- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2002 -------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ______ Commission file number: 0-11258 ------------------------------- WORLDCOM, INC. (Exact name of registrant as specified in its charter) ------------------------------- Georgia 58-1521612 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 500 Clinton Center Drive, Clinton, Mississippi 39056 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (601) 460-5600 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 /X/ No / / Common shares outstanding, net of treasury shares, at April 30, 2002: WorldCom group stock 2,962,836,179 MCI group stock 118,325,109 - -------------------------------------------------------------------------------- <Page> QUARTERLY REPORT ON FORM 10-Q TABLE OF CONTENTS <Table> <Caption> Page Number ------ <S> <C> PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of December 31, 2001 and March 31, 2002.............................. 3 Consolidated Statements of Operations for the three months ended March 31, 2001 and March 31, 2002.............. 4 Consolidated Statements of Cash Flows for the three months ended March 31, 2001 and March 31, 2002.............. 5 Notes to Consolidated Financial Statements........................... 6 Combined Financial Statements of WorldCom group (an integrated business of WorldCom, Inc.)........................ 19 Combined Financial Statements of MCI group (an integrated business of WorldCom, Inc.)........................ 25 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 30 Item 3. Quantitative and Qualitative Disclosures about Market Risk........... 47 PART II. OTHER INFORMATION Item 1. Legal Proceedings.................................................... 47 Item 2. Changes in Securities and Use of Proceeds............................ 47 Item 3. Defaults Upon Senior Securities...................................... 47 Item 4. Submission of Matters to a Vote of Securities Holders................ 47 Item 5. Other Information.................................................... 47 Item 6. Exhibits and Reports on Form 8-K..................................... 49 Signature ..................................................................... 50 Exhibit Index ..................................................................... 51 </Table> 2 <Page> WORLDCOM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Millions, Except Share Data) <Table> <Caption> December 31, March 31, 2001 2002 --------- --------- <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 1,416 $ 2,267 Accounts receivable, net of allowance for bad debts of $1,086 in 2001 and $1,215 in 2002 5,308 5,005 Deferred tax asset 251 222 Other current assets 2,230 2,202 --------- --------- Total current assets 9,205 9,696 --------- --------- Property and equipment: Transmission equipment 23,814 25,219 Communications equipment 7,878 7,595 Furniture, fixtures and other 11,263 12,171 Construction in progress 5,706 4,977 --------- --------- 48,661 49,962 Accumulated depreciation (9,852) (10,807) --------- --------- 38,809 39,155 --------- --------- Goodwill and other intangible assets 50,537 50,607 Other assets 5,363 4,345 --------- --------- $ 103,914 $ 103,803 ========= ========= LIABILITIES AND SHAREHOLDERS' INVESTMENT Current liabilities: Short-term debt and current maturities of long-term debt $ 172 $ 858 Accrued interest 618 853 Accounts payable and accrued line costs 4,844 4,612 Other current liabilities 3,576 3,641 --------- --------- Total current liabilities 9,210 9,964 --------- --------- Long-term liabilities, less current portion: Long-term debt 30,038 29,300 Deferred tax liability 4,066 4,034 Other liabilities 576 536 --------- --------- Total long-term liabilities 34,680 33,870 --------- --------- Commitments and contingencies Minority interests 101 52 Company obligated mandatorily redeemable and other preferred securities 1,993 2,011 Shareholders' investment: Preferred stock, par value $.01 per share; authorized: 30,967,637 shares in 2001 and 30,967,639 shares in 2002; none issued -- -- Common stock: WorldCom group stock, par value $.01 per share; authorized: 4,850,000,000 shares in 2001 and 2002; issued and outstanding: 2,967,436,680 shares in 2001 and 2,969,549,369 in 2002 30 30 MCI group stock, par value $.01 per share; authorized: 150,000,000 shares in 2001 and 2002; issued and outstanding: 118,595,711 in 2001 and 118,595,720 in 2002 1 1 Additional paid-in capital 54,297 54,314 Retained earnings 4,400 4,388 Unrealized holding gain (loss) on marketable equity securities (51) 4 Cumulative foreign currency translation adjustment (562) (646) Treasury stock, at cost, 6,765,316 shares of WorldCom group stock and 270,611 shares of MCI group stock in 2001 and 2002 (185) (185) --------- --------- Total shareholders' investment 57,930 57,906 --------- --------- $ 103,914 $ 103,803 ========= ========= </Table> The accompanying notes are an integral part of these statements. 3 <Page> WORLDCOM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In Millions, Except Per Share Data) <Table> <Caption> For the Three Months Ended March 31, -------------------- 2001 2002 ------- ------- <S> <C> <C> Revenues $ 8,825 $ 8,120 ------- ------- Operating expenses: Line costs 3,696 3,479 Selling, general and administrative 2,597 2,476 Depreciation and amortization 1,335 1,322 ------- ------- Total 7,628 7,277 ------- ------- Operating income 1,197 843 Other income (expense): Interest expense (305) (447) Miscellaneous 100 (156) ------- ------- Income before income taxes and minority interests 992 240 Provision for income taxes 382 86 ------- ------- Income before minority interests 610 154 Minority interests -- 18 ------- ------- Net income 610 172 Distributions on mandatorily redeemable preferred securities and other preferred dividend requirements 16 42 ------- ------- Net income applicable to common shareholders $ 594 $ 130 ======= ======= Net income attributed to WorldCom group $ 532 $ 184 ======= ======= Net income (loss) attributed to MCI group $ 62 $ (54) ======= ======= Earnings (loss) per common share: Net income attributed to WorldCom group: Basic $ 0.18 $ 0.06 ======= ======= Diluted $ 0.18 $ 0.06 ======= ======= Net income (loss) attributed to MCI group: Basic $ 0.54 $ (0.46) ======= ======= Diluted $ 0.54 $ (0.46) ======= ======= </Table> The accompanying notes are an integral part of these statements. 4 <Page> WORLDCOM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In Millions) <Table> <Caption> For the Three Months Ended March 31, -------------------- 2001 2002 ------- ------- <S> <C> <C> Cash flows from operating activities: Net income $ 610 $ 172 Adjustments to reconcile net income to net cash provided by operating activities: Minority interests -- (18) Depreciation and amortization 1,335 1,322 Deferred income taxes 213 (34) Change in assets and liabilities, net of effect of business combinations: Accounts receivable, net (19) 317 Other current assets (11) (4) Accrued interest 45 235 Accounts payable and other current liabilities (483) (151) All other operating activities (115) (38) ------- ------- Net cash provided by operating activities 1,575 1,801 ------- ------- Cash flows from investing activities: Capital expenditures (2,235) (1,280) Acquisitions and related costs (142) (2) Increase in intangible assets (224) (176) Decrease in other liabilities (209) (134) All other investing activities (144) 743 ------- ------- Net cash used in investing activities (2,954) (849) ------- ------- Cash flows from financing activities: Principal borrowings (repayments) on debt, net 1,271 (22) Common stock issuance 71 14 Distributions on mandatorily redeemable and other preferred securities and dividends paid on other equity securities (16) (24) Dividends paid on MCI group stock -- (71) ------- ------- Net cash provided by (used in) financing activities 1,326 (103) Effect of exchange rate changes on cash (4) 2 ------- ------- Net increase (decrease) in cash and cash equivalents (57) 851 Cash and cash equivalents at beginning of period 545 1,416 ------- ------- Cash and cash equivalents at end of period $ 488 $ 2,267 ======= ======= </Table> The accompanying notes are an integral part of these statements. 5 <Page> WORLDCOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (A) GENERAL The consolidated financial statements included herein, are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States for interim financial reporting and SEC regulations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. In the opinion of our management, the financial statements reflect all adjustments (of a normal and recurring nature) which are necessary to present fairly the financial position, results of operations and cash flows for the interim periods. These financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2001. The results for the three-month period ended March 31, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. (B) EARNINGS PER SHARE Our consolidated financial statements present basic and diluted earnings per share for WorldCom group stock and MCI group stock using the two-class method. The two-class method is an earnings formula that determines the attributed earnings per share for WorldCom group stock and MCI group stock according to participation rights in undistributed earnings. The combined financial statements of the WorldCom group and the MCI group do not separately present earnings per share because WorldCom group stock and MCI group stock are series of our common stock, and the WorldCom group and the MCI group are not legal entities with a capital structure. The following is a reconciliation of the numerators and the denominators of the basic and diluted earnings per share computations for the WorldCom group and the MCI group for the three months ended March 31, 2001 and 2002 (in millions, except per share data): <Table> <Caption> 2001(1) 2002 ------- ------- <S> <C> <C> WORLDCOM GROUP STOCK -------------------- BASIC - ----- Income attributed to WorldCom group ...................................... $ 548 $ 226 Distributions on mandatorily redeemable preferred securities and other preferred dividend requirements ............................. 16 42 ------- ------- Net income attributed to WorldCom group .................................. $ 532 $ 184 ======= ======= Weighted-average shares of WorldCom group stock outstanding .............. 2,885 2,962 ======= ======= Basic earnings per share attributed to WorldCom group stock .............. $ 0.18 $ 0.06 ======= ======= DILUTED - ------- Net income attributed to WorldCom group .................................. $ 532 $ 184 ======= ======= Weighted-average shares of WorldCom group stock outstanding .............. 2,885 2,962 WorldCom group stock equivalents ......................................... 12 1 WorldCom group stock issuable upon conversion of preferred stock ......... 2 -- ------- ------- Diluted shares of WorldCom group stock outstanding ....................... 2,899 2,963 ======= ======= Diluted earnings per share attributed to WorldCom group stock ............ $ 0.18 $ 0.06 ======= ======= MCI GROUP STOCK --------------- BASIC AND DILUTED - ----------------- Net income (loss) attributed to MCI group ................................ $ 62 $ (54) ======= ======= Basic and diluted MCI group shares outstanding ........................... 115 118 ======= ======= Basic and diluted earnings (loss) per share attributed to MCI group stock $ 0.54 $ (0.46) ======= ======= </Table> (1) In June 2001, we completed a recapitalization whereby each share of WorldCom stock was changed into one share of WorldCom group stock and 1/25 of a share of MCI group stock. The weighted-average shares outstanding and attributed earnings per share information for periods prior to June 7, 2001 above is pro 6 <Page> forma and assumes the recapitalization occurred at the beginning of 2001 and the WorldCom group stock and MCI group stock existed for all periods presented. (C) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid during the three months ended March 31, 2001 and 2002, amounted to $262 million and $220 million, respectively. We made income tax payments totaling $13 million and received a net refund of previously paid income taxes totaling $214 million during the three months ended March 31, 2001 and 2002, respectively. In conjunction with business combinations during the three months ended March 31, 2001 and 2002, assets acquired and liabilities assumed were as follows (in millions): <Table> <Caption> 2001 2002 ----- ----- <S> <C> <C> Fair value of assets acquired .................. $ 13 $ 21 Excess of cost over net tangible assets acquired 142 12 Liabilities assumed ............................ (13) (31) ----- ----- Net cash paid .................................. $ 142 $ 2 ===== ===== </Table> (D) COMPREHENSIVE INCOME The following table reflects the calculation of our comprehensive income for the three months ended March 31, 2001 and 2002 (in millions): <Table> <Caption> 2001 2002 ----- ----- <S> <C> <C> Net income applicable to common shareholders .......................... $ 594 $ 130 ----- ----- Other comprehensive income (loss): Foreign currency translation losses .............................. (172) (84) Derivative financial instruments: Cumulative effect of adoption of SFAS 133 as of January 1, 2001 ...................................................... 28 -- Reclassification of derivative financial instruments to current earnings .......................................... (39) -- Change in fair value of derivative financial instruments .... 32 -- Unrealized holding gains (losses): Unrealized holding gains (losses) during the period ......... (409) 6 Reclassification adjustment for investment writeoffs included in net income .......................................... -- 81 Reclassification adjustment for gains included in net income ............................................. (141) -- ----- ----- Other comprehensive income (loss) before tax .......................... (701) 3 Income tax benefit (expense) .......................................... 207 (32) ----- ----- Other comprehensive loss .............................................. (494) (29) ----- ----- Comprehensive income applicable to common shareholders ................ $ 100 $ 101 ===== ===== </Table> (E) SEGMENT INFORMATION Based on our organizational structure, we operate in six reportable segments: Commercial voice, data and Internet; International operations; Consumer; Wholesale; Alternative channels and small business; and Dial-up Internet. Our reportable segments represent business units that primarily offer similar products and services; however, the business units are managed separately due to the type and class of customer as well as the geographic dispersion of their operations. The Commercial voice, data and Internet segment includes voice, data and other types of domestic communications services for commercial customers, and Internet services including dedicated access and web and application hosting services. International operations provide voice, data, Internet and other similar types of communications services to customers primarily in Europe and the Asia Pacific region. Consumer includes domestic voice communications services for consumer customers. Wholesale includes long distance voice and data domestic communications services for wholesale customers. Alternative channels and small business includes domestic long distance voice and data, agents, prepaid calling cards and paging services provided to alternative wholesale and small business customers. Dial-up Internet includes dial-up Internet access services. Our chief operating decision-maker utilizes revenue information in assessing performance and making overall operating decisions and resource allocations. Communications services are generally provided utilizing our fiber optic networks, which do not make a distinction between the types of services provided. Profit and loss information 7 <Page> for WorldCom, the WorldCom group and the MCI group is reported only on a consolidated basis to the chief operating decision-maker and our board of directors. The accounting policies of the segments are the same policies as those used by us in preparing our consolidated financial statements set forth in our Annual Report on Form 10-K for the year ended December 31, 2001. Information about our segments for the three months ended March 31, 2001 and 2002, is as follows (in millions): <Table> <Caption> REVENUES FROM SELLING, GENERAL AND EXTERNAL CUSTOMERS ADMINISTRATIVE EXPENSES ------------------- ----------------------- 2001 2002 2001 2002 ------- ------- ------- ------- <S> <C> <C> <C> <C> Voice, data and Internet .............. $ 4,493 $ 4,267 $ 999 $ 899 International operations .............. 710 811 350 395 Consumer .............................. 1,807 1,595 748 678 Wholesale ............................. 695 584 159 168 Alternative channels and small business 695 525 293 276 Dial-up Internet ...................... 425 338 138 145 Elimination of intergroup expenses .... -- -- (90) (85) ------- ------- ------- ------- Total ............................ $ 8,825 $ 8,120 $ 2,597 $ 2,476 ======= ======= ======= ======= </Table> See Note H for a reconciliation of the WorldCom group's and the MCI group's operating results to our consolidated results of operations. (F) CONTINGENCIES We are involved in legal and regulatory proceedings that are incidental to our business and have included loss contingencies in other current liabilities and other liabilities for these matters in our financial statements. In some instances, rulings by federal, state and international regulatory authorities may result in increased operating costs to us. The results of these various legal and regulatory matters are uncertain and could have a material adverse effect on our consolidated results of operations or financial position. REGULATION. We are subject to varying degrees of federal, state, local and international regulation. In the United States, our subsidiaries are most heavily regulated by the states, especially for the provision of local exchange services. Our subsidiaries must be certified separately in each state to offer local exchange and intrastate long distance services. No state, however, subjects us to rate of return regulation, nor are we currently required to obtain FCC authorization for installation or operation of our network facilities used for domestic services, other than licenses for specific multichannel multipoint distribution services, wireless communications service and terrestrial microwave and satellite earth station facilities that utilize radio frequency spectrum. FCC approval is required, however, for the installation and operation of our international facilities and services. We are subject to varying degrees of regulation in the foreign jurisdictions in which we conduct business, including authorization for the installation and operation of network facilities. Although the trend in federal, state and international regulation appears to favor increased competition, no assurance can be given that changes in current or future regulations adopted by the FCC, state or foreign regulators or legislative initiatives in the United States or abroad would not have a material adverse effect on us. In August 1996, the FCC established nationwide rules pursuant to the Telecommunications Act of 1996, or the Telecom Act, designed to encourage new entrants to compete in local service markets through interconnection with the traditional local phone companies, resale of traditional local phone companies' retail services, and use of individual and combinations of unbundled network elements, provided by the traditional local phone companies. Unbundled network elements are defined in the Telecom Act as any "facility or equipment used in the provision of a telecommunication service," as well as "features, function, and capabilities that are provided by means of such facility or equipment." In January 1999, the Supreme Court of the United States confirmed the FCC's authority to issue the rules, including a pricing methodology for unbundled network elements. On remand, the FCC clarified the requirement that traditional local phone companies make specific unbundled network elements available to new entrants. The traditional local phone companies appealed the decision to the United States Court of Appeals for the D.C. Circuit. Oral argument was held March 7, 2002. In its January 1999 decision, the Supreme Court remanded to the United States Court of Appeals for the Eighth Circuit various substantive questions concerning the FCC's rules for pricing unbundled network elements. In July 8 <Page> 2000, the Eighth Circuit upheld the use of a forward-looking methodology but struck down the portion of the rule that calculates costs based on efficient technology and design choices. At the request of various parties, including us, the Supreme Court reviewed the Eighth Circuit's decision. On May 13, 2002, the Supreme Court upheld the FCC's pricing rules in their entirety, including the portion that calculates costs. Numerous other issues related to the list of available unbundled network elements are under active consideration at the FCC or in the courts. In December 2001, the FCC began an examination of whether certain high capacity and broadband services offered by traditional phone companies were subject to sufficient competition such that they no longer needed to be regulated as "dominant". In February 2002, the FCC initiated a proceeding seeking to streamline and simplify the unbundled network element requirements imposed on traditional local phone companies in its "Triennial Review" of its local competition rules. In a separate proceeding, the FCC is examining whether broadband Internet access, or "DSL service" provided by traditional telephone companies should be treated as an information service and not subject to common carrier unbundling requirements. On March 7, 2002, the D.C. Circuit heard oral argument in a case that will determine whether traditional phone companies must unbundle the voice portion of a DSL connection. The FCC may begin to resolve these proceedings in the fourth quarter of 2002. If regulations are streamlined or removed, there are elements and combinations of elements upon which WorldCom relies to provide local services, broadband and advanced services that might no longer be required as a matter of federal regulation. Substantial reduction in unbundling requirements for traditional phone companies would also foreclose WorldCom's future range of options in provisioning local service to customers. The Telecom Act requires traditional local phone companies to petition the FCC for permission to offer long distance services for each state within their region. Under section 271 of the Telecom Act, for these applications to be granted, the FCC must find, among other things, that the traditional phone company has demonstrated that it has satisfied a 14-point competitive checklist to open its local network to competition and that granting the petition is in the public interest. To date, the FCC has rejected five traditional local phone company applications and it has granted eleven: Verizon's for New York, Massachusetts, Connecticut, Pennsylvania, Rhode Island, and Vermont and SBC's for Texas, Kansas, Oklahoma, Missouri and Arkansas. WorldCom and other competitive carriers appealed to the D.C. Circuit the approvals for Kansas, Oklahoma and Massachusetts. On December 28, 2001, the D.C. Circuit decided that the FCC had not adequately addressed whether the prices charged for leasing network elements by SBC in Kansas and Oklahoma create a price squeeze which violated the standards for SBC to gain long distance approval. Without vacating the approval, the D.C. Circuit remanded the case to the FCC for it to address the price squeeze issue. In the Massachusetts appeal, oral argument is scheduled for September 9, 2002. BellSouth has filed applications to offer long distance service for Georgia and Louisiana, and Verizon has filed applications for New Jersey and Maine. Other applications may be filed at any time. We have challenged, and will continue to challenge, any application that we believe does not satisfy the requirements of section 271 or the FCC's local competition rules. To date, these challenges have focused on the pricing of unbundled network elements and on the adequacy of the traditional local phone companies' operations support systems. In addition, legislation has been introduced in Congress that would have the effect of allowing traditional local phone companies to offer in-region long distance data services without satisfying section 271 of the Telecom Act and/or of making it more difficult for competitors to resell incumbent local phone company high-speed Internet access services or to lease the unbundled network elements used to provide these services. This legislation passed the House of Representatives on February 27, 2002 and has been referred to the Senate Commerce Committee. In February 1999, the FCC issued a Declaratory Ruling and Notice of Proposed Rulemaking regarding the regulatory treatment of calls to Internet service providers. Prior to the FCC's order, over thirty state public utility commissions issued orders finding that carriers, including us, are entitled to collect reciprocal compensation for completing calls to Internet service providers under the terms of their interconnection agreements with traditional local phone companies. Many of these public utility commission decisions were appealed by the traditional local phone companies and, since the FCC's order, many traditional local phone companies have filed new cases at the public utility commissions or in court. We petitioned for review of the FCC's order in the D.C. Circuit, which vacated the order and remanded the case to the FCC for further proceedings. In April 2001, the FCC issued an Order on Remand and Report and Order asserting jurisdiction over calls to Internet service providers and establishing a three-year transitional scheme of decreasing reciprocal compensation rates. We filed a petition for review of the FCC's order with the D.C. Circuit, and on May 3, 2002, the D.C. Circuit upheld our challenge and remanded the case to the FCC, ruling that the FCC's legal analysis was based on a flawed reading of the Telecom Act. The Court expressly declined to decide any of the remaining challenges 9 <Page> to the transitional scheme, opting to wait until the FCC provided a sufficient legal basis in support of the conclusions it had reached in the Order. In the interim, however, because the Court apparently believed that there may be other legal basis for adopting the rules chosen here, it decided not to vacate the Order and instead left the FCC transitional scheme in place. It is possible that spectrum rights held may be disrupted by FCC decisions to re-allocate some or all of that spectrum to other services. If this re-allocation were to occur, we cannot predict whether current deployment plans for our multi-channel multipoint distribution services will be sustainable. LITIGATION. In November 2000, class action complaints were filed in the United States District Courts for the Southern District of Mississippi, the Southern District of New York, and the District of Columbia against WorldCom and some of our executive officers. All of these actions were consolidated in the Southern District of Mississippi on March 27, 2001, along with another purported class action lawsuit filed on behalf of individuals who purchased stock in Intermedia between September 5 and November 1, 2000, which action asserted substantially similar claims and alleges that after the announcement of the WorldCom-Intermedia merger, the price of Intermedia stock was tied to the price of WorldCom stock. On June 1, 2001, the plaintiffs filed a consolidated amended complaint. Among other things, the consolidated amended complaint alleged that statements regarding WorldCom's revenues, the integration of MCI, the success of UUNET Technologies, and the expansion of WorldCom's network were false; WorldCom's financial disclosures were false; and WorldCom's announcement of its "generation d" initiative was misleading. Based on these allegations, the consolidated amended complaint asserts claims for violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and Section 20(a) of the Securities Exchange Act of 1934. The consolidated amended complaint seeks to certify a class of persons who purchased WorldCom shares between February 10, 2000 and November 1, 2000, inclusive; it does not assert separate claims on behalf of purchasers of Intermedia shares. On March 29, 2002, the district court granted the motion to dismiss the consolidated amended complaint filed by WorldCom and the individual defendants, and it entered final judgment dismissing the complaint with prejudice. On April 4, 2002, plaintiffs filed a notice of appeal to the U.S. Court of Appeals for the Fifth Circuit. We believe that the consolidated amended complaint and the notice of appeal are without merit and will continue to defend them vigorously. Complaints dated April 30, 2002 and May 3, 2002, purportedly made on behalf of a class of WorldCom shareholders, were filed in the United States District Court for the Southern District of New York. The complaints, which name as defendants WorldCom, various officers and directors, and our auditors, allege that the defendants failed to properly account for goodwill and other intangible assets in connection with numerous acquisitions. One of the actions also alleges pendent state law claims. We believe the factual allegations and legal claims asserted in these complaints are without merit and will defend them vigorously. On March 18, 2002, a current and a former employee filed suit in the United States District Court for the Northern District of California against WorldCom and certain of its executive officers claiming that they breached their fiduciary duty under the Employee Retirement Income Security Act with respect to the administration of the WorldCom 401(k) Plan. Among other things, they allege that the defendants misrepresented and/or concealed WorldCom's revenue, cashflow, earnings and the reason(s) for its change in financial performance. They further allege that the defendants knowingly participated in and/or concealed these alleged acts or omissions while continuing to direct the purchase and retention of WorldCom stock by the WorldCom 401(k) Plan. The complaint seeks to certify a class of persons who participated in the WorldCom 401(k) Plan for the period of February 8, 2000 to November 1, 2000, and requests damages and other relief. We believe the factual allegations and legal claims asserted in the complaint are without merit and will defend them vigorously. In August 1997, three complaints were filed in the United States District Court for the District of Columbia, as class actions on behalf of purchasers of MCI shares. The three cases were consolidated on April 1, 1998. On or about May 8, 1998, the plaintiffs in all three cases filed a consolidated amended complaint alleging, on behalf of purchasers of MCI's shares between July 11, 1997 and August 21, 1997, inclusive, that MCI and some of its officers and directors failed to disclose material information about MCI, including that MCI was renegotiating the terms of the MCI BT merger agreement. The consolidated amended complaint seeks damages and other relief. WorldCom and the other defendants have moved to dismiss the consolidated amended complaint. 10 <Page> (G) GOODWILL AND OTHER INTANGIBLE ASSETS Effective January 1, 2002, we adopted the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets", or SFAS No. 142, which establishes accounting and reporting standards for goodwill and other intangible assets. Under SFAS No. 142, goodwill and intangible assets deemed to have indefinite lives are no longer amortized but are subject to annual impairment tests. The statement also includes provisions for the identification of reporting units for purposes of assessing potential future impairments of goodwill. Upon adoption, we stopped amortizing intangible assets with indefinite useful lives, including goodwill and tradenames. Additionally, we made no revisions to the assigned useful lives of intangible assets that continue to be amortized. We are conducting impairment reviews of all intangible assets with indefinite useful lives and we expect to complete this assessment no later than the second quarter of 2002, in accordance with the provisions of SFAS No. 142. Based on our preliminary analyses, we estimate that as a result of the adoption of SFAS No. 142, we will reduce goodwill by $15 to $20 billion. Our earnings and earnings per share information for the three months ended March 31, 2001, adjusted to exclude the after-tax effect of amortization of intangible assets with indefinite useful lives, is as follows (in millions, except per share amounts): <Table> <Caption> WORLDCOM, WORLDCOM MCI INC. GROUP GROUP ----------- ---------- -------- <S> <C> <C> <C> Net income - as reported ................ $594 $532 $ 62 Add back the after-tax effect of: Goodwill amortization .............. 294 227 67 Tradename amortization ............. 4 4 -- Other amortization ................. 4 3 1 ---- ---- ------- Net income - adjusted ................... $896 $766 $ 130 ==== ==== ======= Earnings per common share: Basic and diluted income - as reported $0.18 $ 0.54 Goodwill amortization ................ 0.08 0.58 Tradename amortization ............... -- -- Other amortization ................... -- 0.01 ----- ------- Basic and diluted income - adjusted ..... $0.26 $ 1.13 ===== ======= </Table> The components of our intangible assets are as follows (in millions): <Table> <Caption> DECEMBER 31, MARCH 31, 2001 2002 -------- -------- <S> <C> <C> Amortized intangible assets: Developed technology ...... $ 1,700 $ 1,700 Other intangibles ......... 4,298 4,557 -------- -------- 5,998 6,257 Accumulated amortization ..... (1,874) (2,085) -------- -------- $ 4,124 $ 4,172 ======== ======== Unamortized intangible assets: Goodwill .................. $ 44,973 $ 44,995 Tradenames ................ 1,023 1,023 Other ..................... 417 417 -------- -------- $ 46,413 $ 46,435 ======== ======== </Table> Depreciation and amortization expense for the net carrying amount of intangible assets, primarily software development, as of March 31, 2002 is estimated to be $856 million in 2002, $911 million in 2003, $860 million in 2004, $752 million in 2005 and $419 million in 2006. 11 <Page> (H) CONSOLIDATING INFORMATION Below is the consolidating financial information of the WorldCom group and the MCI group. The financial information reflects the businesses attributed to the WorldCom group and the MCI group including the allocation of revenues and expenses between the WorldCom group and the MCI group in accordance with our allocation policies. The attribution of the assets, liabilities, equity, revenues and expenses for each group, as reflected in our interim consolidated financial statements, which are consolidated in accordance with accounting principles generally accepted in the United States, is primarily based on specific identification of the businesses included in each group. Where specific identification was impractical, other methods and criteria were used that our management believes are equitable and provide a reasonable estimate of the assets, liabilities, equity, revenues and expenses attributable to each group. Our shared corporate services and related balance sheet amounts (such as executive management, human resources, legal, regulatory, accounting, tax, treasury, strategic planning and information systems support) have been attributed to the WorldCom group or the MCI group based upon identification of such services specifically benefiting each group. Where determinations based on specific usage alone are impractical, other methods and criteria were used that our management believes are equitable and provide a reasonable estimate of the cost attributable to each group. Our board of directors or any special committee appointed by the board of directors may, without shareholder approval, change the polices set forth in our tracking stock policy statement. Our board of directors or any special committee appointed by the board of directors also may, without shareholder approval, adopt additional policies or make exceptions with respect to the application of the policies described in our tracking stock policy statement in connection with particular facts and circumstances, all as our board of directors or any special committee appointed by the board of directors may determine to be in our best interests as a whole. 