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White Paper - Update on the WorldCom Bankruptcy: The Reorganization Plan and Other Recent Developments

Date: Jun 05, 2003

Introduction

This White Paper assesses the WorldCom bankruptcy,1 focusing on the interests of WorldCom's current enterprise customers in the continued availability of the carrier's services during and after the resolution of the bankruptcy proceeding. It examines key developments in the bankruptcy proceeding since WorldCom filed a Reorganization Plan and Disclosure Statement on April 14, 2003. On the same day that it filed a proposed Reorganization Plan with the Bankruptcy Court, WorldCom announced that it appointed a new CFO, changed its brand name to MCI, and relocated its corporate headquarters. 3 For purposes of this White Paper, the new MCI will still be referred to as WorldCom.

Status of Reorganization Plan and Disclosure Statement

WorldCom filed a Reorganization Plan and Disclosure Statement with the Bankruptcy Court on April 14, 2003, calling for a restructuring of the company's capital structure and retention of WorldCom's core businesses, domestically and globally. 4 The plan enables unsecured creditors of WorldCom, MCI, and Intermedia, currently holding about $30 billion in debt, to become the principal owners of the reorganized company. As it emerges from bankruptcy as projected, WorldCom is expected to offload more than $30 billion of debt. 5

On April 24, 2003, WorldCom filed its Motion for an Order (i) approving the disclosure statement, (ii) fixing a record date, (iii) approving solicitation packages and procedures for their distribution, (iv) establishing voting procedures for the reorganization plan, and (v) scheduling a hearing on the plan. 6 The Bankruptcy Court granted WorldCom's Motion on May 28, 2003. 7 Pursuant to the Court's Order, WorldCom creditors would have until August 12, 2003, to vote on the plan, and a confirmation hearing on the plan is set for August 25. WorldCom has moved to extend this initial timeline. On June 2, 2003, WorldCom filed a Motion for an Order extending the exclusive period during which the debtors may solicit acceptances of their Reorganization Plan to September 30, 2003. 8 A ruling on this Motion is pending.

Status of SEC Settlement in Civil Action Against WorldCom

On May 19, 2003, the Securities and Exchange Commission ("SEC") filed a proposed settlement in its action against WorldCom in a New York District Court. 9 In this matter, the District Court issued a permanent injunction against WorldCom on November 26, 2002, prohibiting various practices that violate the anti-fraud provisions of the securities laws, but left open the issue of monetary penalties. 10 Pursuant to the SEC's May 19 proposal, WorldCom would pay a civil penalty of $1.51 billion, which WorldCom could satisfy with a $500 million payment after the Bankruptcy Court approves the settlement. The SEC plans to distribute the funds to fraud victims. 11 The $500 million settlement is purportedly the largest the SEC has ever imposed for corporate fraud.

The District Court entered an Order on May 19, 2003, the same day that the SEC filed its settlement proposal, 12 declining to approve the settlement before obtaining information on several issues. Pursuant to the Court's Order, the parties and other interested parties must file written submissions by June 6, 2003, and the Court will convene with the parties on June 11, 2003 to discuss settlement prospects. 13 One reason for this deferral is that the District Court is awaiting the second report of the WorldCom Examiner, a procedure established in the bankruptcy proceeding, 14 due to be filed shortly, and the report of WorldCom's Special Investigative Committee, due on June 10, 2003. 15

Investigation Into WorldCom's Federal Contracts

A U.S. Senator recently launched an investigation into the General Services Administration's ("GSA's") decision to continue to award federal contracts to WorldCom despite the company's fraudulent activities, principally its violations of the anti-fraud provisions of the securities laws. 16 The number of federal contracts awarded to WorldCom has increased since the company declared bankruptcy. 17 The most pervasive criticism of the GSA's decision is that it gives WorldCom far more favorable treatment than either Enron or Arthur Andersen, both of whom were largely disbarred from future federal contracts due to fraudulent accounting practices. 18 WorldCom reportedly obtains $800 million in revenues from multiple federal contracts. 19

Conclusion

During the 1st Quarter of 2003, WorldCom earned revenues slightly above $2 billion per month. 20 Significantly more modest profit levels21 suggest that markets for WorldCom's core services remain extremely competitive and that the company must continue to prune excess capacity, reduce costs, and enhance revenues in order to meet even its substantially reduced, post-bankruptcy debt obligations and attract additional investment. From our perspective, securing new or renewing existing multi-year services agreements from enterprise customers will remain a near term challenge for a post-bankruptcy WorldCom. While financial analysts and telecom consultants may provide a more detailed and different picture, it is far from certain that the post-bankruptcy company will be in a position to drastically reduce rates for enterprise services and gain substantial market share. Were the proponents of barring WorldCom from future federal contracts to prevail, WorldCom's near-term revenues would be adversely affected.

Despite the virulent criticisms leveled by certain Regional Bell Operating Companies ("RBOCs") against the "equities" of allowing WorldCom to emerge from bankruptcy in light of all its financial transgressions, 22 a purchase of WorldCom by an RBOC is possible. WorldCom's revenue stream and customer base remain substantial. Lingering concerns over corporate viability and integrity would be addressed significantly by an RBOC takeover. In addition, bankruptcy will eliminate WorldCom's once onerously high debt levels.

