The Bermuda-based carrier revealed it would have to restate its 2003 earnings, review its 2002 results, and delay reports for this year. Apparently, it has understated liabilities for access charges (fees paid to other phone companies for connecting calls) in its 2003 financial results by $50m to $80m.
The news couldn’t have come at a worse time. Global Crossing is trying to arrange new financing by the end of June, but the accounting problem could delay or even scupper such a deal.
In its annual report, the carrier said it needed up to $100m in funding this year, and would require substantial additional financing for future years. However, some analysts predict it really needs as much as $252m in 2004 to pay restructuring costs and fund its business.
Its majority shareholder, Singapore Technologies Telemedia (controlled by the Singapore government), owns 61.5% of Global Crossing, and had said it was prepared to provide up to $100m in short-term financial support if it was needed. This much-needed funding deal is now at risk. Another shareholder, Mexican billionaire Carlos Slim, recently increasing his holding in the company to 11.25%.
Global Crossing achieved prominence in the late 1990s when it established a worldwide fiber-optic network. However, it ran up massive debts building the cable network, and the over-supply in the industry forced it into Chapter 11 in January 2002 amid accounting scandals, particularly allegations of the use of capacity swaps with other carriers to bolster their top lines.
Former directors and officers of the carrier last month reached a $325m settlement of a shareholder class-action lawsuit, and the US market regulators are also thought to be considering a settlement of their probe.
So what went wrong this time? According to Global Crossing, it spent $1.92bn in access charges last year, and had recognized $150m in future liabilities for such charges at the end of 2003 before the accounting problem was found.
The problem with the liabilities stems mostly from incorrect estimates of access costs, as well as a failure to reconcile its expenses with bills from vendors. Roughly $10m of the shortfall is due to an expected accounting change allowed under bankruptcy rules.
Global Crossing found the problem while preparing its first-quarter 2004 results. Due to the review, Global Crossing is postponing its June 2004 shareholders meeting, the filing of its proxy statement, and its earnings release for the first quarter of 2004. It has also informed its auditors and the US Securities and Exchange Commission.
This article is based on material originally published by ComputerWire
