-----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, AiSRQ933AKJi6yniZqN0wWINEAb7DWXY+WHmm9BUq/JbsUrVx1r9hD8lG6yU2+qf QautLmNpOnt6jkvw8HLM+w== 0000950134-95-002936.txt : 19951119 0000950134-95-002936.hdr.sgml : 19951119 ACCESSION NUMBER: 0000950134-95-002936 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: WORLDCOM INC /MS/ 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: 1934 Act SEC FILE NUMBER: 000-11258 FILM NUMBER: 95592247 BUSINESS ADDRESS: STREET 1: 515 EAST AMITE ST CITY: JACKSON STATE: MS ZIP: 39201-2702 BUSINESS PHONE: 6013608600 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 FORMER COMPANY: FORMER CONFORMED NAME: CENTRAL CORP /GA/ DATE OF NAME CHANGE: 19890523 10-Q 1 FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 1995 1 ================================================================================ 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, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----------- ------------- Commission file number: 0-11258 ____________________ WorldCom, Inc. (F/K/A LDDS COMMUNICATIONS, INC.) (Exact name of registrant as specified in its charter) ____________________ Georgia 58-1521612 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) 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 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes X No ----- ----- The number of outstanding shares of the registrant's Common Stock, par value $.01 per share, was 193,127,590 on October 31, 1995. ================================================================================ 2 FORM 10-Q INDEX
Page Number ------ PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of September 30, 1995 and December 31, 1994 . . . . . . . . . . . . 3 Consolidated Statements of Operations for the three and nine month periods ended September 30, 1995 and September 30, 1994 . . . . . . . . . . . . . . . . . . . . . 4 Consolidated Statements of Cash Flows for the nine months ended September 30, 1995 and September 30, 1994 . . . . . . . . . . . . . . . . . . . . . . . 5 Notes to Consolidated Financial Statements . . . . . . . . . . . 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 PART II. OTHER INFORMATION Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 13 Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . 13 Item 3. Defaults upon Senior Securities . . . . . . . . . . . . . . . . 13 Item 4. Submission of Matters to a Vote of Securities Holders . . . . . . . . . . . . . . . . . . . . . 13 Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . 13 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 14 Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Page 2 3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements WORLDCOM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands of Dollars, Except Per Share Data)
September 30, December 31, 1995 1994 ------------------- ------------------ ASSETS Current assets: Cash and cash equivalents $ 10,877 $ 19,259 Short-term investments - 1,000 Accounts receivable, net of allowance for bad debts of $48,458 in 1995 and $52,949 in 1994 509,792 470,175 Deferred tax asset 92,652 62,687 Other current assets 38,950 36,305 ------------------- ------------------ Total current assets 652,271 589,426 ------------------- ------------------ Property and equipment: Transmission equipment 1,341,721 472,737 Communications equipment 380,518 307,262 Furniture, fixtures and other 284,398 164,266 ------------------- ------------------ 2,006,637 944,265 Less - accumulated depreciation (438,040) (317,598) ------------------- ------------------ 1,568,597 626,667 ------------------- ------------------ Excess of cost over net tangible assets acquired, net of accumulated amortization 4,186,679 2,070,709 Line installation costs, net of accumulated amortization 33,211 28,768 Deferred income taxes 14,120 14,120 Other assets 97,032 100,502 ------------------- ------------------ $ 6,551,910 $ 3,430,192 =================== ================== LIABILITIES AND SHAREHOLDERS' INVESTMENT Current liabilities: Short-term debt and current maturities of long-term debt $ 2,061 $ 5,996 Accounts payable 133,524 138,101 Accrued line costs 361,285 258,053 Accrued restructuring costs 5,862 25,837 Shareholder litigation reserve - 75,000 Income taxes payable 78,466 11,940 Other current liabilities 291,442 195,728 ------------------- ------------------ Total current liabilities 872,640 710,655 ------------------- ------------------ Long-term liabilities, less current portion: Long-term debt 3,392,357 788,005 Deferred income taxes payable 77,258 - Other liabilities 125,169 104,362 ------------------- ------------------ Total long-term liabilities 3,594,784 892,367 ------------------- ------------------ Commitments and contingencies Shareholders' investment: Series 1 preferred stock, par value $.01 per share; authorized, issued and outstanding: none in 1995 and 10,896,785 shares in 1994 - 109 Series 2 preferred stock, par value $.01 per share; authorized, issued and outstanding: 1,244,048 shares in 1995 and 2,000,000 shares in 1994 12 20 Preferred stock: par value $.01 per share; authorized: 37,103,215 shares in 1995 and 1994; none issued - - Common stock, par value $.01 per share; authorized: 500,000,000 shares; issued and outstanding: 193,052,907 shares in 1995 and 159,643,312 in 1994 1,931 1,596 Additional paid-in capital 1,874,318 1,772,882 Retained earnings 208,225 52,563 ------------------- ------------------ Total shareholders' investment 2,084,486 1,827,170 ------------------- ------------------ $ 6,551,910 $ 3,430,192 =================== ==================
The accompanying notes are an integral part of these Statements Page 3 4 WORLDCOM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands, Except Per Share Data)
