- The Washington Times - Friday, March 12, 2004

McLEAN (AP) — The cleanup of WorldCom’s tainted books reveals pre-tax losses of $74.4 billion not previously reflected in the company’s financial reports for 2000 and 2001, MCI said yesterday in a long-awaited report that wipes away a vast accounting fraud and reflects the plunging value of telecommunications assets.

The financial restatement is likely the biggest in corporate history. But as an adjustment on paper only, it has no direct impact on the renamed telephone company’s operations or bid to emerge from bankruptcy.

The adjustments, issued in MCI’s annual report, also include the company’s first report of its full-year results for 2002: A net loss of $9.2 billion on revenue of $32.2 billion.

The adjustments for the two prior years would mean that WorldCom actually suffered a net loss of $48.9 billion in 2000 and a net loss of $15.6 billion in 2001. The company had reported profits for both those years.

The restatement helps clear a major hurdle in MCI’s bid to emerge from bankruptcy protection. The company, which filed for bankruptcy as the scandal broke in July 2002, plans to exit Chapter 11 by the end of April.

Although the revisions technically apply only to the years 2000 and 2001, MCI said it basically rebuilt its books from scratch, going all the way back to 1993, to develop a proper accounting.

“This filing culminates the largest and most complex financial restatement ever undertaken,” said chief financial officer Bob Blakely. “It is one of the last remaining milestones on our path to emerge from Chapter 11 protection.”

The filing attributes $8.8 billion of the $74.4 billion restatement to the financial irregularities and questionable accounting practices that have led to criminal investigations and charges against former senior executives at the company, including former Chief Executive Bernard Ebbers.

Some estimates of the accounting fraud had reached as high as $11 billion. Company spokesman Peter Lucht said the $11 billion estimates had never been confirmed by the company.

Most of the restatement — nearly $60 billion — stems from a write-down in the value of assets and other adjustments associated with the general struggles of the telecommunications industry.

Another $5.8 billion is the result of inflated estimates of the assets of numerous companies bought by WorldCom during its binge of acquisitions in the 1990s.

MCI’s writedown was even bigger than the $54 billion writedown by AOL Time Warner in April 2002 to reflect the declining value of America Online assets. That restatement resulted in the company reporting the largest quarterly loss ever by a U.S. company.

Mr. Blakely said the financial restatements do not affect the company’s liquidity, and that it has about $6 billion in cash as of the end of 2003.

MCI’s financial restatement yesterday came as the state of Oklahoma announced it had agreed to settle its criminal fraud case against the telecommunications giant in exchange for new jobs and cooperation in its prosecution of former executives of the company.

Under terms of the agreement, MCI would create 1,600 new jobs in Oklahoma over the next 10 years and has pledged to assist the state in its prosecution of former executives of the company formerly known as WorldCom, state Attorney General Drew Edmondson announced.

“Since WorldCom’s collapse, a new company has emerged from the rubble. It was never our intention to put the company out of business and MCI has taken significant steps to clean its own house,” Mr. Edmondson said.

“MCI has purged itself of bad actors, appointed new executives and an entirely new board of directors; it has developed an extensive training program on business ethics and accounting rules and appointed an outside auditor.”

The company had faced a March 29 preliminary hearing on 15 charges of violating Oklahoma securities laws. If found guilty, MCI would have faced fines of $10,000 per count and may have been ordered to pay millions of dollars more in restitution for investment losses by state pension funds.

Prosecutors accused the company of falsifying information on which investors relied, making the company look stronger than it really was.

They said the scandal led to heavy losses by Oklahomans, including $64 million lost by state pension funds.

The new jobs to be created by MCI are to have an average salary of $35,000 a year. Officials estimated the state will get $12.3 million in new tax revenue over the 10 years of the agreement, mainly from the $112 million payroll that will be generated. The city and county tax benefit will be an additional $2 million.

“The company is working hard to ensure that high standard of business ethics are maintained and a culture where honesty and integrity are valued above all else,” Carol Ann Petren, MCI deputy general counsel, said yesterday in a statement.

Mr. Edmondson said the agreement comes closer to “making the state whole than could a victory at trial.”

“If we took the case to trial and won, the company would likely go out of business and we would be stuck in the bankruptcy line,” he said. “This economic development agreement is restitution in a different form.”

Mr. Edmondson has announced he will refile securities charges against Mr. Ebbers, who was hit with federal charges earlier this month that he directed an $11 billion accounting fraud, the biggest in U.S. corporate history. Mr. Ebbers’ lawyer entered a plea of not guilty to the federal charges.

Oklahoma’s charges against Mr. Ebbers are expected to be refiled by the end of the month. They were temporarily dropped late last year after a judge denied Mr. Edmondson’s request to delay a preliminary hearing for Mr. Ebbers.

A May 17 preliminary hearing is set in Oklahoma for former WorldCom Chief Financial Officer Scott Sullivan, who has pleaded guilty to federal charges in New York and agreed to testify against his former boss.

Mr. Ebbers and Sullivan were among six former employees of WorldCom who were accused of 15 violations of Oklahoma securities laws.

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