-----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, EOTFlk9s/o8uOLYvKrPDF4NXfaTkueZwZMtuDNP2kHWQpTi9ey9/R5+5xY16oPd9 ifNveM2ahuPGeePny6WwtQ== 0000950134-98-007844.txt : 19980930 0000950134-98-007844.hdr.sgml : 19980930 ACCESSION NUMBER: 0000950134-98-007844 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980914 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19980929 SROS: NASD 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: 8-K SEC ACT: SEC FILE NUMBER: 000-11258 FILM NUMBER: 98717625 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 8-K 1 FORM 8-K 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): September 14, 1998 MCI WORLDCOM, Inc. (Exact Name of Registrant as Specified in its Charter) Georgia 0-11258 58-1521612 (State or Other (Commission File (IRS Employer Jurisdiction of Number) Identification Number) Incorporation) 515 East Amite Street Jackson, Mississippi 39201-2702 (Address of Principal Executive Office) Registrant's telephone number, including area code: (601) 360-8600 WorldCom, Inc. (Former name or former address, if changed since last report) ================================================================================ 2 ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS 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"). (a) On September 14, 1998, the Company acquired MCI Communications Corporation, a Delaware corporation ("MCI"), pursuant to the merger (the "Merger") of MCI with and into TC Investments Corp. ("Acquisition Subsidiary"), a wholly owned subsidiary of the Company. Upon consummation of the Merger, Acquisition Subsidiary was renamed MCI Communications Corporation which became a wholly owned subsidiary of the Company. The Merger was effected pursuant to an Agreement and Plan of Merger dated as of November 9, 1997 by and among WorldCom, MCI and Acquisition Subsidiary (the "Merger Agreement"). As a result of the 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 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 available cash as a result of the Company's $6.1 billion public debt offering in August 1998, the sale of MCI's Internet assets to Cable & Wireless, the sale of MCI's 24.9% equity stake in Concert Communications Services ("Concert") to BT and availability under the Company's commercial paper program. Certain portions of the press release related to the sale of MCI's 24.9% equity stake in Concert to BT are filed as Exhibit 99.1 hereto and incorporated by reference herein. Upon effectiveness of the Merger, the then outstanding and unexercised options exercisable for shares of MCI common stock were converted into options exercisable for an aggregate of approximately 80 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 basic terms of the Merger and the relationships between the Company, MCI and BT and the respective directors and executive officers of the Company and MCI, were described in the Joint Proxy Statement/Prospectus dated January 22, 1998 filed in connection with the Company's Registration Statement on Form S-4 (Registration No. 333-36901), which is incorporated by reference herein. The terms of the Merger were determined in accordance with the Merger Agreement and were established through arm's length negotiations between the Company, MCI and BT. (b) As of the effectiveness of the Merger, the Board of Directors of the Company consists of the following individuals: Clifford Alexander, Jr., James C. Allen, Judith Areen, Carl J. Aycock, Max E. Bobbitt, Stephen M. Case, Bernard J. Ebbers, Francesco Galesi, Stiles A. Kellett, Jr., Gordon S. Macklin, John A. Porter, Timothy F. Price, Bert C. Roberts, Jr., John W. Sidgmore, Scott D. Sullivan, Gerald H. Taylor and Lawrence C. Tucker. 2 3 (c) Through its acquisition of MCI, the Company acquired one of the world's largest and most advanced digital networks, connecting local markets in the U.S. to more than 280 countries and locations worldwide. The Company intends to continue using property, plant and equipment acquired pursuant to the Merger for the purposes previously noted, subject to possible determinations to eliminate duplicate facilities. (d) The Company has 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. Under the Restated Bylaws, in order for a shareholder to nominate a candidate for director, timely notice of the nomination must be given to and received by the Company in advance of the meeting. Ordinarily, such notice must be given and received not less than 120 nor more than 150 days before the first anniversary of the preceding year's annual meeting (or between December 22, 1998 and January 20, 1999 for the 1999 Annual Meeting); provided, however, that in the event that the date of the annual meeting is advanced by more than 30 days or delayed by more than 60 days from such anniversary date, then such notice must be given by the shareholder and received by the Company not earlier than 150 days prior to such annual meeting and not later than the close of business on the later of the 120th day prior to such annual meeting or the 10th day following the day on which public announcement of such meeting is first made. In certain cases, notice may be delivered and received later if the number of directors to be elected to the Board of Directors is increased. The shareholder submitting the notice of nomination must describe various matters as specified in the Company's Restated Bylaws, including the name and address of each proposed nominee, his or her occupation and number of shares held, and certain other information. In order for a shareholder to bring other business before a shareholder meeting, timely notice must be given to and received by the Company within the time limits described. Such notice must include a description of the proposed business (which must otherwise be a proper subject for action by the shareholders), the reasons therefor and other matters specified in the Company's Restated Bylaws. The Board of Directors or the presiding officer at the meeting may reject any such proposals that are not made in accordance with these procedures or that are not a proper subject for shareholder action in accordance with applicable law. In the case of special meetings of shareholders, only such business will be conducted, and only such proposals will be acted upon, as are brought pursuant to the Company's notice of meeting. Nominations for election to the Board of Directors may be made by any shareholder who complies with the notice and other requirements of the Restated Bylaws. In the event the Company calls a special meeting of shareholders to elect one or more directors, any shareholder may nominate a candidate, if such notice from such shareholder is given and received not earlier than 150 days prior to such special meeting and not later than the close of business on the later of the 120th day prior to such special meeting or the 10th day following the day on which public announcement of such meeting and/or of the nominees proposed by the Company is first made. The notice from such shareholder must also include the same information described above. Proposals of other business may be considered at a special meeting requested in accordance with the Restated Bylaws only if the requesting shareholders give and the Company receives a notice containing the same information as required for an annual meeting at the time the meeting is requested. A special meeting of shareholders, for any purpose or purposes, unless otherwise prescribed by statute, will be called at the written request of holders of not less than 40% of all the votes entitled to be cast on any issue to be considered at the meeting (subject to any requirements or limitations imposed by the Restated Articles of Incorporation, as amended, by the Restated Bylaws, or by law) which request must describe the purpose or purposes for which the meeting is to be held (which must be a proper subject for action by the shareholders), and must further contain the same information as would be required for such a proposal at an annual meeting. In the case of an annual or special meeting, the shareholder proponent must be a shareholder of the Company who was a shareholder of record both at the time of giving of notice and at the time of the meeting and who is entitled to vote at the meeting. Any such notice must be given to the Secretary of the Company, whose address is 515 East Amite Street, Jackson, Mississippi, 39201. Any shareholder desiring a copy of the Company's Restated Articles of Incorporation, as amended, or Restated Bylaws will be furnished a copy without charge upon written request to the Secretary. The time limits described above also apply in determining whether notice is timely for purposes of new Rule 14a-4(c)(1) under the Securities Exchange Act of 1934 relating to exercise of discretionary voting authority, and are separate from and in addition to the Securities and Exchange Commission's requirements 3 4 that a shareholder must meet to have a proposal included in the Company's proxy statement for an annual meeting. Proposals of shareholders intended to be presented at the 1999 Annual Meeting must be received by the Company by December 24, 1998 for inclusion in the Company's proxy statement and proxy relating to that meeting. Upon receipt of any such proposal, the Company will determine whether or not to include such proposal in the proxy statement and proxy in accordance with regulations governing the solicitation of proxies. (e) MCI WorldCom has completed asset valuation studies of MCI's tangible and identifiable intangible assets, including in-process research and development projects ("R&D"). The preliminary estimate of the one-time charge for purchased in-process R&D projects of MCI, was $6 - $7 billion. The Securities and Exchange Commission (the "SEC") recently issued new guidance to the AICPA SEC Regulations Committee with respect to allocations of in-process R&D. Consistent with this guidance, the final analysis reflects the views of the SEC in that the value allocated to MCI's in-process R&D, considered factors such as status of completion, technological uncertainties, costs incurred and projected costs to complete. As a result of the preliminary allocation of the MCI purchase price, approximately $3.1 billion will be immediately expensed as in-process R&D and approximately $26 billion will be recorded as the excess of purchase price over the fair value of identifiable net assets, also known as goodwill, which will be amortized on a straight-line basis over 40 years. The Company expects to finalize the allocation of the MCI purchase price prior to announcing third quarter 1998 results. 4 5 ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (a) Financial statements of businesses acquired The audited financial statements as of December 31, 1997 and 1996 and for each of the three years in the period ended December 31, 1997 of MCI, including the report of independent auditors, were previously reported in WorldCom's Current Report on Form 8-K/A-3 dated November 9, 1997 (filed May 28, 1998). The unaudited financial statements of MCI as of and for the six months ended June 30, 1998 and 1997 are contained in the financial statements and footnotes thereto listed in the Index on Page F-1 herein and incorporated by reference herein. Note: the financial information described above for the three years ended December 31, 1997 related to MCI was previously filed as Exhibit 13 to MCI's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (the "MCI Form 10-K") and has not been updated to reflect changes since December 31, 1997. MCI's financial information for the six months ended June 30, 1998 and 1997 was previously filed in MCI's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1998 (the "MCI Form 10-Q") and has not been updated to reflect changes since June 30, 1998. To the extent the above financial information differs from the financial information reported in the MCI Form 10-K or MCI Form 10-Q, the MCI Form 10-K or MCI Form 10-Q shall control. (b) Pro forma financial information The pro forma financial information required by this item will be filed by amendment to this Current Report on Form 8-K not later than 60 days after the date that the initial report on this Form 8-K must be filed. (c) Exhibits See Exhibit Index 5 6 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Dated: September 29, 1998 MCI WORLDCOM, Inc. By: /s/ Scott D. Sullivan ------------------------------- Scott D. Sullivan Chief Financial Officer 7 INDEX TO FINANCIAL STATEMENTS AND OTHER INFORMATION
Financial Statements Page Numbers -------------------- ------------ MCI Communications Corporation and Subsidiaries - for the three and six month periods ended June 30,1997 and 1998 (unaudited) Consolidated Income Statements F-2 Consolidated Balance Sheets F-3 Consolidated Statements of Cash Flows F-5 Consolidated Statements of Stockholders' Equity F-6 Notes to Interim Condensed Consolidated Financial Statements F-7 Management's Discussion and Analysis of Financial Condition and Results of Operations F-11
Note: the financial information described above related to MCI was previously contained in MCI's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1998 and has not been updated to reflect changes since June 30, 1998. To the extent the above financial information differs from the financial information reported in MCI's Form 10-Q, the MCI Form 10-Q shall control. F-1 8 MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES INCOME STATEMENTS (In millions, except per share amounts)
Three Months Ended Six Months Ended June 30, June 30, ------------------- ----------------- 1998 1997 1998 1997 ------ ------ ------ ------ REVENUE $5,370 $4,843 $10,658 $9,726 ------ ------ ------ ------ OPERATING EXPENSES Cost of services 2,839 2,547 5,722 5,072 Sales, operations and general 1,554 1,265 3,058 2,584 Depreciation 621 479 1,311 932 ------ ------ ------ ------ TOTAL OPERATING EXPENSES 5,014 4,291 10,091 8,588 ------ ------ ------ ------ INCOME FROM OPERATIONS 356 552 567 1,138 Interest expense (54) (58) (106) (116) Interest income 12 4 16 10 Equity in income (losses) of affiliated companies (23) (24) (47) (61) Other income (expense), net 38 (4) 77 (7) ------ ------ ------ ------ INCOME BEFORE INCOME TAXES AND TRUST DISTRIBUTIONS 329 470 507 964 Income tax provision 119 175 181 359 Distributions on subsidiary Trust mandatorily redeemable preferred securities 15 15 30 30 ------ ------ ------ ------ NET INCOME $ 195 $ 280 $ 296 $ 575 ====== ====== ====== ====== BASIC EARNINGS PER COMMON SHARE $ .27 $ .41 $ .41 $ .84 DILUTED EARNINGS PER COMMON SHARE .26 .40 .40 .82 Weighted average number of common shares 729 689 722 688 Weighted average number of common shares assuming dilution 745 708 737 705 Dividends declared per common share $ .025 $ .025 $ .025 $ .025 See accompanying Notes to Interim Condensed Consolidated Financial Statements.
