or any portion of (i) any payment of principal of (and premium, if any) or interest (including any Additional Interest) on the Securities when due, whether at maturity, by acceleration, by redemption or otherwise, or any other monetary obligation of the Company under the Indenture (including obligations to the Trustee) and the Securities, or (ii) the extension of time for the full and punctual performance within applicable grace periods of all other obligations of the Company under the Indenture and the Securities; (c) any failure, omission, delay or lack of diligence on the part of the Holders of the Securities or the Trustee to enforce, assert or exercise any right, privilege, power or remedy conferred on the Holders of the Securities or the Trustee pursuant to the terms of the Indenture or the Securities, or any action on the part of the Company granting indulgence or extension of any kind; (d) voluntary or involuntary liquidation, dissolution, sale of any collateral, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition or readjustment of debt of, or other similar proceedings affecting, the Company or any of the assets of the Company; (e) any invalidity of, or defect or deficiency in, the Securities or the Indenture, (f) the settlement or compromise of any obligation guaranteed hereby or hereby incurred; or (g) any other circumstance whatsoever that might otherwise constitute a legal or equitable discharge or defense of a guarantor, it being the intent of this Section 4 that the - 4 - 5 obligations of the Guarantor hereunder shall be absolute and unconditional under any and all circumstances. There shall be no obligation of the Holders of the Securities or the Trustee to give notice to, or obtain the consent of, the Guarantor with respect to the happening of any of the foregoing. Section 5. (a) Collection of Guarantee and Suits for Enforcement by Trustee. The Guarantor covenants that if any Guarantee Payment is due and payable, the Guarantor will, upon demand of the Trustee, pay to the Trustee (or cause the Company to pay to the Trustee), for the benefit of the Holders and the Trustee the whole amount of such Guarantee Payment then due and payable. If the Guarantor fails to pay (or cause the Company to pay) such amounts forthwith upon such demand, the Trustee, in its own name and as trustee of an express trust, may institute a judicial proceeding for the collection of the sums so due and unpaid, and may prosecute such proceeding to judgment or final decree, and may enforce the same against the Guarantor and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Guarantor, whenever situated. If any Guarantee Payment is due and payable, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders of Securities by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. (b) Trustee May File Proofs of Claim. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other similar judicial proceeding relative to the Guarantor (any such event being hereinafter referred to as a "Guarantor Proceeding"), unless, in the event such proceeding is involuntary, the petition instituting the same is dismissed within 60 days after its filing, (i) the Trustee (irrespective of whether any Guarantee Payment shall then be due and payable and irrespective of whether the Trustee shall have made any demand on the Guarantor for the payment of any overdue Guarantee Payment) shall be entitled and empowered, by intervention in any such Guarantor Proceeding or otherwise, (A) to file and prove a claim for the whole amount of principal (and premium, if any) and - 5 - 6 interest (including any Additional Interest) owing and unpaid in respect to the Securities and to file such other papers or documents as may be necessary or advisable and to take any and all actions as are authorized under the Trust Indenture Act in order to have the claims of the Holders and any predecessor to the Trustee under Section 607 of the Indenture and of the Holders allowed in any such judicial proceedings; and (B) in particular, the Trustee shall be authorized to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same in accordance with Section 506 of the Indenture; and (ii) any custodian, receiver, assignee, trustee, liquidator, sequestrator (or other similar official) in any such Guarantor Proceeding is hereby authorized by each Holder to make such payments to the Trustee for distribution in accordance with Section 506 of the Indenture, and in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due to it and any predecessor Trustee under Section 607 of the Indenture. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any Guarantor Proceeding; provided, however, that the Trustee may, on behalf of the Holders, vote for the election of a trustee in bankruptcy or similar official and be a member of a creditors' or other similar committee. (c) Unconditional Right of Holders and Trustee to Receive Guarantee Payments. Notwithstanding any other provision in the Indenture, the Holder of any Security and the Trustee shall have the right, which is absolute and unconditional, to receive any Guarantee Payments due to them pursuant to Article I, Section 2 of this Supplemental Indenture No. 3, and to institute suit for the enforcement of any such Guarantee Payment, and such right shall not be impaired without the consent of the Trustee or such Holder. In the case of Securities of a series issued to an MCI Trust, any holder of the corresponding series of Preferred Securities shall have the right to institute a proceeding directly against the Guarantor for enforcement of payment to such Holder of any such Guarantee Payments due on Securities having a principal amount equal to the aggregate liquidation preference of the Preferred Securities of the corresponding series held by such Holder. - 6 - 7 (d) Restoration of Rights and Remedies. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under the Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case the Company, the Guarantor, the Trustee and the Holders shall, subject to any determination in such proceeding, be restored severally and respectively to their former positions hereunder, and thereafter all rights and remedies of the Company, the Guarantor, the Trustee and the Holders shall continue as though no such proceeding had been instituted. (e) Delay or Omission Not Waiver. Except as otherwise provided in the last paragraph of Section 306 of the Indenture, no delay or omission of the Trustee or of any Holder of any Security to exercise any right or remedy with respect to any Guarantee Payments due them hereunder shall impair any such right or remedy or constitute a waiver of their right to receive such Guarantee Payment or an acquiescence therein. Every right and remedy given by Article Five of the Indenture, by this Supplemental Indenture No. 3 or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. (f) Waiver of Usury, Stay or Extension Laws. The Guarantor covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any usury, stay or extension law wherever enacted, now or at the time hereafter in force, which may affect the covenants or the performance of the Indenture; and the Guarantor (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. Section 6. Subordination. (a) Guarantee Subordinate to Guarantor Senior Debt. The Guarantee is hereby expressly subordinated in right of payment to the prior payment in full of all Guarantor Senior Debt, and such subordination is for the benefit of the holders of such Guarantor Senior Debt. (b) Payment Over of Proceeds Upon Dissolution, Etc. In case of the pendency of any Guarantor Proceeding, the holders of Guarantor Senior Debt shall be entitled to receive payment in full of principal of (and premium, if any) and interest, if any, on such Guarantor Senior Debt, or provision shall be made for such payment in cash or cash equivalents or otherwise in a manner satisfactory to the holders of Guarantor Senior Debt, before any payment is made in respect of the Guarantee. - 7 - 8 In the event that, notwithstanding the foregoing provisions of this Section, the Trustee or the Holder of any Security shall have received any payment of the Guarantor in respect of the Guarantee, before all Guarantor Senior Debt is paid in full or payment thereof is provided for in cash or cash equivalents or otherwise in a manner satisfactory to the holders of Guarantor Senior Debt, and if such fact shall, at or prior to the time of such payment or distribution, have been made known to the Trustee or, as the case may be, such Holder, then and in such event such payment or distribution shall be paid over or delivered forthwith to the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee, agent or other Person making payment or distribution of assets of the Guarantor for application to the payment of all Guarantor Senior Debt remaining unpaid, to the extent necessary to pay all Guarantor Senior Debt in full, after giving effect to any concurrent payment or distribution to or for the holders of Guarantor Senior Debt. (c) Prior Payment of Guarantor Senior Debt Upon Acceleration of Securities. In the event that any payments are due pursuant to the Guarantee, then and in such event the holders of the Guarantor Senior Debt shall be entitled to receive payment in full of all amounts due on or in respect of such Guarantor Senior Debt (including any amounts due upon acceleration or otherwise), or provision shall be made for such payment in cash or cash equivalents or otherwise in a manner satisfactory to the holders of Guarantor Senior Debt, before any payments are made on account of the Guarantee. In the event that, notwithstanding the foregoing, the Guarantor shall make any payment to the Trustee or the Holder of any Security prohibited by the foregoing provisions of this Section 6(c), and if such fact shall, at or prior to the time of such payment, have been made known to the Trustee or, as the case may be, such Holder, then and in such event such payment shall be paid over and delivered forthwith to the Guarantor. The provisions of this Section 6(c) shall not apply to any payment with respect to which Section 6(b) of Article I of this Supplemental Indenture No. 3 would be applicable. (d) No Payment When Guarantor Senior Debt in Default. (i) In the event and during the continuation of any default in the payment of principal of (or premium, if any) or interest on any Guarantor Senior Debt, or in the event that any event of default with respect to any Guarantor Senior Debt shall have occurred and be continuing and shall have resulted in such Guarantor Senior Debt becoming or being declared due and payable prior to the date on which it would otherwise have become due and payable, unless and until such event of default shall have been cured or waived or shall have ceased to exist and such acceleration shall have been rescinded or annulled, or (ii) in the event any judicial proceeding shall be pending