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Background Document on the WorldCom/MCI Bankruptcy

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                    WorldCom/MCI Stockholders Group
                    Neal Nelson, Spokesperson
                    1221 North La Fox Street
                    South Elgin, Illinois 60177-1223

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                             Table of Contents

                    Executive Summary

                    WorldCom/MCI - Significant Bankruptcy Points

                    Bankruptcy Basics

                    Covad - Chapter 11

                    The WorldCom/MCI Independent Stockholders Group

                    Problems with the Bankruptcy System

                    Long Term Action Required

                    Immediate Action Required

                    Executive Summary

  The United States Trustee apparently made a mistake by not appointing
    an equity committee in the WorldCom bankruptcy case. The bondholders
    have exploited this situation and taken total control of the
    bankruptcy reorganization process.

  The company management and bondholders have created a bankruptcy
    "reorganization plan" that will create a new company with virtually
    no debt, give ownership of this new company to the current company's
    bondholders and leave the current company's stockholders without
    a share of stock in the new company or a penny of compensation. 

  This plan is unnecessarily harsh. It is not necessary to virtually
    eliminate the company debt. The debt could be reduced by 50% and the
    original stockholder equity could be diluted to 50% ownership of the
    new company. The resulting company would have a reasonable debt load
    and still be a strong and viable firm. 

  The stockholders have been excluded from effective participation in the
    creation of the reorganization plan by the rules of the bankruptcy
    system and the decisions made by bureaucrats in the New York district.

  The stockholders need to put pressure on WorldCom/MCI management and
    the bondholders to revise the original plan and submit a new plan
    that is fair to all parties.

  Stockholders need to have some presence in the bankruptcy court to take
    the necessary legal steps that oppose the original plan and request
    creation of a better plan.

  Stockholders need to create public pressure on the company management
    and bondholders to submit a better reorganization plan. 

  The most effective public pressure will come from the threat of mass
    cancellations of WorldCom/MCI Internet and long distance services.

  The company management and bondholders have been given virtually
    unlimited power by the bankruptcy process. They consider themselves
    to be invulnerable in bankruptcy court.

  The "bad guys" have overlooked that fact that a "new MCI" company
    will be virtually worthless if the average American citizen views
    the company as owned and run by crooks. Individuals can refuse to
    buy MCI products or services.

  The current WorldCom/MCI stockholders need to "get the word out"
    about this attempted abuse and create a threat of mass cancelations
    by average citizens.

                    WorldCom/MCI - Significant Bankruptcy Points

  Private meetings between bondholders and company management over a
    9 month period resulted in a sweet deal for both groups. Bondholders
    take over 100% ownership of new company after having bought bonds
    at junk/discount rates. Management gets a new company with 90% less

  Fast track to approve plan. 30 days and it's a done deal.

  64,000 stockholders will lose every penny that they invested in
    WorldCom/MCI if the company's plan is approved by the judge

  The company plan is unnecessarily harsh. The company could come
    out of bankruptcy with 50% reduction in debt and 50% dilution of
    the original stockholders' equity. (read about Covad)

  Stockholders effectively prevented from participating in process
    because U.S. Trustee in NY did not appoint an equity committee

  Southern District of New York is known as the "rocket docket" because
    it is famous for quickly disposing of large bankruptcy cases with
    favorable rulings for company management and unfavorable rulings
    for stockholders.

  Why would a Clinton Mississippi company file their bankruptcy in
    the southern district of New York? There is a bankruptcy court
    that handles Mississippi. Venue shopping?

  WorldCom/MCI was not a "normal" bankruptcy. WorldCom/MCI did not struggle
    over a long period of time. WorldCom/MCI did not have year after
    year of losses. WorldCom/MCI did not go through a long period of
    cutting costs to try and survive. WorldCom/MCI did not sell any assets
    to reduce it debt load. 

  On the day WorldCom/MCI declared bankruptcy they had ??? billion dollars
    in cash in the bank and all vendor accounts were in a normal
    condition. They looked healthy.

