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WorldCom facing world of obstacles

By Andrew Backover, Edward Iwata and Thor Valdmanis
USA Today

When he became a WorldCom customer two years ago, Infolink CEO Prieur Leary hoped for a good relationship. Instead, he wound up owing WorldCom $100,000 because of billing mistakes he says WorldCom made.

Leary says Infolink, which sells communications services, was billed for the same items by different WorldCom units - and both were wrong. It was charged for some services that should have been free, was overcharged for others and was billed for taxes that shouldn't have accrued.

When he wouldn't pay, WorldCom cut off services - leaving Infolink unable to serve customers. "I was panicked," says Leary. WorldCom credited Infolink more than $70,000 but disputes most of Leary's claims.

Yet, complaints such as Leary's have caught the attention of the Securities and Exchange Commission, which has put WorldCom's billing, sales and accounting, as well as CEO loans, under intense scrutiny. The spotlight isn't new to WorldCom. During the telecom boom, it was the boldest and fastest-growing player, building an empire with more than 60 acquisitions, including MCI Communications, which was then the biggest buyout ever.

Now, that aggressiveness is haunting WorldCom. While the SEC investigates, several lawsuits allege that WorldCom and its folksy CEO, Bernie Ebbers, used shady tactics to boost revenue and hid bad news to keep its soaring stock high - then using its pricey stock for its acquisition spree. WorldCom says it did nothing wrong.

Whatever the outcome, the SEC inquiry has focused attention on WorldCom's inner workings. And interviews with former WorldCom employees, customers and analysts paint a picture of a far different WorldCom than the one Ebbers sold to Wall Street. Instead of a smooth-running growth engine, the company was racked with growing pains. Too many computer systems from so many companies likely led to an excessive number of billing errors, employees and customers say. Sales teams overlapped and fought each other for the same business. WorldCom business customers wondered which part of WorldCom it was to do business with.

This, analysts say, became deadly as WorldCom's long-distance business declined and it couldn't make more acquisitions. "No telecom company or stock grew faster and appreciated more," says analyst Pat Brogan of Precursor Group. "But its model depends on the ability to grow. When it hits a wall, all of its problems become more visible."

WorldCom hit that wall in mid-2000, after regulators denied its biggest bet: to buy Sprint for $115 billion. They said the merging of the No. 2 and No. 3 long-distance firms would hurt competition. Since then, WorldCom has done just two minor acquisitions. After years of big gains, revenue declined 10% to $35.2 billion last year.

Now, WorldCom is quelling bankruptcy rumors. Its stock is off about 90% from its all-time high in 1999. It has cut about 10,000 jobs since early last year. It's strained by $30 billion in debt. It expects to take a $15 billion to $20 billion goodwill write-off this year - suggesting that it paid too much for its growth. The consummate predator seems easy prey. Last month, WorldCom adopted an anti-takeover plan to guard against low-ball offers.

Telling of the shift: Ebbers recently sold his yacht, dubbed "Aquasition," and he's selling other assets as he tries to repay WorldCom the $341 million he borrowed to cover margin calls on the falling value of his company stock. "It's shocking to see how (Ebbers) could be so totally blind to the risks he was taking," says Bill Fleckenstein of hedge fund Fleckenstein Capital. "He thought the whole mania of overbuilding and excessive debt would never end."

Growing pains

Bankers who worked for WorldCom during its heyday say Ebbers has been humbled by overambition and a sharp business downturn - not by wrongdoing. The SEC probe could take months. It refused comment.

Long ago, though, WorldCom and its many parts struggled in ways that now are becoming clear. While its prestige grew with each acquisition, the strain of fast growth yielded problems - some of which the SEC is probing for potential wrongdoing - including:

Billing woes. WorldCom's buying spree at one point left it with 55 billing systems. Having so many could have led to some customers being overcharged, ex-WorldCom executives say. The SEC is looking into customer complaints about alleged overcharging, billing disputes and problems from the integration of WorldCom and MCI's computer systems after the 1998 $40 billion buyout.

WorldCom spokesman Brad Burns says the company's billing systems were trimmed to five interconnected ones, improving efficiency. But "it's not like the 55 didn't work," he says.

Telecom billing mistakes are common. But WorldCom's many acquisitions made the melding of systems even more problematic, analysts and former executives say. "If you have two companies combining, it's manageable," says Russ McGuire, strategist at TeleChoice, who briefly worked for Ebbers in the mid-1990s. "If you have 40 companies, it's not."

Denver-based Inflow, which operates Internet data centers, has had billing problems with all telecom partners. But WorldCom's billing problems, while improving, have been bigger and more consistent, say executives familiar with its WorldCom dealings.

Inflow, which buys, then resells WorldCom services, often is billed incorrect amounts for data circuits or for circuits that aren't active, these executives say. Plus, dealing with WorldCom's divisions, such as UUNet, the Internet backbone acquired in 1996, and MFS, the local services arm acquired at the same time, is like dealing with two different companies, the insiders say.

Inflow Chief Financial Officer Jim McHose declined comment on WorldCom's billing problems, saying: "They are working hard to serve their customers amid challenges from a systems perspective, and we will continue to be a big WorldCom customer."

Similar problems were inherent in MCI before it merged with WorldCom. AccessPro, a Florida-based Internet access provider, received bills for Internet lines from two different units of MCI in 1997, according to executives familiar with the AccessPro. Each bill overcharged AccessPro by different amounts, the executives say.