F-2 9 MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES BALANCE SHEETS (In millions)
June 30, December 31, 1998 1997 ----------- ----------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 1,126 $ 261 Receivables, net of allowance for uncollectibles of $426 and $372 million 3,325 3,576 Other current assets 983 1,423 ------- ------- TOTAL CURRENT ASSETS 5,434 5,260 ------- ------- PROPERTY AND EQUIPMENT, net 14,140 13,868 OTHER ASSETS Investment in affiliates 636 653 Investment in DBS 1,064 1,043 Investment in News Corp. 1,350 1,350 Other assets and deferred charges, net 1,054 991 Goodwill, net 2,308 2,345 ------- ------- TOTAL OTHER ASSETS 6,412 6,382 ------- ------- TOTAL ASSETS $25,986 $25,510 ======= =======
See accompanying Notes to Interim Condensed Consolidated Financial Statements. F-3 10 MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES BALANCE SHEETS (In millions)
June 30, December 31, 1998 1997 ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 1,075 $1,321 Accrued telecommunications expense 2,564 2,416 Other accrued liabilities 2,562 2,248 Long-term debt due within one year 742 2,111 ------- ------- TOTAL CURRENT LIABILITIES 6,943 8,096 ------- ------- NONCURRENT LIABILITIES Long-term debt 3,938 3,276 Deferred taxes and other 2,167 2,077 ------- ------- TOTAL NONCURRENT LIABILITIES 6,105 5,353 ------- ------- COMMITMENTS AND CONTINGENT LIABILITIES COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES OF THE COMPANY 750 750 STOCKHOLDERS' EQUITY Class A common stock, $.10 par value, authorized 500 million shares, issued 136 million shares 14 14 Common stock, $.10 par value, authorized 2 billion shares, issued 598 million shares 60 60 Additional paid in capital 6,489 6,343 Retained earnings 5,623 5,345 Accumulated other comprehensive income 2 19 Treasury stock, at cost, 0 million and 22 million shares - (470) ------- ------- TOTAL STOCKHOLDERS' EQUITY 12,188 11,311 ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $25,986 $25,510 ======= =======
See accompanying Notes to Interim Condensed Consolidated Financial Statements. F-4 11 MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES STATEMENTS OF CASH FLOWS (In millions)
Six Months Ended June 30, ------------------------- 1998 1997 ------ ------ OPERATING ACTIVITIES Receipts from customers $10,892 $9,311 Payments to suppliers and employees (8,533) (7,499) Taxes paid, net (56) (167) Interest paid (99) (115) Interest received 8 5 ------ ------ CASH FROM OPERATING ACTIVITIES 2,212 1,535 ------ ------ INVESTING ACTIVITIES Capital expenditures for property and equipment (1,500) (1,710) Proceeds from sales and maturities of marketable securities and other investments, net 40 91 Investment in Direct Broadcast Satellite (34) (127) Investment in affiliates (44) (42) Other, net 418 35 ------ ------ CASH USED FOR INVESTING ACTIVITIES (1,120) (1,753) ------ ------ NET CASH FLOW BEFORE FINANCING ACTIVITIES 1,092 (218) ------ ------ FINANCING ACTIVITIES Issuance of Senior Notes 1,172 - Payment of Senior Notes and other debt (124) (160) Commercial paper and bank credit facility activity, net (1,806) 135 Issuance of common stock for employee plans 579 251 Purchase of treasury stock - (93) Distributions paid on Trust mandatorily redeemable preferred securities (30) (30) Payment of dividends on common stock and class A common stock (18) (17) ------ ------ CASH FROM (USED FOR) FINANCING ACTIVITIES (227) 86 ------ ------ Net increase (decrease) in cash and cash equivalents 865 (132) Cash and cash equivalents - beginning balance 261 187 ------ ------ Cash and cash equivalents - ending balance $1,126 $ 55 ====== ====== Reconciliation of net income to cash from operating activities: Net income $ 296 $ 575 Adjustments to net income: Depreciation and amortization 1,338 953 Equity in (income) losses of affiliated companies 47 61 Deferred income tax provision 86 34 Net change in operating activity accounts other than cash and cash equivalents: Receivables 251 (190) Operating accounts payable and accrued liabilities (51) (204) Other operating activity accounts 245 306 ------ ------ Cash from operating activities $ 2,212 $1,535 ====== ======
See accompanying Notes to Interim Condensed Consolidated Financial Statements. F-5 12 MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES STATEMENT OF STOCKHOLDERS' EQUITY (In millions)
Accumulated Class A Addit'l Other Treasury Common Common Paid in Retained Comprehensive Stock Total Stock Stock Capital Earnings Income at Cost Equity ----------------------------------------------------------------------------------------------- Balance at December 31, 1997 $14 $60 $6,343 $5,345 $19 $ (470) $11,311 Common stock issued for employee stock and benefit plans & other activity (22 million shares) - - 146 - - 470 616 Common stock dividends - - - (18) - - (18) Comprehensive income Net income - - - 296 - - - Change in other comprehensive income - - - - (17) - - Total other comprehensive income - - - - - - 279 ----------------------------------------------------------------------------------------------- Balance at June 30, 1998 $14 $60 $6,489 $5,623 $ 2 $ - $12,188 ===============================================================================================
See accompanying Notes to Interim Condensed Consolidated Financial Statements. F-6 13 MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. GENERAL The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (SEC). The interim condensed consolidated financial statements include the consolidated accounts of MCI Communications Corporation and its majority-owned subsidiaries (collectively, the company) with all significant intercompany transactions eliminated. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the financial position, results of operations and cash flows for the interim periods presented have been made. The preparation of the financial statements includes estimates that are used when accounting for revenue, including long-term customer contracts and allowances for uncollectible receivables, investments, telecommunications expense, depreciation, including asset write-downs and amortization, reorganization accruals, employee benefit plans and taxes. Actual results could differ from those estimates. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such SEC rules and regulations. These financial statements should be read in conjunction with the company's Annual Report on Form 10-K for the year ended December 31, 1997. NOTE 2. MCI WORLDCOM MERGER AGREEMENT On November 9, 1997, the company entered into an Agreement and Plan of Merger (the MCI WorldCom Merger Agreement) with WorldCom, Inc. (WorldCom), a Georgia corporation, and TC Investments Corp. (Merger Sub), a Delaware corporation and a wholly-owned subsidiary of WorldCom, pursuant to which the company will merge with and into Merger Sub (the Merger). As a result of the Merger, (a) each outstanding share of the company's common stock, par value $.10 per share, (other than shares owned by WorldCom or Merger Sub or held by the company) will be converted into the right to receive that number of shares of WorldCom common stock, par value $.01 per share, equal to the quotient determined by dividing $51.00 by the average of the high and low sale prices of WorldCom common stock as reported on the Nasdaq National Market on each of the 20 consecutive trading days ending with the third trading day immediately preceding the effective time of the Merger (the Exchange Ratio), provided that the Exchange Ratio shall not be less than 1.2439 or greater than 1.7586; and (b) each outstanding share of the company's Class A common stock shall be converted into the right to receive $51.00 in cash, without interest thereon. On March 11, 1998, the stockholders of the company and shareholders of WorldCom approved the Merger. On July 8, 1998, and July 15, 1998, the European Commission and the United States Department of Justice (DOJ) approved the merger, respectively, subsequently conditional to the company's agreement to sell its public Internet services business. The Merger is also subject to the approval of the Federal Communications Commission (FCC) and various state regulatory agencies, approvals which the company expects to receive in the summer of 1998. The Merger will be accounted for as a purchase in accordance with GAAP. The company and WorldCom have certain interconnection or other service agreements at prevailing market rates in the ordinary course of their businesses. For the three and six months ended June 30, 1998, the company recognized revenue of approximately $214 million and $402 million, respectively, for services provided by the company under these agreements. In addition, cost of services during the same period for services provided by WorldCom was approximately $18 million and $34 million, respectively, under such agreements. As of June 30, 1998, amounts due from WorldCom, which were included in accounts receivable, totaled approximately $225 million. NOTE 3. COMPREHENSIVE INCOME On January 1, 1998, the company adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income". Total comprehensive income is reported in the statement of stockholders' equity and includes net income, unrealized gains and losses on marketable securities, net of tax, a reclassification adjustment associated with gains and losses realized on marketable securities in net income, net of tax, and foreign currency translation adjustments. NOTE 4. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In July, 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", that will be effective for the company's year ending December 31, 2000. Management is currently evaluating the impact of the adoption of the statement and believes there will not be a material impact to the company's financial statements. In April 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position No. (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," which will be effective for the company's year ending December 31, 1999. Management is currently analyzing the impact of the adoption of the statement, which may be material to the company's financial statements taken as a whole. The AICPA also issued SOP No. 98-5, "Reporting on the Costs of Start-up Activities," which will be effective for the company's year ending December 31, 1999. The company is currently evaluating the effects of this statement, however; management believes F-7 14 its adoption will not have a material impact on the company's financial statements taken as a whole. In 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," that will be effective for the company's year ending December 31, 1998. The company is currently evaluating the effects and believes that the adoption of this statement will not have a material impact on the company's financial statements taken as a whole. NOTE 5. DEBT On April 22, 1998, the company issued $500 million aggregate principal amount of 6.50% Senior Notes due April 15, 2010 and $700 million aggregate principal amount of 6.125% Callable/Redeemable Notes due April 15, 2012. The proceeds from the issuance will be used for general corporate purposes, including the repayment of short-term borrowings under the company's commercial paper program. On April 28, 1998, the company extended its $4 billion revolving line of credit loan agreement with several financial institutions. Borrowings under this agreement mature on the earlier of April 26, 1999 or on the closing date of the Merger. NOTE 6. 1997 REORGANIZATION EFFORTS In the second half of 1997, the company completed a comprehensive review of its product and service offerings. As a result of this review, the company decided to exit and restructure several business customer contracts, consolidate certain operating centers and streamline or discontinue certain non-core or under-performing Information Technology (IT) operations and reorganize certain operations or eliminate certain product or service offerings within its core business. For the year ended December 31, 1997, the company recorded $361 million in its costs of services to reflect costs and provisions to exit, restructure or settle several business customer contracts and cease certain product and service offerings. The company also recorded $282 million in sales, operations and general expense primarily for reorganization efforts, which included approximately $103 million of severance associated with a workforce alignment and $93 million of obligations and penalties associated with lease, vendor and customer contracts. The remainder represented other costs associated with the company's business reorganization and certain legal costs. Through June 30, 1998, the company expended approximately $447 million of the accrued costs related to the above items, with the majority of the remaining $196 million to be expended during the remainder of 1998. The remaining accrual, which is included in other accrued liabilities on the accompanying balance sheet, was primarily comprised of severance, lease obligations and customer and vendor contract termination and commitment costs and certain legal costs. Cash expenditures for these obligations will continue to be funded through cash from operations. As a result of the workforce alignment associated with its reorganization efforts, the company expected to reduce its workforce by approximately 4,500 employees, of whom approximately 3,500 had left the company by June 30, 1998. The remaining employees are expected to leave by the end of 1998. NOTE 7. DIRECT BROADCAST SATELLITE (DBS) VENTURE In May 1997, the company and The News Corporation Limited (News Corp.) entered into an agreement to form a joint