UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ending March 31, 2003
or
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-10415
MCI, Inc.
(Successor by merger to WorldCom, Inc.)
(Exact name of registrant as specified in its charter)
| Delaware | 20-0533283 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
| 22001 Loudoun County Parkway, Ashburn, Virginia |
20147 | |
| (Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code: (703) 886-5600
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No x
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x No ¨
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes x No ¨
As of April 20, 2004, there were 314,856,250 shares of MCI common stock outstanding.
2
(Successor by merger to WorldCom, Inc.)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Millions)
| Predecessor Company |
||||||||
| Three-Month Period Ended March 31, |
||||||||
| 2003 |
2002 |
|||||||
| (Restated) | ||||||||
| Revenues |
$ | 7,228 | $ | 8,766 | ||||
| Operating expenses: |
||||||||
| Access costs |
3,292 | 3,778 | ||||||
| Costs of services and products |
883 | 1,204 | ||||||
| Selling, general and administrative |
1,776 | 2,643 | ||||||
| Depreciation and amortization |
643 | 944 | ||||||
| Unclassified, net |
— | 157 | ||||||
| Total |
6,594 | 8,726 | ||||||
| Operating income |
634 | 40 | ||||||
| Other income (expense), net: |
||||||||
| Interest expense (contractual interest of $625 in 2003) |
(54 | ) | (556 | ) | ||||
| Miscellaneous income, net |
48 | 310 | ||||||
| Reorganization items, net |
(206 | ) | — | |||||
| Income (loss) from continuing operations before income taxes, minority interests and cumulative effects of changes in accounting principles |
422 | (206 | ) | |||||
| Income tax expense |
110 | 28 | ||||||
| Minority interests, net of tax |
46 | 25 | ||||||
| Income (loss) from continuing operations before cumulative effects of changes in accounting principles |
266 | (259 | ) | |||||
| Net income (loss) from discontinued operations |
1 | (182 | ) | |||||
| Income (loss) before cumulative effects of changes in accounting principles |
267 | (441 | ) | |||||
| Cumulative effects of changes in accounting principles |
(215 | ) | (32 | ) | ||||
| Net income (loss) |
52 | (473 | ) | |||||
| Distributions on preferred securities (contractual distributions of $9 in 2003) |
— | 9 | ||||||
| Net income (loss) attributable to common shareholders |
$ | 52 | $ | (482 | ) | |||
See accompanying notes to unaudited condensed consolidated financial statements.
3
(Successor by merger to WorldCom, Inc.)
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In Millions, Except Share Data)
| Predecessor Company |
||||||||
| March 31, 2003 |
December 31, 2002 |
|||||||
| ASSETS | ||||||||
| Current assets |
||||||||
| Cash and cash equivalents |
$ | 3,521 | $ | 2,820 | ||||
| Accounts receivable, net of allowance for doubtful accounts of $1,753 for 2003 and $1,817 for 2002 |
5,712 | 5,611 | ||||||
| Other current assets |
1,334 | 1,218 | ||||||
| Total current assets |
10,567 | 9,649 | ||||||
| Property, plant and equipment, net |
13,742 | 14,190 | ||||||
| Intangible assets, net |
1,501 | 1,514 | ||||||
| Deferred taxes |
551 | 505 | ||||||
| Other assets |
833 | 904 | ||||||
| $ | 27,194 | $ | 26,762 | |||||
| LIABILITIES AND SHAREHOLDERS’ DEFICIT | ||||||||
| Liabilities not subject to compromise |
||||||||
| Current liabilities |
||||||||
| Accounts payable |
$ | 827 | $ | 1,080 | ||||
| Accrued access costs |
1,960 | 2,068 | ||||||
| Current portion of long-term debt |
653 | 885 | ||||||
| Accrued interest |
32 | 35 | ||||||
| Other current liabilities |
3,546 | 3,354 | ||||||
| Total current liabilities |
7,018 | 7,422 | ||||||
| Long-term debt, excluding current portion |
1,166 | 1,046 | ||||||
| Other liabilities |
1,026 | 694 | ||||||
| Liabilities subject to compromise |
37,444 | 37,154 | ||||||
| Commitments and contingencies (Note 8) |
||||||||
| Minority interests not subject to compromise |
928 | 837 | ||||||
| Minority interests subject to compromise |
||||||||
| Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely company guaranteed debentures |
750 | 750 | ||||||