For the Three Months For the Nine Months Ended September 30, Ended September 30, ------------------------------ ------------------------------------------- 1995 1994 1995 1994 -------------- -------------- ------------------- ------------------ Revenues $ 933,560 $ 568,558 $ 2,693,314 $ 1,647,771 -------------- -------------- ------------------- ------------------ Operating expenses: Line costs 508,318 365,513 1,480,696 1,042,584 Selling, general and administrative 167,644 100,337 490,213 290,955 Depreciation and amortization 79,787 42,646 231,301 121,109 Provision to reduce carrying value of certain assets - 35,000 - 35,000 -------------- -------------- ------------------- ------------------ Total 755,749 543,496 2,202,210 1,489,648 -------------- -------------- ------------------- ------------------ Operating income 177,811 25,062 491,104 158,123 Other income (expense): Interest expense (62,526) (12,778) (189,392) (34,298) Shareholder litigation settlement - (76,000) - (76,000) Miscellaneous 3,752 1,223 7,125 4,431 -------------- -------------- ------------------- ------------------ Income (loss) before income taxes 119,037 (62,493) 308,837 52,256 Provision for income taxes 46,424 49,263 120,446 104,109 -------------- -------------- ------------------- ------------------ Net income (loss) 72,613 (111,756) 188,391 (51,853) -------------- -------------- ------------------- ------------------ Preferred dividend requirement 3,811 6,938 17,686 20,828 One-time dividend payment to Series 1 preferred shareholder 15,000 - 15,000 - -------------- -------------- ------------------- ------------------ Net income (loss) applicable to common shareholders $ 53,802 $ (118,694) $ 155,705 $ (72,681) ============== ============== =================== ================== Earnings (loss) per common share : Primary 0.29 (0.75) 0.89 (0.46) ============== ============== =================== ================== Fully diluted 0.29 (0.75) 0.89 (0.46) ============== ============== =================== ================== Earnings (loss) per common share before one-time dividend payment to Series 1 preferred shareholder: Primary 0.37 (0.75) 0.97 (0.46) ============== ============== =================== ================== Fully diluted 0.37 (0.75) 0.96 (0.46) ============== ============== =================== ================== Weighted average shares outstanding: Primary 195,014 158,282 192,517 157,296 Fully diluted 202,961 158,282 200,526 157,296
The accompanying notes are an integral part of these Statements. Page 4 5 WORLDCOM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands of Dollars)
For the Nine Months Ended September 30, ------------------------------------------- 1995 1994 ------------------- ------------------ Cash flows from operating activities: Net income (loss) $ 188,391 $ (51,853) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 137,567 72,136 Amortization 93,734 48,973 Provision for losses on accounts receivable 29,129 26,100 Provision for shareholder litigation - 76,000 Provision to reduce the carrying value of certain assets - 35,000 Provision for deferred income taxes 47,293 58,871 Change in assets and liabilities, net of effect of business combinations: Accounts receivable (38,930) (146,970) Other current assets (359) 4,647 Accounts payable and other current liabilities (10,033) (82,181) Shareholder litigation reserve (75,000) - Other (6,349) 3,830 ------------------- ------------------ Net cash provided by operating activities 365,443 44,553 ------------------- ------------------ Cash flows from investing activities: Capital expenditures (287,441) (110,775) Sale of short-term investments, net 1,000 9,636 Acquisitions and related costs (2,713,765) (77,127) Increase in intangible assets (6,350) (23,049) Proceeds from disposition of other assets 14,463 - Increase in other assets (4,641) (6,558) Increase (decrease) in other liabilities (21,468) 25,821 Payment for line installation costs (14,848) (3,651) Proceeds from disposition of property and equipment 13,690 - ------------------- ------------------ Net cash used in investing activities (3,019,360) (185,703) ------------------- ------------------ Cash flows from financing activities: Borrowings 2,717,650 120,000 Principal payments on debt (128,232) (18,657) Common stock issuance 88,803 33,883 Dividends paid on preferred stock (32,686) (20,828) ------------------- ------------------ Net cash provided by financing activities 2,645,535 114,398 ------------------- ------------------ Net decrease in cash and cash equivalents (8,382) (26,752) Cash and cash equivalents at beginning of period 19,259 60,780 ------------------- ------------------ Cash and cash equivalents at end of period $ 10,877 $ 34,028 =================== ==================
The accompanying notes are an integral part of these Statements Page 5 6 WORLDCOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (A) NAME CHANGE At the annual meeting of shareholders held May 25, 1995, shareholders of LDDS Communications, Inc. voted to change the name of the company to WorldCom, Inc. ("WorldCom" or the "Company") effective immediately. The change was made to appropriately express the Company's image, direction and capabilities as a major participant in the worldwide telecommunications market. (B) GENERAL 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 ("SEC") 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 Annual Report of the Company on Form 10-K for the year ended December 31, 1994. The results for the nine month period ended September 30, 1995, are not necessarily indicative of the results that may be expected for the year ending December 31, 1995. (C) BUSINESS COMBINATIONS On January 5, 1995, the Company completed the acquisition of Williams Telecommunications Group, Inc. ("WilTel"), a subsidiary of The Williams Companies, Inc. ("Williams"), for approximately $2.5 billion in cash (the "WilTel Acquisition"). Through this purchase, the Company acquired a nationwide common carrier network of approximately 11,000 miles of fiber optic cable and digital microwave facilities. The WilTel Acquisition was effected pursuant to a Stock Purchase Agreement dated as of August 22, 1994, by and among the Company, Williams and WTG Holdings, Inc. The WilTel Acquisition is being accounted for as a purchase for financial reporting purposes. The funds paid to Williams were obtained by the Company under a new credit facility entered into on December 21, 1994. The following unaudited pro forma combined results of operations for the Company assume that the WilTel Acquisition was completed on January 1, 1994 (in thousands, except per share data):
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 ------------------ Revenues $2,249,563 Net loss applicable to common shareholders (126,929) Loss per common share (0.81)
These pro forma amounts represent the historical operating results of WilTel combined with those of the Company with appropriate adjustments which give effect to interest expense and amortization. These pro forma amounts are not necessarily indicative of operating results which would have occurred if the WilTel Acquisition had been operated by current management during the periods presented because these amounts do not reflect full network optimization and the synergistic effect on operating, selling, general and administrative expenses. Page 6 7 (D) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid by the Company during the nine months ended September 30, 1995 and 1994 amounted to $165.4 million and $34.0 million, respectively. Income taxes paid during the nine months ended September 30, 1995 and 1994 were $7.4 million and $9.5 million, respectively. In conjunction with business combinations during the nine months ended September 30, 1995 and 1994 (see Note C), assumed assets and liabilities were as follows (in thousands):