venture (DBS Venture) in which both parties would contribute their respective DBS assets and cash. In exchange, the company would receive a 19.9% interest in the new venture. In addition, the parties agreed that the company's funding obligation to the DBS Venture would be limited to $440 million. The agreement also provided that the parties would seek a third party to acquire their combined interests in this DBS business. In June 1997, the company and News Corp. entered into an agreement with Primestar Partners, L.P. (Primestar) for the sale and transfer of the company's and News Corp.'s DBS assets other than two of the four DBS Venture satellites (Primestar Transaction). In March 1998, the parties sold their interest in one of the remaining satellites and are pursuing the disposition of the other. The Primestar Transaction is part of a larger transaction that involves the consolidation of Primestar and TCI Satellite Entertainment, Inc. into a newly formed entity (New Primestar) that was completed in April 1998. Concurrent with the consummation of the Primestar Transaction or upon the approval by the FCC of the transfer of the orbital slot to the DBS Venture or another third party, the company will acquire preferred shares in a subsidiary of News Corp. for a face amount equal to the company's cost of obtaining the FCC license plus interest thereon. Under the terms of the Primestar Transaction, the company will also receive from New Primestar consideration in the form of cash and interest bearing non-voting New Primestar securities for its share of the DBS Venture assets transferred to New Primestar. On May 12, 1998 the Department of Justice filed suit in the U.S. District Court for the District of Columbia seeking to enjoin the completion of the Primestar Transaction. F-8 15 NOTE 8. EARNINGS PER SHARE Earnings per share (EPS) are calculated in accordance with SFAS No. 128. The following is a reconciliation of the numerators and the denominators of the basic and diluted per share computations (in millions, except per share amounts):
Three Months Ended Six Months Ended June 30, June 30, 1998 1997 1998 1997 ----------------------------------------------------------------- Basic: Net income $195 $280 $296 $575 Weighted average common shares outstanding 729 689 722 688 ----------------------- ----------------------- Basic EPS $0.27 $0.41 $0.41 $0.84 ======================= ======================= Diluted: Net income $195 $280 $296 $575 Weighted average common shares outstanding 729 689 722 688 ----------------------- ----------------------- Effect of dilutive securities: Shares of common stock issuable upon the assumed exercise of common stock equivalents 62 84 62 84 Shares of common stock assumed repurchase for treasury (46) (65) (47) (67) ------------------------ ------------------------ Weighted average common shares outstanding assuming dilution 745 708 737 705 ----------------------- ----------------------- Diluted EPS $0.26 $0.40 $0.40 $0.82 ======================= =======================
NOTE 9. CONTINGENCIES The company, in the normal course of business, is a party to a number of lawsuits and regulatory and other proceedings and has included accrued loss contingencies in other accrued 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 consolidated financial position or operations of the company. On November 4, 1996, and thereafter, and on August 25, 1997, and thereafter, the company and all of its directors, including the two directors who are also executive officers of the company and the three directors elected by British Telecommunications plc (BT), were named as 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 the company, individually and purportedly as class actions on behalf of all other stockholders of the company. In general, the complaints allege that the company's directors breached their fiduciary duty in connection with the MCI BT Merger Agreement, that BT aided and abetted those breaches of duty, that BT owes fiduciary duties to the other stockholders of the company 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 the company's directors, including the two directors who are also executive officers of the company and the three 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 the company was named as a nominal defendant. The plaintiff, derivatively and on behalf of the company, alleges breach of fiduciary duty by the company's 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 Merger F-9 16 Sub, as additional defendants. They generally allege that the defendants breached their fiduciary duty to stockholders in connection with the Merger, the agreement to pay a termination fee to WorldCom, and allege discrimination in favor of BT in connection with the Merger. They seek, inter alia, damages and injunctive relief prohibiting the consummation of the 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 the company's 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 the company's shares between July 11, 1997 and August 21, 1997, inclusive, that the company and certain of its officers and directors failed to disclose material information about the company, including that the company was renegotiating the terms of the MCI BT Merger Agreement dated November 3, 1996. 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 the company and WorldCom. The complaint alleges that the pending merger between the company and WorldCom 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. The company believes that all of the complaints are without merit and the company presently does not expect that the above actions will have a material adverse effect on the consolidated financial position or results of operations of the company. NOTE 10. SUBSEQUENT EVENTS Divesture of the Public Internet Services Business On July 15, 1998, the company announced that it had entered into a letter agreement (Letter Agreement) with Cable & Wireless plc (Cable & Wireless) to sell its public Internet services business for $1.75 billion. The Letter Agreement supersedes the letter of intent between the company and Cable & Wireless to sell MCI's Internet backbone services business which was announced on May 28, 1998. The completion of the transaction is subject to certain conditions precedent, including the satisfaction of the conditions precedent to the Merger, which include the approval by the FCC of the Merger. Either party may terminate the Letter Agreement if the sale is not consummated by December 31, 1998. Investment in Embratel On July 29, 1998, the company acquired, through its wholly-owned subsidiary Startel Participacoes Ltda., for approximately $2.3 billion, a 51.79% voting interest and a 19.26% economic interest in Embratel Participacoes S.A., Brazil's only facilities-based national communications provider. The purchase price will be paid in installments of which $916 million was paid on July 29, 1998 with the remainder to be paid prior to July 29, 2000. Sale of Investment in Concert CS On August 7, 1998, the company entered into an agreement with BT, Concert CS and WorldCom addressing various aspects of certain agreements and relationships among the parties. The agreement is conditioned upon the resolution of certain operational matters between the company and Concert CS. Under the terms of the agreement the company has agreed to sell to BT its interest in Concert CS for $1.013 billion immediately after consummation of the Merger. F-10 17 MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997 GENERAL The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of the consolidated results of operations and financial condition of MCI Communications Corporation and its subsidiaries (collectively, the company). The discussion should be read in conjunction with the interim condensed consolidated financial statements and notes thereto and the company's Annual Report on Form 10-K for the year ended December 31, 1997. MERGER AGREEMENT WITH WORLDCOM, INC. On November 9, 1997, the company entered into an Agreement and Plan of Merger (the MCI WorldCom Merger Agreement) with WorldCom, Inc. (WorldCom), a Georgia corporation, and TC Investments Corp. (Merger Sub), a Delaware corporation and a wholly-owned subsidiary of WorldCom, pursuant to which the company will merge with and into Merger Sub (the Merger). As a result of the Merger, (a) each outstanding share of the company's common stock, par value $.10 per share, (other than shares owned by WorldCom or Merger Sub or held by the company) will be converted into the right to receive that number of shares of WorldCom common stock, par value $.01 per share, equal to the quotient determined by dividing $51.00 by the average of the high and low sale prices of WorldCom common stock as reported on the Nasdaq National Market on each of the 20 consecutive trading days ending with the third trading day immediately preceding the effective time of the Merger (the Exchange Ratio), provided that the Exchange Ratio shall not be less than 1.2439 or greater than 1.7586; and (b) each outstanding share of the company's Class A common stock shall be converted into the right to receive $51.00 in cash, without interest thereon. - -------------------------------------------------------------------------------- Forward-looking Statements May Prove Inaccurate The company has made certain forward-looking statements in Management's Discussion and Analysis that are subject to risks and uncertainties. Forward-looking statements include information concerning the possible future results of operations of the company, its communication services, information technology and other services, the possible future results of operations of the company and MCI WorldCom after the Merger and statements preceded by, followed by, or that include the words believes, expects, anticipates, intends, or similar expressions. For those statements, the company claims the protection of the safe-harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. The reader is cautioned that the following important factors, among others, in addition to those contained elsewhere in Management's Discussion and Analysis, could adversely affect the future results of the company, its communication services, information technology and other services and the company and MCI WorldCom after the Merger and could cause those results to differ materially from the statements and information expressed in the forward-looking statements: material adverse changes in the economic conditions in the markets served by the company and MCI WorldCom; a significant delay in the expected closing of the Merger; future regulatory actions and conditions in the company's operating areas, including the ability of the company to implement its local strategy and obtain local facilities at competitive rates and resulting changes in the implementation of its local strategy; and the ability to pass on additional charges imposed by the Federal Communications Commission (FCC); competition from others in the U.S. and international long-distance markets, including the entry of the regional Bell operating companies (RBOCs) and other companies in the long-distance markets in the U.S.; the cost of the company's year 2000 compliance efforts; and the effect of future technological changes on its business. F-11 18 On March 11, 1998, the stockholders of the company and shareholders of WorldCom approved the Merger. On July 8, 1998, and July 15, 1998, the European Commission and the United States (U.S.) Department of Justice (DOJ) approved the merger, respectively, subsequently conditional to the company's agreement to sell its public Internet services business. The Merger is also subject to the approval of the Federal Communications Commission (FCC) and various state regulatory agencies, approvals which the company expects to receive in the summer of 1998. The Merger will be accounted for as a purchase in accordance with generally accepted accounting principles. The company believes that the Merger will create a fully integrated global communications company that will be well positioned to take advantage of growth opportunities in the global telecommunications market by providing a complete range of local, long-distance, Internet and international communications services. DIVESTURE OF THE PUBLIC INTERNET SERVICES BUSINESS On July 15, 1998, the company announced that it had entered into a letter agreement (Letter Agreement) with Cable & Wireless plc (Cable & Wireless) to sell its public Internet services business for $1.75 billion. The Letter Agreement supersedes the letter of intent between the company and Cable & Wireless to sell MCI's Internet backbone services business which was announced on May 28, 1998. The completion of the transaction is subject to certain conditions precedent, including the satisfaction of the conditions precedent to the Merger, which include the approval by the FCC of the Merger. Either party may terminate the Letter Agreement if the sale is not consummated by December 31, 1998. TELECOMMUNICATIONS REGULATORY ENVIRONMENT In 1998, the company began incurring per-line charges resulting from the FCC's Access Reform Order and certain new universal service support obligation costs resulting from the FCC's Universal Service Order. Under the Access Reform Order adopted by the FCC in May 1997, interstate access charges were restructured to shift more costs directly to end users. The Access Reform Order also reduced per-minute charges long-distance carriers pay and created new flat-rate charges to long distance carriers based on the number of pre-subscribed customers the carrier has and subscriber lines held by the customers. In 