  WorldCom/MCI's "crushing debt" consists primarily of bonds that were not
    due until 20 or 30 years from now. That is, until, the WorldCom/MCI
    management decided one day to skip an interest payment on the
    bonds, which triggered clauses in all bond and bank debt to make
    every penny due and payable immediately. 

  The financial shocks of overstated profits from previous years are
    not a reason to declare bankruptcy. Many companies lose money for
    years and years but don't declare bankruptcy. Many companies operate
    for years and years where assets are less than liabilities and don't
    declare bankruptcy.

  The bankruptcy system is being used to steal without breaking the law.

  If this abuse is allowed, AT&T, Sprint and Verizon will all be driven
    into bankruptcy eventually because they will not be able to
    compete with the new MCI which had 40 billion dollars in debt just
    disappear from its balance sheet because of this sham bankruptcy.

  64,000 WorldCom/MCI stockholders are furious. 

  95% are angry at congress, SEC (Bush administration) , U.S. Trustee,
    bankruptcy judge and company management (see straw poll results).

  80% are going to tell everyone they know to avoid doing business with
    the "new MCI".

  WorldCom/MCI stockholders have organized into an effective group via the
    World Wide Web site

  Their Web site has had 20,000 "hits" in the last week and has built
    an email list of over 4,200 stockholders (growing every day). Calls
    for action can be automatically sent out to all of them in less than
    2 hours.

  WorldCom/MCI bondholders and management have been very clever in using
    the bankruptcy process to pursue their goal, but they have overlooked
    that fact that millions of average Americans hate injustice. What they
    are doing is legal but it is wrong.

  The WorldCom/MCI stockholders have both the will and the ability to expose
    this scandalous behavior. There is a real possibility that millions
    of average Americans will turn on the "new MCI" and cancel their MCI

  In the end the clever and greedy bondholders and managers may have a
    company with lots of capacity and no customers. I wonder if they
    will declare bankruptcy?

                    Bankruptcy Basics

  There are two major kinds of business bankruptcies: Chapter 7 and
    Chapter 11.

  In Chapter 7 the company is "going out of business" and they don't
    have enough money (assets) to pay their bills (creditors).

  In Chapter 7 someone, normally the debtor in possession (original
    company owners or managers) but sometimes a court appointed trustee,
    sells off what can be sold and what money results is given to
    the creditors on a pro-rated basis (10 cents on the dollar). 

  Chapter 11 is considered a "reorganization". If a business is basically
    sound but there is some problem that must be solved before it can
    operate profitably it can declare under chapter 11. The court will
    "protect" the company so that it can keep doing business while a
    "reorganization plan" is created that solves the problem.

  Companies used Chapter 11 to deal with asbestos liability lawsuits, etc.

  Under a chapter 11 reorganization plan the court has virtually unlimited
    power. It can cancel leases, "break" contracts with negotiated prices,
    close stores, invalidate labor contracts and so forth.

  Prior to bankruptcy, a company's board of directors is supposed to be
    responsible to the stockholders. In theory, the stockholders own
    the company, the stockholders elect the board, the board hires
    management, the management reports to the board, the management
    operates the company in a way that keeps it going (pays the bills)
    and continues as a viable entity (protects the investment of the

  Once bankruptcy is filed conventional wisdom is that the management
    and board are transformed into the "Debtor in Position". Their
    obligation shifts from responding to and protecting stockholder
    interests and becomes a responsibility to satisfy creditor (banks,
    bondholders and supplier) claims.

  Under bankruptcy the company will stop holding stockholder meetings.
    The board of directors will not go out of office and there will
    be no elections to replace them. They become totally immune to any
    form of stockholder control or pressure.

  The legal and consulting fees for the committees are paid by the "debtor
    in possession" (bankrupt company). The company management hires lawyers
    and consultants (paid for by the company) and the creditors (bondholders)
    committee (which is always created) hires lawyers and consultants (paid
    for by the company). There is, however, almost never an equity
    (stockholder) committee appointed by the U.S. Trustee in a bankruptcy

    This means that if stockholders want to be represented by counsel in
    a bankruptcy case they have to pay for their lawyers out of their own
    back pockets. This puts the stockholders at a huge disadvantage since
    both company management and the bondholders have essentially unlimited
    legal and professional resources at no cost to them but the stockholders
    have to pay their own way. 