FOR THE NINE MONTHS ENDED SEPTEMBER 30, --------------------------------- 1995 1994 ---------- ----------- Fair value of assets acquired $ 829,806 $ - Excess of cost over net tangible assets acquired 2,199,415 283,840 Liabilities assumed (302,606) (189,329) Common stock issued (12,850) (17,384) ----------- ------------ $ 2,713,765 $ 77,127 =========== ============
Acquisition and related costs for the nine months ended September 30, 1994 reflect additional costs related to the acquisitions in 1993. (E) PREFERRED STOCK On August 23, 1995, Metromedia Company ("Metromedia") converted its Series 1 $2.25 Cumulative Senior Perpetual Convertible Preferred Stock (the "Series 1 Preferred Stock") of WorldCom into 21,876,976 shares of WorldCom common stock and exercised warrants to acquire 3,106,976 shares of WorldCom common stock and immediately sold its position of 30,849,548 shares of WorldCom common stock in a public offering. In connection with the preferred stock conversion, WorldCom made a one-time non-recurring payment of $15.0 million to Metromedia, representing a discount to the minimum nominal dividends that would have been payable on the Series 1 Preferred Stock prior to the September 15, 1996 optional call date of approximately $26.6 million (which amount includes an annual dividend requirement of $24.5 million plus accrued dividends to such call date). Metromedia offered the shares immediately through an underwriting by Donaldson, Lufkin & Jenrette Securities Corporation, as representative for the several underwriters. The Company did not receive any proceeds from the sale of the shares, but did receive approximately $33.7 million in proceeds from the exercise of the warrants, which were used to repay certain existing bank debt. John W. Kluge, Chairman of WorldCom, and the two other directors elected by Metromedia, Silvia Kessel and Stuart Subotnick, currently remain as directors of WorldCom. (F) CONTINGENCIES IDB RELATED INVESTIGATIONS. On June 9, 1994, the SEC issued a formal order of investigation concerning certain matters, including IDB Communications Group, Inc.'s ("IDB") financial position, books and records and internal controls and trading in IDB securities on the basis of non-public information. The SEC has issued subpoenas to WorldCom, IDB and others, including certain former officers of IDB, in connection with its investigation. The NASD and other self- regulatory bodies have also made inquiries of IDB concerning similar matters. The U.S. Attorney's Office for the Central District of California has issued grand jury subpoenas to IDB seeking documents relating to IDB's first quarter results, the Deloitte & Touche LLP resignation, trading in IDB securities and other matters, including information concerning certain entities in which certain former officers of IDB are personal investors and transactions between such entities and IDB. IDB has been informed that a criminal investigation has commenced. The U.S. Attorney's Office has issued a grand jury subpoena to WorldCom arising out of the same investigation seeking certain documents relating to IDB. AT&T PATENTS. AT&T has written the Company claiming that certain of the Company's long distance services (including certain 800 services, operator services and calling card services) make unauthorized use of AT&T patents. Similar claims have Page 7 8 been asserted against other long distance carriers. AT&T has stated that it will enforce its patent rights and requested that the Company and other carriers enter into patent license agreements. The Company has had discussions with AT&T and is currently evaluating AT&T's claims. The Company is not yet in a position to predict whether this matter will lead to litigation. In a related development, MCI has brought suit against AT&T alleging that certain of these same patents are invalid under the patent laws or unenforceable due to representations made by AT&T to the District Court at the time of the 1982 AT&T divestiture decree. AT&T has counterclaimed against MCI alleging patent infringement. The Company could be adversely affected if, as a result of litigation or otherwise, it was required to pay substantial patent royalties to AT&T. However, the ultimate outcome of this issue, or the amount of any such patent royalties which might be required, cannot be determined at this time. OTHER. The United States Senate and the House of Representatives have passed separate bills that would permit the Bell System Operating Companies ("BOCs") to provide domestic and international long distance services upon, among other things, a finding that the state regulatory environment and the petitioning BOCs had satisfied certain criteria for opening the BOCs network to competition. Differences between both bills are anticipated to be considered by a House- Senate Conference Committee shortly. The House and the Senate will vote upon a bill reported by the Conference Committee, if any. After passage by both houses of Congress, a bill will be forwarded to the President for enactment or veto. The outcome of pending legislation cannot be predicted. The Company is involved in other legal and regulatory proceedings generally incidental to its business. In some instances, rulings by regulatory authorities in some states may result in increased operating costs to the Company. While the results of these various legal and regulatory matters contain an element of uncertainty, the Company believes that the probable outcome of any of the legal or regulatory matters, or all of them combined, should not have a material adverse effect on the Company's consolidated results of operations or financial position. (G) RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS The following table sets forth the ratio of earnings to combined fixed charges and preferred stock dividends for each of the five years ended December 31, 1994 and for the nine months ended September 1994 and 1995, which ratios are based on the historical consolidated financial statements of WorldCom. The table also sets forth the pro forma combined data for the year ended December 31, 1994, which data gives effect to the WilTel Acquisition and the financing thereof as if it occurred on January 1, 1994. The WilTel Acquisition was accounted for as a purchase transaction. The pro forma combined data are presented for comparative purposes only and are not intended to be indicative of actual results had the transactions occurred as of the date indicated above nor do they purport to be indicative of results which may be attained in the future.