1997, the FCC also adopted the Universal Service Order which created new universal service support obligations for telecommunications services for schools and libraries and rural health care facilities. Despite rate reductions associated with the Access Reform Order that went into effect January 1, 1998, cost of providing telecommunications services for the first half of 1998 increased compared to the first half of 1997. In 1998, the company also recalibrated and will continue to recalibrate its rates to ensure it is collecting amounts necessary to pay incumbent local exchange company (ILEC) per-minute and per-line access charges and the universal service obligations imposed directly on the company. During the first half of 1998, the company had experienced collection difficulties on such charges which led to an increase in its allowance for uncollectibles. Certain provisions of the Access Reform Order, Price Cap Order, and Universal Service Order are now under review by various U.S. Courts of Appeal. In addition, the company has renewed its requests that the FCC itself revisit access reform and mandate that access charges decrease to cost. On August 6, 1998, the FCC began proceedings in which it has proposed to reform its international settlements policy. Through that policy the FCC regulates the fees that U.S. carriers pay to foreign carriers for the termination of international calls from the U.S. The FCC proposed to remove constraints under that policy that restrict the kinds of arrangements the U.S. carriers may enter into with foreign carriers located in World Trade Organization member countries. CONSOLIDATED RESULTS OF OPERATIONS The company operates predominantly in the communications services industry which includes a broad range of long-distance, local and wireless telecommunications services. Long-distance telecommunications services comprise a wide spectrum of domestic and international voice and data services, including long-distance telephone, electronic messaging, teleconferencing and data communications and Internet services. The company also provides information technology (IT) services which include equipment deployment, consulting and systems integration and outsourcing services. The following discusses the company's consolidated results of operations for the three and six months ended June 30, 1998 and 1997, respectively. REVENUE For the three and six months ended June 30, 1998, revenue increased 10.9% and 9.6% to $5,370 million and $10,658 million, respectively, from the comparable periods in 1997. Communications services revenue, which includes voice, messaging, data and Internet, grew 10.6% and 9.5% compared to traffic growth of 12.3% and 13.0% for the three and six months ended June 30, 1998, respectively, from the comparable periods in 1997. The variance in the growth of revenue versus traffic of (1.7%) and (3.5%) reflects the growth in IntraLata services, and ongoing levels of industry pricing competition. IT services revenue increased 11.3% and 15.2% to $464 million and $949 million for the three and six months ended June 30, 1998, respectively, from the comparable prior year periods, as a result of growth in the systems integration and outsourcing businesses.
The following provides supplemental detail for communications services and IT services revenue: Three Months Ended Six Months Ended Percent Percent June 30, 1998 1997 Change 1998 1997 Change - - --------------------------------------------------------------------------------------------------------------------- (In millions) Voice & Messaging $ 3,934 $ 3,654 7.7% $ 7,829 $ 7,367 6.3% Data & Internet 1,001 809 23.7% 1,944 1,561 24.5% Information Technology 464 417 11.3% 949 824 15.2% Eliminations & Other (29) (37) 21.6% (64) (26) NM -------------------------------- ---------------------------- Total Revenue $ 5,370 $ 4,843 10.9% $10,658 $ 9,726 9.6% ================================= ============================== NM = Not meaningful
F-12 19 Voice and messaging services include traditional switched services such as domestic and international inbound and outbound services and local, call centers and wireless services. Voice and messaging revenue increased by $280 million and $462 million to $3,934 million and $7,829 million for the three and six months ended June 30, 1998, respectively, over the comparable periods in 1997. The revenue increase were primarily the results of growth in the mass markets, local services expansion, and increases in certain commercial business services, partially offset by the continued de-emphasis of wholesale carrier customer sales. In the mass markets, revenue and volume increased primarily as a result of growth in the company's transactional brands, such as 1-800-Collect(R) and 10-10-321(R), and pre-subscribed services, such as 5-Cent SundaysSM. For the three and six months ended June 30, 1998, the company's continuing strategy to retain and focus on high-value customers resulted in a reduction of customer churn. In business markets, commercial services revenue and volume increased, led by inbound, teleconferencing and prepaid card services. Local services revenue increased by approximately 70% and 77% for the three and six months ended June 30, 1998, respectively, from the comparable periods in 1997. This increase in revenue is primarily the result of the expansion of facilities based, switched services to a total of 31 markets as of June 30, 1998, an increase of 6 markets since June 30, 1997. Local services are provided to both business and residential customers. Data and Internet services include all domestic and international private line, virtual data, managed services and Internet access services. Data and Internet revenue increased by $192 million and $383 million to $1,001 million and $1,944 million for the three and six months ended June 30, 1998, respectively, from the comparable periods in 1997. The increase was primarily due to increased demand for integrated data and Internet services. For the three and six months ended June 30, 1998, data revenue increased by $159 million and $314 million to $912 million and $1,722 million, respectively, in comparison to prior year's periods. This increase is primarily the result of growth in virtual data, international private line and managed services. Internet revenue for the three and six months ended June 30, 1998, increased by $33 million and $69 million to $89 million and $172 million, respectively, over the comparable periods in 1997. As announced on July 15, 1998, the company has agreed to sell its public Internet services business to Cable & Wireless for $1.75 billion simultaneous with the completion of the Merger. (See Divesture of the Public Internet Services Business on page F-12.) IT services, which consist solely of the operations of MCI Systemhouse, includes equipment deployment, consulting and systems integration and outsourcing services. IT revenue increased 11.3% and 15.2% to $464 million and $949 million for the three and six months ended June 30, 1998, respectively, over the comparable periods in 1997. IT services revenue growth was the result of increases in systems integration and outsourcing business predominately driven by contract wins in late 1997, offset by a decline in revenue from discontinued service lines. Excluding the impact of revenue from service lines discontinued during the first half of 1998, revenue for the three and six months ended June 30, 1998 was $444 million and $889 million, respectively, an increase of 21% and 24.3%, respectively, in comparison to the same periods in 1997. COST OF SERVICES Cost of services consists of telecommunications expense and costs of other products and services. Telecommunications expense is primarily comprised of access fees paid to local exchange carriers and other domestic service providers, and payments made to foreign telephone companies (international settlements) to complete calls made to foreign countries from the U.S. by the company's customers. Cost of services for the three and six months ended June 30, 1998 increased 11.5% and 12.8% to $2,839 million and $5,722 million, respectively, from the comparable prior year periods. Cost of services as a percentage of revenue was 52.9% and 53.7%, from 52.6% and 52.1% for the three and six months ended June 30, 1998, and 1997, respectively. The expense and percentage of revenue increases in 1998 were primarily the results of consolidated revenue growth and increases in direct operating expense in the company's local service and IT businesses revenue mix. Telecommunications expense as a percentage of communication services revenue decreased to 47.9% from 48.7% for the three months ended June 30, 1998, and 1997, respectively. This decrease was due to favorable domestic and international telecommunications interconnections rates, and more efficient network usage; partially offset by prescribed line and universal service support obligations and a reduction in revenue rates as a result of competitive pricing. Telecommunications expense as a percentage of communication services revenue increased to 49.0% from 48.5% for the six months ended June 30, 1998, and 1997, respectively. The increase of telecommunications expense as a percentage of communications revenue is the result of a reduction in revenue rates due to competitive pricing, required compensation to payphone owners and implementation of prescribed line and universal service support obligations. The increase was partially offset by lower domestic and international telecommunications interconnections rates, and more efficient network usage. SALES, OPERATIONS AND GENERAL EXPENSE Sales, operations and general expense increased 22.8% and 18.3% to $1,554 million and $3,058 million for the three and six months ended June 30, 1998, respectively, in comparison to the same periods in 1997. As a percentage of revenue, sales, operations and general expense increased to 28.9% and 28.7%, from 26.1% and 26.6% for the three and six months ended June 30, 1998, and 1997, respectively. The increases for the three and six months ended June 30, 1998 F-13 20 were the result of increased human resource and support costs associated with business growth primarily in local and information and technology services, year 2000 efforts and pre-merger retention bonuses. In connection with the Merger Agreement, pre-merger retention bonus pools were established to retain key executives and employees of the company. For the three and six months ended June 30, 1998, the company recorded compensation costs of $32 million and $67 million, respectively, under these retention bonus programs. The company expects to recognize additional compensation costs of approximately $60 million in the last half of 1998 and approximately $50 million in 1999 under these programs. However, all unpaid amounts under these retention pools will be paid on the closing date of the Merger if earlier than the scheduled pay-out date at which time any unrecognized compensation costs would be accelerated and expensed by the company. DEPRECIATION EXPENSE Depreciation expense increased $142 million and $379 million to $621 million and $1,311 million for the three and six months ended June 30, 1998, respectively, from the comparable prior year periods. Approximately $58 million and $195 million of these increases resulted from additional depreciation expense on equipment disposed of during the three and six months ended June 30, 1998, respectively, that was identified for disposition in connection with an asset disposition plan adopted in the fourth quarter of 1997. The remaining increase in depreciation expense represents the depreciation impact of property and equipment additions placed into service partially offset by the impact of equipment disposals. INTEREST EXPENSE Interest expense decreased $4 million and $10 million for the three and six months ended June 30, 1998, respectively, from the same periods in 1997, due to lower average total debt balances and interest rates. INTEREST INCOME Interest income increased $8 million and $6 million for the three and six months ended June 30, 1998, respectively, from the same periods in 1997, due to increased cash balances. EQUITY IN INCOME (LOSSES) OF AFFILIATES Equity in income (losses) of affiliates decreased $1 million and $14 million to ($23) million and ($47) million for the three and six months ended June 30, 1998, respectively, from the comparable periods in 1997. The decrease for the six month period is primarily the result of a reduction in the company's share of operating losses of ICS Communications, Inc. and Concert Communications Company (Concert CS). OTHER INCOME (EXPENSE), NET Other income, net, was $38 million and $77 million an increase of $42 million and $84 million for the three and six months ended June 30, 1998, and 1997, respectively. For the three months ended June 30, 1998, the increase from the comparable period in 1997 was the result of recognized gains of approximately $43 million related to the sales of certain non-core holdings. For the six months ended June 30, 1998, the increase from the comparable period in 1997 was primarily the result of the aforementioned gains and a $51 million realized gain resulting from the company's exchange of a marketable equity securities investment in Brooks Fiber Properties, Inc. which occurred in the first quarter of 1998. INCOME TAX PROVISION The provision for income taxes decreased by $56 million and $178 million to $119 million and $181 million for the three and six months ended June 30, 1998, respectively, from the comparable periods in 1997. The decreases are the result of the 1998 reduction in pre-tax