WORLDCOM, INC. AND SUBSIDIARIES CONSOLIDATED (100% Correct Solutions)

WORLDCOM, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In Millions, Except Share Data)

December 31,    December 31,
2000                    2001
ASSETS

Current assets:
Cash and cash equivalents  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    $    761            $    1,416
Accounts receivable, net of allowance for bad debts of $1,532 in 2000 and $1,086 in 2001  . . .            6,815                    5,308
Deferred tax asset  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            172                    251
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            2,007                    2,230

Total current assets  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            9,755                    9,205
Property and equipment:

Transmission equipment  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            20,288                    23,814
Communications equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            8,100                    7,878
Furniture, fixtures and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            9,342                    11,263
Construction in progress  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            6,897                    5,706

44,627                    48,661
Accumulated depreciation  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            (7,204)                (9,852)

37,423                    38,809

Goodwill and other intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            46,594                    50,537
Other assets  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            5,131                    5,363

$    98,903            $    103,914
LIABILITIES AND SHAREHOLDERS’ INVESTMENT

Current liabilities:
Short-term debt and current maturities of long-term debt  . . . . . . . . . . . . . . . . . . . . . . .    $    7,200            $    172
Accrued interest  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            446                    618
Accounts payable and accrued line costs  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            6,022                    4,844
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            4,005                    3,576

Total current liabilities  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            17,673                    9,210
Long-term liabilities, less current portion:

Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            17,696                    30,038
Deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            3,611                    4,066
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            1,124                    576

Total long-term liabilities  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            22,431                    34,680
Commitments and contingencies

Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            2,592                    101
Company obligated mandatorily redeemable and other preferred securities . . . . . . . . . . . . . .            798                    1,993
Shareholders’ investment:
Series B preferred stock, par value $.01 per share; authorized, issued and outstanding:
10,693,437 shares in 2000 and none in 2001 (liquidation preference of $1.00 per share plus
unpaid dividends) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            —            —
Preferred stock, par value $.01 per share; authorized: 31,155,008 shares in 2000 and
30,967,637 shares in 2001; none issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            —            —
Common stock:
WorldCom, Inc. common stock, par value $.01 per share; authorized: 5,000,000,000
shares in 2000 and none in 2001; issued and outstanding: 2,887,960,378 shares in 2000 and
none in 2001  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            29                    —
WorldCom group common stock, par value $.01 per share; authorized: none in 2000 and
4,850,000,000 shares in 2001; issued and outstanding: none in 2000 and 2,967,436,680
shares in 2001  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            —            30
MCI group common stock, par value $.01 per share; authorized: none in 2000 and
150,000,000 shares in 2001; issued and outstanding: none in 2000 and 118,595,711 in 2001  .            —            1
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            52,877                    54,297
Retained earnings  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            3,160                    4,400
Unrealized holding gain (loss) on marketable equity securities  . . . . . . . . . . . . . . . . . . . .            345                    (51)
Cumulative foreign currency translation adjustment  . . . . . . . . . . . . . . . . . . . . . . . . . . .            (817)                (562)
Treasury stock, at cost, 6,765,316 shares of WorldCom, Inc. in 2000, 6,765,316 shares of
WorldCom group stock and 270,613 shares of MCI group stock in 2001 . . . . . . . . . . . . .            (185)                (185)

Total shareholders’ investment  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            55,409                    57,930

$    98,903            $    103,914

The accompanying notes are an integral part of these statements.

F-3
 
WORLDCOM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Millions, Except Per Share Data)

For the Years Ended
December 31,

1999            2000            2001

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    $    35,908        $    39,090        $    35,179
Operating expenses:

Line costs  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        14,739            15,462            14,739
Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        8,935            10,597            11,046
Depreciation and amortization  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        4,354            4,878            5,880
Other charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        (8)        —        —

Total  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        28,020            30,937            31,665

Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        7,888            8,153            3,514
Other income (expense):
Interest expense  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        (966)        (970)        (1,533)
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        242            385            412

Income before income taxes, minority interests and cumulative effect of accounting change  . . . .        7,164            7,568            2,393
Provision for income taxes  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        2,965            3,025            927

Income before minority interests and cumulative effect of accounting change  . . . . . . . . . . . . .        4,199            4,543            1,466
Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        (186)        (305)        35

Income before cumulative effect of accounting change . . . . . . . . . . . . . . . . . . . . . . . . . . . .        4,013            4,238            1,501
Cumulative effect of accounting change (net of income tax of $50 in 2000)  . . . . . . . . . . . . . .        —        (85)        —

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        4,013            4,153            1,501
Distributions on mandatorily redeemable preferred securities and other preferred dividend
requirements  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        72            65            117

Net income applicable to common shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    $    3,941        $    4,088        $    1,384

Net income attributed to WorldCom group before cumulative effect of accounting change  . . .    $    2,294        $    2,608        $    1,407

Cumulative effect of accounting change  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    $    —    $    (75)    $    —

Net income attributed to WorldCom group  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    $    2,294        $    2,533        $    1,407

Net income (loss) attributed to MCI group before cumulative effect of accounting change  . . .    $    1,647        $    1,565        $    (23)

Cumulative effect of accounting change  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    $    —    $    (10)    $    —

Net income (loss) attributed to MCI group  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    $    1,647        $    1,555        $    (23)