                    Covad - Chapter 11

  Covad is the perfect example of a "good" bankruptcy. It was struggling
    with an excessive debt load but its business was basically sound and
    it had some money in the bank.

  Covad management organized meetings with major bondholders. Covad
    management was doing their job in trying to save the company and
    protect stockholders interests.

  Covad negotiated a deal with the bondholders where they would get some
    cash (20 cents on the dollar) and also get some stock in exchange for
    their bonds (convert debt into equity).

  In the Covad case the bondholders got some immediate cash, the bondholders
    got 20% of the stock in the new company, the company's debt was
    virtually eliminated and the stockholders of the original company owned
    80% of the stock in the new company. 

                    The WorldCom/MCI Independent Stockholders Group

  An all volunteer ad hoc group organized by a Chicago area computer
    programmer through a site on the World Wide Web.

  The group is committed to trying to protect the interests of the
    WorldCom/MCI stockholders.

  The group is not funded by anyone. It does not have dues or a budget.
    It has established a "Stockholder Legal Fund" which is used to
    collect contributions and pass them on to a lawyer which is working
    for stockholder interests in the bankruptcy court.

  The primary activity of the group is to collect and distribute
    information to interested parties so that individuals can act on
    their own to influence events.

  The primary mechanism used for communication is through the group's
    web site at and via email messages.

                    Problems with the Bankruptcy System

  The people at the SEC are mostly lawyers and not business people. They
    tend to think "is it legal?" rather than "from a business standpoint
    is it necessary?" or "from a moral standpoint is it right?".

  The SEC mission statement says that its primary goal is to "protect
    investors and maintain the integrity of the securities markets". But
    if SEC staff even notice abuse, rather than taking decisive action to
    oppose it, they tend to just wring their hands and say "well that may
    be unfortunate but those people are operating within the letter of the
    law so there is really nothing we can do about it".

  The people at the U.S. Trustees office are mostly lawyers and not
    business people. They tend to think "is it legal?" rather than "from
    a business standpoint is it necessary?" or "from a moral standpoint
    is it right?".

  One of the stated goals of the U.S. Trustees office is to "protect the
    bankruptcy system from abuse". But if trustee staff even notice abuse,
    rather than taking decisive action to oppose it, they tend to just
    wring their hands and say "well that may be unfortunate but those
    people are operating within the letter of the law so there is really
    nothing we can do about it".

  In the bankruptcy system there are no checks and balances. It is possible
    that the U.S. Trustee and SEC were intended to provide some these
    controls but since both organizations have devolved into passive
    observers the result is that there is no one protecting the system
    or the stockholders.

  People (stockholders) are not entitled to have a lawyer represent them
    in a bankruptcy proceeding.

  If people (stockholders) cannot afford a lawyer one will not be appointed
    by the court.

                    Long Term Action Required

  Changes need to be made to the bankruptcy system:

    1) Congress should modify the bankruptcy law so that an equity
       committee is created in all large bankruptcies regardless of the
       debt/equity ratios.

    2) The U.S. Trustee's office needs to act in accordance with its mission
       statement to "protect the bankruptcy system from abuse". The Trustee's
       office should become more active in the process. It should review,
       oppose and submit motions and alternate plans when appropriate.

    3) The accounting firms and auditing firms should be more aggressive in
       challenging management's valuations and assumptions.

    4) The SEC needs to act in accordance with its mission statement to
       "protect investors and maintain the integrity of the securities
       markets". The SEC should become more active in opposing abuses
       while they are in process rather than making rules after the fact.

                    Immediate Action Required

  The WorldCom/MCI stockholders need to collect enough money to hire a
    lawyer and get representation in bankruptcy court.

  The WorldCom/MCI stockholders need to get the word out about how a small
    group of greedy bondholders have conspired with the company management
    to use the bankruptcy system to steal this company from the stockholders.

  The WorldCom/MCI stockholders need to encourage average Americans to
    threaten to cancel the WorldCom/MCI service if this plan is approved
    in its current form.  

                              - end -

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