Pro Forma Historical Combined Historical --------------------------------------------------- ---------------- ---------- Nine Months Ended Year Ended December 31, Year Ended December 31, September 30, 1990 1991 1992 1993 1994 1994 1994 1995 ---- ---- ---- ---- ---- ---- ---- ---- Ratio of earnings to combined fixed charges and preferred stock dividends 2.45:1 2.53:1 1.40:1 4.14:1 0.13:1 0.45:1 1.51:1 2.12:1 Deficiency of earnings to combined fixed charges and preferred stock dividends (in thousands) - - - - $(78,008) $(153,203) - -
Page 8 9 For the purpose of computing the ratio of earnings to combined fixed charges and preferred stock dividends, earnings consist of income (loss) from continuing operations and fixed charges and preferred stock dividends, and fixed charges consist of interest (including capitalized interest, but excluding amortization amounts previously capitalized) on all indebtedness, amortization of debt discount and expense and that portion of rental expense which the Company believes to be representative of interest. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis relates to the financial condition and results of operations of the Company for the three and nine months ended September 30, 1995 and 1994 after giving effect to the Company's merger with IDB on December 30, 1994 (the "IDB Merger"), which was accounted for as a pooling-of-interests. GENERAL The Company's continued emphasis on acquisitions has taken the Company from a small regional long distance carrier to one of the largest long distance telecommunications companies in the industry, serving customers domestically and internationally. The Company's operations have grown significantly in each year of its operations as a result of internal growth, the selective acquisition of smaller long distance companies with limited geographic service areas and market shares, the consolidation of certain third tier long distance carriers with larger market shares and international expansion. The Company's long distance revenues are derived principally from the number of minutes of use billed by the Company. Minutes billed are those conversation minutes during which a call is actually connected at the Company's switch (except for minutes during which the customer receives a busy signal or the call is unanswered at its destination). The Company's profitability is dependent upon, among other things, its ability to achieve line costs that are less than its revenues. The principal components of line costs are access charges and transport charges. Access charges are expenses incurred by all interexchange carriers ("IXCs") for accessing the local networks of the local exchange carriers ("LECs") in order to originate and terminate calls and payments made to foreign telephone administrations to complete calls made from the U.S. by the Company's customers. Transport charges are the expenses incurred in transmitting calls between or within local access and transport areas. The most significant portion of the Company's line costs is access charges which are highly regulated. The FCC regulates international communications services and interstate telephone service and certain states, through the appropriate regulatory agency, regulate intrastate telephone service. Accordingly, the Company cannot predict what effect continued regulation and increased competition between LECs and other IXCs will have on future access charges. However, the Company believes that it will be able to continue to reduce transport costs through effective utilization of its network, favorable contracts with carriers and network efficiencies made possible as a result of expansion of the Company's customer base by acquisitions and internal growth. 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. Page 9 10
For the Quarter Ended For the Nine Months September 30, Ended September 30, ---------------------- --------------------- 1995 1994 1995 1994 ----- ----- ----- ----- Revenues 100.0% 100.0% 100.0% 100.0% ----- ----- ----- ----- Operating expenses: Line costs 54.4% 64.3% 55.0% 63.3% Selling, general and administrative 18.0% 17.6% 18.2% 17.7% Depreciation and amortization 8.5% 7.5% 8.6% 7.3% Provision to reduce carrying value of certain assets - 6.2% - 2.1% ----- ----- ----- ----- Operating income 19.1% 4.4% 18.2% 9.6% Other income (expense): Interest expense -6.7% -2.2% -7.0% -2.1% Shareholder litigation settlement - -13.4% - -4.6% Miscellaneous 0.4% 0.2% 0.3% 0.3% ----- ----- ----- ----- Income (loss) before income taxes 12.8% -11.0% 11.5% 3.2% Provision for income taxes 5.0% 8.7% 4.5% 6.3% ----- ----- ----- ----- Net income (loss) 7.8% -19.7% 7.0% -3.1% ----- ----- ----- ----- Preferred dividend requirement 0.4% 1.2% 0.7% 1.3% One-time dividend payment to Series 1 preferred shareholder 1.6% - 0.5% - ----- ----- ----- ----- Net income (loss) applicable to common shareholders 5.8% -20.9% 5.8% -4.4% ===== ===== ===== =====
Revenues for the three months ended September 30, 1995 increased 64% to $933.6 million on 5.0 billion revenue minutes as compared to $568.6 million on 2.82 billion revenue minutes for the three months ended September 30, 1994. For the nine months ended September 30, 1995, revenues increased 63% to $2.69 billion on 14.27 billion revenue minutes versus $1.65 billion on 8.06 billion revenue minutes for the comparable 1994 period. On a pro forma basis, as though the acquisition of WilTel occurred at the beginning of 1994, revenues and traffic for the third quarter of 1995 increased 18% and 29%, respectively, compared with pro forma revenues of $792.2 million on 3.89 billion revenue minutes for the third quarter of 1994. For the first nine months of 1995, revenues and traffic rose 20% and 32%, respectively, from pro forma revenues of $2.25 billion on 10.83 billion revenue minutes. Revenue growth for the three and nine months ended September 30, 1995 was driven by strong performance from the Company's retail and wholesale markets offset by declines in operator services revenue. The Company's third quarter switched retail revenue, which excludes wholesale and operator services traffic, increased 22% over 1994 pro forma results, while