12 <Page> (H) CONSOLIDATING INFORMATION - (CONTINUED) CONSOLIDATING BALANCE SHEET (IN MILLIONS) <Table> <Caption> AT DECEMBER 31, 2001 ------------------------------------------------- WORLDCOM MCI GROUP GROUP ELIMINATIONS(1) WORLDCOM -------- -------- --------------- -------- <S> <C> <C> <C> <C> Current assets $ 8,179 $ 1,926 $ (900) $ 9,205 Property and equipment, net 36,792 2,017 -- 38,809 Goodwill and other intangibles 40,818 9,719 -- 50,537 Other assets 6,112 227 (976) 5,363 -------- -------- -------- -------- Total assets $ 91,901 $ 13,889 $ (1,876) $103,914 ======== ======== ======== ======== Current liabilities $ 5,915 $ 4,195 $ (900) $ 9,210 Long-term debt 24,533 5,505 -- 30,038 Noncurrent liabilities 3,742 1,876 (976) 4,642 Minority interests 101 -- -- 101 Company obligated mandatorily redeemable and other preferred securities 1,993 -- -- 1,993 Shareholders' investment 55,617 2,313 -- 57,930 -------- -------- -------- -------- Total liabilities and shareholders' investment $ 91,901 $ 13,889 $ (1,876) $103,914 ======== ======== ======== ======== </Table> (1) Represents the elimination of intergroup receivables and payables associated with other intergroup allocations between the WorldCom group and the MCI group. The WorldCom group had a net receivable from the MCI group (and the MCI group had a corresponding net payable to the WorldCom group) of $1.9 billion, of which $900 million was classified as current with the remainder classified as long-term. 13 <Page> (H) CONSOLIDATING INFORMATION - (CONTINUED) CONSOLIDATING BALANCE SHEET (IN MILLIONS) <Table> <Caption> AT MARCH 31, 2002 ------------------------------------------------- WORLDCOM MCI GROUP GROUP ELIMINATIONS(1) WORLDCOM -------- -------- --------------- -------- <S> <C> <C> <C> <C> Current assets $ 8,782 $ 1,835 $ (921) $ 9,696 Property and equipment, net 37,222 1,933 -- 39,155 Goodwill and other intangibles 40,805 9,802 -- 50,607 Other assets 5,154 167 (976) 4,345 -------- -------- -------- -------- Total assets $ 91,963 $ 13,737 $ (1,897) $103,803 ======== ======== ======== ======== Current liabilities $ 6,594 $ 4,291 $ (921) $ 9,964 Long-term debt 23,804 5,496 -- 29,300 Noncurrent liabilities 3,713 1,833 (976) 4,570 Minority interests 52 -- -- 52 Company obligated mandatorily redeemable preferred securities 2,011 -- -- 2,011 Shareholders' investment 55,789 2,117 -- 57,906 -------- -------- -------- -------- Total liabilities and shareholders' investment $ 91,963 $ 13,737 $ (1,897) $103,803 ======== ======== ======== ======== </Table> (1) Represents the elimination of intergroup receivables and payables associated with other intergroup allocations between the WorldCom group and the MCI group. The WorldCom group had a net receivable from the MCI group (and the MCI group had a corresponding net payable to the WorldCom group) of $1.9 billion, of which $921 million was classified as current with the remainder classified as long-term. 14 <Page> (H) CONSOLIDATING INFORMATION - (CONTINUED) CONSOLIDATING STATEMENT OF OPERATIONS (IN MILLIONS) <Table> <Caption> THREE MONTHS ENDED MARCH 31, 2001 ---------------------------------------------- WORLDCOM MCI GROUP GROUP ELIMINATIONS WORLDCOM ------- ------- ------------ -------- <S> <C> <C> <C> <C> Revenues $ 5,203 $ 3,622 $ -- $ 8,825 ------- ------- ------- ------- Operating expenses: Line costs: Attributed costs (1) 1,963 1,733 -- 3,696 Intergroup allocated expenses (2) 24 93 (117) -- Selling, general and administrative: Attributed costs (1) 774 935 888 2,597 Shared corporate services (3) 575 313 (888) -- Other intergroup allocated expenses (4) -- 90 (90) -- Depreciation and amortization: Attributed costs (1) 1,084 251 -- 1,335 Intergroup allocated expenses (5) (183) (24) 207 -- ------- ------- ------- ------- Total 4,237 3,391 -- 7,628 ------- ------- ------- ------- Operating income 966 231 -- 1,197 Interest expense (179) (126) -- (305) Miscellaneous income 100 -- -- 100 ------- ------- ------- ------- Income before income taxes and minority interests 887 105 -- 992 Provision for income taxes 339 43 -- 382 ------- ------- ------- ------- Income before minority interests 548 62 -- 610 Minority interests -- -- -- -- ------- ------- ------- ------- Net income before distributions on mandatorily redeemable preferred securities 548 62 -- 610 Distributions on mandatorily redeemable preferred securities and other preferred dividend requirements 16 -- -- 16 ------- ------- ------- ------- Net income $ 532 $ 62 $ -- $ 594 ======= ======= ======= ======= </Table> (1) Attributed costs represent costs directly incurred by or attributed to the WorldCom group and the MCI group and do not include any intergroup allocations. (2) The WorldCom group was allocated $24 million for its usage of our business voice switches, which have been attributed to the MCI group, and the MCI group was allocated $93 million for its usage of our fiber optic systems, which have been attributed to the WorldCom group. (3) Our shared corporate services (such as executive management, human resources, legal, regulatory, accounting and tax, treasury, strategic planning and information systems support) have been allocated to the WorldCom group and the MCI group in the amounts of $575 million and $313 million, respectively. (4) The MCI group was allocated $83 million of costs related to its use of buildings, furniture and fixtures and $7 million for use of the MCI tradenames, which assets have been attributed to the WorldCom group. (5) A credit of $176 million and $24 million to depreciation expense has been recorded by the WorldCom group and the MCI group, respectively, to reflect the allocation of a portion of the applicable costs for the use by the WorldCom group of the business voice switches attributed to the MCI group, and the proportionate use by the MCI group of the fiber optic systems and buildings, furniture and fixtures attributed to the WorldCom group. Additionally, a credit of $7 million to amortization expense has been recorded by the WorldCom group to reflect the charge to the MCI group for use of the MCI tradenames. 15 <Page> (H) CONSOLIDATING INFORMATION - (CONTINUED) CONSOLIDATING STATEMENT OF OPERATIONS (IN MILLIONS) <Table> <Caption> THREE MONTHS ENDED MARCH 31, 2002 ---------------------------------------------- WORLDCOM MCI GROUP GROUP ELIMINATIONS WORLDCOM ------- ------- ------------ -------- <S> <C> <C> <C> <C> Revenues $ 5,078 $ 3,042 $ -- $ 8,120 ------- ------- ------- ------- Operating expenses: Line costs: Attributed costs (1) 1,999 1,480 -- 3,479 Intergroup allocated expenses (2) 21 91 (112) -- Selling, general and administrative: Attributed costs (1) 829 787 860 2,476 Shared corporate services (3) 465 395 (860) -- Other intergroup allocated expenses (4) -- 85 (85) -- Depreciation and amortization: Attributed costs (1) 1,132 190 -- 1,322 Intergroup allocated expenses (5) (176) (21) 197 -- ------- ------- ------- ------- Total 4,270 3,007 -- 7,277 ------- ------- ------- ------- Operating income 808 35 -- 843 Interest expense (327) (120) -- (447) Miscellaneous expense (156) -- -- (156) ------- ------- ------- ------- Income (loss) before income taxes and minority interests 325 (85) -- 240 Provision for income taxes 117 (31) -- 86 ------- ------- ------- ------- Income (loss) before minority interests 208 (54) -- 154 Minority interests 18 -- -- 18 ------- ------- ------- ------- Net (loss) income before distributions on mandatorily redeemable preferred securities 226 (54) -- 172 Distributions on mandatorily redeemable preferred securities and other preferred dividend requirements 42 -- -- 42 ------- ------- ------- ------- Net income (loss) $ 184 $ (54) $ -- $ 130 ======= ======= ======= ======= </Table> (1) Attributed costs represent costs directly incurred by or attributed to the WorldCom group and the MCI group and do not include any intergroup allocations. (2) The WorldCom group was allocated $21 million for its usage of our business voice switches, which have been attributed to the MCI group, and the MCI group was allocated $91 million for its usage of our fiber optic systems, which have been attributed to the WorldCom group. (3) Our shared corporate services (such as executive management, human resources, legal, regulatory, accounting and tax, treasury, strategic planning and information systems support) have been allocated to the WorldCom group and the MCI group in the amounts of $465 million and $395 million, respectively. (4) The MCI group was allocated $85 million of costs related to its use of buildings, furniture and fixtures which assets have been attributed to the WorldCom group. (5) A credit of $176 million and $21 million to depreciation expense has been recorded by the WorldCom group and the MCI group, respectively, to reflect the allocation of a portion of the applicable costs for the use by the WorldCom group of the business voice switches attributed to the MCI group, and the proportionate use by the MCI group of the fiber optic systems and buildings, furniture and fixtures attributed to the WorldCom group. 16 <Page> (H) CONSOLIDATING INFORMATION - (CONTINUED) CONSOLIDATING STATEMENT OF CASH FLOWS (IN MILLIONS) <Table> <Caption> THREE MONTHS ENDED MARCH 31, 2001 ----------------------------------------- WORLDCOM MCI GROUP GROUP ELIMINATIONS WORLDCOM ------- ------- ------------ -------- <S> <C> <C> <C> <C> Cash flows from operating activities: Net income $ 548 $ 62 $-- $ 610 Adjustments to reconcile net income to net cash provided by operating activities 667 298 -- 965 ------- ------- --- ------- Net cash provided by operating activities 1,215 360 -- 1,575 ------- ------- --- ------- Cash flows from investing activities: Capital expenditures (2,140) (95) -- (2,235) Acquisitions and related costs (142) -- -- (142) All other investing activities, net (276) (301) -- (577) ------- ------- --- ------- Net cash used in investing activities (2,558) (396) -- (2,954) ------- ------- --- ------- Cash flows from financing activities: Principal borrowings on debt, net 1,271 -- -- 1,271 Attributed stock activity of WorldCom, Inc. 71 -- -- 71 All other financing activities, net (31) 15 -- (16) ------- ------- --- ------- Net cash provided by financing activities 1,311 15 -- 1,326 Effect of exchange rate changes on cash (4) -- -- (4) ------- ------- --- ------- Net decrease in cash and cash equivalents (36) (21) -- (57) Cash and cash equivalents beginning of period 504 41 -- 545 ------- ------- --- ------- Cash and cash equivalents end of period $ 468 $ 20 $-- $ 488 ======= ======= === ======= </Table> 17 <Page> (H) CONSOLIDATING INFORMATION - (CONTINUED) CONSOLIDATING STATEMENT OF CASH FLOWS (IN MILLIONS) <Table> <Caption> THREE MONTHS ENDED MARCH 31, 2002 ------------------------------------------ WORLDCOM MCI GROUP GROUP ELIMINATIONS WORLDCOM ------- ------- ------------ -------- <S> <C> <C> <C> <C> Cash flows from operating activities: Net income (loss) $ 226 $ (54) $-- $ 172 Adjustments to reconcile net income (loss) to net cash provided by operating activities 1,366 263 -- 1,629 ------- ------- --- ------- Net cash provided by operating activities 1,592 209 -- 1,801 ------- ------- --- ------- Cash flows from investing activities: Capital expenditures (1,250) (30) -- (1,280) Acquisitions and related costs (2) -- -- (2) All other investing activities, net 536 (103) -- 433 ------- ------- --- ------- Net cash used in investing activities (716) (133) -- (849) ------- ------- --- ------- Cash flows from financing activities: Principal repayments on debt, net (13) (9) -- (22) Attributed stock activity of WorldCom, Inc. 14 -- -- 14 All other financing activities, net (24) (71) -- (95) ------- ------- --- ------- Net cash used in financing activities (23) (80) -- (103) Effect of exchange rate changes on cash 2 -- -- 2 ------- ------- --- ------- Net increase (decrease) in cash and cash equivalents 855 (4) -- 851 Cash and cash equivalents beginning of period 1,409 7 -- 1,416 ------- ------- --- ------- Cash and cash equivalents end of period $ 2,264 $ 3 $-- $ 2,267 ======= ======= === ======= </Table> 18 <Page> WORLDCOM GROUP (an integrated business of WorldCom, Inc.) COMBINED BALANCE SHEETS (In Millions) <Table> <Caption> December 31, March 31, 2001 2002 -------- -------- <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 1,409 $ 2,264 Accounts receivable, net of allowance for bad debts of $693 in 2001 and $775 in 2002 3,734 3,521 Deferred tax asset 241 222 Other current assets 1,895 1,854 Receivable from MCI group, net 900 921 -------- -------- Total current assets 8,179 8,782 -------- -------- Property and equipment: Transmission equipment 23,369 24,765 Communications equipment 5,434 5,082 Furniture, fixtures and other 10,583 11,489 Construction in progress 5,576 4,897 -------- -------- 44,962 46,233 Accumulated depreciation (8,170) (9,011) -------- -------- 36,792 37,222 -------- -------- Goodwill and other intangible assets 40,818 40,805 Long-term receivable from MCI group, net 976 976 Other assets 5,136 4,178 -------- -------- $ 91,901 $ 91,963 ======== ======== LIABILITIES AND SHAREHOLDERS' INVESTMENT Current liabilities: Short-term debt and current maturities of long-term debt $ 172 $ 858 Accrued interest 507 733 Accounts payable and accrued line costs 2,751 2,557 Other current liabilities 2,485 2,446 -------- -------- Total current liabilities 5,915 6,594 -------- -------- Long-term liabilities, less current portion: Long-term debt 24,533 23,804 Deferred tax liability 3,196 3,204 Other liabilities 546 509 -------- -------- Total long-term liabilities 28,275 27,517 -------- -------- Commitments and contingencies Minority interests 101 52 Company obligated mandatorily redeemable and other preferred securities 1,993 2,011 Allocated net worth 55,617 55,789 -------- -------- $ 91,901 $ 91,963 ======== ======== </Table> The accompanying notes are an integral part of these combined statements. 19 <Page> WORLDCOM GROUP (an integrated business of WorldCom, Inc.) COMBINED STATEMENTS OF OPERATIONS (In Millions) <Table> <Caption> For the Three Months Ended March 31, --------------------- 2001 2002 ------- ------- <S> <C> <C> Revenues $ 5,203 $ 5,078 ------- ------- Operating expenses: Line costs 1,987 2,020 Selling, general and administrative 1,349 1,294 Depreciation and amortization 901 956 ------- ------- Total 4,237 4,270 ------- ------- Operating income 966 808 Other income (expense): Interest expense (179) (327) Miscellaneous 100 (156) ------- ------- Income before income taxes and minority interests 887 325 Provision for income taxes 339 117 ------- ------- Income before minority interests 548 208 Minority interests -- 18 ------- ------- Net income before distributions on mandatorily redeemable preferred securities 548 226 Distributions on mandatorily redeemable preferred securities and other preferred dividend requirements 16 42 ------- ------- Net income $ 532 $ 184 ======= ======= </Table> The accompanying notes are an integral part of these combined statements. 20 <Page> WORLDCOM GROUP (an integrated business of WorldCom, Inc.) COMBINED STATEMENTS OF CASH FLOWS (In Millions) <Table> <Caption> For the Three Months Ended March 31, -------------------- 2001 2002 ------- ------- <S> <C> <C> Cash flows from operating activities: Net income before distributions on mandatorily redeemable preferred securities $ 548 $ 226 Adjustments to reconcile net income before distributions on mandatorily redeemable preferred securities to net cash provided by operating activities: Minority interests -- (18) Depreciation and amortization 901 956 Deferred income taxes 207 (4) Change in assets and liabilities, net of effect of business combinations: Accounts receivable, net (81) 227 Receivable from MCI group, net (187) (21) Accrued interest 41 226 Accounts payable and other current liabilities (16) 30 Other current assets (83) 8 All other operating activities (115) (38) ------- ------- Net cash provided by operating activities 1,215 1,592 ------- ------- Cash flows from investing activities: Capital expenditures (2,140) (1,250) Acquisitions and related costs (142) (2) Increase in intangible assets (106) (116) Decrease in other liabilities (121) (131) All other investing activities (49) 783 ------- ------- Net cash used in investing activities (2,558) (716) ------- ------- Cash flows from financing activities: Principal borrowings (repayments) on debt, net 1,271 (13) Attributed stock activity of WorldCom, Inc. 71 14 Distributions on mandatorily redeemable and other preferred securities and dividends paid on other equity securities (16) (24) Advances to MCI group, net (15) -- ------- ------- Net cash provided by (used in) financing activities 1,311 (23) Effect of exchange rate changes on cash (4) 2 ------- ------- Net increase (decrease) in cash and cash equivalents (36) 855 Cash and cash equivalents at beginning of period 504 1,409 ------- ------- Cash and cash equivalents at end of period $ 468 $ 2,264 ======= ======= </Table> The accompanying notes are an integral part of these combined statements. 21 <Page> WORLDCOM GROUP (AN INTEGRATED BUSINESS OF WORLDCOM, INC.) NOTES TO COMBINED FINANCIAL STATEMENTS (A) GENERAL The combined financial statements included herein for the WorldCom group (an integrated business of WorldCom, Inc.), are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States for interim financial reporting and SEC regulations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. In the opinion of our management, the combined financial statements of the WorldCom group reflect all adjustments (of a normal and recurring nature) which are necessary to present fairly the financial position, results of operations and cash flows for the interim periods. These financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2001. The results for the three-month period ended March 31, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. (B) EARNINGS PER SHARE Our consolidated financial statements present basic and diluted earnings per share for WorldCom group stock and MCI group stock using the two-class method. The two-class method is an earnings formula that determines the attributed earnings per share for WorldCom group stock and MCI group stock according to participation rights in undistributed earnings. The combined financial statements of the WorldCom group do not present earnings per share because WorldCom group stock is a series of our common stock, and the WorldCom group is not a legal entity with a capital structure. (C) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid by the WorldCom group during the three months ended March 31, 2001 and 2002, amounted to $140 million and $109 million, respectively. The WorldCom group made income tax payments totaling $7 million and received a net refund of previously paid income taxes totaling $214 million during the three months ended March 31, 2001 and 2002, respectively. In conjunction with business combinations attributed to the WorldCom group during the three months ended March 31, 2001 and 2002, assets acquired and liabilities assumed were as follows (in millions): <Table> <Caption> 2001 2002 ----- ----- <S> <C> <C> Fair value of assets acquired .................. $ 13 $ 21 Excess of cost over net tangible assets acquired 142 12 Liabilities assumed ............................ (13) (31) ----- ----- Net cash paid .................................. $ 142 $ 2 ===== ===== </Table> (D) COMPREHENSIVE INCOME The following table reflects the calculation of comprehensive income attributed to the WorldCom group for the three months ended March 31, 2001 and 2002 (in millions): <Table> <Caption> 2001 2002 ----- ----- <S> <C> <C> Net income .............................................................. $ 532 $ 184 ----- ----- Other comprehensive income (loss): Foreign currency translation losses ................................ (172) (84) Derivative financial instruments: Cumulative effect of adoption of SFAS 133 as of January 1, 2001 28 -- Reclassification of derivative financial instruments to current earnings ................................................... (39) -- Change in fair value of derivative financial instruments ...... 32 -- Unrealized holding gains (losses): Unrealized holding gains (losses) during the period ........... (409) 6 Reclassification adjustment for investment writeoffs included in net income .................................... -- 81 </Table> 22 <Page> <Table> <Caption> 2001 2002 ----- ----- <S> <C> <C> Reclassification adjustment for gains included in net income .. (141) -- ----- ----- Other comprehensive income (loss) before tax ............................ (701) 3 Income tax benefit (expense) ............................................ 207 (32) ----- ----- Other comprehensive loss ................................................ (494) (29) ----- ----- Comprehensive income .................................................... $ 38 $ 155 ===== ===== </Table> (E) SEGMENT INFORMATION Based on its organizational structure, the WorldCom group operates in two reportable segments: Commercial voice, data and Internet, and International operations. The WorldCom group's reportable segments represent business units that primarily offer similar products and services; however, the business units are managed separately due to the type and class of customer as well as the geographic dispersion of their operations. The Commercial voice, data and Internet segment includes voice, data and other types of domestic communications services for commercial customers, and Internet services including dedicated access and web and application hosting services. International operations provide voice, data, Internet and other similar types of communications services to customers primarily in Europe and the Asia Pacific region. Our chief operating decision-maker utilizes revenue information in assessing performance and making overall operating decisions and resource allocations. Communications services are generally provided utilizing our fiber optic networks, which do not make a distinction between the types of services provided. Profit and loss information is reported only on a combined basis to our chief operating decision-maker and our board of directors. The accounting policies of the segments are the same policies as those used by the WorldCom group in preparing its combined financial statements set forth in our Annual Report on Form 10-K for the year ended December 31, 2001. Information about the WorldCom group's segments for the three months ended March 31, 2001 and 2002, is as follows (in millions): <Table> <Caption> REVENUES FROM SELLING, GENERAL AND EXTERNAL CUSTOMERS ADMINISTRATIVE EXPENSES ------------------ ----------------------- 2001 2002 2001 2002 ------ ------ ------ ------ <S> <C> <C> <C> <C> Voice, data and Internet .. $4,493 $4,267 $ 999 $ 899 International operations .. 