Despite AccessPro's complaints, the billing battle grew to about an $80,000 dispute. AccessPro was threatened with service cut-offs and hassled by collection agencies. Near the time of the MCI-WorldCom merger, AccessPro was credited about $60,000. A short time later, it received another bill that reversed the credit. WorldCom eventually dropped the matter.

WorldCom declined to comment on Inflow or AccessPro.

Sales problems. WorldCom's many acquisitions left it with a fragmented sales force that competed for the same customers and tried to steal existing clients from each other. Customers and ex-WorldCom executives say sales reps from different units often called on the same customer within days of each other. Senior management liked the competition: It kept salespeople on their toes. For customers, though, the result was often confusion, ex-employees say.

Spokesman Burns disagrees. "Here and there, you might get an overlapping sales call," he says. "That's certainly been resolved."

WorldCom also leads its peers in complaints for slamming, which is when a customer's long-distance service is switched without permission. From 1997 to March, the Federal Communications Commission received 7,749 complaints against WorldCom for slamming. That's 15% more than complaints received about the much bigger AT&T. WorldCom says it has taken steps, including stiff penalties for offenders, to reduce the problem.

And it has moved to clean up its sales force. It recently fired 14 employees, saying they milked it for commissions they didn't deserve. The SEC has requested information about "disputed" and "inflated" commissions.

TeleChoice's McGuire says the SEC might want to see if fake commissions resulted in inflated revenue, which could have misled investors. WorldCom says the fraud never affected revenue. "They gamed the commission system, which has absolutely nothing to do with revenue," Burns says.

Hiding bad news. WorldCom faces allegations that it hid bad news to keep its stock price high. The higher the stock, the easier it is to use for acquisitions.

One lawsuit filed last year in California alleges that top executives of WorldCom and telecom firm World Access devised a "sham deal" in 1998 to camouflage $165 million in debt owed to WorldCom by a customer, Cherry Communications. That let WorldCom avoid writing off the bad debt, and taking an earnings hit, as it tried to buy MCI, the lawsuit says.

The lawsuit was filed by high-tech entrepreneur Roger Abbott, the former CEO of WorldxChange, a defunct telecom firm that was acquired by World Access in 1999. Abbot is not without warts. He spent time in prison for cocaine trafficking and founded a telecom that gained notoriety for slamming. WorldCom and World Access, which is bankrupt and in liquidation, say the suit has no merit.

Another lawsuit filed on behalf of shareholders more than two years ago alleges that WorldCom, hoping to avoid a financial hit that could jeopardize its acquisition of Sprint, kept $696 million in bad debt on its books from at least 15 troubled companies and other consumers. A federal judge dismissed the lawsuit last month. Plaintiffs' attorneys have appealed.

The lawsuit focuses on a key part of the SEC inquiry, which seeks information about a $685 million charge WorldCom took in the third quarter of 2000 for bad debt. The SEC asked for information on customers, the basis and timing of the charge and how past-due amounts changed over time.

WorldCom says the charge is legitimate and stemmed from customer bankruptcies, litigation and contract settlements.

The glory years

Ebbers, who refused to be interviewed, was once so big he knocked rivals off the calendar. Telecom firm LCI International rescheduled a 1997 New York City investor conference because it was on the same day that Ebbers was in town schmoozing Wall Street types on his yacht. LCI feared few people would show up.

Ebbers had much to celebrate. WorldCom's stock was among the hottest of the 1990s. A $100 investment in his company in 1989 was worth $7,200 a decade later. The former physical education teacher, coach and motel chain owner was worth an estimated $1.4 billion, says Forbes.

The Canadian-born Ebbers, 60, built WorldCom, which grew out of a company named Long Distance Discount Service, from a nobody into a giant with rapid-fire acquisitions: Advantage Cos., WilTel, MFS, UUNet, MCI.

Then came Ebbers' biggest gamble - and defeat: Sprint. It was to give WorldCom growth and a wireless network. While pushing the deal, Ebbers said the telecom sector's $2.5 trillion in 1999 merger activity was "the price of survival in the new millennium."

Regulators thought differently. In summer 2000, they killed the deal. That, in many ways, began a long fall for WorldCom. Without the big revenue growth and cost-cutting from the acquisition, WorldCom fell prey to declining long-distance prices. The economic downturn worsened its woes. WorldCom, and its MCI unit, could see revenue fall 4.5% this year from last, says Lehman Bros. analyst Blake Bath.

Ebbers is hurting, too. After using WorldCom shares to secure personal loans, Ebbers faced margin calls from banks as the value of those shares fell. To prevent him from having to sell shares, which would have further hurt WorldCom's stock, the company lent him $341 million and pledged $35 million for a letter of credit.

Ebbers and WorldCom say he's good for it, and he's selling assets to repay the loans. But the unprecedented size of the loans caught the SEC's eye, former WorldCom executives say. If he can't repay them, they would become an expense against earnings. While the SEC probe hurts the stock, most analysts say WorldCom is among the most forthcoming companies. They seem to agree that its books are untarnished, even if Ebbers' reputation as a mastermind isn't.

"Under whatever rock you want to turn over, WorldCom's accounting will stand up to a fair amount of scrutiny," says Peter DeCaprio of Thomas Weisel Partners. "We are very comfortable."

Many WorldCom investors haven't been.

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