traffic growth from this core business equaled 25%. For the first nine months of 1995, revenues and traffic for switched retail revenue increased 20% and 21%, respectively, over the comparable 1994 period. Third quarter 1995 results for wholesale switched revenue likewise increased, with revenues also up 22% over 1994 pro forma results and volume increasing 39% over the same period. For the first nine months of 1995, wholesale revenues increased 30% and traffic increased 55%, over the comparable 1994 period. Private line revenues for the three months and nine months ended September 30, 1995, also reflected positive growth, with increases of 21% for both periods over the 1994 pro forma results. Line costs as a percentage of revenues decreased to 54.4% during the third quarter of 1995 as compared to 64.3% for the same period in the prior year. On a year-to-date basis, line costs as a percentage of revenues decreased to 55.0% in 1995 from 63.3% in 1994. These decreases are attributable to changes in the product mix, rate reductions resulting from favorable contract negotiations and synergies and economies of scale resulting from network efficiencies achieved from the assimilation of the IDB Merger and the WilTel Acquisition into the Company's operations. Additionally, through the WilTel Acquisition, the Page 10 11 Company has been able to achieve further network efficiencies associated with owning the WilTel nationwide fiber optic cable network rather than leasing similar capacity from other providers at a higher cost. Selling, general and administrative expenses for the third quarter of 1995 increased to $167.6 million or 18.0% of revenues as compared to $100.3 million or 17.6% of revenues for the third quarter of 1994. On a year-to-date basis, these expenses increased to $490.2 million or 18.2% of revenues from $291.0 million or 17.7% of revenues for the nine months ended September 30, 1994. The increase in selling, general and administrative expenses results from the Company's expanding operations, primarily through the WilTel Acquisition and internal growth. Depreciation and amortization expense for the third quarter of 1995 increased to $79.8 million or 8.5% of revenues from $42.6 million or 7.5% of revenues for the third quarter of 1994. On a year-to-date basis, this expense increased to $231.3 million or 8.6% of revenues versus $121.1 million or 7.3% of revenues for the comparable 1994 period. This increase reflects depreciation and amortization of the additional property and equipment and goodwill from the WilTel Acquisition. In the third quarter of 1994, the Company determined that adjustments to certain IDB Broadcast assets were appropriate to properly reflect estimated net realizable values. Accordingly, the Company recorded an adjustment of $35.0 million, to reduce the carrying value of these broadcast assets (primarily intangible assets and property and equipment) to the Company's best estimate of the net realizable value. Although the Company continues to offer IDB Broadcast services, such services are not a part of the Company's core business operations. Accordingly, in the first quarter of 1995, the Company sold its simulcasting operations and entered into an agreement to outsource the management of the remaining IDB Broadcast operations. Interest expense in the third quarter of 1995 was $62.5 million or 6.7% of revenues, as compared to $12.8 million or 2.2% of revenues in the third quarter of 1994. For the nine months ended September 30, 1995, interest expense increased to $189.4 million or 7.0% of revenues, as compared to $34.3 million or 2.1% of revenues for the first nine months of 1994. The increase in interest expense was due primarily to an increase in the average debt outstanding by the Company to finance the WilTel Acquisition. In the third quarter of 1994, the Company recorded a $76.0 million charge which represented an estimated IDB shareholder litigation settlement of $75.0 million and $1.0 million in related legal costs. The shareholder litigation settlement was paid in April 1995. In the third quarter of 1995, Metromedia converted its Series 1 Preferred Stock into 21,876,976 shares of WorldCom common stock and exercised warrants to acquire 3,106,976 shares of WorldCom common stock and immediately sold its position of 30,849,548 shares of WorldCom common stock in a public offering. In connection with the preferred stock conversion, WorldCom made a one-time non-recurring payment of $15.0 million to Metromedia, representing a discount to the minimum nominal dividends that would have been payable on the Series 1 Preferred Stock prior to the September 15, 1996 optional call date of approximately $26.6 million (which amount includes an annual dividend requirement of $24.5 million plus accrued dividends to such call date). Net income applicable to common shareholders was $53.8 million for the third quarter of 1995 versus a $118.7 million loss in the comparable 1994 period. Operating results for the third quarter of 1995 include the one-time non-recurring payment of $15.0 million to Metromedia. Excluding this payment, earnings for the third quarter of 1995 would have been $68.8 million or $0.37 per common share. Operating results in the third quarter of 1994 were significantly affected by the IDB shareholder litigation settlement of $76.0 million, the reduction in carrying value of certain assets of $35.0 million, an $18.3 million valuation reserve provided against certain IDB deferred tax assets, an $8.5 million allowance to adjust the provision for doubtful accounts, a $4.5 million accrual for accounting and legal expenses incurred in connection with the resignation of IDB's prior auditors, and $11.0 million related to various investment write-downs and other balance sheet accruals. On a year-to-date basis, net income applicable to common shareholders increased to $155.7 million or $.89 per share versus a net loss of $72.7 million or $.46 per share for the comparable 1994 period. Page 11 12 LIQUIDITY AND CAPITAL RESOURCES On January 5, 1995, in conjunction with the WilTel Acquisition, the Company utilized its $3.41 billion long-term credit facilities and repaid