WorldCom Fades Into History
Reorganization
Complete, Telecom Company Now Becomes MCI Inc.
By Christopher Stern
Washington Post Staff Writer
Monday,
April 19, 2004; Page E01
WorldCom Inc. is set to end its tumultuous 21-month journey through
bankruptcy reorganization tomorrow when it plans to emerge as a new company
under a new name, freed of more than $35 billion in debt. At 6 a.m., WorldCom is to become MCI Inc. The company has been doing business
informally under the MCI brand for more than a year. The Ashburn-based telecommunications giant has been preparing to take on its
new identity since July 21, 2002, when it filed for protection from its
creditors after revealing the largest accounting fraud in U.S. history. The new MCI will be much different from the former WorldCom, the nation's
second-largest long-distance phone company. It reduced its debt to less than $6
billion from $41 billion. It has trimmed its workforce to about 50,000 people
from more than 70,000. It has overhauled it senior management and rid itself of
about 100 executives who were implicated directly or indirectly in the $11
billion accounting scandal. WorldCom chief executive Michael D. Capellas has played a central role in the
reorganization, during which creditors and federal authorities praised his
ability to steer the company through Chapter 11. But now Capellas must prove he
can keep WorldCom competitive in a marketplace where customers expect a variety
of offerings, including local, long-distance, wireless and Internet service.
"Nobody is kidding themselves. In the short term it is going to be a tough
year," Capellas said. In the near term, WorldCom plans to focus on its business customers, who
account for 80 percent of the company's revenue, offering Internet-based
services that allow companies to "put local, long-distance and Internet all on
the same network," Capellas said. For residential customers, Capellas said the company would concentrate on
high-density urban areas where WorldCom has established its own networks and
does not have to lease lines from other companies. WorldCom will compete for customers at a time when new rivals, such as cable
television companies and Internet phone service providers, are entering the
marketplace. Much of the telecommunications industry is engaged in a price war
as federal regulators free companies to compete for local, long-distance and
other business. As a result, revenue at WorldCom has plummeted 30 percent even though the
company's customer base has remained stable at about 20 million subscribers. In
2002, WorldCom reported revenue of $32 billion. It projects only $21 billion to
$22 billion in revenue this year. "Contracts are being renewed, but every time they get renewed at a lower
price," said Patrick J. Comack, an analyst with Guzman & Co. WorldCom is
suffering from an industry-wide problem, he said. "AT&T is feeling the same
kind of pain." WorldCom's top sales executive, Wayne E. Huyard, doesn't think prices will go
up anytime soon. "I'm not sure when it will stabilize. I really don't see much
change in that in the near future," Huyard said. During the relatively short time WorldCom has been in Chapter 11, the
industry has shifted to a new economic model, based on offering customers a
package of services that can include local, long-distance, wireless and Internet
service. Capellas is trying to reposition the company to offer such a package. It
could be difficult. WorldCom sold its money-losing wireless division more than a
year ago. Now one of Capellas's biggest priorities is to find a new partner in
the mobile-phone business. "Doing a partnership while you are in bankruptcy is
difficult," Capellas said. The company also continues to market its local phone service known as "The
Neighborhood." In the past two years the company has signed up about 3.5 million
customers. At the same time, WorldCom hopes to expand its high-speed Internet
service, which so far has not been aggressively marketed to residential
customers. Both plans depend in part on WorldCom's ability to rent lines from
local telephone companies to reach residential customers. Federal regulations
once dictated the terms of those leasing arrangements, but a federal court
recently threw out the rules and the Federal Communications Commission has not
said whether it will appeal the decision. "We are going to have to determine which way the regulatory wind blows,"
Capellas said. With revenue shrinking or remaining flat, Capellas has said that keeping
costs in check will continue to be a daily priority. The Chapter 11
reorganization has been expensive. In the past year, lawyers, accountants and
consultants have billed the company for $800 million. The company has no current plan to further reduce its workforce, Capellas
said, but he did not rule out future layoffs. As part of its corporate
restructuring, Capellas moved WorldCom's headquarters from Clinton, Miss., to
the company's campus in Ashburn, where it employs more than 4,000 people.
WorldCom has 1,000 more employees around the Washington region. In the near term, the company's single biggest saving has been its ability to
cut its interest payments from $2.5 billion a year to just $400 million. Some analysts were reluctant to discuss WorldCom's prospects because the
company has not yet completed its audited financial statements for 2003. Under
the Securities and Exchange Commission's rules, the company may emerge from
bankruptcy only if it can file complete audited statements within the next 15
days. A WorldCom spokesman said the company is on track to file its 2003
statement this week. The company has already filed restated financials for 2000 and 2001 with the
SEC. It reported a total loss for the two years of $64.5 billion, compared with
its previous claim of $10 billion in pretax earnings. Today lawyers for the company will hole up in conference rooms of its
bankruptcy lawyers, Weil Gotshal & Manges LLP. They will work with
executives to complete the final bankruptcy paperwork, a process not unlike a
real estate closing. In addition to settling its accounts, the company is scheduled to wire $500
million to the SEC today, partial payment of its $750 million fraud settlement.
The SEC is still owed $250 million worth of the new MCI stock. The company plans to issue 326 million shares of MCI stock. About 300 million
shares are to be issued tomorrow, mostly to bondholders. According to the
company's reorganization plan, bondholders were paid an average of 36 cents for
each dollar of debt. The remaining shares are to go to unsecured creditors,
possibly as early as this week. Under an earlier plan of reorganization, several of the key bondholders,
including David J. Matlin of MatlinPatterson Asset Management LLC, planned to
sit on the company's board. But they changed their minds after Richard C.
Breeden, a court-appointed corporate monitor, argued that as board members they
should be required to disclose stock sales up to two weeks before they occur,
meaning they would have to publicly tip their hand if they decided to cash in on
their investments.