MCI Cuts Outlook for 2005;
SEC Settlement Is Approved

MCI cut nearly $3 billion from a 2005 revenue projection it made less than three months ago, citing steep declines in the telecommunications bills of consumers and small businesses.

MCI also gained approval from a U.S. District Court judge for a revised settlement with the Securities and Exchange Commission that would resolve civil fraud charges against the company, formerly known as WorldCom Inc. MCI, based in Ashburn, Va., has agreed to pay $750 million in cash and stock to investors who lost money as a result of the $11 billion fraud that drove the company into Chapter 11 bankruptcy-court protection.

MCI revised its financial projections, which many analysts said at the time seemed overly optimistic, in a filing with the U.S. Bankruptcy Court for the Southern District of New York that also detailed the SEC settlement.

MORE ON WORLDCOM • WorldCom Holders' Accord Nears Record of $750 Million1 07/03/03   COURT DOCUMENTS • See the court ruling approving WorldCom's settlement2 with the SEC, by arrangement with FindLaw (http://www.findlaw.com/3).

The company said package offerings, sharp cuts in prices for high-speed Internet service and limitations on telemarketing have wrought substantial changes in a short time. Taken together, they have slashed the overall bills of some consumers and small businesses by as much as 40% since April. The company said it hasn't cut projections for revenue from its marquee large-business customers.

MCI's projections bring into sharp focus the impact that package deals and promotional rates may have on rivals, including AT&T Corp. and the regional Bells, which offer the most comprehensive packages and have been aggressively reducing prices on primary elements of their service bundles. AT&T has seen substantial declines in revenue from consumers as package deals, cellphones and e-mail eat away at its core long-distance business. For the first quarter of this year, revenue from consumer service fell 18% to $2.5 billion and analysts expect the trend to continue.

MCI made a modest cut in its 2003 revenue projection, trimming it to $24.5 billion from $24.7 billion. It cut its 2004 revenue target to $24.6 billion from $25.8 billion. It slashed its 2005 projection to $25 billion from $27.8 billion.

The company said its creditors continue to support its plan to emerge from bankruptcy-court protection during the fall and the court approval of its settlement with the SEC removes an obstacle to the company's emergence. The judge praised the settlement.

"The proposed settlement is not only fair and reasonable but as good an outcome as anyone could reasonably expect in these difficult circumstances," U.S. District Judge Jed S. Rakoff wrote in a 14-page opinion.

In May, MCI and the SEC agreed to a $1.5 billion penalty, a sum that was a record at the time. The amount MCI would pay was reduced to $500 million to reflect the two-thirds discount that creditors are receiving for their claims.

But after Judge Rakoff expressed concern the amount wasn't sufficient, the parties submitted a plan last week that raised the payout for shareholders who lost money as a result of the company's fraud.

Under the settlement, shareholders and bondholders who qualify would receive $750 million in compensation, 50% more than the $500 million they would have received under the original proposal.

A third of that payment, or $250 million, would be in the form of MCI's new stock, as valued under the reorganization plan. (The official amount of the settlement is $2.25 billion, before the two-thirds discount.)

The judge said the company's official committee of unsecured creditors last week approved the revised sum and promised to support it before the bankruptcy court, which also must approve the settlement.

Judge Rakoff said he was satisfied with the penalty, saying it "reflects the realities of this complex situation." He also said the settlement would undoubtedly be criticized by "those shareholders unfamiliar with the severe limits imposed on their recovery by the bankruptcy laws" as well as "those professed pundits and ideologues for whom anything less than a corporate death penalty constitutes an 'outrage.' "

The judge said he wasn't swayed by complaints filed by AT&T and Verizon Communications Inc., which had called for MCI's effective liquidation. The telecommunications companies contended it wasn't fair that MCI could emerge from bankruptcy with billions in the bank and a slimmer debt load.

"Any suggestion that companies as large and well-positioned as Verizon and AT&T will not be able to compete effectively with the new WorldCom/MCI lacks credence," the judge wrote.

"We have made significant strides in rebuilding our company and we believe today's [Monday's] ruling is a positive reflection of the hard work and dedication of MCI's 55,000 employees, the loyalty of our customers and the support of our creditors," MCI Chairman and Chief Executive Michael Capellas said. The "approved SEC settlement marks a significant milestone in the company's emergence from Chapter 11 protection, which remains on track for later this fall."

A court-appointed administrator will distribute the settlement money to shareholders. The settlement exceeds the $10 million paid by Xerox Corp., which had been the largest penalty levied against a corporation that isn't a broker-dealer. The amount also is larger than the total $487.5 million in penalties imposed against 10 Wall Street firms over alleged research conflicts.

Write to Shawn Young at shawn.young@wsj.com⁴ and Colleen DeBaise at colleen.debaise@dowjones.com⁵

Updated July 8, 2003 10:59 a.m.