[MCI WorldCom Faces Huge Bill If Former Unit Misses Contract Deadline]
(never a dull moment! -- mark)
NEW YORK -(Dow Jones)- MCI WorldCom Inc. could be forced to pay as much as $200 million if a subsidiary it sold last year for $58 million fails to deliver on a defaulted contract by the end of next month.
MFS Network Technologies, now a unit of Able Telcom Holding Corp. (ABTE), has until March 31 to complete a violation-processing center for New Jersey's E-Z Pass electronic road toll system.
If MFSNT doesn't meet the deadline, officials at the New Jersey Turnpike Authority said they could look for a new contractor, and additional costs would be drawn from $200 million worth of contruction performance bonds that are backed by MFSNT's former owner, MCI WorldCom (WCOM).
"We could put (MFSNT) in default for cause if they fail to deliver by March 31," said Edward Gross, executive director or the NJ Turnpike Authority. "If they don't deliver, there will be serious consequences."
But MCI WorldCom's liability to MFSNT doesn't end there.
The Jackson, Miss.-based company is the guarantor for other MFSNT contracts, including those with state agencies in New York and Colorado, though its total exposure to MFSNT performance bonds is unclear.
MCI WorldCom officials declined to comment, and an MFSNT transportation official puts the figure at $250 million. But others familiar with the agreement say it's about twice that amount.
Able reported in a filing with the Securities and Exchange Commission that $499 million in contracts are backed by performance bonds, and former members of MFSNT management and another person currently with MFSNT say that MCI WorldCom is on the hook for all of that amount.
To put that figure in perspective, MCI WorldCom's net income for the fourth quarter was $457 million.
MCI WorldCom is unlikely to pay the full $499 million, but the potential losses resulting from the MFSNT transaction run counter to Chief Executive Officer Bernie Ebbers' reputation as one of corporate
America's saviest deal-makers.
Through a series of timely acquisitions - culminating in a dramatic, unsolicited takeover of MCI Communications Corp. last year - Ebbers transformed WorldCom from a little-known long distance carrier into an Internet powerhouse and one of the world's most formidable telecommunications companies.
The MFSNT experience shows that, in at least one instance, MCI WorldCom has performed less shrewdly when it comes to selling a business. MCI WorldCom plans another sale in the near future as part of a complex deal with Electronic Data Systems Corp. (EDS).
MFSNT officials, meanwhile, insist they will meet the deadline for the New Jersey E-Z Pass system. "We're very confident we'll have the (violation processing center) operating on or before March 31," said Vance Cartee, an MFSNT president.
Critics, however, point out that MFSNT had already promised to provide a completed operational system twice - first in November and then in January - placing the contract in default. And several New Jersey state officials have raised the prospect of firing MFSNT. "There may be a bipartisan push to re-examine this," said John Wisniewski, the deputy Democratic conference leader for the New Jersey state assembly. "A new contractor is a possibility."
MFSNT's involvement with the E-Z Pass system began in 1996 when New Jersey transportation officials said they would hire the WorldCom unit to install electronic tolls and build a fiber optic network along major state highways.
The system, which is enormously popular in New York, reads an electronic tag on car windshields.
The two parties signed a formal contract in March 1998, and the first part of the E-Z Pass system, along the Atlantic City Expressway, was agreed to be completed by November of that year.
Less than two months after the agreement was reached, WorldCom sold MFSNT to West Palm Beach, Fla.-based Able Telcom in a complex transaction ultimately valued at $58 million, according to an Able Telcom spokesman.
One condition of the sale, however, was that projects negotiated by MFSNT while the company was a part of WorldCom would be guaranteed by securities known as performance bonds. These securities are ultimately backed by MCI WorldCom.
Able Telcom was supposed to replace the peformance bonds with new bonds, thus eliminating MCI WorldCom's exposure. But Able has failed to do so, and consequently MCI WorldCom remains liable.
Under the terms of the performance bond, if state officials find MFSNT in violation of a construction agreement, the officials have the right to demand that the bonding company hire a new contractor to
complete the job. Any additional costs associated with the new contractor would be drawn from the performance bond.
Since the sale to Able Telcom, the president of MFSNT and other members of top management have left the company, forcing Able to bring in new project managers and consultants, which resulted in delays on the E-Z Pass system.
At the same time, Able has been pinched for cash following the MFSNT acquisition.
The company failed to honor investor demands for redemption of Able's convertible preferred stock and senior subordinated notes, which put those two securities in default. Able also has been in default of certain financial convenants on its bank debt.
Recently, however, Able announced that Interfiducia Partners LLC has agreed to purchased a $10 million defaulted notes held by John Hancock, and that other unamed investors will purchase the preferred stock.
In the meantime, Able has also agreed to pay $25,000 a day to the consortium in charge of the E-Z Pass system until the violation processing center is completed. |