income. The company's effective tax rate approximated 38% for each period. NET INCOME Net income decreased $85 million and $279 million to $195 million and $296 million for the three and six months ended June 30, 1998, respectively, from the same periods during 1997. The decrease in net income for the three and six months ended June 30, 1998 are the result of increases in operating expense associated with, and in response to, growth and competitive initiatives as well as the additional depreciation expense for equipment subject to the asset disposition plan adopted in 1997 offset by the increase in other income, net and the lower provision for income taxes. GLOBAL AND OTHER ALLIANCES CONCERT CS During the first quarter of 1998, the company invested $8 million in Concert CS, its 24.9% owned international services venture with British Telecommunications plc, (BT). For the three and six months ended June 30, 1998, Concert CS distributor revenue amounted to approximately $232 million and $444 million, respectively. The company's share of Concert CS losses reported in accordance with U.S. GAAP was $(2) million and $(5) million for the three and six months ended June 30, 1998, respectively. BT has agreed to exercise its call option to acquire the company's shares in Concert CS immediately following the effective time of the Merger. On August 7, 1998, the company entered into an agreement with BT, Concert CS and WorldCom addressing various aspects of certain agreements and relationships among the parties. The agreement is conditioned upon the resolution of certain operational matters between the company and Concert CS. Under the terms of the agreement the company has agreed to sell to BT its interest in Concert CS for F-14 21 $1.013 billion immediately after consummation of the Merger. The company will be a distributor of Concert CS services on a nonexclusive basis to customers in the U.S. for a period of at least two years and as many as five years following BT's exercise of its call option. TELEFONICA de ESPANA S.A. ALLIANCE (Telefonica) In April 1997, the company formed a strategic alliance with Telefonica to explore opportunities in Latin America's telecommunications market. In March 1998, the company and Telefonica expanded the scope of their alliance to include WorldCom and to pursue certain activities in the Americas and Europe. AVANTEL S.A. de C.V (Avantel) During the first half of 1998, the company funded an additional $37 million in Avantel, a 44.5% owned business venture with Grupo Financiero Banamex-Accival. At June 30, 1998, Avantel has approximately a 10% share in the addressable Mexico long-distance market. The company's share of Avantel's losses reported in accordance with U.S. GAAP was $(23) million and $(43) million for the three and six months ended June 30, 1998, respectively. The company expects Avantel to continue to generate operating losses as Avantel expands its service and customer bases in Mexico's telecommunications market. INVESTMENT in EMBRATEL On July 29, 1998, the company acquired, through its wholly-owned subsidiary Startel Participacoes Ltda., for approximately $2.3 billion, a 51.79% voting interest and a 19.26% economic interest in Embratel Participacoes S.A., Brazil's only facilities-based national communications provider. The purchase price will be paid in installments of which $916 million was paid on July 29, 1998 with the remainder to be paid prior to July 29, 2000. DIRECT BROADCAST SATELLITE (DBS) VENTURE In May 1997, the company and The News Corporation Limited (News Corp.) entered into an agreement to form a joint venture (DBS Venture) in which both parties would contribute their respective DBS assets and cash. In exchange, the company would receive a 19.9% interest in the new venture. In addition, the parties agreed that the company's funding obligation to the DBS Venture would be limited to $440 million. The agreement also provided that the parties would seek a third party to acquire their combined interests in this DBS business. In June 1997, the company and News Corp. entered into an agreement with Primestar Partners, L.P. (Primestar) for the sale and transfer of the company's and News Corp.'s DBS assets other than two of the four DBS Venture satellites (Primestar Transaction). In March 1998, the parties sold their interest in one of the remaining satellites and are pursuing the disposition of the other. The Primestar Transaction is part of a larger transaction that involves the consolidation of Primestar and TCI Satellite Entertainment, Inc. into a newly formed entity (New Primestar) that was completed in April 1998. Concurrent with the consummation of the Primestar Transaction or upon the approval by the FCC of the transfer of the orbital slot to the DBS Venture or another third party, the company will acquire preferred shares in a subsidiary of News Corp. for a face amount equal to the company's cost of obtaining the FCC license plus interest thereon. Under the terms of the Primestar Transaction, the company will also receive from New Primestar consideration in the form of cash and interest bearing non-voting New Primestar securities for its share of the DBS Venture assets transferred to New Primestar. On May 12, 1998 the Department of Justice filed suit in the U.S. District Court for the District of Columbia seeking to enjoin the completion of the Primestar Transaction. YEAR 2000 EFFORTS The company continues to evaluate and upgrade its computer systems and applications for the year 2000. The company's objective is to target year 2000 compliance for all of its major systems, including network and customer interfacing systems, on or before March 31, 1999. All other systems are targeted for compliance by June 1999. The company is currently testing the systems and applications that have been corrected or reprogrammed to date for year 2000 compliance. As part of its year 2000 plan, the company is seeking confirmation from its domestic and foreign interconnecting carriers and major communications equipment vendors (Primary Vendors) that they are developing and implementing plans to become year 2000 compliant. Confirmations received to date from its Primary Vendors have indicated that such respondents are in the process of implementing remediation procedures to ensure that their computer systems are year 2000 compliant by December 31, 1999. The company has already started testing with some of its Primary Vendors and expects to have started testing with all of its Primary Vendors by the second quarter of 1999. In addition, the company is developing a contingency plan to deal with potential year 2000 related business interruptions that may occur on January 1, 2000 or thereafter. The company believes this plan will be ready for implementation in early 1999 and it is anticipated that contingency plan testing will begin during the first quarter of 1999. 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 costs incurred by the company for the six months ended June 30, 1998 were approximately $52 million and are included in sales, operations and general expense and were consistent with the planned expenditures for the period. The company expects to incur approximately $350 million in expenses in the last half of 1998 and 1999 to support its compliance initiatives. Although the company expects its systems to be year 2000 compliant on or before December 31, 1999, it cannot predict the outcome or the success of its year 2000 joint testing program or the year 2000 compliance programs of the Primary Vendors, nor can it predict the impact on its financial condition or results of operations, if any, in the event that such joint testing compliance objectives and year 2000 compliance programs of its Primary Vendors are not successful. F-15 22 FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES CASH FLOWS Cash from operating activities increased by $677 million to $2,212 million for the six months ended June 30, 1998 compared to the six months ended June 30, 1997. Receipts from customers increased by $1,581 million due primarily to the increase in revenue and improved collection experience. Payments to suppliers and employees increased by $1,034 million as a result of increases in operating expenses and the timing of the related payments. Taxes and interest paid for the six months ended June 30, 1998 declined from the year ago period primarily as a result of lower income taxes and interest expenses, and income tax refunds. Cash used for investing activities decreased by $633 million for the six months ended June 30, 1998 compared to the six months ended June 30, 1997. The decrease was the result of lower expenditures for property and equipment and investments in DBS and affiliates of $301 million. These investing activities were offset by a $383 million increase in other investing activities, net primarily the result of $360 million of proceeds received from a sale-lease back transaction offset by a reduction in proceeds received from marketable securities and other investments, net of $51 million. Cash from operating activities and financing activities was used to support the company's investing activities for the six months ended June 30, 1998. Cash used for financing activities was ($227) million for the six months ended June 30, 1998 compared to net cash proceeds from financing activities of $86 million for the six months ended June 30, 1997. During the six months ended June 30, 1998, the company was able to repay approximately $1.8 billion in commercial paper and other debt balances. These balances were repaid in-part from proceeds raised from issuances of common stock to support employee benefit programs and proceeds from debt issuances of $500 million aggregate principal amount of 6.50% Senior Notes and $700 million aggregate principal amount of 6.125% Callable/Redeemable notes issued in April 1998. Other financing activities included distributions paid on Trust mandatorily redeemable preferred securities of $30 million and dividend payments of $18 million. Cash from financing activities for the six months ended June 30, 1997 consisted of payments of Senior Notes and other debt of $160 million, distributions paid on Trust mandatorily redeemable preferred securities of $30 million, and dividend payments of $17 million offset by net commercial paper borrowings of $135 million and issuances of common stock to support employer benefit programs net of treasury share repurchases of $158 million. CAPITAL RESOURCES AND LIQUIDITY For the six months ended June 30, 1998, the company funded its capital expenditures and other investment activities through cash from operations and other financing activities. The company expects net capital expenditures of approximately $3.1 billion for 1998 and expects to fund a majority of the expenditures with cash from operations. The company has a $4 billion bank credit facility that supports the company's commercial paper program and may be used to fund short-term fluctuations in working capital and other corporate requirements. In April 1998, this facility was extended until the earlier of the consummation of the Merger or April 26, 1999. In April 1998, the company also issued $500 million aggregate principal amount of 6.50% Senior Notes due April 15, 2010 and $700 million aggregate principal amount of 6.125% Callable/Redeemable Notes due April 15, 2012 under its $1.2 billion shelf registration. The proceeds from these issuances were used to repay maturing commercial paper balances and for other general corporate purposes. After these issuances, there were no amounts available for issuance under the shelf registration. Upon issuance of the $500 million Senior Notes, the company terminated an interest rate swap which had been designated as a hedge against adverse market interest rate changes. The swap had a negative fair value of approximately $27 million at the time of the transaction which is being amortized over the life of the Senior Notes. On July 29, 1998 the company invested approximately $916 million for its interest in Embratel Participacoes S.A. This was funded with cash from operations. The company believes it will be able to meet its current and long-term liquidity and capital requirements from cash from operating activities, its commercial paper program and other investing activities. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The company believes its market risk exposure with regard to its financial instruments is limited to changes in interest rates primarily in the U.S. The company believe its market risk exposure is not material. At June 30, 1998, the company had no amounts of variable rate debt outstanding. F-16 23 EXHIBIT INDEX
Exhibit No. Description of Exhibit ----------- ---------------------- 2.1 Agreement and Plan of Merger by and among WorldCom, TC Investments Corp. and MCI dated as of November 9, 1997 (filed as Annex I to the Joint Proxy Statement/Prospectus dated January 22, 1998 included in WorldCom's Registration Statement on Form S-4, Registration No. 333-36901 and incorporated herein by reference)* 2.2 Agreement by and among BT, MCI and WorldCom dated as of November 9, 1997 (incorporated herein by reference to Exhibit 99.1 of WorldCom's Current Report on Form 8-K dated November 9, 1997 (filed November 12, 1997) (File No. 0-11258))* 3.1 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)) 3.2 Restated Bylaws of MCI WORLDCOM, Inc. 99.1 Certain portions of Press Release dated August 12, 1998 99.2 Joint Proxy Statement/Prospectus dated January 22, 1998 filed in connection with WorldCom's Registration Statement on Form S-4, Registration No. 333- 36901, and incorporated herein by reference.