all debt under the Company's previous credit facilities and the $123.0 million in senior notes. Total additional borrowings for the nine months ended September 30, 1995 were $2.7 billion. At September 30, 1995, the Company had access to an additional $220.6 million under its long-term credit facilities. For the nine months ended September 30, 1995, the weighted average interest rate under the credit facilities was 7.4%. In February 1995, in the event of rising interest rates, the Company entered into financial hedging agreements with various financial institutions, in connection with the credit facilities. The hedging agreements establish capped fixed rates of interest ranging from 8.25% to 8.3125% on an aggregate notional value of $1.7 billion. If interest rates do not reach this cap, the Company's interest rate remains variable. These contracts range in duration from one to two years with $845.4 million maturing in each of the years ending 1996 and 1997. The Company believes that the combined operations of WorldCom, IDB and WilTel will generate sufficient cash flow to service the Company's debt under the new credit facilities; however, economic downturns, increased interest rates and other adverse developments, including factors beyond the Company's control, could impair its ability to service its indebtedness. In addition, the cash flow required to service WorldCom's debt will reduce its liquidity, which in turn may reduce its ability to fund internal growth, additional acquisitions and capital improvements. The Company anticipates it will need to refinance a portion of the $1.25 billion term principal debt under the credit facilities prior to December 1996, thereby requiring the Company to seek financing alternatives such as public or private debt or equity offerings, or refinancing with the existing or new lenders. The Company is committed to a priority plan of accelerating operating cash flow to reduce debt. The Company anticipates that the remaining debt balances will be refinanced with a combination of commercial bank debt and public market debt. Successful execution of this priority plan would provide continued compliance with required operating ratio covenants and would eliminate any type of equity financing other than equity issued in connection with acquisitions. No assurance can be given that the Company will achieve its priority plan or that any refinancing will be available on terms acceptable to WorldCom. The Company has historically utilized cash flow from operations to finance capital expenditures and a mixture of cash flow, debt and stock to finance acquisitions. The Company will continue to analyze potential acquisitions utilizing primarily equity financing until the additional leverage from the WilTel Acquisition is reduced. For the nine months ended September 30, 1995, the Company's cash flow from operations was $365.4 million, increasing from $44.6 million in the comparable period for 1994. The increase in cash flow from operations was primarily attributable to cash flow from acquired operations, internal growth and the sale of the Company's receivables as noted below. Cash used in investing activities in the nine months ended September 30, 1995 totaled $3.02 billion and included $2.71 billion for acquisitions and related costs and $287.4 million for capital expenditures. Primary capital expenditures include purchases of switching, transmission, communication and other equipment. Capital expenditures for 1995 are anticipated to total approximately $340.0 million to $350.0 million. Included in cash flows from financing activities are payments of $17.7 million for preferred dividend requirements and $15.0 million for the one-time non-recurring payment to Metromedia. All of the Series 1 Preferred Stock was converted by Metromedia in August 1995 and accordingly, no further dividends will be required on the Series 1 Preferred Stock. A portion of the Company's Series 2 Preferred Stock was also converted during the third quarter of 1995. The future annual dividend requirement for the Company's remaining Series 2 Preferred Stock is $2.0 million, payable on a quarterly basis. The Company believes that no event will occur during the remainder of 1995 to interfere with its ability to satisfy these dividend requirements. During 1995, the Company amended WilTel's existing $80.0 million receivables purchase agreement to include certain additional receivables and received additional proceeds of $200.0 million. The Company used these proceeds to reduce the outstanding debt under the Company's credit facilities and provide additional working capital. As of September 30, 1995, the Page 12 13 purchaser owned an undivided interest in a $558.8 million pool of receivables which includes the $280.0 million sold. The aggregate purchase limit under this agreement was $280.0 million at September 30, 1995. In April 1995, an additional $75.0 million was borrowed against the Company's long-term credit facilities to pay the IDB shareholder litigation settlement liability, which had been recognized by the Company during the third quarter of 1994. During 1995, Metromedia exercised its right to purchase a total of 6.2 million shares of the Company's common stock under purchase warrants. Aggregate proceeds of $64.4 million from these exercises were used to reduce the outstanding debt under the Company's credit facilities. Absent significant capital requirements for other acquisitions, the Company believes that cash flow from operations and funds available under the credit facilities will be adequate to meet the Company's capital needs for the remainder of 1995. RECENTLY ISSUED ACCOUNTING STANDARDS In March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This Statement establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of. This Statement is effective for financial statements for fiscal years beginning after December 15, 1995. WorldCom has not determined what effect this statement will have on the Company's consolidated results of operations or financial position. In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation." This Statement establishes financial accounting and