[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
THE EFFECTS OF THE GLOBAL CROSSING
BANKRUPTCY ON INVESTORS, MARKETS,
AND EMPLOYEES
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
OVERSIGHT AND INVESTIGATIONS
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
__________
MARCH 21, 2002
__________
Printed for the use of the Committee on Financial Services
Serial No. 107-63
U.S. GOVERNMENT PRINTING OFFICE
78-601 WASHINGTON : 2002
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512-1800
Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001
HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa JOHN J. LaFALCE, New York
MARGE ROUKEMA, New Jersey, Vice BARNEY FRANK, Massachusetts
Chair PAUL E. KANJORSKI, Pennsylvania
DOUG BEREUTER, Nebraska MAXINE WATERS, California
RICHARD H. BAKER, Louisiana CAROLYN B. MALONEY, New York
SPENCER BACHUS, Alabama LUIS V. GUTIERREZ, Illinois
MICHAEL N. CASTLE, Delaware NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California GARY L. ACKERMAN, New York
FRANK D. LUCAS, Oklahoma KEN BENTSEN, Texas
ROBERT W. NEY, Texas JAMES H. MALONEY, Connecticut
BOB BARR, Georgia DARLENE HOOLEY, Oregon
SUE W. KELLY, New York JULIA CARSON, Indiana
RON PAUL, Texas BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio MAX SANDLIN, Texas
CHRISTOPHER COX, California GREGORY W. MEEKS, New York
DAVE WELDON, Florida BARBARA LEE, California
JIM RYUN, Kansas FRANK MASCARA, Pennsylvania
BOB RILEY, Alabama JAY INSLEE, Washington
STEVEN C. LaTOURETTE, Ohio JANICE D. SCHAKOWSKY, Illinois
DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas
WALTER B. JONES, North Carolina CHARLES A. GONZALEZ, Texas
DOUG OSE, California STEPHANIE TUBBS JONES, Ohio
JUDY BIGGERT, Illinois MICHAEL E. CAPUANO, Massachusetts
MARK GREEN, Wisconsin HAROLD E. FORD Jr., Tennessee
PATRICK J. TOOMEY, Pennsylvania RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut KEN LUCAS, Kentucky
JOHN B. SHADEGG, Arizona RONNIE SHOWS, Mississippi
VITO FOSSELLA, New York JOSEPH CROWLEY, New York
GARY G. MILLER, California WILLIAM LACY CLAY, Missouri
ERIC CANTOR, Virginia STEVE ISRAEL, New York
FELIX J. GRUCCI, Jr., New York MIKE ROSS, Arizona
MELISSA A. HART, Pennsylvania
SHELLEY MOORE CAPITO, West Virginia BERNARD SANDERS, Vermont
MIKE FERGUSON, New Jersey
MIKE ROGERS, Michigan
PATRICK J. TIBERI, Ohio
Terry Haines, Chief Counsel and Staff Director
------
Subcommittee on Oversight and Investigations
SUE W. KELLY, New York, Chair
RON PAUL, Ohio, Vice Chairman LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York KEN BENTSEN, Texas
ROBERT W. NEY, Texas JAY INSLEE, Washington
CHRISTOPHER COX, California JANICE D. SCHAKOWSKY, Illinois
DAVE WELDON, Florida DENNIS MOORE, Kansas
WALTER B. JONES, North Carolina MICHAEL CAPUANO, Massachusetts
JOHN B. SHADEGG, Arizona RONNIE SHOWS, Mississippi
VITO FOSSELLA, New York JOSEPH CROWLEY, New York
ERIC CANTOR, Virginia WILLIAM LACY CLAY, Missouri
PATRICK J. TIBERI, Ohio
C O N T E N T S
----------
Page
Hearing held on:
March 21, 2002............................................... 1
Appendix:
March 21, 2002............................................... 49
WITNESSES
Thursday, March 21, 2002
Cleland, Scott C., CEO, Precursor Group.......................... 39
Cohrs, Dan J., Ph.D., Executive Vice President and Chief
Financial Officer, Global Crossing............................. 12
Legere, John J., Chief Executive Officer, Global Crossing........ 10
McGrath, Andrew, President, Cable & Wireless Service Providers
PLC............................................................ 17
McNamara, Will, Director, Energy Industry Analysis, SCIENTECH,
Inc............................................................ 40
Mohebbi, Afshin, President and Chief Operating Officer, Qwest
Communications International, Inc.............................. 14
Morrissey, John M., Deputy Chief Accountant, U.S. Securities and
Exchange Commission............................................ 37
Salisbury, Michael H., Executive Vice President and General
Counsel, WorldCom, Inc......................................... 16
APPENDIX