with respect to any default in payment or such event of default, then no - 8 - 9 payment shall be made by the Guarantor on account of the Guarantee. In the event that, notwithstanding the foregoing, the Guarantor shall make any payment to the Trustee or the Holder of any Security prohibited by the foregoing provisions of this Section 6(d), and if such fact shall, at or prior to the time of such payment, have been made known to the Trustee or, as the case may be, such Holder, then and in such event such payment shall be paid over and delivered forthwith to the Guarantor. The provisions of this Section 6(d) shall not apply to any payment with respect to which Section 6(b) of Article I of this Supplemental Indenture No. 3 would be applicable. (e) Payment Permitted If No Default. Nothing contained in this Section 6 or elsewhere in the Indenture or in any of the Securities shall prevent (i) the Guarantor, at any time except during the pendency of any Guarantor Proceeding referred to in Section 6(b) of Article I of this Supplemental Indenture No. 3 or under the conditions described in Sections 6(c) and 6(d) of Article I of this Supplemental Indenture No. 3, from making payments at any time in respect of this Guarantee, or (ii) the application by the Trustee of any money or Government Obligations deposited with it hereunder to the payment of or on account of the Guarantee or the retention of such payment by the Holders if, at the time of such application by the Trustee, it did not have knowledge that such payment would have been prohibited by the provisions of this Section 6. (f) Subrogation to Rights of Holders of Guarantor Senior Debt. Subject to the payment in full of all Guarantor Senior Debt, or the provision for such payment in cash or cash equivalents or otherwise in a manner satisfactory to the holders of Guarantor Senior Debt, the Trustee and the Holders of the Securities shall be subrogated to the extent of the payments or distributions made to the holders of such Guarantor Senior Debt pursuant to the provisions of this Section 6 (equally and ratably with the holders of all indebtedness of the Guarantor which by its express terms is subordinated to Guarantor Senior Debt to substantially the same extent as the Guarantee is subordinated to the Guarantor Senior Debt and is entitled to like rights of subrogation by reason of any payments or distributions made to holders of such Guarantor Senior Debt) to the rights of the holders of such Guarantor Senior Debt to receive payments and distributions of cash, property and securities applicable to the Guarantor Senior Debt until the Guarantee payments due hereunder shall be paid in full. For purposes of such subrogation, no payments or distributions to the holders of the Guarantor Senior Debt of any cash, property or securities to which the Holders of the Securities or the Trustee would be entitled except for the provisions of this Section 6, and no payments over pursuant to the provisions of this Section 6 to the holders of Guarantor Senior Debt by Holders of the Securities or the Trustee, shall, - 9 - 10 as among the Guarantor, its creditors other than holders of Guarantor Senior Debt, and the Holders of the Securities and the Trustee, be deemed to be a payment or distribution by the Guarantor to or on account of the Guarantor Senior Debt. (g) Provisions Solely to Define Relative Rights. The provisions of this Section 6 are and are intended solely for the purpose of defining the relative rights of the Holders of the Securities and the Trustee on the one hand and the holders of Guarantor Senior Debt on the other hand. Nothing contained in this Section 6 or elsewhere in the Indenture or in the Securities is intended to or shall (i) impair, as between the Guarantor and the Holders of the Securities and the Trustee, the obligations of the Guarantor, which are absolute and unconditional, to pay to the Holders of the Securities and the Trustee, all Guarantee Payments due pursuant to Section 2 of this Supplemental Indenture No. 3 or (ii) affect the relative rights against the Guarantor of the Holders of the Securities or the Trustee and creditors of the Guarantor other than their rights in relation to the holders of Guarantor Senior Debt; or (iii) prevent the Trustee or the Holder of any Security from exercising all remedies otherwise permitted by applicable law upon default under this Supplemental Indenture No. 3, including, without limitation, filing and voting claims in any Guarantor Proceeding, subject to the rights, if any, under this Section 6 of the holders of Guarantor Senior Debt to receive cash, property and securities otherwise payable or deliverable to the Trustee or such Holder. (h) Trustee to Effectuate Subordination. Each Holder of a Security by his or her acceptance thereof authorizes and directs the Trustee on his or her behalf to take such action as may be necessary or appropriate to acknowledge or effectuate the subordination provided in this Section 6 and appoints the Trustee his or her attorney-in-fact for any and all such purposes. (i) No Waiver of Subordination Provisions. No right of any present or future holder of any Guarantor Senior Debt to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Guarantor or by any act or failure to act, in good faith, by any such holder, or by any noncompliance by the Guarantor with the terms, provisions and covenants of this Section 6, regardless of any knowledge thereof that any such holder may have or be otherwise charged with. (j) Notice to Trustee. The Guarantor shall give prompt written notice to the Trustee of any fact known to the Guarantor which would prohibit the making of any payment to or by the Trustee in respect of the Guarantee. Notwithstanding the provisions of this Section 6 or any other provision of the Indenture, the Trustee shall not be charged with knowledge of the existence of any facts which would prohibit the making of any payment to or by the Trustee in respect of this Guarantee, unless and until the Trustee shall have received written notice thereof - 10 - 11 from the Guarantor or a holder of Guarantor Senior Debt or from any trustee, agent or representative therefor (whether or not the facts contained in such notice are true); provided, however, that if the Trustee shall not have received the notice provided for in this Section 6(j) at least two Business Days prior to the date upon which by the terms hereof any monies may become payable under the Guarantee, then, anything herein contained to the contrary notwithstanding, the Trustee shall have full power and authority to receive such monies and to apply the same to the purpose for which they were received and shall not be affected by any notice to the contrary which may be received by it within two Business Days prior to such date. (k) Reliance on Judicial Order or Certificate of Liquidating Agent. Upon any payment or distribution of assets of the Guarantor referred to in this Section 6, the Trustee, subject to the provisions of Article Six of the Indenture, and the Holders of the Securities shall be entitled to rely upon any order or decree entered by any court of competent jurisdiction in which such Proceeding is pending, or a certificate of the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee for the benefit of creditors, agent or other Person making such payment or distribution, delivered to the Trustee or to the Holders of Securities, for the purpose of ascertaining the Persons entitled to participate in such payment or distribution, the holders of the Guarantor Senior Debt and other indebtedness of the Guarantor, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Section 6. (l) Trustee Not Fiduciary for Holders of Guarantor Senior Debt. The Trustee, in its capacity as trustee under the Indenture, shall not be deemed to owe any fiduciary duty to the holders of Guarantor Senior Debt and shall not be liable to any such holders if it shall in good faith mistakenly pay over or distribute to Holders of Securities or to the Guarantor or to any other Person cash, property or securities to which any holders of Guarantor Senior Debt shall be entitled by virtue of this Section 6. (m) Rights of Trustee as Holder of Guarantor Senior Debt; Preservation of Trustee's Rights. The Trustee in its individual capacity shall be entitled to all the rights set forth in this Section 6 with respect to any Guarantor Senior Debt which may at any time be held by it, to the same extent as any other holder of Guarantor Senior Debt, and nothing in the Indenture shall deprive the Trustee of any of its rights as such holder. (n) Section 6 of Supplemental Indenture No. 3 Applicable to Paying Agent. In case at any time any Paying Agent other than the Trustee shall have been appointed by the Company and be then acting under the Indenture, the term "Trustee" as used in this Section 6 shall in such case (unless the context otherwise requires) be construed as extending to and including such Paying - 11 - 12 Agent within its meaning as fully for all intents and purposes as if such Paying Agent were named in this Section 6 in addition to or in place of the Trustee. Section 7. Successors and Assigns of Guarantor. All guarantees and agreements of the Guarantor contained in this Indenture shall bind the successors, assigns, receivers, trustees and representatives of the Guarantor. In the event that the Guarantor shall assign its obligations contained in this Indenture, the Guarantor shall be discharged from all obligations and covenants under the Indenture and the Securities to the fullest extent permitted by law. ARTICLE II. Section 704 of the Indenture is hereby deleted in its entirety and the following paragraph is hereby substituted in lieu thereof: SECTION 704. Reports by Company or Guarantor. The Company or the Guarantor shall file with the Trustee and with the Commission, and transmit to Holders, such information, documents and other reports, and such summaries thereof, as may be required pursuant to the Trust Indenture Act at the times and in the manner provided in the Trust Indenture Act; provided, that any such information, documents or reports required to be filed with the Commission pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 shall be filed with the Trustee within 15 days after the same is required to be filed with the Commission. Notwithstanding that the Guarantor may not be required to remain subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Guarantor shall continue to file with the Commission and provide the Trustee with the annual reports and the information, documents and other reports which are specified in Sections 13 and 15(d) of the Securities Exchange Act of 1934. The Guarantor also shall comply with the other provisions of Trust Indenture Act Section 314(a). ARTICLE III. Except as is expressly set forth herein, nothing in this Supplemental Indenture No. 3 is intended to impose any restrictions