2 For earlier assessments of the WorldCom bankruptcy and the implications for WorldCom's enterprise customers, see Update on the WorldCom Bankruptcy: The Enterprise Customer's Perspective, March 14, 2003; and Telecommunications Management Triage - Responding to WorldCom's Precipitous Financial Position, dated July 1, 2002, available on Keller and Heckman LLP's website, at http://www.khlaw.com/index.cfm?SR=1&fuseaction=publications.showSearchResults&practiceAreaID=19&.

3 Press Release, WorldCom, WorldCom Files Plan of Reorganization and Changes Brand Name to MCI, April 14, 2003, at http://global.mci.com/news/news2.xml?newsid=7430&mode=long&lang=en&width=530&root=/&langlinks=off.

4 In re WorldCom, Inc., Debtors' Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code, Chapter 11 Case No. 02-13533 (AJG) (Jointly Administered), April 14, 2003 (Bankr. S.D.N.Y.).

5 See Christopher Stern, WorldCom Files Reorganization Plan, WASH. POST, April 14, 2003.

6 In re WorldCom, Inc., Notice of Debtors' Motion for Entry of Order (I) Approving the Disclosure Statement; (II) Fixing a Record Date; (III) Approving Solicitation Packages and Procedures for Distribution Thereof; (IV) Approving Forms of Ballots and Establishing Procedures for Voting on the Debtors' Joint Plan of Reorganization; and (V) Scheduling a Hearing and Establishing Notice and Objection Procedures in Respect of Confirmation of the Debtors' Joint Plan of Reorganization, Chapter 11 Case No. 02-13533 (AJG) (Jointly Administered), April 24, 2003 (Bankr. S.D.N.Y.).

7 In re WorldCom, Inc., Order (I) Approving the Disclosure Statement; (II) Fixing a Record Date; (III) Approving Solicitation Packages and Procedures for Distribution Thereof; (IV) Approving Forms of Ballots and Establishing Procedures for Voting on the Debtors' Joint Plan of Reorganization; and (V) Scheduling a Hearing and Establishing Notice and Objection Procedures in Respect of Confirmation of the Debtors' Joint Plan of Reorganization, Chapter 11 Case No. 02-13533 (AJG) (Jointly Administered), May 28, 2003 (Bankr. S.D.N.Y.).

8 In re WorldCom, Inc., Motion of the Debtors Pursuant to Section 1121(d) of the Bankruptcy Code for Order Extending the Exclusive Period During Which the Debtors May Solicit Acceptances of Plan of Reorganization, Chapter 11, Case No. 02-13533 (AJG) (Jointly Administered), June 2, 2003 (Bankr. S.D.N.Y.), at 4.

9 SEC v. WorldCom, Inc., Civ. No. 02-CV-4963 (JSR), May 19, 2003 (S.D.N.Y.).

10 See SEC v. WorldCom, Inc., Civ. No. 02 CV 4963 (JSR), Nov. 26, 2002 (S.D.N.Y.). In addition to issuing an injunction, the Court ordered a review of WorldCom's governance systems, policies, and procedures, ordered a review of its internal accounting procedures, and ordered WorldCom to provide training and education for certain officers and employees.

11 See Press Release, WorldCom, MCI and SEC Reach Final Settlement, May 19, 2003, at http://global.mci.com/news/news2.xml?newsid=7670&mode=long&lang=en&width=530&root=/&langlinks=off.

12 SEC v. WorldCom, Inc., Civ. No. 02-CV-4963 (JSR), May 19, 2003 (S.D.N.Y.).

13 See id. at 2.

14 See In Re WorldCom, Inc., Order Granting the Motion of the United States Trustee for the Appointment of an Examiner, Chapter 11, Case No. 02-13533 (AJG) (Jointly Administered), July 22, 2002 (Bankr. S.D.N.Y.).

15 See id.

16 See Christopher Stern, Senator Probing WorldCom's Federal Contracts, WASH. POST, May 22, 2003, at E6.

17 See id.

18 See Brock N. Meeks, MCI's Federal Contracts Questioned, MSNBC News, June 3, 2003, athttp://www.msnbc.com/news/920944.asp?0si=-.

19 See id.

20 WorldCom earned gross revenues of $2.16 billion in January, $2.03 billion in February, and $2.1 billion in March. See Press Release, WorldCom, MCI Issues February and March 2003 Monthly Operating Results, April 28, 2003, at http://global.mci.com/news/news2.xml?newsid=7550&mode=long&lang=en&width=530&root=/&langlinks=off; Press Release, WorldCom, WorldCom January 2003 Monthly Operating Results Show Company Profitable, March 26, 2003, at http://global.mci.com/news/news2.xml?newsid=7310&mode=long&lang=en&width=530&root=/&langlinks=off.

21 See id.

22 See Christopher Stern, Senator Probing WorldCom's Federal Contracts, WASH. POST, May 22, 2003, at E6.