Skip to main content


is already feeling the pressure.

Less than a month after emerging from the nation's largest-ever Chapter 11 case, the big telco laid out plans to slash 7,500 jobs in the second quarter. The cutbacks, which aim to restore the company to profitability in the second half of the year, will pare 15% from the company's workforce.

MCI also reported a steep first-quarter loss and noted sharp revenue declines in all of its main businesses. MCI blamed severe price-cutting in the wholesale and business services markets, along with continued customer defections and competition in the consumer division for its weak performance.

"Although we made significant strides in restructuring the company during the past year, overall industry conditions and an unfavorable regulatory environment affected our first quarter results," said CEO Michael Capellas. "In response we are accelerating our cost reduction program, ramping new product introductions and optimizing our network wherever possible."

In some instances, even the mighty weren't spared the ax. After hiring former


(T) - Get AT&T Inc. Report

business services chief Rick Roscitt in August, MCI said it let Roscitt go in March. Nonetheless, the time appears to have been well spent for the executive: According to a federal filing, Roscitt leaves with a severance payoff of $8 million for his efforts.


For its first quarter ended March 31, the company swung to a $388 million loss from the year-ago $52 million profit. MCI cited a 17% drop in revenue, caused in part by weak pricing across the brutally competitive industry.

MCI did note that it posted first-quarter positive cash flow of $150 million. MCI said it expects positive cash flow for the balance of the year, with cash balances well above operating requirements. The quarter leaves company with $4.3 billion in net cash and about $7.3 billion in total debt.

The company also sounded some hestitantly positive notes in a conference call Monday afternoon. "We are starting to see some stability of pricing, particularly on the higher end" of the business services market, said Capellas.

Still, MCI shares dropped $1.10, or 8%, to close at $13.15 Monday on the pink sheets. Since emerging from bankruptcy on April 20, the company has seen its shares lose half their value.

MCI's comments will find anxious ears on Wall Street. Analysts and investors have been eager to see the big telco resume trading, and the stock could be relisted on Nasdaq by next month. Some observers believe MCI, particularly after its recent plunge,

could be a plum takeover target for rivals seeking to build business client lists.

Monday's news comes as the fallout of the company's record-setting bankruptcy continues to be felt on Wall Street. Earlier Monday, the biggest U.S. financial services firm,

Scroll to Continue

TheStreet Recommends


(C) - Get Citigroup Inc. Report

, agreed to pony up nearly $3 billion to settle an investor class action suit linked to the fall of MCI's predecessor company, WorldCom.

How Soon They Forget

Led by founder and CEO Bernie Ebbers, WorldCom was a fast-growing stock market favorite throughout the 1990s. But the company declared bankruptcy on June 25, 2002, wiping out billions of dollars in shareholder value, after discovering massive misstatements in the way it booked the cost of its phone lines. While Ebbers and former CFO Scott Sullivan bore the brunt of Wall Street's wrath, Citigroup's close relationship with the company, embodied in the person of Salomon Smith Barney analyst Jack Grubman, also was a primary focus of investor ire.

Shareholders claimed Citigroup was culpable because Grubman consistently praised the stock even as WorldCom's fortunes declined, while his parent company collected tens of millions of dollars in investment banking fees. They also alleged Ebbers was given access to sure-thing IPO shares in return for keeping his business with Citi.

Citigroup neither admitted to nor denied the allegations in the suit. The payout will amount to $1.64 billion after taxes for WorldCom shareholders and bond owners.

MCI has spent the last year trying to overcome the legacy of its failed predecessor. In the spring of 2003, the company moved to Ashburn, Va., from Clinton, Miss., and named former Compaq chief Michael Capellas its CEO. Then, in March of this year, the company made public revised 2000 and 2001 annual reports that outlined some of $11 billion in Ebbers-era revenue overstatements. The revisions eviscerated some $74 billion in phony pretax income booked over the late Ebbers-Sullivan period.

In February, prosecutors charged Ebbers and ex-financial chief 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.

Posing a Threat

MCI's latest numbers come as the telecom sector seeks a long-awaited revival from its deep slump. Meanwhile, MCI and its peers confront emerging threats such as voice-over-Internet technology. Capellas

told investors in February that telcos must embrace these new challenges unless they want to see their business taken by rivals.

The reappearance of the nation's No. 2 long-distance service provider has been eagerly anticipated since the company's collapse. Some investors have said they believe MCI could be a takeout target as industry's intensifying competition makes consolidation more likely. Recent speculation has the company in the cross hairs of Westwood, Kan., telco



. Names like






also have been floated as possibilities.

MCI's difficulties may come as a shock to those who saw the company as having gained a leg up through its bankruptcy. Rival telcos such as


(VZ) - Get Verizon Communications Inc. Report

and AT&T furiously fought MCI's court-overseen reorganization, contending 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.

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.

In financial statements released late last month, MCI said it expected to lose money for 2004, though it hoped to swing into the black in the second half. At the time, the company targeted 4,000 layoffs in call center operations. MCI said it also cut 1,700 jobs in the first quarter.