Prepared statements:
Kelly, Hon. Sue W............................................ 50
Oxley, Hon. Michael G........................................ 69
Clay, Hon. William Lacy...................................... 71
Jones, Hon. Stephanie T...................................... 72
Slaughter, Hon. Louise....................................... 73
Cleland, Scott C............................................. 145
Legere, John J., and Dan J. Cohrs, joint statement........... 74
McGrath, Andrew.............................................. 126
McNamara, Will............................................... 160
Mohebbi, Afshin.............................................. 104
Morrissey, John M............................................ 132
Salisbury, Michael H......................................... 118
Additional Material Submitted for the Record
Kelly, Hon. Sue W.:
EITF Abstracts, Issue 00-11.................................. 63
EITF Abstracts, Issue 00-13.................................. 66
Financial Accounting Series, FASB Interpretation #43......... 52
Legere, John J., and Dan J. Cohrs:
Ralph C. Ferrera, clarification letter to Hon. Sue W. Kelly.. 103
Written response to questions from Hon. Sue W. Kelly......... 93
McGrath, Andrew:
Written response to questions from Hon. Sue W. Kelly......... 128
Mohebbi, Afshin:
Written response to questions from Hon. Sue W. Kelly......... 110
Salisbury, Michael H.:
Written response to questions from Hon. Sue W. Kelly......... 123
THE EFFECTS OF THE GLOBAL CROSSING
BANKRUPTCY ON INVESTORS, MARKETS,
AND EMPLOYEES
----------
THURSDAY, MARCH 21, 2002
U.S. House of Representatives,
Subcommittee on Oversight and Investigations,
Committee on Financial Services,
Washington, DC.
The subcommittee met, pursuant to call, at 10:05 a.m., in
room 2128, Rayburn House Office Building, Hon. Sue W. Kelly,
[chairwoman of the subcommittee], presiding.
Present: Chairwoman Kelly; Representatives LaFalce, Tiberi,
Oxley, Jones, Capuano and Clay.
Also present: Representatives Slaughter and Baker.
Chairwoman Kelly. Good morning. This hearing of the
Oversight and Investigations Subcommittee of the House
Financial Services Committee will come to order.
I want to thank all Members of Congress who are present
today, and without objection, all Members present will
participate fully in the hearing. Their opening statements and
their questions will be made part of the official hearing
record. In the interest of ensuring proper subcommittee
consideration of H.R. 3763, The Corporate and Auditor
Accountability, Responsibility, and Transparency Act, known as
CARTA, we are here today to examine the status of the
telecommunications industry.
We will hear from the executives of the companies, from the
industry experts, and from an accounting expert at the
Securities and Exchange Commission. Global Crossing's
bankruptcy in January marked the fourth largest bankruptcy in
the history of the United States.
It serves as an ominous warning to the financial and
business community and has had far-reaching consequences. While
the overall downturn in the telcom industry was a factor in the
collapse, the fall of Global Crossing raises serious questions
about current accounting practices, disclosure requirements,
and corporate management.
Just yesterday we learned that Global Crossing did not
disclose a complex communications deal, several months before
the company filed for bankruptcy in January. Experts called the
lack of disclosure a serious lapse by management.
An estimated 500,000 jobs have been lost in the telecom
industry. Global Crossing's bankruptcy resulted in the loss of
an estimated 9,000 jobs, and has caused real harm to investor
confidence.
It has had an impact on my home State of New York.
Statewide, Global Crossing has eliminated hundreds of local
jobs, and the New York State Pension Fund lost $63 million as a
result of the collapse.
How did a company that was perceived by all conventional
measures as healthy, fall so far so fast? By all accounts,
Global Crossing was a winner, but now we know that it was
actually a financial time bomb.