- ---------------------- * The registrant hereby undertakes to furnish supplementally a copy of any omitted schedule to this Agreement to the Securities and Exchange Commission upon request. EX-3.2 2 RESTATED BYLAWS OF MCI WORLDCOM 1 EXHIBIT 3.2 As Adopted September 15, 1993, Amended on May 23, 1996, August 25, 1996 and September 10, 1998 and Reflecting Name Change on September 15, 1998 RESTATED BYLAWS OF MCI WORLDCOM, INC. (a Georgia Corporation) ----------------------- ARTICLE I OFFICES The principal office of the corporation shall be located in Jackson, Mississippi. The principal books of the corporation shall be kept at such principal office, with necessary books and records being kept at such other place or places as the Board of Directors may from time to time determine. The registered office of the corporation required by the Georgia Business Corporation Code shall be located within the State of Georgia. The corporation may have such other offices, either within or without the State of Georgia, as the Board of Directors may designate or as the business of the corporation may require from time to time. ARTICLE II SHAREHOLDERS Section 1. Annual Meeting. The annual meeting of the shareholders shall be held on the date and time fixed by the Board of Directors for the purpose of electing directors and for the transaction of such other business as may properly be brought before the meeting. Section 2. Special Meetings. Special meetings of the shareholders, for any purpose or purposes, unless otherwise prescribed by statute, may be called by the Board of Directors or President, and shall be called by the President at the written request of the holders of not less than forty percent (40%) of all the votes entitled to be cast on any issue to be considered at the meeting (subject to any requirements or limitations imposed by the corporation's Articles of Incorporation, by these Bylaws or by law), which written request must describe the purpose or purposes for which the special meeting is to be held (which must be a proper subject for action by the corporation's shareholders) and further comply with the provisions of Section 11 of this Article II. Section 3. Place of Meeting. Meetings of the shareholders shall be held at such place as may be designated by the Board of Directors and stated in the notice of meeting. Section 4. Notice of Meeting. Written notice stating the place, date and time of the meeting and, in case of a special meeting, the purpose or purposes for which the meeting is called, shall, unless otherwise prescribed by statute, be delivered to each shareholder of record entitled to vote at such meeting not less than ten (10) days or more than sixty (60) days before the date of the meeting. Section 5. Record Date. In order that the corporation may determine the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other action, the Board of Directors may fix, in advance, a record date, which shall not be more than seventy (70) days before the date of such meeting or action. If no record date is fixed, (i) the record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the day before the day on which the first notice is given to such shareholders, and (ii) the record date for determining shareholders for any other purpose shall be at the close of business on the day which the Board of Directors authorizes the action. A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders 2 shall apply to any adjournment of the meeting, unless the Board of Directors fixes a new record date. The Board of Directors is required to fix a new record date if the meeting is adjourned to a date more than one hundred twenty (120) days after the date fixed for the original meeting. Section 6. Voting Record. The officer or agent having charge of the stock transfer books for shares of the corporation shall make a complete record of the shareholders entitled to vote at each meeting of shareholders or any adjournment thereof, arranged by voting group in alphabetical order, with the address of and the number of shares held by each. Such record shall be produced and kept open beginning two (2) business days after notice of the meeting through the meeting at the corporation's principal office. Upon written demand of a shareholder, such record shall be subject to inspection by the shareholder during regular business hours during such time. Such record may also be copied by any shareholder, at his expense, if such shareholder does so in good faith, for a proper purpose and in compliance with statutory requirements. Section 7. Quorum. The holders of shares entitled to vote as a separate voting group may take action on a matter at a meeting only if a quorum exists with respect to that matter. Unless the Articles of Incorporation or the Georgia Business Corporation Code, as amended from time to time, provides otherwise, the holders of a majority of the votes entitled to be cast on a matter by the voting group constitute a quorum of that voting group for action on that matter. Once a share is represented for any purpose at a meeting, the holder is deemed present for quorum purposes for the remainder of the meeting, unless a new record date is or must be set for an adjournment of such meeting. Section 8. Proxies. At all meetings of shareholders, a shareholder may vote in person or by proxy executed in writing by the shareholder or by his duly authorized attorney-in-fact. Such proxy shall be filed with the Secretary of the corporation before or at the time of the meeting. No proxy shall be valid after eleven (11) months from the date of its execution, unless otherwise provided in the proxy. The appointment of a proxy is revocable by the shareholder, unless the appointment form conspicuously states that it is irrevocable and the appointment is coupled with an interest. Section 9. Voting of Shares. Directors shall be elected by a plurality of the votes cast by shareholders entitled to vote in the election at a meeting at which a quorum is present. Shareholder action on all other matters shall be approved if the votes cast in favor of the action exceed the votes cast in opposition to such action, unless otherwise provided by law or the Articles of Incorporation. If two or more groups are entitled to vote separately on a matter, action on a matter is taken only when approved by each voting group. Each outstanding share of the capital stock having voting power shall be entitled to one vote upon each matter submitted to a vote at a meeting of shareholders; provided, however, that the preferred stock of the corporation outstanding, if any, shall have such voting rights as granted to such shares of preferred stock in or pursuant to the corporation's Articles of Incorporation. Section 10. Adjournment. When a meeting of shareholders is adjourned to another date, time or place, notice need not be given of the adjourned meeting if the new date, time and place are announced at the meeting before the adjournment; provided, however, that if a new record date is or must be fixed under the Georgia Business Corporation Code, as amended from time to time, or these Bylaws, a notice of the adjourned meeting must be given to shareholders as of the new record date. At the adjourned meeting the shareholders may transact any business which might have been transacted had a quorum been present at the time originally designated for the meeting. Section 11. Advance Notice of Nominations and Shareholder Proposals. All nominations of individuals for election to the Board of Directors and proposals of business to be considered at any meeting of the shareholders shall be made as set forth in this Section 11. (a) Annual Meeting of Shareholders. (1) Nominations of individuals for election to the Board of Directors and the proposal of business to be considered by the shareholders may be made at an annual meeting of shareholders (i) pursuant to the corporation's notice of meeting, (ii) by or at the direction of the Board of Directors or a committee appointed by the Board of Directors, or (iii) by any shareholder of the corporation who was a shareholder of record both at the time of giving of notice provided for in this Section 11 and at the time of the meeting, who is entitled to vote at the meeting and who complied with the notice and other requirements set forth in this Section 11. 2 3 (2) For nominations or other business to be properly brought before an annual meeting by a shareholder pursuant to clause (iii) of paragraph (a)(1) of this Section 11, the shareholder must have given timely notice thereof in writing to the Secretary as hereinafter provided and, in the case of other business, such other business must otherwise be a proper subject for action by the corporation's shareholders. To be timely, a shareholder's notice shall be delivered to the Secretary at the principal executive offices of the corporation and received not less than one hundred twenty (120) days nor more than one hundred fifty (150) days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than thirty (30) days or delayed by more than sixty (60) days from such anniversary date, notice by the shareholder to be timely must be so delivered and received not earlier than the 150th day prior to such annual meeting and not later than the close of business on the later of the 120th day prior to such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made. Such shareholder's notice shall set forth (i) as to each person whom the shareholder proposes to nominate for election or reelection as a director (a) the name, age, business and residential addresses, and principal occupation or employment of each proposed nominee, (b) the class and number of shares of capital stock of the corporation that are beneficially owned by such nominee on the date of such notice, (c) a description of all arrangements or understandings between the shareholder and each nominee and the name of any other person or persons pursuant to which the nomination or nominations are to be made by the shareholder, (d) all other information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or any successor provision, and (e) the written consent of each proposed nominee to being named as a nominee in the proxy statement and to serve as a director of the corporation if so elected; (ii) as to any other business that the shareholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such shareholder and of the beneficial owner, if any, on whose behalf the proposal is made; and (iii) as to the shareholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made, (x) the name and address of such shareholder, as they appear on the corporation's books, and of such beneficial owner, (y) the class and number of shares of stock of the corporation which are owned beneficially and of record by such shareholder and such beneficial owner, and (z) a representation that the shareholder intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice or to propose such other business. The corporation may require any proposed nominee to furnish any information, in addition to that furnished pursuant to clause (i) above, it may reasonably require to determine the eligibility of the proposed nominee to serve as a director of the corporation. (3) Notwithstanding anything in the second sentence of paragraph (a)(2) of this Section 11 to the contrary, in the event that the number of directors to be elected to the Board of Directors is increased and there is no public announcement naming all of the nominees for director or specifying the size of the increased Board of Directors made by the corporation at least one hundred thirty (130) days prior to the first anniversary of the preceding year's annual meeting, a shareholder's notice required by this Section 11(a) shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to and received by the Secretary at the principal executive offices of the corporation not later than the close of business on the tenth day following the day on which such public announcement is first made by the corporation. (b) Special Meetings of Shareholders. Only such business shall be conducted, and only such proposals shall be acted upon, at a special meeting of shareholders as shall have been brought before such meeting pursuant to the corporation's notice of meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of shareholders at which directors are to be elected (i) by or at the direction of the Board of Directors or a committee appointed by the Board of Directors, or (ii) provided that the notice of the special meeting states that the purpose or one of the purposes of the special meeting is to elect directors at such special meeting, by any shareholder of the corporation who is a shareholder of record both at the time of giving of notice provided for in this Section 11 and at the time of the meeting, who is entitled to vote at the meeting and who complied with the notice and other requirements set forth in this Section 11. In the event the corporation calls a special meeting of shareholders for the purpose of electing one or more directors to the Board of Directors, any such shareholder may nominate a person or persons (as the case may be) for election to such position as specified in the corporation's notice of meeting, if a notice containing the same information as would be required under Section 11(a)(2) of this Article II for an annual meeting is delivered to and received by the Secretary at the principal executive offices of the corporation not earlier than the 150th day prior to such special meeting and not later than the close of business on the later of the 120th day prior to such 3 4 special meeting or the tenth day following the day on which public announcement is first made of the date of the special meeting and/or of the nominees proposed by the Board of Directors or a committee appointed by the Board of Directors to be elected at such meeting. Proposals of business other than the nomination of persons for election to the Board of Directors may be considered at a special meeting requested by shareholders in accordance with Section 2 of this Article II only if the shareholders give a notice containing the same information as would be required under Section 11(a)(2) of this Article II for an annual meeting at the time such shareholders requested the meeting. (c) General. (1) Only such persons who are nominated in accordance with the procedures set forth in this Section 11 shall be eligible to serve as directors and only such business shall be conducted at a meeting of shareholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 11. The Board of Directors may reject