or obligations on the Guarantor, or to create any Events of Default, including, without limitation, (i) any restrictions on the Guarantor's ability to pay dividends on or repurchase its securities, or (ii) any Event of Default upon a Guarantor Proceeding. ARTICLE IV. Miscellaneous Provisions. Section 1. Capitalized terms used but not otherwise defined in this Supplemental Indenture No. 3 shall have the meanings ascribed thereto in the Indenture. The Article and Section headings herein are for convenience only and shall not affect the construction hereof. This Supplemental Indenture No. 3 may be executed in counterparts. - 12 - 13 Section 2. THIS SUPPLEMENTAL INDENTURE NO. 3 SHALL BE DEEMED TO BE A CONTRACT MADE UNDER THE LAWS OF THE STATE OF NEW YORK AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES THEREOF. [Remainder of Page Intentionally Blank] - 13 - 14 IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture No. 3 to be duly executed, as of the day and year first above written. WILMINGTON TRUST COMPANY, as Trustee By: /s/ JAMES P. LAWLER --------------------------------- name: James P. Lawler title: Vice President MCI WORLDCOM, INC. By: /s/ SCOTT D. SULLIVAN --------------------------------- name: Scott D. Sullivan title: Chief Financial Officer MCI COMMUNICATIONS CORPORATION By: /s/ SCOTT D. SULLIVAN --------------------------------- name: Scott D. Sullivan title: Chief Financial Officer - 14 - EX-4.9 3 SUPPLEMENT NO. 1 TO GUARANTEE AGREEMENT 1 EXHIBIT 4.9 SUPPLEMENT NO. 1 TO THE GUARANTEE AGREEMENT DATED AS OF MAY 29, 1996 Between MCI COMMUNICATIONS CORPORATION (as Guarantor) and WILMINGTON TRUST COMPANY (as Trustee) THIS SUPPLEMENT NO. 1 ("Supplement No. 1") to the Guarantee Agreement, dated as of May 29, 1996 (including this Supplement No. 1 and all other Supplements thereto, the "Guarantee Agreement"), between MCI Communications Corporation, a Delaware corporation and wholly-owned subsidiary of the Additional Guarantor (as hereinafter defined) ("MCI" or the "Guarantor") (formerly known as TC Investments Corp.), and Wilmington Trust Company, a Delaware banking corporation organized under the laws of Delaware, as trustee (the "Guarantee Trustee"), is entered into as of November 12, 1998 by and among MCI, the Guarantee Trustee, and MCI WORLDCOM, Inc., a Georgia corporation ("MCI WorldCom" or the "Additional Guarantor"). WHEREAS, in connection with the issuance by MCI Capital I, a Delaware statutory business trust (the "Issuer"), of $750,000,000 aggregate liquidation amount of its 8.00% Cumulative Quarterly Income Preferred Securities, Series A (the "Preferred Securities") representing undivided beneficial interests in the assets of the Issuer, and pursuant to the Guarantee Agreement, the Guarantor irrevocably and unconditionally agreed, to the extent set forth therein, to pay to the Holders of the Preferred Securities the Guarantee Payments (as defined therein) and to make certain other payments on the terms and conditions set forth therein (collectively, the "Guarantee"); and WHEREAS, the Additional Guarantor desires to unconditionally and irrevocably guarantee, on a subordinated basis, the Guarantor's obligations to pay in full to the Holders the Guarantee Payments; and 2 WHEREAS, Section 802 of the Guarantee Agreement allows for the amendment of the Guarantee Agreement, without the consent of the Holders of the Preferred Securities, provided that such action shall not adversely affect the rights of the Holders in any material respect; NOW THEREFORE, in consideration of the mutual covenants and promises set forth herein and other good and valuable consideration, the adequacy and receipt of which are hereby acknowledged, the parties agree to amend the Guarantee Agreement as follows: ARTICLE I. The following sections of this Supplement No. 1 supplement the Guarantee Agreement: SECTION 1. Definitions. "Additional Guarantee" shall have the meaning ascribed thereto in Section 2 of this Article I. "Additional Guarantee Payments" means the Guarantee Payments, to the extent not paid or made by or on behalf of the Issuer or the Guarantor. "Additional Guarantor" means MCI WORLDCOM, Inc., a Georgia corporation, (formerly known as WorldCom, Inc.). "Additional Guarantor Event of Default" means a default by the Additional Guarantor on any of its payment or other obligations under this Guarantee Agreement; provided, however, that, except with respect to a default in payment of any Additional Guarantee Payments, the Additional Guarantor shall have received notice of default and shall not have cured such default within 60 days after receipt of such notice. "Additional Guarantor Senior Debt" means the principal of (and premium, if any) and interest, if any (including, without limitation, interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to the Additional Guarantor whether or not such claim for post-petition interest is allowed in such proceeding), on Debt of the Additional Guarantor, whether incurred on or prior to the date of this Agreement or thereafter incurred, unless, in the instrument creating or evidencing the same or pursuant to which the same is outstanding, it is expressly provided that such obligations are not superior in right of payment to the Additional Guarantee or to other Debt of the Additional Guarantor which is pari passu with, or subordinated to, the Additional Guarantee, provided, however, that Additional Guarantor Senior Debt shall not be deemed to include (a) any Debt of the Additional Guarantor which, when incurred and without respect to any election under Section 1111(b) of the Bankruptcy Reform Act of 1978, was without recourse to the Additional Guarantor, (b) any Debt of the Additional Guarantor to any of its Subsidiaries, other than Debt to a Subsidiary the proceeds of which the Additional Guarantor used to pay Additional Guarantor Senior Debt (c) any Debt to any employee of the Additional Guarantor, (d) any liability for taxes, or (e) any Debt or other monetary obligations to trade creditors created or assumed by the Additional Guarantor or any of its Subsidiaries in the ordinary course of business in connection with the obtaining of goods, materials or services. - 2 - 3 "Issuer" means MCI Capital I, a Delaware statutory business trust. "Subsidiary" of any Person means a corporation more than 50% of the outstanding voting stock of which is owned, directly or indirectly, by such Person or one or more other Subsidiaries of such Person, or by such Person and one or more other Subsidiaries of such Person. For purposes of this definition, "voting stock" means stock which ordinarily has voting power for the election of directors, whether at all times or only so long as no senior class of stock has such voting power by reason of any contingency. SECTION 2. Additional Guarantee. (a) The Additional Guarantor irrevocably and unconditionally agrees, on a subordinated basis as provided herein (the "Additional Guarantee"), to pay in full to the Holders the Additional Guarantee Payments (without duplication of amounts theretofore paid by or on behalf of the Issuer or Guarantor), as and when due, regardless of any defense, right of set-off or counter claim which the Issuer or the Guarantor may have or assert. The Additional Guarantor's obligation to make an Additional Guarantee Payment may be satisfied by direct payment of the required amounts by the Additional Guarantor to the Holders or by causing the Guarantor or the Issuer to pay such amounts to the Holders. SECTION 3. Waiver of Notice and Demand. The Additional Guarantor hereby waives notice of acceptance of the Guarantee Agreement, including the Additional Guarantee, and of any liability to which it applies or may apply, presentment, demand for payment, any right to require a proceeding first against the Guarantee Trustee, Guarantor or the Issuer or any other Person before proceeding against the Additional Guarantor, protest, notice of nonpayment, notice of dishonor, notice of redemption and all other notices and demands. SECTION 4. Obligations Not Affected. The obligations, covenants, agreements and duties of the Additional Guarantor under this Guarantee Agreement, including the Additional Guarantee, subject to Section 9 of this Article I of this Supplement No. 1, shall in no way be affected or impaired by reason of the happening from time to time of any of the following: (a) the release or waiver, by operation of law or otherwise, of the performance or observance by the Issuer or the Guarantor of any express or implied agreement, covenant, term or condition relating to the Preferred Securities or the Guarantee to be performed or observed by the Issuer or the Guarantor; (b) (i) the extension of time for the payment (A) by the Issuer of all or any portion of the Distributions (other than an extension of time for payment of Distributions that results from the extension of any interest payment period on the Debentures as so provided in the Indenture), Redemption Price, Liquidation Distribution or any other - 3 - 4 sums payable under the terms of the Preferred Securities, or (B) by the Guarantor of all or any portion of the Guarantee Payments or any other sums payable under the Guarantee Agreement, or (ii) the extension of time for the performance of any other obligation under, arising out of, or in connection with, the Preferred Securities or the Guarantee Agreement; (c) any failure, omission, delay or lack of diligence on the part of the Holders or the Guarantee Trustee to enforce, assert or exercise any right, privilege, power or remedy conferred on the Holders or the Guarantee Trustee pursuant to the terms of the Preferred Securities or the Guarantee Agreement, or any action on the part of the Issuer granting indulgence or extension of any kind; (d) the voluntary or involuntary liquidation, dissolution, sale of any collateral, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition or readjustment of debt of, or other similar proceedings affecting, the Issuer or the Guarantor or any of the assets of the Issuer or the Guarantor; (e) any invalidity of, or defect or deficiency in, the Preferred Securities or the Guarantee Agreement; (f) the settlement or compromise of any obligation guaranteed hereby or hereby incurred; or (g) any other circumstance whatsoever that might otherwise constitute a legal or equitable discharge or defense of a guarantor, it being the intent of this Section 4 that the obligations of the Additional Guarantor hereunder shall be absolute and unconditional under any and all circumstances. There shall be no obligation of the Holders, the Guarantor or the Guarantee Trustee to give notice to, or obtain consent of, the Additional Guarantor with respect to the happening of any of the foregoing. SECTION 5. Rights of Holders. The Additional Guarantor expressly acknowledges that: (i) this Guarantee Agreement, including the Additional Guarantee, will be deposited with the Guarantee