reporting standards for stock-based employee compensation plans and is effective for fiscal years beginning after December 15, 1995. The Company expects to continue to apply the accounting provisions of APB Opinion 25 in determining its net income. However, additional disclosures will be made to disclose the estimated value of compensation expense under the method established by SFAS No. 123. PART II. OTHER INFORMATION Item 1. Legal Proceedings. There have been no material changes in the litigation reported in the Company's Annual Report on Form 10-K for the year ended December 31, 1994, filed on March 30, 1995 except as may be reflected in the discussion under Note F of the Notes to Consolidated Financial Statements in Part I, Item 1, above. Item 2. Changes in Securities. None Item 3. Defaults upon Senior Securities. None Item 4. Submission of Matters to a Vote of Security Holders. None Item 5. Other Information. None Page 13 14 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 8, 1995 (filed September 8, 1995), reporting under Item 5, Other Events, the ratio of earnings to combined fixed charges and preferred stock dividends for each of the five years ended December 31, 1994 and for the six months ended June 30, 1994 and 1995. (ii) Current Report on Form 8-K dated August 23, 1995 (filed August 29, 1995), reporting under Item 5, Other Events, information relative to Metromedia converting its Series 1 Preferred Stock into 21,876,976 shares of WorldCom common stock and exercise of warrants to acquire 3,106,976 shares of WorldCom common stock and subsequent sale of its position of 30,849,548 shares of WorldCom common stock in a public offering. (iii) Current Report on Form 8-K dated August 14, 1995 (filed August 14, 1995), reporting under Item 5, Other Events, the following information: (a) the Company's announcement that it was notified by Metromedia of its intent to convert its Series 1 Preferred Stock and to sell its position of WorldCom in a public offering and (b) brief summaries of certain provisions relating to the capital stock of the Company. Page 14 15 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report on Form 10-Q to be signed on its behalf by Scott D. Sullivan, thereunto duly authorized to sign on behalf of the registrant and as the principal financial officer thereof. WORLDCOM, INC. By: /s/ Scott D. Sullivan ---------------------------------- Scott D. Sullivan Chief Financial Officer Dated: November 14, 1995 Page 15 16 EXHIBIT INDEX Exhibit No. Description - ------ ----------- 3(i) Amended and Restated Articles of Incorporation of the Company (including preferred stock designations) as of September 15, 1993 (incorporated herein by reference to Exhibit 3(i) to Amendment No. 1 to the Company's Registration Statement on Form S-3 (File No. 33-67340)), as amended by Articles of Amendment dated May 26, 1994 (incorporated herein by reference to Exhibit 3.1 to the Quarterly Report on Form 10-Q filed by the Company (File No. 1-10415) for the quarter ended June 30, 1994), as amended by Articles of Amendment dated May 25, 1995 (incorporated herein by reference to Exhibit 3(ii) to the Quarterly Report on Form 10-Q filed by the Company for the quarter ended June 30, 1995). 3(ii) Bylaws of the Company (incorporated herein by reference to Exhibit 3(ii) to Amendment No. 1 to the Company's Registration Statement on Form S-3 (File No. 33-67340)) 11.1 Computation of Per Share Earnings 12.1 Statement regarding computation of ratio of earnings to combined fixed charges and preferred stock dividends 27.1 Financial Data Schedule Page 16 EX-11.1 2 COMPUTATION OF PER SHARE EARNINGS 1 Exhibit 11.1 WORLDCOM, INC. AND SUBSIDIARIES COMPUTATION OF PER SHARE EARNINGS (In thousands, except per share data)
For the Three Months Ended For the Nine Months Ended September 30, September 30, --------------------------------------------------------------- 1995 1994 1995 1994 ------------- ----------- ------------ ---------------- Primary: Weighted average shares outstanding 176,644 158,282 166,725 157,296 Common stock equivalents 4,492 - 5,515 - Common stock issuable upon conversion of: Series 1 preferred stock 12,603 - 18,786 - Series 2 preferred stock 1,275 - 1,491 - ------------- ----------- ------------ ---------------- 195,014 158,282 192,517 157,296 ============= =========== ============ ================ Income (loss) applicable to common shareholders $ 53,802 $ (118,694) $ 155,705 $ (72,681) Dividend paid on Series 1 preferred stock conversions 3,062 - 15,312 - Dividend paid on Series 2 preferred stock conversions 243 - 858 - ------------- ----------- ------------ ---------------- Primary income (loss) applicable to common shareholders after one-time dividend $ 57,107 $ (118,694) $ 171,875 $ (72,681) One-time dividend payment on Series 1 preferred stock conversion 15,000 - 15,000 - ------------- ----------- ------------ ---------------- Primary income (loss) applicable to common shareholders before one-time dividend $ 72,107 $ (118,694) $ 186,875 $ (72,681) ============= =========== ============ ================ Primary earnings (loss) per share: After one-time dividend payment to Series 1 preferred shareholder $ 0.29 $ (0.75) $ 0.89 $ (0.46) ============= =========== ============ ================ Before one-time dividend payment to Series 1 preferred shareholder $ 0.37 $ (0.75) $ 0.97 $ (0.46) ============= =========== ============ ================ Fully diluted: Weighted average shares outstanding 176,644 158,282 166,725 157,296 Common stock equivalents 4,671 - 5,756 - Common stock issuable upon conversion of: 5% convertible notes 5,135 - 5,135 - Series 1 preferred stock 12,603 - 18,786 - Series 2 preferred stock 3,908 - 4,124 - ------------- ----------- ------------ ---------------- 202,961 158,282 200,526 157,296 ============= =========== ============ ================ Income (loss) applicable to common shareholders $ 53,802 $ (118,694) $ 155,705 $ (72,681) Add back: Interest on 5% convertible notes, net of taxes 1,491 - 4,472 - Series 1 preferred dividend requirement 3,062 - 15,312 - Series 2 preferred dividend requirement 749 - 2,374 - ------------- ----------- ------------ ---------------- Fully diluted income (loss) applicable to common shareholders after one-time dividend $ 59,104 $ (118,694) $ 177,863 $ (72,681) Dividend paid on Series 1 preferred stock conversion 15,000 - 15,000 - ------------- ----------- ------------ ---------------- Fully diluted income (loss) applicable to common shareholders before one-time dividend $ 74,104 $ (118,694) $ 192,863 $ (72,681) ============= =========== ============ ================ Fully diluted earnings (loss) per share: After one-time dividend payment to Series 1 preferred shareholder $ 0.29 $ (0.75) $ 0.89 $ (0.46) ============= =========== ============ ================ Before one-time dividend payment to Series 1 preferred shareholder $ 0.37 $ (0.75) $ 0.96 $ (0.46) ============= =========== ============ ================
