The Week at WorldCom: Chapter II

It's been another gruesome week for the folk at WorldCom Inc., with further accusations of misdeeds being flung at the bankrupt carrier.

So, following on from our opening roundup of the trials and tribulations surrounding our favorite multi-named carrier (see The Week at WorldCom), here are the latest developments at WorldCom/MCI/Whatever-it's-called-this-week:

  • On Monday, the carrier predicted the shortfall in net income it will suffer as a result of its current ban from winning any further U.S. government contracts. (It currently has contracts worth $1 billion a year that are unaffected by the ban). In a filing with the Securities and Exchange Commission (SEC), WorldCom estimated that it would suffer a net income shortfall of $36 million between now and the end of 2005 if the ban is lifted by November 1 this year.

    The ban will be lifted if WorldCom demonstrates that it's dealt with the concerns the government has about its internal controls and business ethics.

    However, if the ban lasts until July 1, 2004, the impact would be a whole lot greater: an $8 million hit in 2003, $105 million in 2004, and $137 million in 2005, which comes to a whopping net income shortfall of $250 million. The ban could last for anything up to three years.

  • Federal investigators are looking into claims by Verizon Communications Inc. (NYSE: VZ) that VOIP service providers DataVon, now reborn as Transcom, and Focal Communications Corp. passed on WorldCom traffic as local instead of long-distance calls so as to avoid higher interconnection costs.

    Verizon claims the call data was somehow stripped of information to make it seem local, and the Wall Street Journal reported that Verizon had supplied investigators with emails sent between WorldCom and DataVon that implicate the two companies. Naturally, all the parties named are denying any involvement in wrongdoings.

  • The FBI appealed for witnesses as they continued to investigate claims that WorldCom improperly routed calls via Canada, again in an effort to reduce interconnection charges. It seems the Feds haven't got enough people to interview. Either that, or they haven't found anyone yet that can explain least-cost routing in a way they can understand.

  • Next it was the turn of SBC Communications Inc. (NYSE: SBC) to fling some dirt. It claims it is not being paid the right amount for terminating long-distance calls coming from WorldCom's network, and claims that WorldCom is currently disguising long-distance calls as local.

  • As if to give itself a breather, WorldCom generated some news of its own by announcing a new president and chief operating officer (see ADC CEO Jumps Ship to MCI). Former AT&T Corp. (NYSE: T) exec Rick Roscitt, known for his fat wage checks, is checking out from vendor ADC Telecommunications Inc. (Nasdaq: ADCT) to join the carrier from September 1.

    It seems we'll have to wait until Roscitt actually checks into his WorldCom desk before any details of golden handshakes/parachutes/showers are revealed. The operator's press release quotes WorldCom CEO Michael Capella as follows: "He [Roscitt] knows our customers and our business and will immediately fit with MCI's new culture -- one focused on customer service, innovation and integrity."

  • Unhappy bondholders were the next group to have a dig at WorldCom. The dissenting group, which opposes WorldCom's reorganization plans, allege the operator routed $19 billion of revenue through a subsidiary called MCI WorldCom Brands LLC, in an effort to avoid paying state tax. The scheme, apparently devised by management consultancy KPMG, involved the subsidiary, which is licensed in Delaware and pays no state tax, charging other parts of WorldCom millions of dollars to use the company's brands. The result, allegedly, was that billions of dollars of revenue was booked as returns on intellectual property rather than phone service revenues.

  • After so many accusations, it was nice to see Yankee Group issuing a research note reminding WorldCom's enterprise users that the operator may have been accused of a great deal, but nothing has yet been proven (see Yankee Defends MCI).

    Yankee's analysts say the countless allegations against WorldCom could be "little more than a determined effort by MCI's competitors to disrupt its bankruptcy reorganization," and that "at the core of the fraud allegations is the legal practice of least cost routing, which is commonly used by all carriers in the industry including AT&T." How very reasonable!

  • To close a turbulent week, WorldCom today filed its monthly operating report for June (see MCI Improves Numbers in June). Its revenue crept up slightly month-on-month to $2.075 billion, while its net income was $84 million, compared with $46 million in May. The operator ended June with $4.6 billion in cash, up $400 million from the end of May. "Our customer loyalty remains strong and we are on track to emerge from Chapter 11," stated Bob Blakely, MCI chief financial officer, in the company's press release.