Trustee to be held for the benefit of the Holders; (ii) the Guarantee Trustee has the right to enforce this Guarantee Agreement, including the Additional Guarantee, on behalf of the Holders; (iii) the Holders of a majority in liquidation preference of the Preferred Securities have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Guarantee Trustee in respect of this Guarantee Agreement, including the Additional Guarantee, or exercising any trust or power conferred upon the Guarantee Trustee under this Guarantee Agreement, including the Additional Guarantee; and (iv) any Holder may institute a legal proceeding directly against the Additional Guarantor to enforce its rights under this Guarantee Agreement, including the Additional Guarantee, without first instituting a legal proceeding against the Issuer, the Guarantor, the Guarantee Trustee or any other Person. - 4 - 5 SECTION 6. Guarantee of Payment. The Additional Guarantee is a guarantee of payment and not merely of collection. The Additional Guarantee will not be discharged except by payment of the Additional Guarantee Payments in full (without duplication of amounts theretofore paid by the Issuer or the Guarantor) or upon distribution of the Debentures to the Holders as provided in the Trust Agreement. SECTION 7. Subrogation. The Additional Guarantor shall be subrogated to all (if any) rights of the Holders and the Guarantee Trustee against the Issuer and the Guarantor in respect of any amounts paid to the Holders or the Guarantee Trustee by the Additional Guarantor under this Guarantee Agreement; provided, however, that the Additional Guarantor shall not (except to the extent required by mandatory provisions of law) be entitled to enforce or exercise any rights that it may acquire by way of subrogation or any indemnity, reimbursement or other agreement, in all cases as a result of payment under this Guarantee Agreement, if, at the time of any such payment, any amounts are due and unpaid under this Guarantee Agreement. If any amount shall be paid to the Additional Guarantor in violation of the preceding sentence, the Additional Guarantor agrees to hold such amount in trust for, and to pay over such amount to, the Holders or the Guarantee Trustee as the case may be. SECTION 8. Independent Obligations. The Additional Guarantor acknowledges that its obligations hereunder are independent of the obligations of the Issuer with respect to the Preferred Securities and the Guarantor with respect to the Guarantee, and that the Additional Guarantor shall be liable as principal and as debtor hereunder to make any payments required pursuant to the terms of this Guarantee Agreement, including the Additional Guarantee, notwithstanding the occurrence of any event referred to in paragraphs (a) through (g) inclusive, of Section 4 of this Supplement No. 1. SECTION 9. Subordination. The Additional Guarantee will constitute an unsecured obligation of the Additional Guarantor and will rank subordinate and junior in right of payment to all Additional Guarantor Senior Debt. ARTICLE II. Sections 204, 205, 206 and 207 of the Guarantee Agreement are hereby amended to read in their entirety as follows: SECTION 204. Periodic Reports to Guarantee Trustee. The Guarantor or the Additional Guarantor shall provide to the Guarantee Trustee, the Securities and Exchange Commission and the Holders such documents, reports and information, if any, as may be required by Section 314 of the Trust Indenture Act, and the compliance certificate required by Section 314 of the Trust Indenture Act in the form, in the manner and at the times required by Section 314 of the Trust Indenture Act. SECTION 205. Evidence of Compliance with Conditions Precedent. The Guarantor or the Additional Guarantor shall provide to the Guarantee Trustee such evidence of compliance with such conditions precedent, if any, provided for in - 5 - 6 this Guarantee Agreement that relate to any of the matters set forth in Section 314(c) of the Trust Indenture Act. Any certificate or opinion required to be given by an officer pursuant to Section 314(c)(1) may be given in the form of an Officers' Certificate. SECTION 206. Events of Default; Waiver. The Holders of a Majority in liquidation preference of the Preferred Securities may, on behalf of the Holders, waive any past Event of Default or Additional Guarantor Event of Default and its consequences. Upon such waiver, any such Event of Default or Additional Guarantor Event of Default shall cease to exist, and any Event of Default or Additional Guarantor Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Guarantee Agreement, but no such waiver shall extend to any subsequent or other default, Event of Default or Additional Guarantor Event of Default or impair any right consequent therefrom. SECTION 207. Event of Default; Notice. (a) The Guarantee Trustee shall, within 90 days after the occurrence of an Event of Default or Additional Guarantor Event of Default, transmit by mail, first class postage prepaid, to the Holders, notices of all Events of Default and Additional Guarantor Events of Default known to the Guarantee Trustee, unless such defaults have been cured before the giving of such notice, provided, that, except in the case of a default in the payment of a Guarantee Payment or Additional Guarantee Payment, the Guarantee Trustee shall be protected in withholding such notice if and so long as the Board of Directors, the executive committee or a trust committee of directors and/or Responsible Officers of the Guarantee Trustee in good faith determines that the withholding of such notice is in the interests of the Holders. (b) The Guarantee Trustee shall not be deemed to have knowledge of any Event of Default or Additional Guarantor Event of Default unless the Guarantee Trustee shall have received written notice, or a Responsible Officer charged with the administration of the Trust Agreement shall have obtained written notice, of such Event of Default or Additional Guarantor Event of Default. ARTICLE III. Paragraphs (b) and (c), and subparagraph (d)(i) of Section 301 of the Guarantee Agreement are hereby amended to read in their entirety as follows: SECTION 301. Powers and Duties of the Guarantee Trustee. (b) If an Event of Default or an Additional Guarantor Event of Default has occurred and is continuing, the Guarantee Trustee shall enforce this Guarantee Agreement, including the Additional Guarantee, for the benefit of the Holders. (c) The Guarantee Trustee, before the occurrence of any Event of Default or Additional Guarantor Event of Default, and after the curing or waiver of all such Events of Default and Additional Guarantor Events of Default that may have occurred, shall undertake to perform - 6 - 7 only such duties as are specifically set forth in this Guarantee Agreement, and no implied covenants shall be read into this Guarantee Agreement against the Guarantee Trustee. In case an Event of Default or Additional Guarantor Event of Default has occurred (that has not been waived pursuant to Section 206), the Guarantee Trustee shall exercise such of the rights and powers vested in it by this Guarantee Agreement, and use the same degree of care and skill in its exercise thereof, as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs. (d) No provision of this Guarantee Agreement shall be construed to relieve the Guarantee Trustee from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that: (i) prior to the occurrence of any Event of Default or Additional Guarantor Event of Default and after the curing or waiving of all such Events of Default and Additional Guarantor Events of Default that may have occurred: ARTICLE IV. Subparagraphs (a) (ii), (iii), (iv) and (v) of Section 302 of the Guarantee Agreement are hereby amended to read in their entirety as follows: SECTION 302. Certain Rights of Guarantee Trustee. (a) Subject to the provisions of Section 301: (ii) Any direction or act of the Guarantor or Additional Guarantor contemplated by this Guarantee Agreement shall be sufficiently evidenced by an Officers' Certificate unless otherwise prescribed herein. (iii) Whenever, in the administration of this Guarantee Agreement, the Guarantee Trustee shall deem it desirable that a matter be proved or established before taking, suffering or omitting to take any action hereunder, the Guarantee Trustee (unless other evidence is herein specifically prescribed) may, in the absence of bad faith on its part, request and rely upon an Officers' Certificate which, upon receipt of such request from the Guarantee Trustee, shall be promptly delivered by the Guarantor or Additional Guarantor, as the case may be. (iv) The Guarantee Trustee may consult with legal counsel, and the written advice or opinion of such legal counsel with respect to legal matters shall be full and complete authorization and protection in respect of any action taken, suffered or omitted to be taken by it hereunder in good faith and in accordance with such advice or opinion. Such legal counsel may be legal counsel to the Guarantor, the Additional Guarantor or any of their Affiliates and may be one of their employees. The Guarantee Trustee shall have the right at any time to seek instructions concerning the administration of this Guarantee Agreement from any court of competent jurisdiction. - 7 - 8 (v) The Guarantee Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Guarantee Agreement at the request or direction of any Holder, unless such Holder shall have provided to the Guarantee Trustee such adequate security and indemnity as would satisfy a reasonable person in the position of the Guarantee Trustee against the costs, expenses (including attorneys' fees and expenses) and liabilities that might be incurred by it in complying with such request or direction, including such reasonable advances as may be requested by the Guarantee Trustee; provided that, nothing contained in this Section 302(a)(v) shall be taken to relieve the Guarantee Trustee, upon the occurrence of an Event of Default or an Additional Guarantor Event of Default, of its obligation to exercise the rights and powers vested in it by this Guarantee Agreement. ARTICLE V. Subparagraph (a) (i) and paragraph (c) of Section 401 of the Guarantee Agreement are hereby amended to read in their entirety as follows: SECTION 401. Guarantee Trustee; Eligibility (a) There shall at all times be a Guarantee Trustee which shall: (i) not be an Affiliate of the Guarantor or the Additional Guarantor; (c) If the Guarantee Trustee has or shall acquire any "conflicting interest" within the meaning of Section 310(b) of the Trust Indenture Act, the Guarantee Trustee, Guarantor and Additional Guarantor shall in all respects comply with the provisions of Section 310(b) of the Trust Indenture Act. ARTICLE VI. Section 801 of the Guarantee Agreement is hereby amended to read in its entirety as follows: SECTION 801. Successors and Assigns All guarantees and