710 811 350 395 ------ ------ ------ ------ Total ................ $5,203 $5,078 $1,349 $1,294 ====== ====== ====== ====== </Table> The following is a reconciliation of the segment information to income before income taxes and minority interests for the three months ended March 31, 2001 and 2002 (in millions): <Table> <Caption> 2001 2002 ------- ------- <S> <C> <C> Revenues ........................................ $ 5,203 $ 5,078 Operating expenses .............................. 4,237 4,270 ------- ------- Operating income ................................ 966 808 Other income (expense): Interest expense ........................... (179) (327) Miscellaneous .............................. 100 (156) ------- ------- Income before income taxes and minority interests $ 887 $ 325 ======= ======= </Table> (F) CONTINGENCIES The WorldCom group's shareholders are subject to all of the risks related to an investment in WorldCom and the WorldCom group, including the effects of any legal proceedings and claims against the MCI group. See Note F to our interim consolidated financial statements for information related to our contingencies. 23 <Page> (G) GOODWILL AND OTHER INTANGIBLE ASSETS Effective January 1, 2002, we adopted SFAS No. 142, which establishes accounting and reporting standards for goodwill and other intangible assets. Under SFAS No. 142, goodwill and intangible assets deemed to have indefinite lives are no longer amortized but are subject to annual impairment tests. The statement also includes provisions for the identification of reporting units for purposes of assessing potential future impairments of goodwill. Upon adoption, we stopped amortizing intangible assets with indefinite useful lives, including goodwill and tradenames. Additionally, we made no revisions to the assigned useful lives of intangible assets that continue to be amortized. We are conducting impairment reviews of all intangible assets with indefinite useful lives and we expect to complete this assessment no later than the second quarter of 2002, in accordance with the provisions of SFAS No. 142. Based on our preliminary analyses, we estimate that as a result of the adoption of SFAS No. 142 we will reduce goodwill by $15 to $20 billion. Our earnings attributed to the WorldCom group for the three months ended March 31, 2001, adjusted to exclude the after-tax effect of amortization of intangible assets with indefinite useful lives, is as follows (in millions): <Table> <Caption> WORLDCOM GROUP -------- <S> <C> Net income - as reported ........ $532 Add back the after-tax effect of: Goodwill amortization ........ 227 Tradename amortization ....... 4 Other amortization ........... 3 ---- Net income - adjusted ........... $766 ==== </Table> The components of intangible assets attributed to the WorldCom group are as follows (in millions): <Table> <Caption> DECEMBER 31, MARCH 31, 2001 2002 -------- -------- <S> <C> <C> Amortized intangible assets: Developed technology ...... $ 1,190 $ 1,190 Other intangibles ......... 3,014 3,125 -------- -------- 4,204 4,315 Accumulated amortization ..... (1,324) (1,470) -------- -------- $ 2,880 $ 2,845 ======== ======== Unamortized intangible assets: Goodwill .................. $ 36,632 $ 36,654 Tradenames ................ 1,023 1,023 Other ..................... 283 283 -------- -------- $ 37,938 $ 37,960 ======== ======== </Table> Depreciation and amortization expense for the net carrying amount of intangible assets attributed to the WorldCom group, primarily software development, as of March 31, 2002 is estimated to be $600 million in 2002, $637 million in 2003, $602 million in 2004, $529 million in 2005 and $305 million in 2006. 24 <Page> MCI GROUP (an integrated business of WorldCom, Inc.) COMBINED BALANCE SHEETS (In Millions) <Table> <Caption> December 31, March 31, 2001 2002 -------- -------- <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 7 $ 3 Accounts receivable, net of allowance for bad debts of $393 in 2001 and $440 in 2002 1,574 1,484 Deferred tax asset 10 -- Other current assets 335 348 -------- -------- Total current assets 1,926 1,835 -------- -------- Property and equipment: Transmission equipment 445 454 Communications equipment 2,444 2,513 Furniture, fixtures and other 680 682 Construction in progress 130 80 -------- -------- 3,699 3,729 Accumulated depreciation (1,682) (1,796) -------- -------- 2,017 1,933 -------- -------- Goodwill and other intangible assets 9,719 9,802 Other assets 227 167 -------- -------- $ 13,889 $ 13,737 ======== ======== LIABILITIES AND SHAREHOLDERS' INVESTMENT Current liabilities: Payable to WorldCom group, net $ 900 $ 921 Accrued interest 111 120 Accounts payable and accrued line costs 2,093 2,055 Other current liabilities 1,091 1,195 -------- -------- Total current liabilities 4,195 4,291 -------- -------- Long-term liabilities, less current portion: Long-term debt 5,505 5,496 Long-term payable to WorldCom group, net 976 976 Deferred tax liability 870 830 Other liabilities 30 27 -------- -------- Total long-term liabilities 7,381 7,329 -------- -------- Commitments and contingencies Allocated net worth 2,313 2,117 -------- -------- $ 13,889 $ 13,737 ======== ======== </Table> The accompanying notes are an integral part of these combined statements. 25 <Page> MCI GROUP (an integrated business of WorldCom, Inc.) COMBINED STATEMENTS OF OPERATIONS (In Millions) <Table> <Caption> For the Three Months Ended March 31, -------------------- 2001 2002 ------- ------- <S> <C> <C> Revenues $ 3,622 $ 3,042 ------- ------- Operating expenses: Line costs 1,826 1,571 Selling, general and administrative 1,338 1,267 Depreciation and amortization 227 169 ------- ------- Total 3,391 3,007 ------- ------- Operating income 231 35 Other expense: Interest expense (126) (120) ------- ------- Income (loss) before income taxes 105 (85) Income tax expense (benefit) 43 (31) ------- ------- Net income (loss) $ 62 $ (54) ======= ======= </Table> The accompanying notes are an integral part of these combined statements. 26 <Page> MCI GROUP (an integrated business of WorldCom, Inc.) COMBINED STATEMENTS OF CASH FLOWS (In Millions) <Table> <Caption> For the Three Months Ended March 31, ---------------- 2001 2002 ----- ----- <S> <C> <C> Cash flows from operating activities: Net income (loss) $ 62 $ (54) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 227 169 Deferred income taxes 6 (30) Change in assets and liabilities, net of effect of business combinations: Accounts receivable, net 62 90 Other current assets 72 (12) Accrued interest 4 9 Accounts payable and other current liabilities (260) 16 Payable to WorldCom group, net 187 21 ----- ----- Net cash provided by operating activities 360 209 ----- ----- Cash flows from investing activities: Capital expenditures (95) (30) Increase in intangible assets (118) (60) Decrease in other liabilities (88) (3) All other investing activities (95) (40) ----- ----- Net cash used in investing activities (396) (133) ----- ----- Cash flows from financing activities: Principal repayments on debt, net -- (9) Dividends paid on MCI group common stock -- (71) Advances from WorldCom group, net 15 -- ----- ----- Net cash provided by (used in) financing activities 15 (80) ----- ----- Net decrease in cash and cash equivalents (21) (4) Cash and cash equivalents at beginning of period 41 7 ----- ----- Cash and cash equivalents at end of period $ 20 $ 3 ===== ===== </Table> The accompanying notes are an integral part of these combined statements. 27 <Page> MCI GROUP (AN INTEGRATED BUSINESS OF WORLDCOM, INC.) NOTES TO COMBINED FINANCIAL STATEMENTS (A) GENERAL The combined financial statements included herein for the MCI group (an integrated business of WorldCom, Inc.), are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States for interim financial reporting and SEC regulations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. In the opinion of our management, the combined financial statements of the MCI group reflect all adjustments (of a normal and recurring nature) which are necessary to present fairly the financial position, results of operations and cash flows for the interim periods. These financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2001. The results for the three-month period ended March 31, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. (B) EARNINGS PER SHARE Our consolidated financial statements present basic and diluted earnings per share for WorldCom group stock and MCI group stock using the two-class method. The two-class method is an earnings formula that determines the attributed earnings per share for WorldCom group stock and MCI group stock according to participation rights in undistributed earnings. The combined financial statements of the MCI group do not present earnings (loss) per share because MCI group stock is a series of our common stock, and the MCI group is not a legal entity with a capital structure. (C) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid by the MCI group during the three months ended March 31, 2001 and 2002, amounted to $122 million and $111 million, respectively. Income taxes paid, net of refunds received, during the three months ended March 31, 2001 totaled $6 million. No income taxes were paid during the three months ended March 31, 2002. (D) SEGMENT INFORMATION Based on its organizational structure, the MCI group operates in four reportable segments: Consumer; Wholesale; Alternative channels and small business; and Dial-up Internet. The MCI group's reportable segments represent business units that primarily offer similar products and services; however, the business units are managed separately due to the type and class of customer as well as the geographic dispersion of their operations. Consumer includes domestic voice communications services for consumer customers. Wholesale includes domestic long distance voice and data communications services for wholesale customers. Alternative channels and small business includes domestic long distance voice and data, agents, prepaid calling cards and paging services provided to alternative wholesale and small business customers. Dial-up Internet includes dial-up Internet access services. Our chief operating decision-maker utilizes revenue information in assessing performance and making overall operating decisions and resource allocations. Communications services are generally provided utilizing our network facilities, which do not make a distinction between the types of services provided. Profit and loss information is reported only on a combined basis to our chief operating decision-maker and our board of directors. The accounting policies of the segments are the same policies as those used by the MCI group in preparing its combined financial statements set forth in our Annual Report on Form 10-K for the year ended December 31, 2001. Information about the MCI group's segments for the three months ended March 31, 2001 and 2002, is as follows (in millions): 28 <Page> <Table> <Caption> REVENUES FROM SELLING, GENERAL AND EXTERNAL CUSTOMERS ADMINISTRATIVE EXPENSES ------------------ ----------------------- 2001 2002 2001 2002 ------ ------ ------ ------ <S> <C> <C> <C> <C> Consumer .............................. $1,807 $1,595 $ 748 $ 678 Wholesale ............................. 695 584 159 168 Alternative channels and small business 695 525 293 276 Dial-up Internet ...................... 425 338 138 145 ------ ------ ------ ------ Total ............................ $3,622 $3,042 $1,338 $1,267 ====== ====== ====== ====== </Table> The following is a reconciliation of the segment information to income (loss) before income taxes for the three months ended March 31, 2001 and 2002 (in millions): <Table> <Caption> 2001 2002 ------- ------- <S> <C> <C> Revenues ........................ $ 3,622 $ 3,042 Operating expenses .............. 3,391 3,007 ------- ------- Operating income ................ 231 35 Other income (expense): Interest expense ........... (126) (120) ------- ------- Income (loss) before income taxes $ 105 $ (85) ======= ======= </Table> (E) CONTINGENCIES The MCI group's shareholders are subject to all of the risks related to an investment in WorldCom and the MCI group, including the effects of any legal proceedings and claims against the WorldCom group. See Note F to our interim consolidated financial statements for information related to our contingencies. (F) GOODWILL AND OTHER INTANGIBLE ASSETS Effective January 1, 2002, we adopted SFAS No. 142, which establishes accounting and reporting standards for goodwill and other intangible assets. Under SFAS No. 142, goodwill and intangible assets deemed to have indefinite lives are no longer amortized but are subject to annual impairment tests. The statement also includes provisions for the identification of reporting units for purposes of assessing potential future impairments of goodwill. Upon adoption, we stopped amortizing intangible assets with indefinite useful lives, including goodwill and tradenames. Additionally, we made no revisions to the assigned useful lives of intangible assets that continue to be amortized. We are conducting impairment reviews of all intangible assets with indefinite useful lives and we expect to complete this assessment no later than the second quarter of 2002, in accordance with the provisions of SFAS No. 142. Based on our preliminary analyses, we estimate that as a result of the adoption of SFAS No. 142 we will reduce goodwill by $15 to $20 billion. Our earnings attributed to the MCI group for the three months ended March 31, 2001, adjusted to exclude the after-tax effect of amortization of intangible assets with indefinite useful lives, is as follows (in millions): <Table> <Caption> MCI GROUP --------- <S> <C> Net income - as reported ........ $ 62 Add back the after-tax effect of: Goodwill amortization ........ 67 Other amortization ........... 1 ---- Net income - adjusted ........... $130 ==== </Table> 29 <Page> The components of intangible assets attributed to the MCI group are as follows (in millions): <Table> <Caption> DECEMBER 31, MARCH 31, 2001 2002 ------- ------- <S> <C> <C> Amortized intangible assets: Developed technology ...... $ 510 $ 510 Other intangibles ......... 1,284 1,432 ------- ------- 1,794 1,942 Accumulated amortization ..... (550) (615) ------- ------- $ 1,244 $ 1,327 ======= ======= Unamortized intangible assets: Goodwill .................. $ 8,341 $ 8,341 Other ..................... 134 134 ------- ------- $ 8,475 $ 8,475 ======= ======= </Table> Depreciation and amortization expense for the net carrying amount of intangible assets attributed to the MCI group, primarily software development, as of March 31, 2002 is estimated to be $256 million in 2002, $274 million in 2003, $258 million in 2004, $223 million in 2005 and $114 million in 2006. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Our common stock consists of two separately traded tracking stocks: WorldCom group stock, which is intended to reflect the performance of our data, Internet, international and commercial voice businesses; and MCI group stock, which is intended to reflect the performance of our consumer, small business, wholesale long distance voice and data, wireless messaging and dial-up Internet access businesses. Through the businesses that we have aligned as the WorldCom group, which have an extensive, advanced facilities-based global communications network, we provide a broad range of integrated communications and managed network services to both U.S. and non-U.S. based corporations. Offerings include data services such as frame relay, asynchronous transfer mode and Internet protocol networks; Internet related services, including dedicated access, virtual private networks, digital subscriber lines, web centers encompassing application and server hosting and managed data services; commercial voice services; and international communications services. Through the businesses that we have aligned as the MCI group, we provide a broad range of retail and wholesale communications services, including long distance voice and data communications, consumer local voice communications, wireless messaging, private line services and dial-up Internet access services. Our retail services are provided to consumers and small businesses in the United States. We are the second largest carrier of long distance telecommunications services in the United States. Our services include: basic long distance telephone service, dial around, collect calling, operator assistance and calling card services (including prepaid calling cards) and toll free or 800 services. We offer these services individually and in combinations. Through combined offerings, we provide customers with benefits such as single billing, unified services for multi-location companies and customized calling plans. Our wholesale businesses include wholesale voice and data services provided to carrier customers and other resellers and dial-up Internet access services. ADDITIONAL DISCUSSION RELATED TO THE WORLDCOM GROUP AND THE MCI GROUP FINANCIAL STATEMENTS Each of the WorldCom group and the MCI group includes the results of operations shown in the combined statements of operations and the attributed assets and liabilities shown in the combined balance sheets of the relevant group. If we acquire interests in other businesses, we intend to attribute those assets and any related liabilities to our WorldCom group or our MCI group in accordance with our tracking stock policy statement. All net income and cash flows generated by the assets will be attributed to the group to which the assets were attributed and all net proceeds from any disposition of these assets will also be attributed to that group. 30 <Page> Although we sometimes refer to such assets and liabilities as those of the WorldCom group or the MCI group, neither of the groups is a separate legal entity. Rather, all of the assets of a group are owned by WorldCom and holders of the WorldCom group stock or the MCI group stock are shareholders of WorldCom and subject to all of the risks of an investment in WorldCom and all of its businesses, assets and liabilities. We intend, for so long as the WorldCom group stock and the MCI group stock remains outstanding, to include in filings by WorldCom under the Securities Exchange Act of 1934, as amended, the combined financial statements of each of the WorldCom group and the MCI group. These combined financial statements will be prepared in accordance with accounting principles generally accepted in the United States, and in the case of annual financial statements, will be audited. These combined financial statements are not legally required under current law or SEC regulations. Our board of directors or any special committee appointed by our board of directors may, without shareholder approval, change the policies set forth in our tracking stock policy statement. Our board of directors or any special committee appointed by our board of directors also may, without shareholder approval, adopt additional policies or make exceptions with respect to the application of the policies described in our policy statement in connection with particular facts and circumstances, all as they may determine to be in the best interests of WorldCom. Our board is subject to fiduciary duties to all of WorldCom's shareholders as one group, not to the holders of any series of stock separately. Any changes or exceptions will be made after a determination by our board of what is in the best interests of WorldCom as a whole, which may be detrimental to the interests of the holders of one series of stock. The ability to make these changes may make it difficult to address the future of a group based on the group's past performance. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS The following statements are or may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995: (i) any statements contained or incorporated herein regarding possible or assumed future results of operations of WorldCom's business, pricing trends, anticipated benefits from The Neighborhood, our credit facilities or receivables purchase program, the sufficiency of our liquidity and cash flow, the markets for WorldCom's services and products, anticipated capital expenditures, regulatory developments or competition; (ii) any statements preceded by, followed by or that include the words "intends," "estimates," "believes," "expects," "anticipates," "should," "could," or similar expressions; and (iii) other statements contained or incorporated by reference herein regarding matters that are not historical facts. Because such statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements; factors that could cause actual results to differ materially include, but are not limited to: o economic uncertainty; o the effects of vigorous competition, including price compression; o risks associated with debt service requirements and our financial leverage; o the impact of technological change on our business, alternative technologies, and dependence on availability of transmission facilities; o risks of international business; o regulatory risks in the United States and internationally; o contingent liabilities; o uncertainties regarding the collectibility of receivables; o uncertainties associated with the success of acquisitions; 31 <Page> o the ongoing war on terrorism; and o other risks referenced from time to time in WorldCom's filings with the SEC. Potential purchasers of WorldCom capital stock are cautioned not to place undue reliance on such statements, which speak only as of the date thereof. The cautionary statements contained or referred to in this section should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by WorldCom or persons acting on its behalf. We undertake no duty to update these forward-looking statements, even though our situation may change in the future. The following discussion and analysis relates to our financial condition and results of operations for the three months ended March 31, 2001 and 2002. This information should be read in conjunction with the consolidated financial statements and notes thereto contained herein, and the combined financial statements and notes thereto of each of the WorldCom group and the MCI group contained herein. RESULTS OF OPERATIONS The following table sets forth for the periods indicated our statements of operations as a percentage of revenues: <Table> <Caption> FOR THE THREE MONTHS ENDED MARCH 31, ---------------- 2001 2002 ------ ------ <S> <C> <C> Revenues ................................................... 100.0% 200.0% Line costs ................................................. 41.9 42.8 Selling, general and administrative ........................ 29.4 30.5 Depreciation and amortization .............................. 15.1 16.3 ------ ------ Operating income ........................................... 13.6 10.4 Other income (expense): Interest expense ...................................... (3.5) (5.5) Miscellaneous ......................................... 1.1 (1.9) ------ ------ Income before income taxes and minority interests .......... 11.2 3.0 Provision for income taxes ................................. 4.3 1.1 ------ ------ Income before minority interests ........................... 6.9 1.9 Minority interests ......................................... -- 0.2 ------ ------ Net income ................................................. 6.9 2.1 Distributions on mandatorily redeemable preferred securities and other preferred dividend requirements ............. 0.2 0.5 ------ ------ Net income applicable to common shareholders ............... 6.7% 1.6% ====== ====== </Table> THREE MONTHS ENDED MARCH 31, 2001 VS. THREE MONTHS ENDED MARCH 31, 2002 For the three months ended March 31, 2001 and 2002, our revenues were as follows (dollars in millions): <Table> <Caption> 2001 2002 ------------------- ------------------- PERCENT PERCENT $ OF TOTAL $ OF TOTAL ------ ------- ------ ------- <S> <C> <C> <C> <C> WorldCom group $5,203 59.0% $5,078 62.5% MCI group .... 3,622 41.0 3,042 37.5 ------ ------- ------ ------- $8,825 100.0% $8,120 100.0% ====== ======= ====== ======= </Table> Actual reported revenues by category for the three months ended March 31, 2001 and 2002 reflect the following changes by category (dollars in millions): 32 <Page> <Table> <Caption> PERCENT 2001 2002 CHANGE ------ ------ --------- <S> <C> <C> <C> COMMERCIAL SERVICES REVENUES Voice ................................... $1,726 $1,518 (12.1) Data .................................... 2,045 1,963 (4.0) International ........................... 710 811 14.2 Internet ................................ 722 786 8.9 ------ ------ TOTAL COMMERCIAL SERVICES REVENUES ........ 5,203 5,078 (2.4) Consumer ................................ 1,807 1,595 (11.7) Wholesale ............................... 695 584 (16.0) Alternative channels and small business . 695 525 (24.5) Dial-up Internet ........................ 425 338 (20.5) ------ ------ TOTAL ..................................... $8,825 $8,120 (8.0) ====== ====== </Table> Commercial services revenues, which include the revenues generated from commercial voice, data, international and Internet services, for the first quarter of 2002 were $5.1 billion versus $5.2 billion for the first quarter of 2001. The decrease reflects the current economic conditions as well as continued overall price compression in the marketplace. Voice revenues for the first quarter of 2002 decreased 12.1% over the prior year period and traffic decreased 2.5%. Price compression for long distance business voice services drove this decline while wireless and local voice services reflected a modest increase of 4.0% to $482 million. Price compression on voice revenues is expected to continue for the near term, which will negatively affect revenue growth in this area. Data revenues for the first quarter of 2002 decreased 4.0% over the prior year period. The decrease was driven by customer data network reductions resulting from economic restraints which caused many companies to not only reduce their capital spending but to also reduce their network requirements or groom their network into more cost effective alternatives. While we continue to add new sales to our customer base, the customer downsizing noted above outpaced new sales in the first quarter of 2002. Data includes both commercial long distance and local dedicated bandwidth sales. International revenues for the first quarter of 2002 increased 14.2% to $811 million versus $710 million, for the first quarter of 2001. Geographically, Europe grew 18.3% and Asia Pacific and other areas grew 6.6% for the first quarter of 2002. These increases were partially offset by foreign currency fluctuations that had the effect of reducing revenues by approximately $22 million in the first quarter of 2002. Our international business continues to experience significant price pressure on its products as we continue to penetrate the retail markets and wholesale continues to represent a large portion of international revenues. Internet revenues for the first quarter of 2002 increased 8.9% over the prior year period. The increase included $34 million of Digex revenues, after intercompany eliminations, as a result of our merger with Intermedia in July 2001. While less of an impact than data, customer network grooming on Internet networks partially offset new customer growth in the first quarter of 2002. Our Internet protocol virtual private network product, or IP-VPN, continued to show improvement during the first quarter of 2002. This new product has grown to approximately $120 million in annualized revenue. We have recently signed several large customer contracts for IP-VPN services and these customers, combined with overall market acceptance of this product, should continue to drive growth in this product. Despite this, IP-VPNs have not yet achieved a size or scale to overcome the attrition on our remote access product. Our legacy x.25 remote access product is supported by more mature technologies and our customers are migrating their services to more cost effective alternatives, such as IP-VPN. Excluding the revenues from the legacy x.25 product, Internet revenues grew 25%. Internet revenues include dedicated Internet access, managed networking services and applications (such as virtual private networks), web hosting and electronic commerce and transaction services (such as web centers and credit card transaction processing). Consumer revenues for the first quarter of 2002 decreased 11.7% over the prior year period. The majority of this decrease is attributed to decreases in calling card, dial around and dial-1 revenues as a result of consumers' continued substitution of wire line services with wireless and e-mail. Our consumer local initiatives continue to perform well as consumer local revenues increased over 108% for the first quarter of 2002. In an effort to align our product offerings with consumer needs and increase our marketshare, we launched The Neighborhood built by MCIsm in the second quarter of 2002. The Neighborhood is a new nationwide telecommunications business which unifies local and long 33 <Page> distance services. The Neighborhood is currently available in 32 states and is expected to eventually reach more than 50 million households. The brand's flagship offering, Neighborhood Complete, provides unlimited calling within the U.S., whether across the street or across the country. It also provides a complete suite of calling and messaging features from one company, on one bill for one fixed monthly price. We believe that The Neighborhood will attract incremental revenue from existing customers as well as new revenues from new customers. While this product is in its early marketing stages, we believe we will begin to see the benefits from The Neighborhood as early as the second half of 2002. Wholesale revenues for the first quarter of 2002 decreased 16.0% over the prior year period. The wholesale market continues to be extremely price competitive, although the average rate per minute has been relatively stable since the second quarter of 2001. Alternative channels and small business revenues for the three months ended March 31, 2002 decreased 24.5% over the prior year period. Alternative channels and small business includes sales agents and affiliates, wholesale alternative channels, small business, prepaid calling card and wireless messaging revenues. The decrease is attributed to pricing pressures in the wholesale alternative channels and small business markets which negatively affected revenue growth and gross margins in this area. Dial-up Internet revenues for the three months ended March 31, 2002 decreased 20.5% over the prior year amount. Our dial access network has grown 7.5% to approximately 3.2 million modems as of March 31, 2002, compared with the prior year period. However, Internet connect hours decreased 7.2% to 1.8 billion hours for the first quarter of 2002 versus the prior year period. The decrease in dial-up Internet revenues is attributed to pricing pressure resulting from the impact of volume discounts and off-net traffic, which lowered average revenue per hour by approximately 14% for the first quarter of 2002 versus the prior year period. LINE COSTS. For the three months ended March 31, 2001 and 2002, our line costs were as follows (dollars in millions): <Table> <Caption> 2001 2002 -------------------- ---------------------- PERCENT PERCENT $ OF TOTAL $ OF TOTAL ------- ------- ------- -------- <S> <C> <C> <C> <C> WorldCom group ........ $ 1,987 53.8% $ 2,020 58.1% MCI group ............. 1,826 49.4 1,571 45.1 Intergroup eliminations (117) (3.2) (112) (3.2) ------- ------- ------- ------- $ 3,696 100.0% $ 3,479 100.0% ======= ======= ======= ======= </Table> Line costs as a percentage of revenues for the first quarter of 2002 increased to 42.8% as compared to 41.9% for the first quarter of 2001. The increase as a percentage of revenues is a direct result of the pricing pressure in most of our business segments without adequate volume offsets. Additionally, line costs as a percentage of revenues have increased as a result of the decrease in higher margin calling card and dial around revenues due to wireless substitution as noted above. The principal components of line costs are access charges and transport charges. Regulators have historically permitted access charges to be set at levels that are well above traditional phone companies' costs. As a result, access charges have been a source of universal service subsidies that enable local exchange rates to be set at levels that are affordable. We have actively participated in a variety of state and federal regulatory proceedings with the goal of bringing access charges to cost-based levels and to fund universal service using explicit subsidies funded in a competitively neutral manner. We cannot predict the outcome of these proceedings or whether or not the results will have a material adverse impact on our consolidated financial position or results of operations. However, our goal is to manage transport costs through utilization of our networks, favorable contracts with carriers and network efficiencies. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the three months ended March 31, 2001 and 2002, our selling, general and administrative expenses were as follows (dollars in millions): 34 <Page> <Table> <Caption> 2001 2002 ----------------------- ---------------------- PERCENT PERCENT $ OF TOTAL $ OF TOTAL ------- -------- ------- -------- <S> <C> <C> <C> <C> WorldCom group ........ $ 1,349 51.9% $ 1,294 52.3% MCI group ............. 1,338 51.5 1,267 51.2 Intergroup eliminations (90) (3.4) (85) (3.5) ------- ------- ------- ------- $ 2,597 100.0% $ 2,476 100.0% ======= ======= ======= ======= </Table> Selling, general and administrative expenses for the first quarter of 2002 were $2.5 billion or 30.5% of revenues as compared to $2.6 billion or 29.4% of revenues for the prior year period. Selling, general and administrative expenses for the three months ended March 31, 2001 include pre-tax costs of $125 million associated with domestic severance packages and other costs related to our February 2001 workforce reductions ($77 million allocated to the WorldCom group and $48 million allocated to the MCI group). Excluding these charges in 2001, selling, general and administrative expenses as a percentage of revenues would have been 28.0% for the first quarter of 2001. The increase in selling, general and administrative expenses as a percentage of revenues for the three months ended March 31, 2002 is primarily the result of increased selling, general and administrative expenses associated with our wireless resale unit. At the end of the first quarter of 2002 we initiated actions to reduce costs in reaction to the decline in revenues we experienced in the first quarter of 2002. These actions include our recently announced workforce reductions. We plan to continue to take steps to reduce our selling, general and administrative expenses in response to the pricing pressure on our products, which we believe should help to stabilize selling, general and administrative expense as a percentage of revenues during the second half of 2002. DEPRECIATION AND AMORTIZATION. For the three months ended March 31, 2001 and 2002, our depreciation and amortization expense was as follows (dollars in millions): <Table> <Caption> 2001 2002 ----------------- ----------------- PERCENT PERCENT $ OF TOTAL $ OF TOTAL ------ ------ ------ ------ <S> <C> <C> <C> <C> WorldCom group ........ $ 901 67.5 % $ 956 72.3 % MCI group ............. 227 17.0 169 12.8 Intergroup eliminations 207 15.5 197 14.9 ------ ------ ------ ------ $1,335 100.0% $1,322 100.0% ====== ====== ====== ====== </Table> Depreciation and amortization expense for the first quarter of 2002 decreased to $1.32 billion or 16.3% of revenues from $1.34 billion or 15.1% of revenues for the first quarter of 2001. Depreciation and amortization for the first quarter of 2002 reflects our discontinued amortization of intangible assets with indefinite useful lives, in accordance with SFAS No. 142. For the first quarter of 2001, depreciation and amortization expense was $1.01 billion excluding the amortization of indefinite-lived intangibles no longer amortized under SFAS No. 142. On a comparable basis, depreciation and amortization expense increased as a result of increased depreciation associated with 2000 and 2001 capital expenditures as well as increased depreciation associated with the assets acquired in our merger with Intermedia. INTEREST EXPENSE. Interest expense for the first quarter of 2002 was $447 million or 5.5% of revenues as compared to $305 million or 3.5% of revenues for the first quarter of 2001. For the three months ended March 31, 2001 and 2002, weighted-average annual interest rates on our long-term debt were 7.13% and 7.44%, respectively, while weighted-average levels of borrowings were $24.9 billion and $30.2 billion, respectively. Interest expense for the three months ended March 31, 2002 increased as a result of higher debt levels and $3.0 billion of debt obligations acquired in the Intermedia merger. Capitalized interest for the first quarter of 2002 was $102 million, versus $128 million in the prior year period. The decrease is a result of lower capital and construction expenditures. For 2002, we expect capitalized interest to continue to decline $10-$15 million each quarter. 