Earnings (loss) per common share:            Pro Forma
WorldCom group:

Net income attributed to WorldCom group before cumulative effect of accounting change:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    $    0.81    $    0.91        $    0.48

Diluted  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    $    0.78    $    0.90        $    0.48

Cumulative effect of accounting change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    $    —    $    (0.03)    $    —
Net income attributed to WorldCom group:

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    $    0.81    $    0.88        $    0.48

Diluted  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    $    0.78    $    0.87        $    0.48
MCI group:

Net income (loss) attributed to MCI group before cumulative effect of accounting change:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    $    14.32    $    13.61        $    (0.20)

Diluted  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    $    14.32    $    13.61        $    (0.20)

Cumulative effect of accounting change  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    $    —    $    (0.09)    $    —
Net income (loss) attributed to MCI group:

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    $    14.32    $    13.52        $    (0.20)

Diluted  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    $    14.32    $    13.52        $    (0.20)

The accompanying notes are an integral part of these statements.

F-4
 
WORLDCOM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Millions)

For the Years
Ended December 31,

1999            2000        2001
Cash flows from operating activities:

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    $ 4,013        $    4,153        $ 1,501
Adjustments to reconcile net income to net cash provided by operating
activities:
Cumulative effect of accounting change . . . . . . . . . . . . . . . . . . . . . . .    —        85        —
Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    186            305        (35)
Other charges  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    (8)        —    —
Depreciation and amortization  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    4,354            4,878        5,880
Provision for deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . .    2,903            1,649        1,104
Change in assets and liabilities, net of effect of business combinations:
Accounts receivable, net  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    (875)        (1,126)    281
Other current assets  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    143            (797)    164
Accounts payable and other current liabilities . . . . . . . . . . . . . . . . .    692            (1,050)    (1,154)
All other operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    (403)        (431)    253

Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . .    11,005            7,666        7,994
Cash flows from investing activities:

Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    (8,716)        (11,484)    (7,886)
Acquisitions and related costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    (1,078)        (14)    (206)
Increase in intangible assets  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    (743)        (938)    (694)
Decrease in other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    (650)        (839)    (480)
All other investing activities  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    1,632            (1,110)    (424)

Net cash used in investing activities  . . . . . . . . . . . . . . . . . . . . . . . . . . .    (9,555)        (14,385)    (9,690)
Cash flows from financing activities:

Principal borrowings (repayments) on debt, net  . . . . . . . . . . . . . . . . .    (2,894)        6,377        3,031
Common stock issuance  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    886            585        124
Distributions on mandatorily redeemable and other preferred
securities and dividends paid on other equity securities . . . . . . . . . .    (72)        (65)    (154)
Redemptions of preferred stock  . . . . . . . . . . . . . . . . . . . . . . . . . . . .    —        (190)    (200)
All other financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    —        (84)    (272)

Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . .    (2,080)        6,623        2,529
Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . .    (221)        (19)    38

Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . .    (851)        (115)    871
Cash and cash equivalents at beginning of period  . . . . . . . . . . . . . . . . .    1,727            876        761
Deconsolidation of Embratel  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    —        —    (216)

Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . .    $   876        $    761        $ 1,416

The accompanying notes are an integral part of these statements.

F-6
 
WORLDCOM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2001

(1) The Company and Significant Accounting Policies— (Continued)

Our equity in Embratel’s loss for 2001 is included in miscellaneous income/(expense) in the accompanying consolidated financial statements.

Fair Value of Financial Instruments:

The fair value of long-term debt and company obligated mandatorily redeemable and other preferred securities is determined based on quoted market rates or the cash flows from such financial instruments discounted at our estimated current interest rate to enter into similar financial instruments. The carrying amounts and fair values of these financial instruments were $25.7 billion and $25.3 billion, respectively, at December 31, 2000 and $32.2 billion and $32.9 billion, respectively, at December 31, 2001. The carrying values for all our other financial instruments approximate their respective fair values.

Cash and Cash Equivalents:

We consider cash in banks and short-term investments with original maturities of three months or less as cash and cash equivalents.

Property and Equipment:

Property and equipment are stated at cost. Depreciation is provided for financial reporting purposes using the straight-line method over the following estimated useful lives:

Transmission equipment (including conduit)    4    to 40    years
Communications equipment    5 to 10 years
Furniture, fixtures, buildings and other    4    to 39    years

We evaluate the recoverability of property and equipment when events and circumstances indicate that such assets might be impaired. We determine impairment by comparing the undiscounted future cash flows estimated to be generated by these assets to their respective carrying amounts. In the event an impairment exists, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the asset. If quoted market prices for an asset are not available, fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on property and equipment to be disposed of are determined in a similar manner, except that fair market values are reduced for the cost to dispose.

Maintenance and repairs are expensed as incurred. Replacements and betterments are capitalized. The cost and related reserves of assets sold or retired are removed from the accounts, and any resulting gain or loss is reflected in results of operations.

We construct certain of our own transmission systems and related facilities. Internal costs directly related to the construction of such facilities, including interest and salaries of certain employees, are capitalized. Such internal costs were $625 million ($339 million in interest), $842 million ($495 million in interest) and $858 million ($498 million in interest) in 1999, 2000 and 2001, respectively.

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