| Mandatorily redeemable preferred stock issued by subsidiaries |
660 | 660 | ||||||
| Preferred stock subject to compromise—Series D, E, and F Junior Convertible Preferred Stock ($436 and $494 aggregate liquidation preference for 2003 and 2002, including $1 of accrued and unpaid dividends for 2003 and 2002) |
436 | 494 | ||||||
| Shareholders’ deficit: |
||||||||
| Preferred Stock, par value $.01 per share: authorized 50,000,000 in 2003 and 2002; issued and outstanding: none in 2003 and 2002 |
— | — | ||||||
| Common stock: |
||||||||
| WorldCom group common stock, par value $.01 per share; authorized: 4,850,000,000 at March 31, 2003 and December 31, 2002; issued and outstanding: 2,977,561,915 at March 31, 2003 and 2,975,109,694 at December 31, 2002 |
30 | 30 | ||||||
| MCI group common stock, par value $.01 per share; authorized: 150,000,000 at March 31, 2003 and December 31, 2002; issued and outstanding: 119,004,216 at March 31, 2003 and 118,877,925 at December 31, 2002 |
1 | 1 | ||||||
| Additional paid-in capital |
56,442 | 56,384 | ||||||
| Accumulated deficit |
(78,115 | ) | (78,167 | ) | ||||
| Treasury stock, at cost: 6,765,316 shares of WorldCom group common stock and 270,611 shares of MCI group common stock at March 31, 2003 and December 31, 2002 |
(185 | ) | (185 | ) | ||||
| Accumulated other comprehensive loss |
(407 | ) | (358 | ) | ||||
| Total shareholders’ deficit |
(22,234 | ) | (22,295 | ) | ||||
| $ | 27,194 | $ | 26,762 | |||||
See accompanying notes to unaudited condensed consolidated financial statements.
4
(Successor by merger to WorldCom, Inc.)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Millions)
| Predecessor Company |
||||||||
| Three-Month Period Ended March 31, |
||||||||
| 2003 |
2002 |
|||||||
| (Restated) | ||||||||
| OPERATING ACTIVITIES |
||||||||
| Net income (loss) |
$ | 52 | $ | (473 | ) | |||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
||||||||
| Depreciation and amortization |
643 | 944 | ||||||
| Cumulative effects of changes in accounting principles |
215 | 32 | ||||||
| Minority interests, net of tax |
46 | 25 | ||||||
| Bad debt provision |
326 | 399 | ||||||
| (Gain) loss on sale of property, plant and equipment |
(3 | ) | 23 | |||||
| Deferred tax provision |
(52 | ) | 92 | |||||
| Reserve for employee loan |
— | 296 | ||||||
| Non-cash reorganization items |
166 | — | ||||||
| Other |
13 | (6 | ) | |||||
| Changes in assets and liabilities: |
||||||||
| Accounts receivable |
(428 | ) | (507 | ) | ||||
| Other current assets |
(132 | ) | (252 | ) | ||||
| Non current assets |
34 | 74 | ||||||
| Accounts payable and accrued access costs |
(376 | ) | (290 | ) | ||||
| Other liabilities |
394 | 536 | ||||||
| Other |
— | (11 | ) | |||||
| Net cash provided by operating activities |
898 | 882 | ||||||
| INVESTING ACTIVITIES |
||||||||
| Additions to property, plant and equipment |
(94 | ) | (427 | ) | ||||
| Proceeds from sale of property, plant and equipment |
11 | — | ||||||
| Proceeds from sale of investments |
— | 753 | ||||||
| Net cash (used in) provided by investing activities |
(83 | ) | 326 | |||||
| FINANCING ACTIVITIES |
||||||||
| Principal borrowings on debt |
58 | 17 | ||||||
| Principal repayments on debt |
(182 | ) | (178 | ) | ||||
| Proceeds from exercise of stock options |
— | 15 | ||||||
| Dividends paid on common and preferred stock |
— | (80 | ) | |||||
| Net cash used in financing activities |
(124 | ) | (226 | ) | ||||
| Effect of exchange rate changes on cash |
10 | — | ||||||
| Net change in cash and cash equivalents |
701 | 982 | ||||||
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
2,820 | 1,290 | ||||||
| CASH AND CASH EQUIVALENTS AT END OF PERIOD |
$ | 3,521 | $ | 2,272 | ||||
| SUPPLEMENTAL CASH FLOW INFORMATION: |
||||||||
| Refunds received for taxes, net |
$ | (4 | ) | $ | (227 | ) | ||
| Cash paid for interest, net of amounts capitalized |
36 | 314 | ||||||
| Cash paid for reorganization items |
40 | — | ||||||
| Non cash items: |
||||||||
| Conversion of preferred stock to common stock |
58 | — | ||||||
| Unrealized holding loss on investments |
— | 13 | ||||||
See accompanying notes to unaudited condensed consolidated financial statements.