    So, how have the week's developments influenced the Big Question of whether MCI/WorldCom/Whatever should be liquidated or resuscitated?

    Since last week, the number of people that have taken Light Reading's Research Poll on the topic has risen to 391, from 243. Sentiment appears to be swinging in favor of liquidation. 63 percent of respondents now say this would be the best outcome for the telecom industry as a whole, compared to 58 percent last week.

    To take the poll and see the latest results, please click on this link.

    — Ray Le Maistre, International Editor, Boardwatch

  • optical_man 12/4/2012 | 11:34:27 PM
    re: The Week at WorldCom: Chapter II Have a question for the Accountants (no one from KPMG please).
    MCI reported it's June Net Income at $86M.
    During bankruptcy, does MCI pay any debt?
    If not, then my household income would be up 1000% for June if I could stop all my debt servicing!
    Any accountants know the answer (no one from KPMG please).
    the_lord 12/4/2012 | 11:34:26 PM
    re: The Week at WorldCom: Chapter II

    Simple, Net Income implies that your revenues are greater than your losses. Bankruptcy means that you cannot pay your bills. This occurs when your cash inflow is less than your cash outflow.

    One simple way is to book revenues before receiving cash (and this is typical and allowed). With MCI, they may be doing fine this quarter but they may be having a big interes payment due in the coming quarter.

    skeptic 12/4/2012 | 11:34:24 PM
    re: The Week at WorldCom: Chapter II
    You know, in the midst of all this pile-on
    "cute" articles about MCI, your not bothering
    to even cover certain other things going on.

    A case in point:

    "Sprint Decries Debarment Request"

    From August 5. And as far as I can tell, not
    even worth the notice of light reading.

    Its kind of strange don't you think that
    worldcom and sprint are now both the targets
    of GSA action. And I guess its just concedence
    that these investigations will leave the RBOCs
    (SBC and Verizon in particular) to divide the
    government business between them.

    Of course we all know that SBC and Verizon are
    "honest" companies who would never do anything
    wrong. And its certainly impossible for them
    to be influcing the GSA. I mean to believe that,
    you might as well believe that they could
    influence the FCC to gut the competition clauses
    they accepted in 1996. Utterly impossible.

    It will be so great when we return to the good
    old days with one or two giant telephone
    monopolies using the law to shut out competition
    and holding back techology that people don't

    dave77777 12/4/2012 | 11:34:13 PM
    re: The Week at WorldCom: Chapter II SEC Chairman Arthur Leavitt today announced that MCI would be placed in "double secret bankruptcy" until some way could be found to legally have management publicly flogged.
    BobbyMax 12/4/2012 | 11:34:12 PM
    re: The Week at WorldCom: Chapter II With the appointment of Capeela and Rick Roscitt, MCI has lost its face and conscience. "Dr" Roscitt is a con artist who bled ADC to death by awarding himself huge salaries, bonuses, stock options, Loan which was subsequently excused by ADC. He also does not have any accomplishment at AT&T. Mr Capella should be removed from his position as he and Rick Roscitt do not understand the telecommunications business. Thgese two appoibntments at MCI clearly shows the incompetence of the board.

    The US Government has taken any positive action against Mr. Eber> No body has been indicted and the case has not been presented to the grand jury.
    It appears that the US Goverment will renew the MCI contract.

    The shareholders of MCI have suffered serious economic losses. The complicity of the US Government is very serious and that is why it would not take any action against MCI.
    atmguy 12/4/2012 | 11:34:12 PM
    re: The Week at WorldCom: Chapter II
    Sorry, my previous post did'nt get through.

    Can some one explain how and why Bernie Ebbers got home free? I was hoping that the other guys would take some kind of plea and point fingers at Bernie .. Any news there?

    atmguy 12/4/2012 | 11:34:12 PM
    re: The Week at WorldCom: Chapter II
    jnj 12/4/2012 | 11:34:02 PM
    re: The Week at WorldCom: Chapter II That's my favorite explanation for this bruhaha
    if it weren't for the facts
    but what's $14 bilion among friends
    anyway they pay good..just ask the lawyers and directors
    i'm thinking of applying..do you think they'll check my resume' for veracity?

    Have you been convicted of a felony? "no, cause i never got caught"

    "well then, welcome aboard!"
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