agreements of the Guarantor and the Additional Guarantor contained in this Guarantee Agreement shall bind the successors, assigns, receivers, trustees and representatives of the Guarantor and the Additional Guarantor, as applicable, and shall inure to the benefit of the Holders of the Preferred Securities then outstanding. Except in connection with a consolidation, merger or sale involving the Guarantor that is permitted under Article Eight of the Indenture, and pursuant to which the assignee agrees in writing to perform the Guarantor's obligations hereunder, the Guarantor shall not assign its obligations hereunder. In the event that the Additional Guarantor shall assign its obligations hereunder, the Additional Guarantor shall be discharged from all obligations and covenants of the Additional Guarantor hereunder to the fullest extent permitted by law. - 8 - 9 ARTICLE VII. Section 803 of the Guarantee Agreement is hereby amended by adding, immediately after paragraph (c) thereto, a new paragraph (d) which shall read in its entirety as follows: (d) if given to the Additional Guarantor, to the address set forth below or such other address, facsimile number or to the attention of such other Person as the Additional Guarantor may give notice of to the Holders: MCI WORLDCOM, Inc. 515 East Amite St. Jackson, MS 39201 Facsimile No.: 601-360-8110 Attention: Treasurer with a copy to: MCI WORLDCOM, Inc. 10777 Sunset Office Dr. Suite 330 St. Louis, MO 63127 Facsimile No.: 314 909-4101 Attention: P. Bruce Borghardt with a copy to: MCI Communications Corporation 1801 Pennsylvania Ave, N.W. Washington, D.C. 20006 Facsimile No: (202) 887-2846 Attention: Assistant Treasurer ARTICLE VIII. Miscellaneous Provisions. SECTION 1. Capitalized terms used but not otherwise defined in this Supplement No. 1 shall have the meanings ascribed thereto in the Guarantee Agreement. The Article and Section headings herein are for convenience only and shall not affect the construction hereof. This Supplement No. 1 may be executed in counterparts. SECTION 2. THIS SUPPLEMENT NO. 1 SHALL BE DEEMED TO BE A CONTRACT MADE UNDER THE LAWS OF THE STATE OF NEW YORK AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES THEREOF. - 9 - 10 SECTION 3. The Guarantee Agreement, as supplemented and amended by this Supplement No. 1, is in all respects hereby adopted, ratified and confirmed and all terms not supplemented and amended hereby remain in full force and effect. [Remainder of Page Intentionally Left Blank] - 10 - 11 IN WITNESS WHEREOF, the parties hereto have caused this Supplement No. 1 to be duly executed as of the day and year first above written. WILMINGTON TRUST COMPANY, as Guarantee Trustee By: /s/ JAMES P. LAWLER --------------------------------------------- name: James P. Lawler title: Vice President MCI WORLDCOM, INC. By: /s/ SCOTT D. SULLIVAN --------------------------------------------- name: Scott D. Sullivan title: Chief Financial Officer MCI COMMUNICATIONS CORPORATION By: /s/ SCOTT D. SULLIVAN --------------------------------------------- name: Scott D. Sullivan title: Chief Financial Officer - 11 - EX-4.10 4 TRUST AGREEMENT GUARANTEE 1 EXHIBIT 4.10 TRUST AGREEMENT GUARANTEE (this "Agreement"), dated as of November 12, 1998, among Wilmington Trust Company ("Wilmington"), a Delaware banking corporation duly organized and existing under the laws of Delaware, as property trustee and Delaware trustee (in each such capacity, the "Property Trustee" and the "Delaware Trustee", respectively), the undersigned administrative trustee (the "Administrative Trustee", and together with the Property Trustee and the Delaware Trustee, the "Trustees"), MCI Communications Corporation, a Delaware corporation, formerly known as TC Investments Corp ("MCI" or the "Company"), and MCI WORLDCOM, Inc., a Georgia corporation ("MCI WorldCom" or the "Guarantor"). WHEREAS, MCI and the Trustees are parties to an Amended and Restated Trust Agreement, dated as of May 29, 1996 (the "Trust Agreement"), pursuant to which (i) they declared and established MCI Capital I, a Delaware business trust (the "Trust") pursuant to the Delaware Business Trust Act (ii) the Trust issued to the public $750,000,000 aggregate liquidation amount of its 8.00% Cumulative Quarterly Income Preferred Securities, Series A (the "Preferred Securities"), representing undivided beneficial interests in the assets of the Trust, (iii) the Trust issued to MCI $23,195,900 of its Common Securities (the "Common Securities"), and (iv) the Trust used the proceeds of the issuance of the Preferred Securities and Common Securities to purchase $773,195,900 in aggregate principal amount of the Company's 8.00% Junior Subordinated Deferrable Interest Debentures, Series A (the "Debentures"), issued pursuant to that certain indenture dated as of May 29, 1996 (as supplemented, the "Indenture") by and between MCI and Wilmington, as trustee (in such capacity, the "Indenture Trustee"); and WHEREAS, the Guarantor desires to unconditionally and irrevocably guarantee, on a subordinated basis, the full and punctual payment and performance (within applicable grace periods) of all the obligations of the Company in its capacity as depositor under the Trust Agreement (in such capacity, the "Depositor"). NOW, THEREFORE, the Company, the Guarantor and the Trustees hereby agree as follows: SECTION 1. Definitions. Capitalized terms used but not defined herein have the meanings ascribed to them in the Trust Agreement. In addition, the following terms shall have the following meanings: "Debt" means, with respect to any Person, whether recourse is to all or a portion of the assets of such Person and whether or not contingent, (i) every obligation of such Person for money borrowed; (ii) every obligation of such Person evidenced by bonds, debentures, notes or other similar instruments, including obligations incurred in connection with the acquisition of property, assets or businesses; (iii) every reimbursement obligation of such Person with respect to letters of credit, bankers' acceptances or similar facilities issued 2 for the account of such Person; (iv) every obligation of such Person issued or assumed as the deferred purchase price of property or services (but excluding trade accounts payable or accrued liabilities arising in the ordinary course of business); (v) every capital lease obligation of such Person; and (vi) every guarantee of or responsibility or liability for, direct or indirect, as obligor or otherwise (a) any obligation of the types referred to in clauses (i) through (v) of another Person or (b) the payment of any and all dividends of another Person. "Guarantee" shall have the meaning ascribed to it in Section 2 of this Agreement. "Guarantor Senior Debt" means the principal of (and premium, if any) and interest, if any (including, without limitation, interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to the Guarantor whether or not such claim for post-petition interest is allowed in such proceeding), on Debt of the Guarantor, whether incurred on or prior to the date of this Agreement or thereafter incurred, unless, in the instrument creating or evidencing the same or pursuant to which the same is outstanding, it is expressly provided that such obligations are not superior in right of payment to the Guarantee or to other Debt of the Guarantor which is pari passu with, or subordinated to, the Guarantee, provided, however, that Guarantor Senior Debt shall not be deemed to include (a) any Debt of the Guarantor which, when incurred and without respect to any election under Section 1111(b) of the Bankruptcy Reform Act of 1978, was without recourse to the Guarantor, (b) any Debt of the Guarantor to any of its Subsidiaries, other than Debt to a Subsidiary the proceeds of which the Guarantor used to pay Guarantor Senior Debt (c) any Debt to any employee of the Guarantor, (d) any liability for taxes, or (e) any Debt or other monetary obligations to trade creditors created or assumed by the Guarantor or any of its Subsidiaries in the ordinary course of business in connection with the obtaining of goods, materials or services. "Holder" shall mean any holder, as registered on the books and records of the Trust, of any Preferred Securities. "Indenture" shall have the meaning ascribed to it in the Recitals. "Subsidiary" of any Person means a corporation more than 50% of the outstanding voting stock of which is owned, directly or indirectly, by such Person or one or more other Subsidiaries of such Person, or by such Person and one or more other Subsidiaries of such Person. For purposes of this definition, "voting stock" means stock which ordinarily has voting power for the election of directors, whether at all times or only so long as no senior class of stock has such voting power by reason of any contingency. SECTION 2. The Guarantee. (a) The Guarantor irrevocably and unconditionally guarantees on a subordinated basis as set forth herein (the "Guarantee"), to each Holder of Preferred Securities and to the Trustees and their successors and assigns (without duplication of amounts theretofore paid by the Depositor), the full and punctual payment and performance (within applicable grace periods) of all the obligations of the Depositor under the Trust Agreement. -2- 3 (b) The Guarantor further agrees that the Guarantee constitutes a guarantee of payment, performance and compliance and not merely of collection. (c) The Guarantor's obligation to make any payment hereunder may be satisfied by causing the Depositor to make such payment. (d) The Guarantor also agrees to pay any and all costs and expenses (including reasonable attorneys' fees) incurred by the Trustees or any Holder of Preferred Securities in enforcing any of their respective rights under the Guarantee. (e) Except as specifically provided herein, the obligations of the Depositor under the Trust Agreement remain in full force and effect. SECTION 3. Waiver of Notice and Demand. The Guarantor hereby waives notice of acceptance of the Guarantee and of any liability to which it applies or may apply, presentment, demand for payment, any right to require a proceeding first against the Depositor, any Trustee, the Trust or any other Person before proceeding against the Guarantor, protest, notice of nonpayment, notice of dishonor, notice of redemption and all other notices and demands. SECTION 4. Obligations Not Affected. The obligations, covenants, agreements and duties of the Guarantor under the Guarantee shall in no way be affected or impaired by reason of the happening from time to time of any of the following: (a) the release or waiver, by operation of law or otherwise, of the performance or observance by the Depositor of any express or implied agreement, covenant, term or condition relating to the Trust Agreement or the Preferred Securities to be performed or observed by the Depositor; (b) the extension of time for the payment by the Depositor