35 <Page> MISCELLANEOUS INCOME AND EXPENSE. Miscellaneous expense for the first quarter of 2002 was $156 million or 1.9% of revenues compared to miscellaneous income of $100 million or 1.1% of revenues for the first quarter of 2001. Miscellaneous income includes investment income, equity in income and losses of affiliated companies, the effects of fluctuations in exchange rates for transactions denominated in foreign currencies, gains and losses on the sale of assets and other non-operating items. Miscellaneous expense for the first quarter of 2002 includes pre-tax charges of $141 million associated with the disposition of investments, including the News Corporation sale. PROVISION FOR INCOME TAXES. The effective income tax rate of 35.8% of income before taxes for the first quarter of 2002 is less than the 38.5% effective income tax rate in the first quarter of 2001 primarily due to our discontinued amortization of goodwill in 2002. NET INCOME APPLICABLE TO COMMON SHAREHOLDERS. For the three months ended March 31, 2002, we reported net income applicable to common shareholders of $130 million as compared to $594 million for the three months ended March 31, 2001. ATTRIBUTION AND ALLOCATION OF ASSETS, LIABILITIES, REVENUES AND EXPENSES BETWEEN THE WORLDCOM GROUP AND THE MCI GROUP The following is a discussion of the methods used to attribute and allocate property and equipment, revenues, line costs, shared corporate services, intangible assets and financing arrangements to the WorldCom group and the MCI group. These methods have been consistently applied for all periods presented. Additionally, our management believes that the cost allocations outlined below are equitable and provide a reasonable estimate of the costs attributable to each group. PROPERTY AND EQUIPMENT. Property and equipment was attributed to the WorldCom group and the MCI group based on specific identification consistent with the assets necessary to support the continuing operations of the businesses attributed to the respective groups. The balances of property and equipment attributed to each of the groups as of March 31, 2002 are as follows: <Table> <Caption> WORLDCOM MCI GROUP GROUP WORLDCOM -------- -------- -------- (IN MILLIONS) <S> <C> <C> <C> Transmission equipment ...... $ 24,765 $ 454 $ 25,219 Communications equipment .... 5,082 2,513 7,595 Furniture, fixtures and other 11,489 682 12,171 Construction in progress .... 4,897 80 4,977 -------- -------- -------- 46,233 3,729 49,962 Accumulated depreciation .... (9,011) (1,796) (10,807) -------- -------- -------- $ 37,222 $ 1,933 $ 39,155 ======== ======== ======== </Table> REVENUES. Revenues have been attributed to the WorldCom group and the MCI group based on specific identification of the lines of business that are attributed to the two groups. LINE COSTS. Allocated line costs and related liabilities include the costs of the fiber optic systems attributed to the WorldCom group and the costs of the business voice switched services attributed to the MCI group. Line costs have been attributed to the WorldCom group and the MCI group predominantly based on specific identification of network usage by that group. Where determinations based on specific usage alone were impractical, we used other allocation methods, including methods based on the total revenues generated by each group. SHARED CORPORATE SERVICES. A portion of our shared corporate services and related balance sheet amounts (such as executive management, human resources, legal, regulatory, accounting, tax, treasury, strategic planning and information systems support) has been attributed to the WorldCom group or the MCI group based upon identification of such services specifically benefiting such group. Where determinations based on specific usage alone have been impractical, we used other allocation methods that we believe are fair, including methods based on such factors as the number of employees and total line costs or revenues generated by each group. 36 <Page> ALLOCATION OF INTANGIBLE ASSETS. Intangible assets include the excess consideration paid over the fair value of net tangible assets acquired by us in business combinations accounted for under the purchase method and include goodwill, channel rights, developed technology and tradenames. These assets have been attributed to the respective groups based on specific identification and where acquired companies have been divided between the WorldCom group and the MCI group, the intangible assets have been allocated based on the respective fair values at the date of purchase of the related operations attributed to each group. Our management believes that this method of allocation is equitable and provides a reasonable estimate of the intangible assets attributable to the WorldCom group and the MCI group. All tradenames, including the MCI tradename and the other related MCI tradenames, have been attributed to the WorldCom group. Prior to 2002, the MCI group was allocated an expense of $27.5 million per annum, and the WorldCom group was allocated a corresponding decrease in depreciation and amortization expense, for the use of the MCI tradenames. Beginning January 1, 2002, we stopped amortizing intangible assets with indefinite useful lives, including goodwill and tradenames, in accordance with SFAS No. 142. We therefore discontinued the allocation of this expense to the MCI group. Goodwill and other intangibles assigned or allocated to the WorldCom group and the MCI group as of March 31, 2002 are as follows: <Table> <Caption> WORLDCOM MCI GROUP GROUP WORLDCOM -------- -------- -------- <S> <C> <C> <C> Amortized intangible assets: Developed technology ...... $ 1,190 $ 510 $ 1,700 Other intangibles ......... 3,125 1,432 4,557 -------- -------- -------- 4,315 1,942 6,257 Accumulated amortization ..... (1,470) (615) (2,085) -------- -------- -------- $ 2,845 $ 1,327 $ 4,172 ======== ======== ======== Unamortized intangible assets: Goodwill .................. $ 36,654 $ 8,341 $ 44,995 Tradenames ................ 1,023 -- 1,023 Other ..................... 283 134 417 -------- -------- -------- $ 37,960 $ 8,475 $ 46,435 ======== ======== ======== </Table> FINANCING ARRANGEMENTS. As of January 1, 2001, $6.0 billion of our outstanding debt was notionally allocated to the MCI group and the remainder of our debt was notionally allocated to the WorldCom group. Our debt was allocated between the WorldCom group and the MCI group based upon a number of factors including estimated future cash flows and the ability to pay debt service and dividends of each of the groups. In addition, we considered certain measures of creditworthiness, such as coverage ratios and various tests of liquidity, in the allocation process. Our management believes that the initial allocation was equitable and supportable by both the WorldCom group and the MCI group. The debt allocated to the MCI group bears interest at a rate indicative of the rate at which the MCI group would borrow from third parties if it was a wholly owned subsidiary of WorldCom but did not have the benefit of any guarantee by WorldCom. Interest rates are calculated on a quarterly basis. Debt allocated to the MCI group bears an interest rate equal to the weighted-average interest rate, excluding capitalized interest, of WorldCom debt plus 1 1/4 percent. Interest allocated to the WorldCom group reflects the difference between our actual interest expense and the interest expense charged to the MCI group. Each group's allocated debt increases or decreases by the amount of any net cash generated by, or required to fund, the group's operating activities, investing activities, dividend payments, share repurchases and other financing activities. As of March 31, 2002, our receivables purchase program consisted of a $4.0 billion pool of receivables in which the purchaser had an undivided interest including $2.0 billion sold. The WorldCom group was allocated $2.7 billion of the pool and $1.7 billion of the sold receivables. The MCI group was allocated the balance. The receivables sold were assigned based on specific identification where practical, or allocated based on total revenues. Our management believes that this method of allocation is equitable and provides a reasonable estimate of the receivables attributable to the groups. 37 <Page> WORLDCOM GROUP RESULTS OF OPERATIONS The following table sets forth for the periods indicated the WorldCom group's statements of operations in millions of dollars and as a percentage of its revenues: <Table> <Caption> 2001 2002 -------------------- -------------------- <S> <C> <C> <C> <C> Revenues ................................................ $ 5,203 100.0% $ 5,078 100.0% Line costs .............................................. 1,987 38.2 2,020 39.8 Selling, general and administrative ..................... 1,349 25.9 1,294 25.5 Depreciation and amortization ........................... 901 17.3 956 18.8 ------- ------- ------- ------- Operating income ........................................ 966 18.6 808 15.9 Other income (expense): Interest expense ................................... (179) (3.4) (327) (6.4) Miscellaneous ...................................... 100 1.9 (156) (3.1) ------- ------- ------- ------- Income before income taxes and minority interests ....... 887 17.0 325 6.4 Provision for income taxes .............................. 339 6.5 117 2.3 ------- ------- ------- ------- Income before minority interests ........................ 548 10.5 208 4.1 Minority interests ...................................... -- -- 18 0.4 Distributions on mandatorily redeemable preferred securities and other preferred dividend requirements 16 0.3 42 0.8 ------- ------- ------- ------- Net income .............................................. $ 532 10.2% $ 184 3.6% ======= ======= ======= ======= </Table> THREE MONTHS ENDED MARCH 31, 2001 VS. THREE MONTHS ENDED MARCH 31, 2002 REVENUES. Actual reported revenues by category for the three months ended March 31, 2001 and 2002 reflect the following changes by category (dollars in millions): <Table> <Caption> PERCENT 2001 2002 CHANGE --------- ---------- -------- <S> <C> <C> <C> COMMERCIAL SERVICES REVENUES Voice............................... $ 1,726 $ 1,518 (12.1) Data................................ 2,045 1,963 (4.0) International....................... 710 811 14.2 Internet............................ 722 786 8.9 -------- -------- $ 5,203 $ 5,078 (2.4) ======== ======== </Table> WorldCom group revenues for the first quarter of 2002 were $5.1 billion versus $5.2 billion for the first quarter of 2001. The decrease reflects the current economic conditions as well as continued overall price compression in the marketplace. Voice revenues for the first quarter of 2002 decreased 12.1% over the prior year period and traffic decreased 2.5%. Price compression for long distance business voice services drove this decline while wireless and local voice services reflected a modest increase of 4.0% to $482 million. Price compression on voice revenues is expected to continue for the near term, which will negatively affect revenue growth in this area. Data revenues for the first quarter of 2002 decreased 4.0% over the prior year period. The decrease was driven by customer data network reductions resulting from economic restraints which caused many companies to not only reduce their capital spending but to also reduce their network requirements or groom their network into more cost effective alternatives. While we continue to add new sales to our customer base, the customer downsizing noted above outpaced new sales in the first quarter of 2002. Data includes both commercial long distance and local dedicated bandwidth sales. International revenues for the first quarter of 2002 increased 14.2% to $811 million versus $710 million, for the first quarter of 2001. Geographically, Europe grew 18.3% and Asia Pacific and other areas grew 6.6% for the first quarter of 2002. These increases were partially offset by foreign currency fluctuations that had the effect of reducing revenues by approximately $22 million in the first quarter of 2002. Our international business continues to experience significant price pressure on its products as we continue to penetrate the retail markets and wholesale continues to represent a large portion of international revenues. 38 <Page> Internet revenues for the first quarter of 2002 increased 8.9% over the prior year period. The increase included $34 million of Digex revenues, after intercompany eliminations, as a result of our merger with Intermedia in July 2001. While less of an impact than data, customer network grooming on Internet networks partially offset new customer growth in the first quarter of 2002. Our Internet protocol virtual private network product, or IP-VPN, continued to show improvement during the first quarter of 2002. This new product has grown to approximately $120 million in annualized revenues. We have recently signed several large customer contracts for IP-VPN services and these customers, combined with overall market acceptance of this product, should continue to drive growth in this product. Despite this, IP-VPNs have not yet achieved a size or scale to overcome the attrition on our remote access product. Our legacy x.25 remote access product is supported by more mature technologies and our customers are migrating their services to more cost effective alternatives, such as IP-VPN. Excluding the revenues from the legacy x.25 product, Internet revenues grew 25%. Internet revenues include dedicated Internet access, managed networking services and applications (such as virtual private networks), web hosting and electronic commerce and transaction services (such as web centers and credit card transaction processing). LINE COSTS. Line costs as a percentage of revenues for the first quarter of 2002 increased to 39.8% as compared to 38.2% reported for the first quarter of 2001. The increase as a percentage of revenues is a direct result of the pricing pressure in the data, international and Internet markets without adequate volume offsets. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses for the first quarter of 2002 were $1.3 billion or 25.5% of revenues as compared to $1.3 billion or 25.9% of revenues for the prior year period. Selling, general and administrative expenses for the first quarter of 2001 include pre-tax costs of $77 million associated with domestic severance packages and other costs related to our February 2001 workforce reductions. Excluding these charges in 2001, selling, general and administrative expenses as a percentage of revenues would have been 24.4% for the first quarter of 2001. The increase in selling, general and administrative expenses is primarily the result of increased selling, general and administrative expenses associated with our wireless resale unit. At the end of the first quarter of 2002 we initiated actions to reduce costs in reaction to the decline in revenues we experienced in the first quarter of 2002. These actions include our recently announced workforce reductions. We plan to continue to take steps to reduce our selling, general and administrative expenses in response to the pricing pressure on our products, which we believe should help to stabilize selling, general and administrative expense as a percentage of revenues during the second half of 2002. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense for the first quarter of 2002 increased to $956 million or 18.8% of revenues from $901 million or 17.3% of revenues for the prior year period. Depreciation and amortization for the first quarter of 2002 reflects the WorldCom group's discontinued amortization of intangible assets with indefinite useful lives, in accordance with SFAS No. 142. For the first quarter of 2001, depreciation and amortization expense was $650 million excluding the amortization of indefinite-lived intangibles no longer amortized under SFAS No. 142. On a comparable basis, depreciation and amortization expense increased as a result of additional depreciation associated with 2000 and 2001 capital expenditures and increased depreciation associated with the assets acquired in our merger with Intermedia. INTEREST EXPENSE. Interest expense for the first quarter of 2002 was $327 million or 6.4% of revenues as compared to $179 million or 3.4% of revenues for the first quarter of 2001. Interest expense on borrowings incurred by WorldCom and allocated to the WorldCom group reflects the difference between WorldCom's actual interest expense and the interest expense allocated to the MCI group. The MCI group is allocated interest based on the weighted-average interest rate, excluding capitalized interest, of WorldCom debt plus 1 1/4 percent. Capitalized interest for the first quarter of 2002 was $102 million, versus $128 million in the prior year period. The decrease is a result of lower capital and construction expenditures. For 2002, we expect capitalized interest to continue to decline $10-$15 million each quarter. MISCELLANEOUS INCOME AND EXPENSE. Miscellaneous expense for the first quarter of 2002 was $156 million, or 3.1% of revenues as compared to miscellaneous income of $100 million, or 1.9% of revenues for the first quarter of 2001. 39 <Page> Miscellaneous income includes investment income, equity in income and losses of affiliated companies, the effects of fluctuations in exchange rates for transactions denominated in foreign currencies, gains and losses on the sale of assets and other non-operating items. Miscellaneous expense for the first quarter of 2002 includes pre-tax charges of $141 million associated with the disposition of investments, including the News Corporation sale. PROVISION FOR INCOME TAXES. The effective income tax rate of 36.0% of income before taxes for the first quarter of 2002 is less than the 38.2% effective income tax rate in the first quarter of 2001 primarily due to our discontinued amortization of goodwill in 2002. NET INCOME. For the three months ended March 31, 2002, the WorldCom group reported net income of $184 million as compared to $532 million for the three months ended March 31, 2001. Diluted income per WorldCom group share for the first quarter of 2002 was $0.06 compared to income per WorldCom group share of $0.18 for the first quarter of 2001. Diluted income per share for the 2001 period assumes the recapitalization occurred at the beginning of 2001 and that the WorldCom group stock and MCI group stock existed for all periods presented. MCI GROUP RESULTS OF OPERATIONS The following table sets forth for the periods indicated the MCI group's statements of operations in millions of dollars and as a percentage of its revenues: <Table> <Caption> THREE MONTHS ENDED MARCH 31, ------------------------------------------- 2001 2002 ------------------- ------------------- <S> <C> <C> <C> <C> Revenues .......................... $ 3,622 100.0 % $ 3,042 100.0 % Line costs ........................ 1,826 50.4 1,571 51.6 Selling, general and administrative 1,338 36.9 1,267 41.7 Depreciation and amortization ..... 227 6.3 169 5.6 ------- ------ ------- ------ Operating income .................. 231 6.4 35 1.1 Other income (expense): Interest expense ............. (126) (3.5) (120) (3.9) ------- ------ ------- ------ Income (loss) before income taxes . 105 2.9 (85) (2.8) Income tax expense (benefit) ...... 43 1.2 (31) (1.0) ------- ------ ------- ------ Net income (loss) ................. $ 62 1.7% $ (54) (1.8)% ======= ====== ======= ====== </Table> THREE MONTHS ENDED MARCH 31, 2001 VS. THREE MONTHS ENDED MARCH 31, 2002 REVENUES. Revenues for the three months ended March 31, 2002 decreased 16.0% to $3.0 billion versus $3.6 billion for the prior year period. The decrease in total revenues is primarily attributable to consumers' substitution of wire line services with wireless and e-mail. Actual reported revenues by category for the three months ended March 31, 2001 and 2002 reflect the following changes by category (dollars in millions): <Table> <Caption> PERCENT 2001 2002 CHANGE ------ ------ ------- <S> <C> <C> <C> Consumer .............................. $1,807 $1,595 (11.7) Wholesale ............................. 695 584 (16.0) Alternative channels and small business 695 525 (24.5) Dial-up Internet ...................... 