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A record $750 million payment will eventually make its way to investors who were hurt by the company's accounting fraud and subsequent bankruptcy.
Stephen Taub, CFO.com | US
April 21, 2004
It's a new beginning for MCI, the nation's second-largest long-distance phone company.
The telecom's plan of reorganization, confirmed last October 31 by the U.S. Bankruptcy Court for the Southern District of New York, is now effective, and the company has begun to distribute securities and cash to its creditors.
With the Chapter 11 process behind it, the company, formerly known as WorldCom, is now officially MCI Inc.
Under former chairman Bernard Ebbers, MCI's acquisition-fed growth made it one of the most aggressive players in telecommunications after the industry was deregulated in the mid-1990s. However, the company crashed into a record $104 billion Chapter 11 filing in July 2002 after Ebbers and other executives were accused of overstating earnings by $10.8 billion. The overstatement — the largest accounting fraud in U.S. corporate history — wiped out $180 billion in shareholder value, measured from the company's peak valuation.
Last month former chief financial officer Scott Sullivan pleaded guilty to three criminal counts for his role in the scandal and agreed to cooperate with prosecutors in the case against his former boss. Ebbers has pleaded not guilty to charges including conspiracy and securities fraud, according to The New York Times.
Under the reorganization agreement, the company will make a record $750 million payment to the Securities and Exchange Commission — $500 million in cash and $250 million in stock. In accordance with the Fair Funds for Investors provision of the Sarbanes-Oxley Act, eventually those funds will make their way to investors who were hurt by the accounting fraud and subsequent bankruptcy.
The newly reorganized company will have about $5.7 billion in debt and more than $6 billion in cash, giving it a stronger position than many of its competitors had hoped for after its scandal, pointed out Reuters. These figures exclude $1.5 billion in back taxes claimed by a group of states; they also exclude any proceeds from the sale of Brazilian telecom business Embratel, added the wire service.
MCI will immediately spend about half its cash in claims and settlements, according to Reuters. Under the reorganization, most WorldCom bondholders will get 35.7 cents on the dollar, in a mix of new MCI shares and bonds.
MCI said in a statement that it emerges with a strong enterprise customer base, retaining all of its largest corporate customers as well as signing many new accounts. In the past six months, longstanding MCI customers such as DaimlerChrysler and NASDAQ have signed new agreements, and other customers such as Emerson, Hughes Supply, and Siebel Systems continue to rely on it, the company added.
"MCI's turnaround is a tribute to the human spirit and the amazing will of our 50,000 dedicated employees," said president and chief executive officer Michael Capellas. "This is a symbolic day for MCI employees, who have remained committed to serving our customers. I feel a great sense of pride for all we've accomplished together. We are emerging with a new board and management team, a sound financial position, unmatched global assets, a strong customer base and industry-leading service quality."
As for Richard Breeden, who became the court-appointed monitor for WorldCom about two years ago, it's not quite time to pack his bags. "The monitorship probably will go on for another two years or so," said the man who named Breeden to his post, U.S. District Judge Jed Rakoff, according to The Wall Street Journal.