of all or any portion of (i) any payment of any monetary obligation of the Depositor under the Trust Agreement (including obligations to the Trustees) and the Preferred Securities, or (ii) the extension of time for the full and punctual performance within applicable grace periods of all other obligations of the Depositor under the Trust Agreement and the Preferred Securities; (c) any failure, omission, delay or lack of diligence on the part of the Holders of the Preferred Securities or the Trustees to enforce, assert or exercise any right, privilege, power or remedy conferred on the Holders of the Preferred Securities or the Trustees pursuant to the terms of the Trust Agreement or the Preferred Securities, or any action on the part of the Depositor granting indulgence or extension of any kind; (d) voluntary or involuntary liquidation, dissolution, sale of any collateral, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition or readjustment of debt of, or other similar proceedings affecting, the Depositor or any of the assets of the Depositor; -3- 4 (e) any invalidity of, or defect or deficiency in, the Preferred Securities or the Trust Agreement; (f) the settlement or compromise of any obligation guaranteed hereby or hereby incurred; or (g) any other circumstance whatsoever that might otherwise constitute a legal or equitable discharge or defense of a guarantor, it being the intent of this Agreement that the obligations of the Guarantor hereunder shall be absolute and unconditional under any and all circumstances. There shall be no obligation of the Holders of the Preferred Securities or the Trustees to give notice to, or obtain the consent of, the Guarantor with respect to the happening of any of the foregoing. SECTION 5. Subordination. (a) Guarantee Subordinate to Guarantor Senior Debt. The Guarantee is hereby expressly subordinated in right of payment to the prior payment in full of all Guarantor Senior Debt, and such subordination is for the benefit of the holders of such Guarantor Senior Debt. (b) Payment Over of Proceeds Upon Dissolution, Etc. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Guarantor (each such event, if any, herein sometimes referred to as a "Proceeding"), then the holders of Guarantor Senior Debt shall be entitled to receive payment in full of principal of (and premium, if any) and interest, if any, on such Guarantor Senior Debt, or provision shall be made for such payment in cash or cash equivalents or otherwise in a manner satisfactory to the holders of Guarantor Senior Debt, before any payment is made in respect of the Guarantee. In the event that, notwithstanding the foregoing provisions of this Section, any Trustee or any Holder of the Preferred Securities shall have received any payment of the Guarantor in respect of the Guarantee, before all Guarantor Senior Debt is paid in full or payment thereof is provided for in cash or cash equivalents or otherwise in a manner satisfactory to the holders of Guarantor Senior Debt, and if such fact shall, at or prior to the time of such payment or distribution, have been made known to such Trustee or, as the case may be, such Holder, then and in such event such payment or distribution shall be paid over or delivered forthwith to the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee, agent or other Person making payment or distribution of assets of the Guarantor for application to the payment of all Guarantor Senior Debt remaining unpaid, to the extent necessary to pay all Guarantor Senior Debt in full, after giving effect to any concurrent payment or distribution to or for the holders of Guarantor Senior Debt. -4- 5 (c) Prior Payment of Guarantor Senior Debt. In the event that any payments are due pursuant to the Guarantee, then and in such event the holders of the Guarantor Senior Debt shall be entitled to receive payment in full of all amounts due on or in respect of such Guarantor Senior Debt (including any amounts due upon acceleration or otherwise), or provision shall be made for such payment in cash or cash equivalents or otherwise in a manner satisfactory to the holders of Guarantor Senior Debt, before any payments are made on account of the Guarantee. In the event that, notwithstanding the foregoing, the Guarantor shall make any payment to any Trustee or any Holder of the Preferred Securities prohibited by the foregoing provisions of this Section 5(c), and if such fact shall, at or prior to the time of such payment, have been made known to such Trustee or, as the case may be, such Holder, then and in such event such payment shall be paid over and delivered forthwith to the Guarantor. The provisions of this Section 5(c) shall not apply to any payment with respect to which Section 5(b) of this Agreement would be applicable. (d) No Payment When Guarantor Senior Debt in Default. (i) In the event and during the continuation of any default in the payment of principal of (or premium, if any) or interest on any Guarantor Senior Debt, or in the event that any event of default with respect to any Guarantor Senior Debt shall have occurred and be continuing and shall have resulted in such Guarantor Senior Debt becoming or being declared due and payable prior to the date on which it would otherwise have become due and payable, unless and until such event of default shall have been cured or waived or shall have ceased to exist and such acceleration shall have been rescinded or annulled, or (ii) in the event any judicial proceeding shall be pending with respect to any default in payment or such event of default, then no payment shall be made by the Guarantor on account of the Guarantee. In the event that, notwithstanding the foregoing, the Guarantor shall make any payment to any Trustee or any Holder of any Preferred Security prohibited by the foregoing provisions of this Section 5(d), and if such fact shall, at or prior to the time of such payment, have been made known to such Trustee or, as the case may be, such Holder, then and in such event such payment shall be paid over and delivered forthwith to the Guarantor. The provisions of this Section 5(d) shall not apply to any payment with respect to which Section 5(b) of this Agreement would be applicable. (e) Payment Permitted If No Default. Nothing contained in this Section 5 or elsewhere in this Agreement or in the Trust Agreement or in the Preferred Securities shall prevent (i) the Guarantor, at any time except during the pendency of any Proceeding referred to in Section 5(b) of this Agreement or under the conditions described in Sections 5(c) and 5(d) of this Agreement, from making payments at any time in respect of the Guarantee. -5- 6 (f) Subrogation to Rights of Holders of Guarantor Senior Debt. Subject to the payment in full of all Guarantor Senior Debt, or the provision for such payment in cash or cash equivalents or otherwise in a manner satisfactory to the holders of Guarantor Senior Debt, the Trustees and the Holders of the Preferred Securities shall be subrogated to the extent of the payments or distributions made to the holders of such Guarantor Senior Debt pursuant to the provisions of this Section 5 (equally and ratably with the holders of all indebtedness of the Guarantor which by its express terms is subordinated to Guarantor Senior Debt to substantially the same extent as the Guarantee is subordinated to the Guarantor Senior Debt and is entitled to like rights of subrogation by reason of any payments or distributions made to holders of such Guarantor Senior Debt) to the rights of the holders of such Guarantor Senior Debt to receive payments and distributions of cash, property and securities applicable to the Guarantor Senior Debt until the payments due under the Guarantee shall be paid in full. For purposes of such subrogation, no payments or distributions to the holders of the Guarantor Senior Debt of any cash, property or securities to which the Holders of the Preferred Securities or the Trustees would be entitled except for the provisions of this Section 5, and no payments over pursuant to the provisions of this Section 5 to the holders of Guarantor Senior Debt by Holders of the Preferred Securities or the Trustees, shall, as among the Guarantor, its creditors other than holders of Guarantor Senior Debt, and the Holders of the Preferred Securities and the Trustees, be deemed to be a payment or distribution by the Guarantor to or on account of the Guarantor Senior Debt. (g) Provisions Solely to Define Relative Rights. The provisions of this Section 5 are and are intended solely for the purpose of defining the relative rights of the Holders of the Preferred Securities and the Trustees on the one hand and the holders of Guarantor Senior Debt on the other hand. Nothing contained in this Section 5 or elsewhere in this Agreement or in the Trust Agreement or in the Preferred Securities is intended to or shall (i) impair, as between the Guarantor and the Holders of the Preferred Securities and the Trustees, the obligations of the Guarantor, which are absolute and unconditional, to pay to the Holders of the Preferred Securities and the Trustees all payments due on the Guarantee; or (ii) affect the relative rights against the Guarantor of the Holders of the Preferred Securities or the Trustees and creditors of the Guarantor other than their rights in relation to the holders of Guarantor Senior Debt; or (iii) prevent the Trustees or the Holders of the Preferred Securities from exercising all remedies otherwise permitted by applicable law upon default under this Agreement, including, without limitation, filing and voting claims in any Proceeding, subject to the rights, if any, under this Section 5 of the holders of Guarantor Senior Debt to receive cash, property and securities otherwise payable or deliverable to the Trustees or such Holders. (h) No Waiver of Subordination Provisions. No right of any present or future holder of any Guarantor Senior Debt to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Guarantor or by any act or failure to act, in good faith, by any such holder, or by any noncompliance by the Guarantor with the terms, provisions and covenants of this Section 5, regardless of any knowledge thereof that any such holder may have or be otherwise charged with. -6- 7 SECTION 6. Subrogation to Rights of Depositor. The Guarantor shall be subrogated to all (if any) rights of the Depositor in respect of any amounts paid by the Guarantor under this Agreement; provided, however, that the Guarantor shall not (except to the extent required by mandatory provisions of law) be entitled to enforce or exercise any rights which it may acquire by way of subrogation or any indemnity, reimbursement or other agreement, in all cases as a result of payment under this Agreement, if, at the time of any such payment, any amounts are due and unpaid under this Agreement. SECTION 7. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE CONFLICT OF LAWS PRINCIPLES THEREOF. SECTION 8. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which when taken together shall constitute but one instrument. SECTION 9. Headings. The headings of this Agreement are for reference only and shall not limit or otherwise affect the meaning hereof. SECTION 10. Separability. In case any one or more of the provisions contained in this Agreement shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement, but this Agreement shall be construed as if such invalid or illegal or unenforceable provision had never been contained herein. SECTION 11. Termination. This Agreement shall terminate automatically upon the termination of the Trust Agreement in accordance with its terms. SECTION 13. Successors and Assigns. All guarantees and agreements of the Guarantor contained in this Agreement shall bind the successors, assigns, receivers, trustees and representatives of the Guarantor and shall inure to the benefit of the Trustees and the Holders of the Preferred Securities then outstanding. In the event that the Guarantor shall assign its obligations contained in this Agreement, the Guarantor shall be discharged from all obligations and covenants of the Guarantor under this Agreement to the fullest extent permitted by law. -7- 8 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. WILMINGTON TRUST COMPANY, as Delaware Trustee and Property Trustee By: /s/ JAMES P. LAWLER ------------------------------------------ Name: James P. Lawler Title: Vice President /s/ SCOTT D. SULLIVAN ------------------------------------------ Scott D. Sullivan, as Administrative Trustee MCI WORLDCOM, INC. By: /s/ SCOTT D. SULLIVAN ------------------------------------------ Name: Scott D. Sullivan Title: Chief Financial Officer MCI COMMUNICATION CORPORATION By: /s/ SCOTT D. SULLIVAN ------------------------------------------ Name: Scott D. Sullivan Title: Chief Financial Officer -8- EX-4.11 5 EXPENSE AGREEMENT GUARANTEE 1 EXHIBIT 4.11 EXPENSE AGREEMENT GUARANTEE (this "Agreement"), dated as of November 12, 1998, between MCI WORLDCOM, Inc., a Georgia corporation, formerly known as WorldCom, Inc. ("MCI WorldCom" or the "Guarantor"), and MCI Capital I, a Delaware business trust (the "Trust"). WHEREAS, MCI Communications Corporation (formerly known as TC Investments Corp.), a Delaware corporation and a wholly owned subsidiary of MCI WorldCom ("MCI" or the "Company"), and the Trust are parties to that certain Agreement as to Expenses and Liabilities (the "Expense Agreement"), dated as of May 29, 1996, pursuant to which MCI has irrevocably and unconditionally guaranteed to each Beneficiary (as defined in the Expense Agreement) the full payment when and as due of any and all Obligations (as defined in the Expense Agreement) of the Trust; and WHEREAS, pursuant to the terms of an Amended and Restated Trust Agreement, dated as of May 29, 1996 (the "Trust Agreement"), the Trust has (i) issued to the public $750,000,000 aggregate liquidation amount of its 8.00% Cumulative Quarterly Income Preferred Securities, Series A (the "Preferred Securities"), representing undivided beneficial interests in the assets of the Trust, (ii) issued to MCI, in its capacity as depositor of the Trust, $23,195,900 of its Common Securities (the "Common Securities"), and (iii) used the proceeds of the issuance of the Preferred Securities and Common Securities to purchase from MCI $773,195,900 in aggregate principal amount of MCI's 8.00% Junior Subordinated Deferrable Interest Debentures, Series A (the "Debentures"), issued pursuant to a Junior Subordinated Indenture (the "Indenture"), dated as of May 29, 1996; and WHEREAS, the Guarantor desires to unconditionally and irrevocably guarantee, on a subordinated basis, the full and punctual payment and performance (within applicable grace periods) of all the obligations of the Company under the Expense Agreement; NOW, THEREFORE, the Guarantor and the Trust hereby agree as follows: SECTION 1. Definitions. Capitalized terms used but not defined herein have the meanings ascribed to them in the Expense Agreement. In addition, the following terms shall have the following meanings: "Company" shall have the meaning set forth in the Recitals. "Debt" means, with respect to any Person, whether recourse is to all or a portion of the assets of such Person and whether or not contingent, (i) every obligation of such Person for money borrowed; (ii) every obligation of such Person evidenced by bonds, debentures, notes or other similar instruments, including obligations incurred in connection with the acquisition of property, assets or businesses; (iii) every reimbursement obligation of such Person with respect to letters of credit, bankers' acceptances or similar facilities issued 2 for the account of such Person; (iv) every obligation of such Person issued or assumed as the deferred purchase price of property or services (but excluding trade accounts payable or accrued liabilities arising in the ordinary course of business); (v) every capital lease obligation of such Person; and (vi) every guarantee of or responsibility or liability for, direct or indirect, as obligor or otherwise (a) any obligation of the types referred to in clauses (i) through (v) of another Person or (b) the payment of any and all dividends of another Person. "Guarantee" shall have the meaning set forth in Section 2 hereof. "Guarantor" shall have the meaning set forth in the Recitals. "Guarantor Senior Debt" means the principal of (and premium, if any) and interest, if any (including, without limitation, interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to the Guarantor whether or not such claim for post-petition interest is allowed in such proceeding), on Debt of the Guarantor, whether incurred on or prior to the date of this Agreement or thereafter incurred, unless, in the instrument creating or evidencing the same or pursuant to which the same is outstanding, it is expressly provided that such obligations are not superior in right of payment to the Guarantee or to other Debt of the Guarantor which is pari passu with, or subordinated to, the Guarantee, provided, however, that Guarantor Senior Debt shall not be deemed to include (a) any Debt of the Guarantor which, when incurred and without respect to any election under Section 1111(b) of the Bankruptcy Reform Act of 1978, was without recourse to the Guarantor, (b) any Debt of the Guarantor to any of its Subsidiaries, other than Debt to a Subsidiary the proceeds of which the Guarantor used to pay Guarantor Senior Debt (c) any Debt to any employee of the Guarantor, (d) any liability for taxes or (e) any Debt or other monetary obligations to trade creditors created or assumed by the Guarantor or any of its Subsidiaries in the ordinary course of business in connection with the obtaining of goods, materials or services. "Indenture" shall have the meaning ascribed to it in the Recitals. "Preferred Securities" shall have the meaning ascribed thereto in the Recitals. "MCI WorldCom" shall have the meaning set forth in the Recitals. "Subsidiary" of any Person means a corporation more than 50% of the outstanding voting stock of which is owned, directly or indirectly, by such Person or one or more other Subsidiaries of such Person, or by such Person and one or more other Subsidiaries of such Person. For purposes of this definition, "voting stock" means stock which ordinarily has voting power for the election of directors, whether at all times or only so long as no senior class of stock has such voting power by reason of any contingency. SECTION 2. The Guarantee. (a) Subject to the terms and conditions hereof, the Guarantor hereby irrevocably and unconditionally guarantees, on a subordinated basis as set forth herein (the "Guarantee"), to each Beneficiary (without duplication of amounts theretofore paid by the Trust or the Company), the full payment, when and as due, of any and - 2 - 3 all obligations of the Company under the Expense Agreement. This Guarantee is intended to be for the benefit of, and to be enforceable by, all such Beneficiaries, whether or not such Beneficiaries have received notice hereof. (b) Except as provided herein, the obligations of the Company under the Expense Agreement remain in full force and effect. SECTION 3. Waiver of Notice. The Guarantor hereby waives notice of acceptance of the Guarantee and of any liability to which it applies or may apply, and the Guarantor hereby waives presentment, demand for payment, protest, notice of nonpayment, notice of dishonor, notice of redemption and all other notices and demands. SECTION 4. No Impairment. The obligations, covenants, agreements and duties of the Guarantor under the Guarantee shall in no way be affected or impaired by reason of the happening from time to time of any of the following: (a) the extension of time for the payment by the Company of all or any portion of any monetary obligation of the Company under the Expense Agreement, or for the performance of any other obligations of the Company under, arising out of, or in connection with the Expense Agreement; (b) any failure, omission, delay or lack of diligence on the part of the Beneficiaries to enforce, assert or exercise any right, privilege, power or remedy conferred on the Beneficiaries pursuant to the terms of the Expense Agreement, or any action on the part of the Company or the Trust granting indulgence or extension of any kind; (c) the voluntary or involuntary liquidation, dissolution, sale of any collateral, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition or readjustment of debt of, or other similar proceedings affecting, the Company or the Trust or any of the assets of the Company or the Trust. There shall be no obligation of the Beneficiaries to give notice to, or obtain the consent of, the Guarantor with respect to the happening of any of the foregoing. SECTION 5. Subordination. (a) Guarantee Subordinate to Guarantor Senior Debt. The Guarantee is hereby expressly subordinated in right of payment, to the prior payment in full of all Guarantor Senior Debt, and such subordination is for the benefit of the holders of such Guarantor Senior Debt. (b) Payment Over of Proceeds Upon Dissolution, Etc. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Guarantor (each such event, if any, herein sometimes referred to as a "Proceeding"), then the holders of Guarantor Senior Debt shall be entitled to receive payment in full of principal of (and premium, if any) and interest, if any, on such Guarantor Senior Debt, or provision shall be made for such - 3 - 4 payment in cash or cash equivalents or otherwise in a manner satisfactory to the holders of Guarantor Senior Debt, before any payment is made in respect of the Guarantee. In the event that, notwithstanding the foregoing provisions of this Section, any Beneficiary shall have received any payment of the Guarantor in respect of the Guarantee, before all Guarantor Senior Debt is paid in full or payment thereof is provided for in cash or cash equivalents or otherwise in a manner satisfactory to the holders of Guarantor Senior Debt, and if such fact shall, at or prior to the time of such payment or distribution, have been made known to such Beneficiary, then and in such event such payment or distribution shall be paid over or delivered forthwith to the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee, agent or other Person making payment or distribution of assets of the Guarantor for application to the payment of all Guarantor Senior Debt remaining unpaid, to the extent necessary to pay all Guarantor Senior Debt in full, after giving effect to any concurrent payment or distribution to or for the holders of Guarantor Senior Debt. (c) Prior Payment of Guarantor Senior Debt. In the event that any payments are due pursuant to the Guarantee, then and in such event the holders of the Guarantor Senior Debt shall be entitled to receive payment in full of all amounts due on or in respect of such Guarantor Senior Debt (including any amounts due upon acceleration or otherwise), or provision shall be made for such payment in cash or cash equivalents or otherwise in a manner satisfactory to the holders of Guarantor Senior Debt, before any payments are made on account of the Guarantee. In the event that, notwithstanding the foregoing, the Guarantor shall make any payment to any Beneficiary prohibited by the foregoing provisions of this Section 5(c), and if such fact shall, at or prior to the time of such payment, have been made known to such Beneficiary, then and in such event such payment shall be paid over and delivered forthwith to the Guarantor. The provisions of this Section 5(c) shall not apply to any payment with respect to which Section 5(b) of this Agreement would be applicable. (d) No Payment When Guarantor Senior Debt in Default. (i) In the event and during the continuation of any default in the payment of principal of (or premium, if any) or interest on any Guarantor Senior Debt, or in the event that any event of default with respect to any Guarantor Senior Debt shall have occurred and be continuing and shall have resulted in such Guarantor Senior Debt becoming or being declared due and payable prior to the date on which it would otherwise have become due and payable, unless and until such event of default shall have been cured or waived or shall have ceased to exist and such acceleration shall have been rescinded or annulled, or (ii) in the event any judicial proceeding shall be pending with respect to any default in payment or such event of default, then no payment shall be made by the Guarantor on account of the Guarantee. - 4 - 5 In the event that, notwithstanding the foregoing, the Guarantor shall make any payment to any Beneficiary, prohibited by the foregoing provisions of this Section 5(d), and if such fact shall, at or prior to the time of such payment, have been made known to such Beneficiary then and in such event such payment shall be paid over and delivered forthwith to the Guarantor. The provisions of this Section 5(d) shall not apply to any payment with respect to which Section 5(b) of this Agreement would be applicable. (e) Payment Permitted If No Default. Nothing contained in this Section 5 or elsewhere in this Agreement or the Expense Agreement shall prevent (i) the Guarantor, at any time except during the pendency of any proceeding referred to in Section 5(b) of this Agreement or under the conditions described in Sections 5(c) and 5(d) of this Agreement, from making payments at any time in respect of this Guarantee. (f) Subrogation to Rights of Holders of Guarantor Senior Debt. Subject to the payment in full of all Guarantor Senior Debt, or the provision for such payment in cash or cash equivalents or otherwise in a manner satisfactory to the holders of Guarantor Senior Debt, the Beneficiaries shall be subrogated to the extent of the payments or distributions made to the holders of such Guarantor Senior Debt pursuant to the provisions of this Section 5 (equally and ratably with the holders of all indebtedness of the Guarantor which by its express terms is subordinated to Guarantor Senior Debt to substantially the same extent as the Guarantee is subordinated to the Guarantor Senior Debt and is entitled to like rights of subrogation by reason of any payments or distributions made to holders of such Guarantor Senior Debt) to the rights of the holders of such Guarantor Senior Debt to receive payments and distributions of cash, property and securities applicable to the Guarantor Senior Debt until the payments due under the Guarantee shall be paid in full. For purposes of such subrogation, no payments or distributions to the holders of the Guarantor Senior Debt of any cash, property or securities to which the Beneficiaries would be entitled except for the provisions of this Section 5, and no payments over pursuant to the provisions of this Section 5 to the holders of Guarantor Senior Debt by any Beneficiary, shall, as among the Guarantor, its creditors other than holders of Guarantor Senior Debt, and the Beneficiaries, be deemed to be a payment or distribution by the Guarantor to or on account of the Guarantor Senior Debt. (g) Provisions Solely to Define Relative Rights. The provisions of this Section 5 are and are intended solely for the purpose of defining the relative rights of the Beneficiaries on the one hand and the holders of Guarantor Senior Debt on the other hand. Nothing contained in this Section 5 or elsewhere in this Agreement or in the Expense Agreement is intended to or shall (i) impair, as between the Guarantor and the Beneficiaries, the obligations of the Guarantor, which are absolute and unconditional, to pay to the Beneficiaries, all payments due on the Guarantee; or (ii) affect the relative rights against the Guarantor of the Beneficiaries and creditors of the Guarantor other than their rights in relation to the holders of Guarantor Senior Debt; or (iii) prevent the Beneficiaries from exercising all remedies otherwise permitted by applicable law upon default under this Agreement, including, without limitation, filing and voting claims in any Proceeding, subject to the rights, if any, under this Section 5 of the holders of Guarantor Senior Debt to receive cash, property and securities otherwise payable or deliverable to the Beneficiaries. - 5 - 6 (h) No Waiver of Subordination Provisions. No right of any present or future holder of any Guarantor Senior Debt to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Guarantor or by any act or failure to act, in good faith, by any such holder, or by any noncompliance by the Guarantor with the terms, provisions and covenants of this Section 5, regardless of any knowledge thereof that any such holder may have or be otherwise charged with. SECTION 6. Enforcement. A Beneficiary may enforce this Agreement directly against the Guarantor and the Guarantor waives any right or remedy to require that any action be brought against the Trust, the Company or any other person or entity before proceeding against the Guarantor. SECTION 7. Subrogation. The Guarantor shall be subrogated to all (if any) rights of the Company and the Trust in respect of any amounts paid to the Beneficiaries by the Guarantor under this Agreement; provided, however, that the Guarantor shall not (except to the extent required by mandatory provisions of law) be entitled to enforce or exercise any rights which it may acquire by way of subrogation or any indemnity, reimbursement or other agreement, in all cases as a result of payment under this Agreement, if, at the time of any such payment, any amounts are due and unpaid under this Agreement. SECTION 8. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE CONFLICT OF LAWS PRINCIPLES THEREOF. SECTION 9. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which when taken together shall constitute but one instrument. SECTION 10. Headings. The headings of this Agreement are for reference only and shall not limit or otherwise affect the meaning hereof. SECTION 11. Separability. In case any one or more of the provisions contained in this Agreement shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement, but this Agreement shall be construed as if such invalid or illegal or unenforceable provision had never been contained herein. SECTION 12. Termination. This Agreement shall terminate automatically upon the termination of the Expense Agreement; provided, however, that this Agreement shall continue to be effective or shall be reinstated, as the case may be, if and to the extent the Expense Agreement continues to be effective or is reinstated for any reason whatsoever. This Agreement is continuing, irrevocable, unconditional and absolute. - 6 - 7 SECTION 13. Successors and Assigns. All guarantees and agreements of the Guarantor contained in this Agreement shall bind the successors, assigns, receivers, trustees and representatives of the Guarantor and shall inure to the benefit of the Beneficiaries. In the event that the Guarantor shall assign its obligations contained in this Agreement, the Guarantor shall be discharged from all obligations and covenants of the Guarantor under this Agreement to the fullest extent permitted by law. SECTION 14. Amendment. So long as there remains any Beneficiary or any Preferred Securities of any series are outstanding, this Agreement shall not be modified or amended in any manner adverse to such Beneficiary or to the holders of the Preferred Securities. SECTION 15. Notices. Any notice, request or other communication required or permitted to be given hereunder shall be given in writing by delivering the same against receipt therefor by facsimile transmission (confirmed by mail), telex or by registered or certified mail, addressed as follows (and if so given, shall be deemed given when mailed or upon receipt of an answer-back, if sent by telex): MCI Capital I c/o Wilmington Trust Company 1100 North Market Street Wilmington, Delaware 19890 Facsimile No.: (302) 651-8882 Attn: Corporate Trust Department MCI WORLDCOM, Inc. 515 East Amite St. Jackson, MS 39201 Facsimile No.: 601-360-8110 Attn: Treasurer - 7 - 8 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. MCI WORLDCOM, INC. By: /s/ SCOTT D. SULLIVAN ----------------------------------------- Name: Scott D. Sullivan Title: Chief Financial Officer MCI CAPITAL I By: /s/ SCOTT D. SULLIVAN ----------------------------------------- Name: Scott D. Sullivan Title: Administrative Trustee - 8 - EX-27.1 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MCI WORLDCOM INC.'S FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERNCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 944 0 0 0 0 8,660 23,777 (1,477) 82,278 14,143 16,032 750 0 18 44,246 82,278 0 8,661 4,141 10,869 (36) 115 351 (2,523) 462 (2,985) 0 129 0 (3,141) (2.77) (2.77)
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