WorldCom will conduct business as usual while it develops a re-organisation plan under Chapter 11 of the US Bankruptcy Code, the company said in a statement on Monday.
The company filed for court protection Sunday evening in the US Bankruptcy Court for the Southern District of New York. That filing covers WorldCom and substantially all of its active US subsidiaries, but not its non-US subsidiaries, according to the statement.
WorldCom's is the largest bankruptcy filing in US corporate history, the Wall Street Journal said in its online edition on Sunday night, with the company listing assets of over $US100 billion, and having more than 1,000 creditors.
The company has debt estimated at $32.8 billion, several thousand corporate customers, serves around 20 million consumers and runs the world's biggest Internet network. Subsidiaries include Internet infrastructure company UUNet Technologies and telecommunications carrier MCI Communications.
"Our debt had become the enemy of our company, threatening our viability and driving down our stock price. We regret we are in this position, but the significant accounting irregularities we discovered reduced our refinancing options. This is the only way to provide for the future, and help the greatest number of people, including our customers, employees and shareholders," said John Sidgmore, WorldCom's president and CEO, at a New York press conference this week.
Chapter 11 provides a financially beleaguered company with a method to keep operating its business under protection from its creditors while developing a plan for resolving its financial problems. The filing means that WorldCom will not have to pay interest due on loans taken out earlier.
"WorldCom plays a vital role in America's national security infrastructure, and this filing will allow us to serve our customers in a normal manner, and operate our business in a normal course," said Sidgmore.
US Federal Communications Commission chairman Michael Powell released a statement that said he is "deeply concerned" about the bankruptcy filing, but that it would not lead to an interruption of service to Internet customers of WorldCom. Powell said the FCC will act "vigilantly" to protect the telecommunications network, and it reserves the right to involve itself in the bankruptcy proceedings "as necessary."
WorldCom has obtained an agreement to arrange up to $2 billion in Debtor-in-Possession (DIP) financing, of which $750 million has already been committed by several banks, including General Electric Capital. This facility, once approved by the Bankruptcy Court, will allow the company to operate its business normally while it focuses on its new strategic plan, restructures its finances, reduces its debt burden and strengthens its balance sheet, according to the statement.
The $750 million in financing, if approved, "will carry us throughout the rest of the year", said Sidgmore. WorldCom was making payments of $2 billion a year in interest on its debt, which it expects to cut by three-fourths through the Chapter 11 process, he said.
"This is not the path we wanted to take, but it is clearly the right thing to do," Sidgmore said.
Expenses will certainly be reduced by the decision to suspend executive bonuses, which leaves Sidgmore's compensation at "just a salary", he said. Executive compensation for the rest of the year will be determined by judges, he said.
WorldCom also announced the appointment of two new members to its board of directors. Nicholas Katzenbach and Dennis Beresford will have an oversight role over the previously announced internal investigation into the accounting irregularities. Katzenbach was US Attorney General during the Lyndon Johnson administration in 1965 to 1966, and later served as senior vice president of IBM. Beresford is currently a professor at the University of Georgia, and was chairman of the Financial Accounting Standards Board, which is responsible for maintaining the GAAP (generally accepted accounting principles) standard, from 1987 to 1997.
The appointment of the directors "demonstrates our seriousness in getting to the bottom of those problems", said Sidgmore.
KPMG is currently auditing WorldCom's financial records, and the turnaround time for the company will depend on when KPMG can deliver those results, said Sidgmore.
WorldCom was scheduled to report its second-quarter results next week, but is now unlikely to do so, said Sidgmore.
WorldCom was valued at around $US120 billion at its peak in mid-1999. Late last week, WorldCom's market capitalisation had fallen to $280 million. Its stock was trading up $0.02 to $0.11 a share in early Monday morning trading on the Nasdaq.
While a Chapter 11 filing enables WorldCom to keep its creditors at bay, it does not wipe out the company's other difficulties, which include:
* The discovery in late June of accounting irregularities totalling an estimated $3.85 billion.
* A lawsuit brought by the US Securities and Exchange Commission (SEC), related to the accounting irregularities, charging the company with fraud and asking a court to block the destruction of documents by WorldCom.
* An investigation into the irregularities by the US House of Representatives' Energy and Commerce Committee* A lawsuit that the company has filed against former chief financial officer Scott Sullivan, seeking to recover a $US10 million bonus awarded to Sullivan in 2000.
* Further tarnishing of the company's reputation as Sullivan and former CEO Bernie Ebbers refused to answer questions put to them by a US House of Representatives committee by pleading the Fifth Amendment to the US Constitution, which allows citizens to decide not to answer questions that may incriminate them during an investigation.
* The discovery that the accounting irregularities at WorldCom began more than two years ago and showed a history of lies and financial wrongdoing by executives trying to reach profit forecasts.
* Suggestions from US Representatives Billy Tauzin and Michael Oxley that company officials convicted of serious fraud charges could be sentenced to jail terms.
* An attempt by IDT to buy up some of WorldCom's core assets such as its local phone offerings for businesses and MCI dialup services.
* Completing a restructuring which will see 17,000 employees leave the company.
Cara Garretson in Washington contributed to this report.