any nomination or shareholder proposal submitted for consideration at any meeting of shareholders which is not made in accordance with the provisions of this Section 11 or which is not a proper subject for shareholder action in accordance with provisions of applicable law. Alternatively, if the Board of Directors fails to consider the validity of any nomination or shareholder proposal, the presiding officer of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made in accordance with the provisions of this Section 11 and is a proper subject for shareholder action in accordance with provisions of applicable law and, if any proposed nomination or business is not in compliance with this Section 11 or not a proper subject for shareholder action, to declare that such defective nomination or proposal be disregarded. This provision shall not prevent the consideration and approval or disapproval at the meeting of reports of officers, directors and committees of the Board of Directors, but, in connection with such reports, no new business shall be acted upon at the meeting unless stated, submitted and received as herein provided. (2) For purposes of this Section 11, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press, Reuters or comparable news service or in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act or any successor provision. In no event shall the public announcement of a postponement or adjournment of a meeting commence a new time period for the giving of a shareholder's notice pursuant to this Section 11. (3) Notwithstanding the foregoing provisions of this Section 11, a shareholder shall also comply with all applicable requirements of state law and of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 11. Nothing in this Section 11 shall be deemed to affect any rights of shareholders to request inclusion of proposals in, or the corporation's right to omit proposals from, the corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act or any successor provision. ARTICLE III BOARD OF DIRECTORS Section 1. General Powers. The powers of the corporation shall be exercised, its business conducted and managed, and its property controlled under the direction of the Board of Directors. Section 2. Number, Tenure and Qualifications. The number of directors of the corporation shall be not less than three (3); the number thereof to be determined from time to time by the Board of Directors. Each director shall hold office until the next annual meeting of shareholders following his election or appointment and until his successor shall have been elected and qualified or until his earlier resignation, removal from office, or death. A director need not be a resident of the State of Georgia or a shareholder of the corporation. Section 3. Nomination. Nominations for the election of directors shall be made as provided in Section 11 of Article II of these Bylaws. Section 4. Regular Meetings. A regular meeting of the Board of Directors shall be held without notice other than this Bylaw immediately after, and at the same place as, the annual meeting of shareholders. The Board of 4 5 Directors may provide, by resolution, the time and place for the holding of additional regular meetings without notice other than such resolution. Section 5. Special Meetings. Special meetings of the Board of Directors may be called by or at the request of the Chairman of the Board, the President or a majority of directors. The person or persons authorized to call special meetings of the Board of Directors may fix any place as the place for holding any special meeting of the Board of Directors so called. Section 6. Chairman of the Board. The Chairman of the Board shall be chosen from among the members of the Board of Directors. If requested to do so, the Chairman of the Board shall preside at all meetings of the Board of Directors and shareholders. The Chairman of the Board shall perform such other duties as from time to time may be assigned by the Board of Directors. Section 7. Telephonic Meetings. Meetings of the Board of Directors may be conducted by conference telephone or similar communications equipment by means of which all persons participating can hear each other, and participation in such a meeting shall constitute presence in person at such meeting. Section 8. Notice of Meeting. Notice of any special meeting shall be given at least one (1) day prior thereto. Notice is not required prior to any regular meeting of the Board of Directors. Any director may waive notice of any meeting. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of any regular or special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting. Section 9. Adjournment. When a meeting of the Board of Directors is adjourned to another time or place, notice need not be given of the adjourned meeting if the new time and place are fixed at the meeting at which the adjournment is taken and if the period of adjournment does not exceed one (1) month in any one adjournment. At the adjourned meeting the Board of Directors may transact any business which might have been transacted had a quorum been present at the time originally designated for the meeting. Section 10. Quorum and Voting. A quorum of the Board of Directors consists of a majority of the number of directors fixed pursuant to these Bylaws. The affirmative vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors, except as otherwise may be specifically provided by law, by the Articles of Incorporation or by these Bylaws. Section 11. Action without a Meeting. Any action required or permitted to be taken by the Board of Directors at a meeting may be taken without a meeting if all members of the Board consent thereto in writing, setting forth the action so taken, and there is an affirmative vote of the number of directors which would be necessary to authorize or take such action at a meeting, evidenced in writing. The writing or writings are to be filed with the minutes of the proceedings of the Board. Section 12. Vacancies. Any vacancy occurring on the Board of Directors created by an increase in the number of directors by action of the shareholders shall be filled by the shareholders in the same manner as at an annual election. The Board of Directors shall fill any vacancy occurring on the Board created by an increase in the number of directors by action of the Board or the removal or resignation of a director as set forth in Sections 14 and 15 of this Article III, except such vacancy shall be filled pursuant to the Articles of Incorporation to the extent the Articles of Incorporation provide that a class of shareholders may fill a vacancy created by the removal or resignation of a director elected by that class. A director elected to fill a vacancy shall hold office for the unexpired term of his predecessor. Section 13. Compensation. By resolution of the Board of Directors, each director may be paid his expenses, if any, of attendance at each meeting of the Board of Directors, and may be paid a stated salary as director, or a fixed sum for attendance at each meeting of the Board of Directors, or both, payable in cash or securities of the corporation. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. 5 6 Section 14. Removal. Any or all of the directors may be removed with or without cause by majority vote of the shares represented at a meeting of the shareholders at which a quorum is present. Section 15. Resignation. A director may resign at any time by delivering written notice to the corporation, the Chairman of the Board, the Board of Directors or the President. A resignation is effective when the notice is delivered unless the notice specifies a later effective date. ARTICLE IV OFFICERS Section 1. Number. The officers of the corporation shall be a President and a Secretary, each of whom shall be elected by the Board of Directors. The Board may also elect or appoint a Chairman of the Board, one or more Vice Presidents (with or without a modified title such as "Senior," "Executive," or "Assistant"), an Assistant Secretary, a Treasurer, an Assistant Treasurer and such other officers and assistant officers as may be deemed necessary. One person may hold any number of such offices, except the President may not hold the office of Senior Vice President, Vice President, Secretary or Assistant Secretary, and the Secretary and Treasurer shall not hold the office of Assistant Secretary and Assistant Treasurer, respectively. Section 2. Election and Term of Office. The officers of the corporation shall be elected from time to time by the Board of Directors, as it deems advisable. Each officer shall hold office until his successor shall have been duly elected and qualified, or until his death, or until he shall resign or shall have been removed in the manner hereinafter provided. Section 3. Removal. The Board of Directors may remove any officer or agent of the corporation at any time with or without cause. Removal of an officer or agent shall be without prejudice to the contract rights, if any, of the person so removed. Election or appointment of an officer or agent shall not of itself create any contract rights. Section 4. Resignation. Any officer may resign at any time by delivering notice to the corporation. A resignation is effective when the notice is delivered unless the notice specifies a later effective date. If a resignation is made effective at a later date and the corporation accepts the future effective date, the Board of Directors may fill the pending vacancy before the effective date if it provides that the successor does not take office until the effective date. An officer's resignation does not affect the corporation's contract rights, if any, with the officer. Section 5. Vacancies. A vacancy in any office because of death, resignation, removal, disqualification, or otherwise, may be filled by the Board of Directors for the unexpired portion of the term. In the event of an absence of any officer of the corporation, or for any other reason which the Board of Directors may deem sufficient, the Board may delegate for the time being the powers or duties, or any of them, of such officer to any other officer or director, in connection with these Bylaws. Section 6. Salaries. The salaries of the officers shall be fixed from time to time by the Board of Directors, and no officer shall be prevented from receiving such salary by reason of the fact that he is also a director of the corporation. Section 7. President. The President shall be the chief executive officer of the corporation and, subject to the control of the Board of Directors, shall be primarily responsible for the general management of the business affairs of the corporation and for implementing the policies and directives of the Board of Directors, shall in general supervise and control all of the business and affairs of the corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect, shall have authority to make contracts on behalf of the corporation in the ordinary course of business of the corporation, shall preside at all meetings of the Board of Directors and shareholders if requested to do so and shall perform such other duties as from time to time may be assigned by the Board of Directors. Section 8. The Vice Presidents. The Vice Presidents shall assist the President in the management of the business. During the absence or disability of the President, the Vice Presidents in the order designated by the 6 7 President or the Board of Directors, or in the absence of any designation, then in the order of their election, shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President. The Vice Presidents shall perform such other duties as from time to time may be assigned to them by the President. Section 9. The Secretary. The Secretary shall: (a) keep the minutes of the proceedings of the shareholders, the Board of Directors and the standing committees in one or more books provided for that purpose; (b) see that all notices are duly given in accordance with the provisions of these Bylaws or as required by law; (c) be custodian of the corporate records and of the seal of the corporation and see that the seal of the corporation is affixed to all documents, the execution of which on behalf of the corporation under its seal is duly authorized; (d) keep a register of the post office address of each shareholder which shall be furnished to the Secretary by such shareholder; (e) sign, with the President, certificates for shares of the corporation, the issuance of which shall have been authorized by resolution of the Board of Directors; (f) have general charge of the stock transfer books of the corporation; and (g) in general perform all duties incident to the office of Secretary and such other duties as from time to time may be assigned to him by the Board of Directors or the President. Section 10. The Treasurer. The Treasurer shall be the chief financial officer of the corporation and shall have custody of all valuables. The Treasurer shall: (a) have charge and custody of and be responsible for all funds and securities of the corporation; (b) receive and give receipts for monies due and payable to the corporation from any source whatsoever, and deposit all such monies in the corporation's account(s); and (c) in general perform all of the duties incident to the office of Treasurer and such other duties as from time to time may be assigned to him by the President. Section 11. Assistant Secretaries and Assistant Treasurers. The Assistant Secretaries may sign with the President certificates for shares of the corporation, the issuance of which shall have been authorized by a resolution of the Board of Directors. The Assistant Treasurers shall, if required by the Board of Directors, give bonds for the faithful discharge of their duties in such sums and with such sureties as the Board of Directors shall determine. The Assistant Secretaries and Assistant Treasurers, in general, shall perform such duties as shall be assigned to them by the Secretary or the Treasurer, respectively, or the President. ARTICLE V CERTIFICATES FOR SHARES AND THEIR TRANSFER Section 1. Certificates for Shares. Shares may be issued by the corporation by the delivery of certificates representing such shares and in such form as shall be determined by the Board of Directors. Such certificates shall be signed by the President and by the Secretary or an Assistant Secretary. The signature of such officers upon a certificate may be facsimiles if the certificate is manually signed on behalf of a transfer agent or a registrar, other than the corporation itself or one of its employees. Each certificate for shares shall be consecutively numbered or otherwise identified. The name and address of the person to whom the shares represented thereby are issued, with the number and class of shares, the designation of the series, if any, the certificate represents, and date of issue, shall be entered on the stock transfer books of the corporation. All certificates surrendered to the corporation for transfer shall be cancelled, and no new certificate shall be issued until the former certificate for a like number of shares shall have been surrendered and cancelled, except that in case of a lost, destroyed, or mutilated certificate a new one may be issued therefor upon such terms and indemnity to the corporation as the President or the Board of Directors may prescribe. Section 2. Shares without Certificates. Shares of common stock of the corporation need not be represented by certificates. The Board of Directors of the corporation may authorize the issuance of some or all of the shares of any or all of the corporation's other classes or series of stock without certificates. Any such authorization shall not affect shares already represented by certificates until such certificated shares are surrendered to the corporation. Within a reasonable time after the issue or transfer of shares without certificates, the corporation shall send to the holder thereof a written statement which includes: (1) the name of the corporation and that it is organized under the laws of the State of Georgia; (2) the name of the person to whom the shares are issued; (3) the number and class and designation of the series, if any, of the shares; and (4) any restrictions on the transfer or registration of transfer of such shares. 