EX-12.1 3 COMPUTATION OF RATIO OF EARNINGS 1 Exhibit 12.1 WorldCom,Inc. Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
Year Ended December 31, ------------------------------------------------ 1990 1991 1992 1993 1994 ------------------------------------------------ Earnings: Pretax Income (loss) from continuing operations 61,645 65,646 20,401 198,237 (76,108) Fixed charges, net of capitalized interest 38,109 38,116 38,720 58,999 87,455 ------------------------------------------------ Earnings 99,754 103,762 59,121 257,236 11,347 ================================================ Fixed charges: Interest expense 32,635 31,595 30,311 35,557 47,303 Interest capitalized 2,647 2,900 3,504 3,100 1,900 Amortization of financing costs 984 1,018 1,464 1,792 2,086 Interest factor of rent expense 4,490 5,503 4,833 9,967 10,300 Preferred dividend requirements - - 2,112 11,683 27,766 ------------------------------------------------ Fixed charges 40,756 41,016 42,224 62,099 89,355 ================================================ Deficiency of earnings to fixed charges - - - - (78,008) ================================================ Ratio of earnings to combined fixed charges and preferred stock dividends 2.45:1 2.53:1 1.40:1 4.14:1 0.13:1 ================================================
Nine Months Ended Pro Forma September 30, Fiscal Year ----------------- 1994 1994 1995 --------- ----------------- Earnings: Pretax Income (loss) from continuing operations (151,303) 31,428 276,151 Fixed charges, net of capitalized interest 276,506 59,900 239,461 -------- ----------------- Earnings 125,203 91,328 515,612 ======== ================= Fixed charges: Interest expense 222,568 34,298 189,392 Interest capitalized 1,900 455 3,221 Amortization of financing costs 9,586 1,037 5,574 Interest factor of rent expense 16,586 3,737 11,809 Preferred dividend requirements 27,766 20,828 32,686 -------- ----------------- Fixed charges 278,406 60,355 242,682 ======== ================= Deficiency of earnings to fixed charges (153,203) - - ======== ================= Ratio of earnings to combined fixed charges and preferred stock dividends 0.45:1 1.51:1 2.12:1 ======== =================
See notes to computation of ratio of earnings to combined fixed charges and preferred stock dividends. 2 NOTES TO COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (1) On January 5, 1995, the Company completed the acquisition of Williams Telecommunications Group, Inc. for approximately $2.5 billion in cash (the "WilTel Acquisition"). The WilTel Acquisition is being accounted for as a purchase. (2) As a result of the mergers with IDB Communications Group, Inc. (the "IDB Merger") and Advanced Telecommunications Corporation (the "ATC Merger"), the Company initiated plans to reorganize and restructure its management and operational organization and facilities to eliminate duplicate personnel, physical facilities and service capacity, to abandon certain products and marketing activities, and to further take advantage of the synergy available to the combined entities. Also, during the fourth quarter of 1993, plans were approved to reduce IDB Communications Group, Inc.'s cost structure and to improve productivity. Accordingly, in 1994, 1993 and 1992, the Company charged to operations the estimated costs of such reorganization and restructuring activities, including employee severance, physical facility abandonment and duplicate service capacity. These costs totaled $43.7 million in 1994, $5.9 million in 1993 and $79.8 million in 1992. Also, during 1994 and 1992, the Company incurred direct merger costs of $15.0 million and $7.3 million, respectively, related to the IDB Merger (in 1994) and the ATC Merger (in 1992). These costs include professional fees, proxy solicitation costs, travel and related expenses and certain other direct costs attributable to these mergers. (3) In connection with certain debt refinancing, the Company recognized in 1993 and 1992 extraordinary items of approximately $7.9 million and $5.8 million, respectively, net of income taxes, consisting of unamortized debt discount, unamortized issuance cost and prepayment fees. (4) In the third quarter of 1995, Metromedia Company ("Metromedia") converted its Series 1 Preferred Stock into 21,876,976 shares of WorldCom common stock and exercised warrants to acquire 3,106,976 shares of WorldCom common stock and immediately sold its position of 30,849,548 shares of WorldCom common stock in a public offering. In connection with the preferred stock conversion, WorldCom made a one-time non-recurring payment of $15.0 million to Metromedia, representing a discount to the minimum nominal dividends that would have been payable on the Series 1 Preferred Stock prior to the September 15, 1996 optional call date of approximately $26.6 million (which amount includes an annual dividend requirement of $24.5 million plus accrued dividends to such call date). EX-27.1 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF WORLDCOM, INC. (F/K/A LDDS COMMUNICATIONS, INC.) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1995 JAN-01-1995 SEP-30-1995 10,877 0 558,250 48,458 0 652,271 2,006,637 438,040 6,551,910 872,640 3,392,357 1,931 0 12 2,082,543 6,551,910 2,693,314 2,693,314 1,480,696 2,202,210 (7,125) 29,129 189,392 308,837 120,446 188,391 0 0 0 155,705 .97 .96
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