425 338 (20.5) ------ ------ TOTAL ................................. $3,622 $3,042 (16.0) ====== ====== </Table> Consumer revenues for the first quarter of 2002 decreased 11.7% over the prior year period. The majority of this decrease is attributed to decreases in calling card, dial around and dial-1 revenues as a result of consumers' continued substitution of wire line services with wireless and e-mail. Our consumer local initiatives continue to perform well as consumer local revenues increased over 108% for the first quarter of 2002. In an effort to align our product offerings with consumer needs and increase our market share, we launched The Neighborhood built by MCIsm in the second quarter of 2002. The Neighborhood is a new nationwide telecommunications business which unifies local and long distance services. The Neighborhood is currently available in 32 states and is expected to eventually reach more than 50 40 <Page> million households. The brand's flagship offering, Neighborhood Complete, provides unlimited calling within the U.S., whether across the street or across the country. It also provides a complete suite of calling and messaging features from one company, on one bill for one fixed monthly price. We believe that The Neighborhood will attract incremental revenue from existing customers as well as new revenues from new customers. While this product is in its early marketing stages, we believe we will begin to see the benefits from The Neighborhood as early as the second half of 2002. Wholesale revenues for the first quarter of 2002 decreased 16.0% over the prior year period. The wholesale market continues to be extremely price competitive, although the average rate per minute has been relatively stable since the second quarter of 2001. Alternative channels and small business revenues for the three months ended March 31, 2002 decreased 24.5% over the prior year period. Alternative channels and small business includes sales agents and affiliates, wholesale alternative channels, small business, prepaid calling card and wireless messaging revenues. The decrease is attributed to pricing pressures in the wholesale alternative channels and small business markets which negatively affected revenue growth and gross margins in this area. Dial-up Internet revenues for the three months ended March 31, 2002 decreased 20.5% over the prior year amount. Our dial access network has grown 7.5% to approximately 3.2 million modems as of March 31, 2002, compared with the prior year period. However, Internet connect hours decreased 7.2% to 1.8 billion hours for the first quarter of 2002 versus the prior year period. The decrease in dial-up Internet revenues is attributed to pricing pressure resulting from the impact of volume discounts and off-net traffic, which lowered average revenue per hour by approximately 14% for the first quarter of 2002 versus the prior year period. LINE COSTS. Line costs as a percentage of revenues for the first quarter of 2002 increased to 51.6% as compared to 50.4% reported for the prior year period. This increase resulted from the continued competitive pricing on the dial-up Internet business and the decrease in higher margin calling card and dial around revenues due to wireless substitution as noted above. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses for the first quarter of 2002 were $1.27 billion or 41.7% of revenues as compared to $1.34 billion or 36.9% of revenues for the prior year period. Selling, general and administrative expenses for the first quarter of 2001 include $48 million associated with domestic severance packages and other costs related to our February 2001 workforce reductions. Excluding this, selling, general and administrative expenses as a percentage of revenues were 35.6% for the first quarter of 2001. The increase in selling, general and administrative expenses as a percentage of revenues can be attributed to the pricing pressure on our products as noted above. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense for the first quarter of 2002 decreased to $169 million or 5.6% of revenues from $227 million or 6.3% of revenues for the same period in the prior year. Depreciation and amortization for the first quarter of 2002 reflects the MCI group's discontinued amortization of intangible assets with indefinite useful lives, in accordance with SFAS No. 142. For the first quarter of 2001, depreciation and amortization expense was $154 million excluding the amortization of indefinite-lived intangibles no longer amortized under SFAS No. 142. On a comparable basis, depreciation and amortization expense increased as a result of additional depreciation associated with 2000 and 2001 capital expenditures. INTEREST EXPENSE. Interest expense for the first quarter of 2002 was $120 million or 3.9% of revenues as compared to $126 million or 3.5% of revenues for the same period in 2001. Interest expense on borrowings incurred by WorldCom and allocated to the MCI group is based on the weighted-average interest rate, excluding capitalized interest, of WorldCom debt plus 1 1/4 percent. As of January 1, 2001, $6.0 billion of WorldCom's outstanding debt was notionally allocated to the MCI group. INCOME TAX EXPENSE (BENEFIT). The effective income tax rate of 36.5% of loss before taxes for the first quarter of 2002 is less than the 41.0% effective income tax rate in the first quarter of 2001 primarily due to our discontinued amortization of goodwill in 2002. 41 <Page> NET INCOME. For the three months ended March 31, 2002, the MCI group reported net loss of $54 million as compared to net income of $62 million for the three months ended March 31, 2001. Diluted loss per MCI group share for the first quarter of 2002 was $0.46 compared to diluted income per MCI group share of $0.54 for the first quarter of 2001. Diluted income per share assumes the recapitalization occurred at the beginning of 2001 and that the WorldCom group stock and MCI group stock existed for all periods presented. LIQUIDITY AND CAPITAL RESOURCES As of March 31, 2002, our total debt was $30.2 billion and we had available liquidity of $10.2 billion under our credit facilities, which are described in our Annual Report on Form 10-K for the year ended December 31, 2001, and from available cash. As of January 1, 2001, the MCI group was notionally allocated $6.0 billion of WorldCom's debt and the remaining outstanding debt was notionally allocated to the WorldCom group. WorldCom management has a wide degree of discretion over the cash management policies of both the WorldCom group and the MCI group. Cash generated by either group can be transferred to the other group without prior approval of WorldCom's shareholders. Due to the discretion possessed by management over the cash management policies of both groups, including the timing and decision of whether to finance capital expenditures, it may be difficult to assess each group's liquidity and capital resource needs, and, in turn, the future prospects of each group based on past performance. For the first quarter of 2002, the MCI group generated sufficient cash to pay $71 million for dividends on MCI group stock and to repay $9 million of its allocated notional debt. As of March 31, 2002, we had no amounts drawn against our credit facilities which include the following: o $1.6 billion revolving credit facility that expires June 8, 2006; o $2.65 billion 364-day revolving credit facility that expires June 7, 2002 with a one-year conversion feature; and o $3.75 billion revolving credit facility that expires June 30, 2002. We intend to replace our $2.65 billion 364-day revolving credit facility and we do not intend to renew the $3.75 billion revolving credit facility. Additionally, we are working with our banking group to increase the size of our facilities in exchange for security. These negotiations, if successfully completed, will result in $5.0 billion or more of availability under credit facilities which would mature between 2005 - 2006. We remain on schedule in these negotiations and expect to complete the process over the next few weeks. It is anticipated that in the interim, we will draw against the $2.65 billion revolving credit facility in order to preserve the one-year conversion feature on the facility. However, it is intended that the amounts drawn under the $2.65 billion revolving credit facility will be repaid upon completion of the new credit facility agreements. Our senior debt is currently rated as follows: <Table> <Caption> Rating Agency Rating Outlook ------------------------------------------------------------------- <S> <C> <C> Moody's Investors Service Ba2 negative Standard & Poor's BB negative Fitch Ratings BB negative </Table> These ratings, or any further downgrade in rating, have not and will not trigger any defauls on our outstanding bond debt or our undrawn credit facilities, although our interest rates and our annual commitment fee under our credit facilities are sensitive to ratings adjustments. On May 9, 2002, we obtained a waiver on our existing $2.0 billion receivables purchase program, which eliminates any concerns regarding the effect of credit ratings on this program during the period covered by the waiver. Additionally, we are in the process of negotiating the replacement of our current receivables purchase program with a new $1.5 billion facility that does not contain any ratings triggers. We expect the new program will be in place by May 23, 2002, when the current waiver expires on our existing $2.0 billion receivables purchase program. We expect the funds used to reduce the receivables purchase program down to a $1.5 billion facility will be obtained from a combination of cash and availability under our credit facilities. 42 <Page> In February 2002, we liquidated our remaining investment in News Corporation and received cash proceeds of $870 million, net of $60 million for sales discounts and banking fees. Additionally, on April 15, 2002, we elected to redeem our $700 million 6.125% senior notes due 2012. Cash balances were used to repay this obligation. OPERATING ACTIVITIES For the three months ended March 31, 2001 and 2002, our cash flows from operations were as follows (dollars in millions): <Table> <Caption> 2001 2002 ------ ------ <S> <C> <C> WorldCom group ............................... $1,215 $1,592 MCI group .................................... 360 209 ------ ------ Net cash provided by operating activities $1,575 $1,801 ====== ====== </Table> The increase for the three months ended March 31, 2002 versus the prior year amount reflects an improved working capital position, which was partially offset by lower operating results in both the WorldCom group and the MCI group. INVESTING ACTIVITIES For the three months ended March 31, 2001 and 2002, our net cash used in investing activities was as follows (dollars in millions): <Table> <Caption> 2001 2002 ------- ------- <S> <C> <C> WorldCom group ........................... $(2,558) $ (716) MCI group ................................ (396) (133) ------- ------- Net cash used in investing activities $(2,954) $ (849) ======= ======= </Table> The WorldCom group's capital expenditures totaled $2.1 billion in the first three months of 2001 and $1.3 billion in the first three months of 2002. Primary capital expenditures include purchases of transmission, communications and other equipment. The MCI group's capital expenditures totaled $95 million in the first three months of 2001 and $30 million in the first three months of 2002. The MCI group's capital expenditures include purchases of switching equipment, dial modems and messaging and other equipment. Investing activities include intangible asset increases at the WorldCom group of $106 million for the first quarter of 2001 and $116 million for the first quarter of 2002, and at the MCI group of $118 million for the first quarter of 2001 and $60 million for the first quarter of 2002. Intangible asset additions primarily represent costs incurred to develop software for internal use. Investing activities include acquisitions and related costs at the WorldCom group of $142 million and $2 million in the first three months of 2001 and 2002, respectively. FINANCING ACTIVITIES For the three months ended March 31, 2001 and 2002, cash provided by (used in) financing activities was as follows (dollars in millions): <Table> <Caption> 2001 2002 ------ ------ <S> <C> <C> WorldCom group ......................................... $1,311 $ (23) MCI group .............................................. 15 (80) ------ ------ Net cash provided by (used in) financing activities $1,326 $ (103) ====== ====== </Table> Financing activities include net repayments on debt of $22 million for the first three months of 2002 and net proceeds from borrowings on debt of $1.3 billion for the first three months of 2001. Financing activities for the MCI group reflect the payment of dividends to MCI group shareholders and repayment of notionally allocated debt from WorldCom. 43 <Page> Also included in financing activities are proceeds from WorldCom's common stock issuances of $71 million and $14 million in the first three months of 2001 and 2002, respectively, as a result of WorldCom common stock option and warrant exercises. Distributions on mandatorily redeemable preferred securities and dividends paid on preferred stock in the first three months of 2001 and 2002 were $16 million and $24 million, respectively. The increase represents dividends associated with our Series D, E and F preferred stock which was issued in connection with the Intermedia merger. Dividends on the Series D, E and F preferred stock are payable in cash or shares of our common stock, at our election. To date, we have paid these dividends in cash, however, we expect that future dividends on the Series D, E and F preferred stock will be paid in shares of our common stock. During the first quarter of 2002, we paid a cash dividend of $0.60 per share of MCI group common stock, or $71 million in the aggregate. Additionally, the dividends payable during the second and third quarters of 2002 have already been declared and/or paid. We anticipate that 2002 capital expenditures for the WorldCom group will be up to $4.5 billion and will be approximately $400 million (including software development) at the MCI group. Additionally, we believe that free cash flow (cash flow from operations less cash flow used in investing activities) will approximate $1.0 billion in 2002 and will increase each subsequent year by more than $250 million through at least 2004. Currently, scheduled debt maturities are $60 million for the remainder of 2002, after our redemption of $700 million of remarketable notes on April 15, 2002, $1.6 billion in 2003, $2.5 billion in 2004 and $2.3 billion in 2005. Additionally, we have $1.0 billion in dealer remarketable securities which are subject to mandatory tender in January 2003, and we have $500 million of bonds with a stated 2027 maturity which have a put feature for June 2003. We believe that the free cash flow noted above in addition to available cash and availability under our credit facilities will be more than sufficient to meet our debt and capital requirements beyond the next twelve months. CRITICAL ACCOUNTING POLICIES Our significant accounting policies are described in Note 1 to the consolidated and combined financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2001. We believe some of our most critical accounting policies include: o estimating valuation allowances and accrued liabilities associated with revenue reserves and provisions for uncollectible accounts and pending litigation and regulatory matters; o accounting for income taxes; o goodwill and intangibles; o valuation of long-lived and intangible assets, and goodwill; o estimating depreciation and amortization associated with long-lived assets; and o allocation policies between the WorldCom group and the MCI group. ESTIMATING VALUATION ALLOWANCES AND ACCRUED LIABILITIES. The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities as well as the reported amounts of revenues and expenses for the periods presented. Specifically, our management must make estimates of future customer credits through the analysis of historical trends and known events. Significant management judgments and estimates must be made and used in connection with establishing the revenue reserves associated with discounts earned on special customer agreements, billing reserves for pricing changes and customer disputes. Material differences may result in the amount and timing of our revenue adjustments if management projections differ from actual results. Similarly, our management must make estimates regarding the collectibility of our accounts receivable. Management specifically analyzes accounts receivable including historical bad debts, customer concentrations, customer credit-worthiness and current economic trends when evaluating the adequacy of 44 <Page> the allowance for doubtful accounts. As of March 31, 2002, our accounts receivable balance was $5.0 billion, net of allowance for doubtful accounts of $1.2 billion. We have recorded accruals for loss contingencies in our consolidated financial statements associated with legal and regulatory proceedings that are incidental to our business. Such accruals are based on our management's estimate of the projected liability and range of loss in accordance with applicable accounting guidance. Because of the uncertainties related to both the amount and range of loss on the remaining pending matters, management is unable to make a reasonable estimate of the ultimate liability related to an unfavorable outcome. As additional information becomes available, we will assess the potential liability related to our pending matters and revise our estimates. The results of these various legal and regulatory matters are uncertain and could have a material adverse affect on our consolidated results of operations or financial position. ACCOUNTING FOR INCOME TAXES. As part of the process of preparing our consolidated financial statements we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves our estimating actual current tax exposure for WorldCom together with assessing temporary differences resulting from differing treatment of items, such as property, plant and equipment depreciation, for tax and accounting purposes. Actual income taxes could vary from these estimates due to future changes in income tax law or results from final tax exam reviews. GOODWILL AND INTANGIBLES. Purchase accounting requires extensive use of accounting estimates and judgments to allocate the purchase price to the fair market value of the assets and liabilities purchased. In our recording of acquisitions, we allocate the purchase price among certain identifiable intangible assets and goodwill based on third party appraisals. VALUATION OF LONG-LIVED ASSETS, GOODWILL AND INTANGIBLES. We assess the impairment of identifiable intangibles, long-lived assets and goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include the following: o significant underperformance relative to expected historical or projected future operating results; o significant changes in the use of our assets or the strategy for our overall business; o significant negative industry or economic trends; o significant decline in our stock price for a sustained period; and o our market capitalization relative to net book value. We determine any impairment by comparing the undiscounted future cash flows estimated to be generated by those 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 or group of assets. 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. As discussed below, SFAS No. 142, became effective on January 1, 2002 and as a result, we stopped amortizing approximately $45.0 billion of net goodwill and $1.0 billion of net tradenames. Based on our current levels of such assets, this will reduce amortization by approximately $1.3 billion annually. In lieu of amortization, we are required to perform an initial impairment review of our goodwill and tradenames in 2002 and an annual impairment review thereafter. We expect to complete our initial impairment review in the second quarter of 2002. We currently estimate that we will record an impairment charge upon completion of the initial impairment review of approximately $15 to $20 billion. 