7 8 Section 3. Transfer of Shares. Transfers of shares of the corporation shall be made only on the stock transfer books of the corporation by the holder of record thereof or by his legal representative, who shall furnish proper evidence of his authority to transfer, or by his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary of the corporation or a transfer agent or registrar, and on surrender for cancellation of the certificate for such shares, if a certificate representing such shares shall have been issued. The person in whose name shares stand on the books of the corporation shall be deemed by the corporation to be the owner thereof for all purposes. ARTICLE VI FISCAL YEAR The fiscal year of the corporation shall be determined and fixed by the Board of Directors. ARTICLE VII CORPORATE SEAL The Board of Directors of the corporation may adopt a corporate seal for the corporation and when so adopted and impressed on the margin hereof or the margin of the minutes of the meeting at which the seal is adopted, the same shall be and constitute the corporate seal of this corporation, but unless and until such action be taken by the Board of Directors, this corporation shall have no corporate seal. In the event that no corporate seal is adopted, or if it is inconvenient to use such seal at any time, the signature of the corporation followed by the word "Seal" enclosed in parentheses shall be deemed the seal of the corporation, but the absence of such seal on any instrument, or its addition thereto, shall not affect its character or validity or legal effect in any respect. ARTICLE VIII WAIVER OF NOTICE Whenever any notice is required to be given to any shareholder or director of the corporation pursuant to law or under the provisions of the Articles of Incorporation or these Bylaws, a waiver thereof in writing signed by the person or persons entitled to such notice delivered to the corporation and filed in the corporation's minutes or corporate records, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. A shareholder's or director's attendance at, or participation in, a meeting shall constitute waiver of notice and consent to the consideration of matters not described in any notice as set forth in the Georgia Business Corporation Code, as amended from time to time. Neither the business to be transacted at, nor the purpose of, any meeting of the shareholders or directors is required to be specified in any waiver of notice. ARTICLE IX COMMITTEES Section 1. Appointment. The Board of Directors, by resolution adopted by a majority of all the directors in office when the action is taken, may designate one or more of its members to constitute a committee. The designation of a committee and the delegation of authority thereto shall not operate to relieve the Board of Directors, or any member thereof, of any responsibility imposed by law. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disabled member at any meeting of the committee. 8 9 Section 2. Tenure. The members of a committee serve at the pleasure of the Board of Directors, which may at any time, for any or no reason, remove any individual committee member, increase or decrease the number of members of a committee, or terminate the existence of a committee. The membership of a committee member shall terminate on the date of his removal, resignation or death. The Board of Directors may fill any vacancy on a committee created by removal, resignation, death or an increase in the number of members of the committee. Section 3. Authority. All duly delegated committees may exercise such power and authority in the management of the business and affairs of the corporation as specified by resolution of the Board of Directors and to the extent allowed by applicable law, the Articles of Incorporation and these Bylaws and may have power to authorize the seal of the corporation to be affixed to all papers which may require it. Section 4. Executive Committee. The Board of Directors may appoint an Executive Committee which, to the extent permitted by law, shall have and may exercise when the Board of Directors is not in session all powers of the Board of Directors regarding the supervision of the management of the business and affairs of the corporation. The Executive Committee shall be chaired by the President of the corporation. ARTICLE X INDEMNIFICATION OF OFFICERS AND DIRECTORS Section 1. Indemnification for Third Party Actions. Under the circumstances prescribed in Sections 3 and 4 of this Article, the corporation shall indemnify and hold harmless any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in a manner he believed in good faith to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. Section 2. Indemnification for Derivative Actions. Under the circumstances prescribed in Sections 3 and 4 of this Article, the corporation shall indemnify and hold harmless any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit, if he acted in good faith and in a manner he believed in good faith to be in or not opposed to the best interests of the corporation; except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the corporation, unless and only to the extent that the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the court shall deem proper. Section 3. Indemnification for Expenses. To the extent that a director, officer, employee or agent of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections 1 and 2 of this Article, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. 9 10 Section 4. Determination as to Indemnification. Except as provided in Section 3 of this Article and except as may be ordered by a court, any indemnification under Sections 1 and 2 of this Article shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in Sections 1 and 2. Such determination shall be made (1) by the Board of Directors by a majority vote of a quorum consisting of directors not at the time parties to the proceeding; (2) if a quorum cannot be obtained under paragraph (1) of this subsection, by majority vote of a committee duly designated by the Board of Directors (in which designation directors who are parties may participate), consisting solely of two (2) or more directors not at the time parties to the proceeding; (3) by special legal counsel (A) selected by the Board of Directors or a committee thereof in the manner prescribed in paragraph (1) or (2) of this subsection, or (B) if a quorum of the Board of Directors cannot be obtained under paragraph (1) of this subsection and a committee cannot be designated under paragraph (2) of this subsection, selected by majority vote of the full Board of Directors (in which selection directors who are parties may participate); or (4) by the shareholders, but shares owned by or voted under the control of directors who are at the time parties to the proceeding may not be voted on the determination. The obligation to indemnify and the evaluation as to reasonableness of expenses shall be made in the same manner as the determination whether indemnification is proper is made, except that if the determination is made by special legal counsel, authorization of indemnification and evaluation as to reasonableness of expenses also shall be made by such special legal counsel. Section 5. Advancement of Expenses. Reasonable expenses incurred by a director, officer, employee or agent who is a party to a civil or criminal action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding as authorized by the Board of Directors in the specific case upon receipt of (1) a written affirmation from the director, officer, employee or agent of his good faith belief that he has met the standard of conduct set forth in Sections 1 and 2 of this Article, and (2) a written undertaking, executed personally or on behalf of such director, officer, employee or agent, to repay any advances if it ultimately shall be determined that he is not entitled to be indemnified by the corporation as authorized in this section. Section 6. Indemnification not Exclusive. The indemnification provided by this Article shall not be deemed exclusive of any other rights, in respect of indemnification or otherwise, to which those seeking indemnification may be entitled under any Bylaw or resolution approved by the affirmative vote of the holders of a majority of the shares entitled to vote thereon taken at a meeting the notice of which specified that such Bylaw or resolution would be placed before the shareholders, both as to action by a director, officer, employee or agent in his official capacity while holding such office or position, and as to action by a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors, and administrators of such a person. Section 7. Insurance. The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, or other enterprise, against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this Article. Section 8. Statement to Shareholders. If and as required by the Georgia Business Corporation Code, as amended from time to time, the corporation shall send to its shareholders a statement regarding expenses or other amounts paid by way of indemnification. ARTICLE XI AMENDMENTS The Bylaws of the corporation may be altered, amended or repealed, and new Bylaws may be adopted, by the shareholders at any annual or special meeting of the shareholders or by the Board of Directors at any regular or special meeting of the Board of Directors; provided, however, that, the notice of such meeting shall specify that amendments to the Bylaws will be considered at such meeting and shall summarize the proposed amendments; and 10 11 provided further, that the Bylaws may not be altered, amended or repealed by the Board of Directors to the extent: (1) the Articles of Incorporation or applicable law reserve the power to alter, amend or repeal a particular Bylaw exclusively to the shareholders, in whole or in part; or (2) the shareholders in altering, amending or repealing a particular Bylaw provide expressly that the Board of Directors may not alter, amend or repeal that Bylaw. ARTICLE XII ARTICLES OF INCORPORATION In the event that any provision of these Bylaws is inconsistent or in conflict with any provision contained in the corporation's Articles of Incorporation (including any amendment thereto setting forth the preferences, limitations and rights of any series or class of the corporation's preferred stock) the provision contained in the Articles of Incorporation shall govern. 11 EX-99.1 3 PRESS RELEASE DATED AUGUST 12, 1998 1 Exhibit 99.1 BT AGREES TO PURCHASE MCI'S STAKE IN CONCERT FOR US$1 BILLION; MCI RETAINS RIGHT TO DISTRIBUTE CONCERT SERVICES ON NON-EXCLUSIVE BASIS WASHINGTON, Aug. 12, 1998 -- MCI today announced that it has reached an Agreement to sell its 24.9 percent equity stake in Concert Communications Services to British Telecommunications (BT) for US$1 billion. The sale will occur immediately following the close of the MCI and WorldCom merger, expected later this summer. Under the agreement, MCI will continue providing Concert services in the U.S. on a non-exclusive basis for up to five years after the close of the merger. Contracts for Concert services which are signed with MCI prior to the end of a two-year period, will continue to be supported by MCI and Concert for three additional years. In addition, Concert will continue to honor, on an interim basis, MCI's sub-distributor and supply agreements for Concert services in the Americas, including its distribution agreement with Stentor Communications of Canada. These sub-distributor agreements also will be on a non-exclusive basis. BT announced its intent to buy back MCI's stake in Concert following MCI and WorldCom's 1997 merger agreement. The pre-existing joint venture agreement between MCI and BT gave BT the right to exercise its purchase rights following a change in ownership of the U.S. company. Today's agreement to buy MCI's stake in Concert is contingent upon the resolution of certain operational matters, which are expected to be finalized shortly. MCI, headquartered in Washington, D.C., is a leading provider of local-to- global communication services to business, government and residential users. The company's fast-growing portfolio of advanced data and IT services accounts for a quarter of MCI's approximately $20 billion in annual revenue. MCI operates one of the world's largest and most advanced digital networks, connecting local markets in the U.S. to hundreds of locations worldwide. MCI has agreed to merge with WorldCom, one of the world's fastest-growing communications companies. The merger, which is expected to be completed later this summer, will create MCI WorldCom, a company uniquely positioned in the U.S. local and long distance markets as well as the global data and Internet markets. /CONTACT: For media, Jane Levene, 914-934-6480 or 800-644-NEWS; or for investors, Mike Kraft, 202-887-2801, both of MCI. -----END PRIVACY-ENHANCED MESSAGE-----