Just a month after taking a timeout to get its act together, MCI closed the books Friday on some $74 billion in false profits. The company made public revised 2000 and 2001 annual reports Friday that outlined some of the $11 billion in revenue overstatements during the Bernie Ebbers era. The company also posted a $9.2 billion audited 2002 loss. The papers, filed with the Securities and Exchange Commission and the federal bankruptcy court, clear the way for MCI to emerge from Chapter 11 protection next month. "This filing culminates the largest and most complex financial restatement ever undertaken," said financial chief Bob Blakely. "It is one of the last remaining milestones on our path to emerge from Chapter 11 protection." MCI also said Friday it settled state securities fraud charges with Oklahoma. Under terms of the agreement, MCI will create 1,600 jobs in Oklahoma over 10 years and will help the state pursue cases against former executives. The state had been the first to charge ex-CEO Ebbers in a criminal case, though those charges were put on hold for a federal case that's now pending. MCI, which was known as WorldCom at the time of its collapse, made accounting adjustments Friday that resulted in subtracting more than $70 billion in pretax income due to adjustments and writedowns. WorldCom was a fast-growing stock market favorite throughout the 1990s, but Friday's filings make crystal clear that the company's financial foundation was never as stable as tech-happy investors believed. The filings come just a week after federal prosecutors charged Ebbers, the longtime former CEO of the onetime telecom highflier, and ex-financial chief Scott Sullivan with three counts each of securities fraud, conspiracy and making false statements. The government alleges that the men conspired to deceive investors about WorldCom's true financial health. Sullivan pleaded guilty and agreed to cooperate with federal prosecutors. Ebbers pleaded innocent and is free on bail, though his travel is restricted to three states and Washington, D.C.
According to the filing Friday, the company has recently sold a substantial portion of Ebbers' properties, after the former chief defaulted on his loan payments. The company, then operating as WorldCom, gave Ebbers personal loans during the boom era totaling $408 million to keep the exec from selling his stock. When Ebbers left the company, he pledged several land and business holdings to secure the loan. But Ebbers stock, like that of other investors, was left worthless in the bankruptcy case. And in April, Ebbers failed to pay his first installment and the company took control of his pledged assets. Last month, the company received $35 million for the sale of Ebbers' Douglas Lake property in British Columbia, once known as the world's largest cattle ranch. It has been reported that Ebbers paid $100 million for the property in 1998. A year ago, MCI sold Ebbers' Intermarine yacht sales business for $17.4 million. The company still has the option to sell Ebbers' stake in the Joshua timberland properties in Tennessee, Mississippi, Louisiana and Alabama. Friday's filings mean the end of the nation's largest-ever corporate bankruptcy case is now in sight. MCI had been scheduled to return to publicly traded status by the end of last month, but on Feb. 11 MCI
was granted a 60-day extension to complete its paperwork. The Ashburn, Va., phone giant must yet file an audited 2003 annual report by April 30 before gaining bankruptcy court clearance for emergence from Chapter 11. "We are working diligently on 2003 and are in the process of auditing the results and preparing the filings," Blakely said last month at the time of the extension. "We will review all of our filings to ensure accuracy, quality and transparency." The reappearance of the nation's No. 2 long-distance service provider in an ever-tightening telecom market has been eagerly anticipated by investors ever since the company's June 2002 collapse. Some investors have said they believe MCI could be a takeout target as the rising stock market makes industry consolidation seem more likely.
The emergence of MCI will cap off a contentious process fraught with opposition from rival telcos such as Verizon ( VZ) and AT&T ( T). Those companies contended that MCI gained an unfair advantage through the bankruptcy process, by trimming its operations and slashing debt even as other big telecom companies remain burdened with costs. MCI's move comes as the telecom sector enjoys the beginnings of a long-awaited revival from a deep slump, and it confronts emerging threats such as voice-over-the-Internet technology. MCI's chief executive, former Compaq head Michael Capellas,
told investors last month that telcos must embrace these new challenges unless they want to see their business taken by rivals. Last week big long-distance telcos such as MCI suffered a setback as a federal appeals court handed the big baby Bell local telcos a victory on network pricing rules. The order reversed the cut-rate wholesale prices the Bells were forced to charge rivals that sell local phone service, such as AT&T, Sprint ( FON) and MCI. Though MCI's books are surely cleaner now than they were in the late Ebbers era, the company continues to have difficulty turning a profit in the intensely competitive long-distance and Internet backbone markets it focuses on. MCI posted a loss in December despite a monthly revenue gain.