45 <Page> DEPRECIATION AND AMORTIZATION OF LONG-LIVED ASSETS. We assign useful lives for long-lived assets based on periodic studies of actual asset lives and our intended use for those assets. Any change in these asset lives would be reported in our statement of operations as soon as any change in estimate is determined. There have been no material changes in asset lives during the periods presented. ALLOCATION POLICIES BETWEEN THE WORLDCOM GROUP AND THE MCI GROUP. The financial information for the WorldCom group and the MCI group reflect the performance of the businesses attributed to each group and includes the attribution and allocation of our assets, liabilities, revenues and expenses between the WorldCom group and the MCI group in accordance with our tracking stock policy. Our management believes that the attribution and allocation methods used are equitable and provide a reasonable estimate of the costs attributable to each group. However, it is not practical to determine whether the allocated amounts represent amounts that would have been incurred on a stand-alone basis. Our board of directors or any special committee appointed by our board of directors may, without shareholder approval, change the policies set forth in our tracking stock policy statement and may adopt additional policies or make exceptions with respect to the application of the policies described in our policy statement in connection with particular facts and circumstances, all as they may determine to be in the best interests of WorldCom. Our board is subject to fiduciary duties to all of WorldCom's shareholders as one group, not to the holders of any series of stock separately. These policies are discussed in this management's discussion and analysis of financial condition and results of operations. RELATED PARTY TRANSACTIONS The information regarding related party transactions is included in Part II, Item 5, below, which is hereby incorporated by reference herein. RECENTLY ISSUED ACCOUNTING STANDARDS In June 2001, the FASB issued SFAS No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets." SFAS No. 141 requires business combinations initiated after June 30, 2001, which includes the Intermedia merger, to be accounted for using the purchase method of accounting and broadens the criteria for recording intangible assets separate from goodwill. Recorded goodwill and intangibles are evaluated against this new criteria and may result in certain intangibles being subsumed into goodwill, or alternatively, amounts initially recorded as goodwill may be separately identified and recognized apart from goodwill. Under the new rules, goodwill and intangible assets deemed to have indefinite lives are no longer amortized but are subject to annual impairment tests. The statement includes provisions for the identification of reporting units for purposes of assessing potential future impairments of goodwill. Upon adoption, we stopped amortizing intangible assets with indefinite useful lives, including goodwill and tradenames. Based on current levels of such assets, this will reduce amortization expense by approximately $1.3 billion annually ($1.0 billion at WorldCom group and $0.3 billion at MCI group). Additionally, we are conducting impairment reviews of all intangible assets with indefinite useful lives and we expect to complete this assessment no later than the second quarter of 2002, in accordance with the provisions of SFAS No. 142. Based on our preliminary analyses, we estimate that as a result of the adoption of SFAS No. 142 we will reduce goodwill by $15 to $20 billion. In June 2001, the FASB issued SFAS No. 143 "Asset Retirement Obligations," which establishes new accounting and reporting standards for legal obligations associated with retiring assets. The fair value of a liability for an asset retirement obligation must be recorded in the period in which it is incurred, with the cost capitalized as part of the related long-lived assets and depreciated over the asset's useful life. Changes in the liability resulting from the passage of time will be recognized as operating expenses. SFAS No. 143 must be adopted by 2003. We have not yet quantified the impact of adopting SFAS No. 143 on our consolidated results of operations or financial position. In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets," which supersedes both SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the accounting and reporting provisions for the disposal of a segment of a business contained in APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS No. 144 establishes a single accounting model for long-lived assets to be disposed of by sale and broadens the presentation of discontinued operations. The provisions of SFAS No. 144 are effective beginning in 2002 and are not expected to have a material impact on our consolidated results of operations or financial position. 46 <Page> ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to the impact of foreign currency fluctuations and changes in market values of our investments. We do not use derivative financial instruments to manage our interest rate risk. We have minimal cash flow exposure due to general interest rate changes for our fixed rate, long-term debt obligations. We do not believe a hypothetical 10% adverse rate change in our variable rate debt obligations would be material to our results of operations. We are exposed to foreign exchange rate risk primarily due to our international operation's holding of approximately $512 million in U.S. dollar denominated debt, and our holding of approximately $1.8 billion of indebtedness indexed in other foreign currencies including the Euro and Sterling Pound as of March 31, 2002. Our potential immediate loss that would result from a hypothetical 10% change in foreign currency exchange rates based on this position would be approximately $205 million. In addition, if that change were to be sustained, our cost of financing would increase in proportion to the change. We are also subject to risk from changes in foreign exchange rates for our international operations which use a foreign currency as their functional currency and are translated into U.S. dollars. We believe our market risk exposure with regard to our marketable equity securities is limited to changes in quoted market prices for the securities. Based upon the composition of our marketable equity securities at March 31, 2002, we do not believe a hypothetical 10% adverse change in quoted market prices would be material to our results of operations or financial position. PART II. OTHER INFORMATION Item 1. Legal Proceedings There have been no material changes in the legal proceedings reported in our Annual Report on Form 10-K for the year ended December 31, 2001, except as reflected in the discussion under Note F of the Notes to Consolidated Financial Statements in Part I, Item 1, above, which is hereby incorporated by reference herein. Item 2. Changes in Securities and Use of Proceeds None. Item 3. Defaults upon Senior Securities None. Item 4. Submission of Matters to a Vote of Securities Holders None. Item 5. Other Information We have entered into certain loan and guaranty arrangements involving Bernard J. Ebbers, principally relating to certain obligations to financial institutions secured by Mr. Ebbers' stock in WorldCom. We initially established these arrangements in 2000, and have agreed to a series of modifications since January 1, 2001. On April 29, 2002, in connection with Mr. Ebbers' resignation as President, Chief Executive Officer and Director of WorldCom, we consolidated these various loan and guaranty arrangements into a single promissory note in the principal amount of approximately $408.2 million, repayable with accrued interest over five years. This principal amount includes approximately $198.7 million that we have paid to Bank of America, N.A., or Bank of America, as repayment of outstanding indebtedness of Mr. Ebbers or certain companies controlled by him which we had guaranteed, approximately $36.5 million that we have deposited to collateralize a letter of credit used to support financing to an unrelated third party, 47 <Page> approximately $165 million that we have loaned to Mr. Ebbers and all interest accrued on the foregoing amounts to April 29, 2002. These transactions are further described below. Since establishing these arrangements, we agreed to guarantee $150 million principal amount of indebtedness owed by Mr. Ebbers to Bank of America, as well as certain additional payments and related costs. The additional payments included, among other things, amounts payable to Bank of America by Mr. Ebbers or certain companies controlled by him relating to an approximately $45.6 million letter of credit secured by a portion of Mr. Ebbers' stock and used to support financing to an unrelated third party; specified amounts, including margin debt, that became payable following stock price declines; and amounts subject to a margin call with respect to certain margin debt. The scheduled maturity of the Bank of America margin debt was extended in January 2002 for a period of up to two years. However, following declines in the closing price of the WorldCom group stock through early February 2002, we made aggregate payments of approximately $198.7 million to repay all of the outstanding debt covered by our guaranty and deposited with Bank of America approximately $36.5 million to collateralize the letter of credit, which is scheduled to expire on February 15, 2003, subject to renewal, extension or substitution. Our payments, together with any amounts paid or costs incurred by us in connection with the letter of credit, plus accrued interest at a floating rate equal to that under one of our credit facilities, were payable by Mr. Ebbers to us, as modified in early April 2002, within 90 days after demand, or within 180 days after demand if subsequent to his death or incapacity. In addition to the guaranty arrangements, during 2000 we loaned $100 million to Mr. Ebbers. Since January 1, 2001, we have loaned him approximately an additional $65 million, for a total maximum principal amount of approximately $165 million. These loans bore interest at floating rates equal to that under certain of our credit facilities and, as modified in early April 2002, were payable within 90 days after demand, or within 180 days after demand if subsequent to Mr. Ebbers' death or incapacity. As noted above, on April 29, 2002, Mr. Ebbers' obligations to WorldCom under these loans and guaranty arrangements were consolidated into a single promissory note, which replaced the former notes. As of May 14, 2002, the aggregate principal amount of indebtedness owed by Mr. Ebbers to us under this note was approximately $408.2 million, which constitutes the largest aggregate amount of indebtedness outstanding since January 1, 2001. The principal amount is subject to payment over five years on the following schedule: $25 million on April 29, 2003, $25 million on April 29, 2004, $75 million on April 29, 2005, $100 million on April 29, 2006, and all remaining principal on April 29, 2007. Mr. Ebbers is also obligated to pay interest on the outstanding balance, compounded monthly, on each repayment date at a fluctuating interest rate equal to that under one of our credit facilities, which was 2.32% per annum as of April 29, 2002. All principal and accrued interest under this note are immediately due and payable (1) upon the death of Mr. Ebbers, or (2) upon demand in the case of certain events of default, or (3) automatically without notice in the case of certain events of bankruptcy by or against Mr. Ebbers. We have been advised that Mr. Ebbers has used the proceeds of the loans from us principally to repay certain indebtedness under loans secured by shares of our stock owned by him and that the proceeds of such secured loans were used for private business purposes. The loans and guaranty arrangements by us were made following a determination that they were in the best interests of WorldCom and our shareholders in order to avoid additional forced sales of Mr. Ebbers' stock in WorldCom. The determination was made by our compensation and stock option committee as a result of the pressure on our stock price, margin calls faced by Mr. Ebbers and other considerations. Such actions by our compensation and stock option committee were ratified and approved by our board of directors. In connection with the transactions described above and, as to a portion of the shares, subject to certain limitations and effective upon termination of restrictions under existing lending agreements, Mr. Ebbers pledged to us the shares of our stock currently owned by him or later acquired upon option exercise with respect to his obligations under the loans and guaranty arrangements from us. This pledge has been perfected as to 9,287,277 shares of WorldCom group stock and 575,149 shares of MCI group stock. The pledge of the remaining shares of WorldCom and MCI group stock owned by Mr. Ebbers will 48 <Page> take effect as and to the extent the limitations and restrictions under existing lending arrangements terminate. Following recent margin sales in respect of his shares, Mr. Ebbers' remaining holdings consist of an additional 5,091,483 shares of WorldCom group stock and no shares of MCI group stock. In addition, Mr. Ebbers has pledged to us security interests in certain equity interests in privately held businesses owned by him. Mr. Ebbers also agreed to indemnify us for any amounts expended or losses, damages, costs, claims or expenses incurred under the guaranty arrangements or the loans from us. Mr. Ebbers has also entered into a separation agreement with us as of April 29, 2002, which provides that he resigned from all directorships, offices and positions with us, and that he would be appointed to serve our board of directors as non-executive CHAIRMAN EMERITUS at the pleasure of the board. The agreement further provides that Mr. Ebbers will remain available for a period of five years to provide consulting services to us from time to time. The agreement also provides that we will pay an annual pension of $1.5 million to Mr. Ebbers for the remainder of his life, and an annual pension benefit of $750,000 to his current spouse for the remainder of her life, should she survive him, as well as continued medical and life insurance benefits for Mr. Ebbers' lifetime at our expense, limited use of our aircraft and the right to lease office space from us. The agreement further provides that all of Mr. Ebbers' outstanding options to purchase WorldCom group stock or MCI group stock became fully vested and exercisable as of April 29, 2002, and will generally remain exercisable for a period of five years following that date (or, if earlier, the expiration of the original term). As of that date, Mr. Ebbers held unvested options to acquire 1,788,627 shares of WorldCom group stock at a weighted-average exercise price of $30.90 per share and vested options to acquire 9,510,678 shares of WorldCom group stock at a weighted- average exercise price of $21.25 per share. Mr. Ebbers does not hold any outstanding options to acquire MCI group stock. Under the agreement, Mr. Ebbers also is subject to a number of restrictive covenants, including a five-year non-competition covenant in favor of us and our affiliates. Mr. Ebbers and we also agreed to a mutual release of actual or potential claims, subject to certain exceptions. Finally, in the event of any breach of the agreement or default by Mr. Ebbers in any of his obligations under the promissory note and related arrangements or the filing of bankruptcy by him, the payment of pension benefits described above will be permanently discontinued and all outstanding amounts due to us by him will be accelerated as provided in the promissory note. Effective with Mr. Ebbers' resignation, John W. Sidgmore, previously Vice Chairman of WorldCom, was appointed President and CEO of WorldCom and Bert C. Roberts has remained Chairman of our board of directors. Additionally, Scott D. Sullivan has been made Executive Vice President and Chief Financial Officer, and Ronald R. Beaumont has been made Chief Operating Officer of WorldCom, overseeing operations for both the WorldCom group and the MCI group. Item 6. Exhibits and Reports on Form 8-K A. Exhibits See Exhibit Index. B. Reports on Form 8-K Pursuant to Item 5, "Other Events," we filed two Current Reports on Form 8-K dated February 7, 2002 (filed February 7, 2002) and one Current Report on Form 8-K dated March 7, 2002 (filed March 13, 2002). 49 <Page> SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report on Form 10-Q to be signed on its behalf by Scott D. Sullivan, thereunto duly authorized to sign on behalf of the registrant and as the principal financial officer thereof. WORLDCOM, INC. By: /s/ Scott D. Sullivan ------------------------------------ Scott D. Sullivan Chief Financial Officer Dated: May 15, 2002 50 <Page> EXHIBIT INDEX Exhibit No. Description - ----------- ----------- 4.1 Articles of Amendment to the Second Amended and Restated Articles of Incorporation of WorldCom (amending former Article Seven by inserting Articles Seven D, E, F, and G) (incorporated herein by reference to Exhibit 3.1 to WorldCom's registration statement on Form S-8 dated August 22, 2001 (Registration No. 333-68204)) 4.2 Articles of Amendment to the Second Amended and Restated Articles of Incorporation of WorldCom (amending former Article Four by deleting the text thereof and substituting new Article Four) (incorporated herein by reference to Exhibit 3.2 to WorldCom's registration statement on Form S-8 dated August 22, 2001 (Registration No. 333-68204)) 4.3 Articles of Amendment to the Second Amended and Restated Articles of Incorporation of WorldCom (amending former Article Eleven by deleting the text thereof and substituting new Article Eleven) (incorporated herein by reference to Exhibit 3.3 to WorldCom's registration statement on Form S-8 dated August 22, 2001 (Registration No. 333-68204)) 4.4 Second Amended and Restated Articles of Incorporation of WorldCom (including preferred stock designations), as amended as of May 1, 2000 (incorporated herein by reference to Exhibit 3.4 to WorldCom's registration statement on Form S-8 dated August 22, 2001 (Registration No. 333-68204)) 4.5 Restated Bylaws of WorldCom (incorporated by reference to Exhibit 3.5 to WorldCom's registration statement on Form S-8 dated August 22, 2001 (Registration No. 333-68204)) 4.6 Rights Agreement between WorldCom and The Bank of New York, as Rights Agent, dated as of March 7, 2002 (incorporated herein by reference to Exhibit 1 to WorldCom's Form 8-A dated March 13, 2002 (File No. 0-11258)) 10.1 Letter Agreement made as of April 2, 2002, between Bernard J. Ebbers ("Borrower") and WorldCom, amending, restating and confirming the understandings contained in the Letter Agreement dated November 1, 2000 10.2 Pledge and Security Agreement dated April 18, 2002 by Borrower in favor of WorldCom 10.3 Promissory note dated April 29, 2002 payable by Borrower to WorldCom 10.4 Letter Agreement made as of April 29, 2002 between Borrower and WorldCom 10.5 Separation Agreement between WorldCom and Borrower, dated April 29, 2002 10.6 Mutual Release by and between Borrower and WorldCom dated as of April 29, 2002 51