5
(Successor by merger to WorldCom, Inc.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) The Organization and Description of Business
MCI, Inc. (formerly known as WorldCom, Inc., (the “Predecessor Company” or “WorldCom”) a public corporation organized in 1983 under the laws of Georgia) serves as a holding company for its direct and indirect domestic subsidiaries and foreign affiliates (collectively, the “Company”, “Successor Company” or “MCI”). Prior to and including December 31, 2003, all operations of the business resulted from the operations of the Predecessor Company. All conditions required for adoption of fresh-start reporting were met on December 23, 2003 and the Company selected December 31, 2003 as the date to adopt the accounting provisions of fresh-start reporting. As a result, the fair value of the Predecessor Company’s assets became the new basis for the Successor Company’s consolidated balance sheet as of December 31, 2003 and all operations beginning January 1, 2004 will be those of the Successor Company.
The Company is one of the world’s leading global telecommunications companies, providing a broad range of communication services. The Company serves thousands of businesses and government entities throughout the world and provides voice and Internet communication services for millions of consumer customers. The Company operates one of the most extensive telecommunications networks in the world, comprising network connections linking metropolitan centers and various regions across North America, Europe, Asia, Latin America, the Middle East, Africa and Australia. The Company began doing business as MCI in 2003.
The Company has primarily conducted business through three business units, each of which focuses on the communication needs of customers in specific market segments:
| • | Business Markets serves large domestic and multinational businesses, medium size domestic businesses, government agencies and other communication carriers; |
| • | Mass Markets serves residential and small size business customers; and |
| • | International serves businesses, government entities and telecommunications carriers outside the United States. |
The Company also owns approximately a 19% economic interest and a 52% voting interest in Embratel Participações S.A. and subsidiaries (“Embratel”), which is a Brazilian voice and data telecommunications company and is considered a separate segment. Because the Company owns a controlling interest in Embratel, the Company consolidates Embratel in its condensed consolidated financial statements. Embratel is operated by its own management and employees. On November 12, 2003, the Predecessor Company announced its intention to sell its interest in Embratel and on March 15, 2004, the Predecessor Company announced that it had entered into a definitive agreement to sell its ownership interest in Embratel to Telefonos de Mexico (“Telmex”) for $360 million in cash. On April 21, 2004, the Company announced that an amendment to the sale agreement had been signed which, among other things, increases the cash purchase price to $400 million from $360 million. Completion of the sale is subject to approval by the applicable regulatory, securities and anti-trust authorities. On April 27, 2004, these assets qualified as discontinued operations. As such, the Company will classify these assets as “held for sale” in its consolidated balance sheet and reclassify all revenues and expenses to discontinued operations for all prior periods in the interim three-month period ended June 30, 2004.
Commencing in June 2002, the Predecessor Company undertook a comprehensive review of its previously issued consolidated financial statements and determined that the consolidated financial statements were not prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). As a result of this review, the Predecessor Company has restated its previously issued consolidated financial statements for the fiscal years ended December 31, 2001 and 2000 and for the three-month period ended March 31, 2002 (see Note 4).
6
MCI, INC. AND SUBSIDIARIES
(Successor by merger to WorldCom, Inc.)