Did some top executives know that the clock was ticking and
that time was running out? One thing is certain. We do know
that the bomb was tossed right in the lap of employees and
investors who didn't have a clue that the company was going
under.
The collapse of Global Crossing calls into question, how
much confidence employees, investors, and the public should
have in financial information that's released by companies,
particularly the pro forma financial projections. Since these
pro forma statements are not required to use Generally Accepted
Accounting Principles, known as GAAP Principals or GAAP
Accounting, a company such as Global Crossing can massage the
numbers on these pro forma financial statements, or, in other
words, these pro forma statements can provide an easy
opportunity to cook the books.
In the case of Global Crossing, the company's pro forma
statements may have misinformed investors and employees as to
the profitability and performance of the company. In an
examination of Global Crossing's filings submitted last spring
with the SEC, the company reported an additional $531 million
in earnings in the pro forma statement, pumping up earnings by
nearly 50 percent as the result of controversial swaps
activities.
However, the $531 million was not included in the company's
GAAP-compliant statement of earnings. Why not? Because under
present required disclosure regulations, it didn't exist. It
wasn't required to exist.
In addition, we need to examine the way in which companies
report their swaps of indefeasible rights of use known as IRUs.
It appears that swaps are being used as a quick and easy way to
inflate earnings, and make a company look more profitable than
it really is.
Investors deserve accurate information and in some cases,
they appear not to be getting it. We need to know how the SEC
views these IRUs, since some have alleged that this accounting
practice has misled investors and the companies' employees as
to the true profitability of the corporations.
Other issues raised by the collapse of Global Crossing
include corporate governance and responsibility, including
blackout periods imposed on employee 401K plans. At the highest
levels of Global Crossing, top executives were selling stock
and pocketing millions before the company's collapse. Former
CEO Gary Winnick, sold stock worth $734 million before the
company collapsed, while this winter, employees of his company
watched their savings, investments, and severance packages
disappear.
The purpose of this hearing is to take an honest look at
the issues surrounding this collapse. The ultimate goal is to
protect workers and investors and prevent this from happening
in the future through new legislation, if it's necessary.
Accounting methods, financial disclosure, and transparency
and corporate governance are matters that the Full Committee is
deliberating right now. I believe that CARTA provides a
comprehensive solution to our concerns and will restore
investor and employee confidence in company disclosures.
I would like to note for the record that we invited the
President of the Communications Workers of America to testify,
however, he was unable to join us due to scheduling problems.
In addition, we also invited the American Institute of
Certified Public Accountants to testify, but they were also
unable to accept the invitation.
[The prepared statement of Hon. Sue W. Kelly can be found
on page 50 in the appendix.]
Chairwoman Kelly. Unfortunately, my friend, the Ranking
Member, Mr. Gutierrez, is unable to join us today, so I will
now recognize the Ranking Member for the Full Committee,
Congressman LaFalce, for his opening statement. Mr. LaFalce.
Mr. LaFalce. Thank you very much. First of all, I am
delighted that you are having this hearing today. I think it's
very, very important, and I am pleased we have such
distinguished witnesses.
Once again, investigation into the companies, most
particularly Global Crossing's conduct, by the Securities and
Exchange Commission and by the Justice Department have raised
the specter of another major United States company that may
have been engaged in very deceptive accounting practices.
While we do not yet know for certain if Global Crossing
engaged in fraudulent accounting practices, there are certainly
very serious questions as to whether it engaged in practices
that had far more to do with meeting analysts' earnings
estimates than with economic substance.
While its ultimate failure may have had to do primarily
with its underlying business model, and also--and very
importantly--excess industry capacity, Global Crossing may well
have succeeded in keeping its share price inflated much longer
than was justified, based upon its true value.
Global Crossing may not be alone within the world of
companies or within the world of telecommunications companies.
The Financial Services Committee is currently considering
legislation aimed at correcting the systemic weaknesses that
have become all to apparent in our financial reporting system.
Mrs. Kelly has mentioned one of them, CARTA. That's been
introduced by the Chairman and co-sponsored by many individuals
in this subcommittee. There is another approach, too. While
there's nothing wrong with the CARTA approach, in my judgment,
as far as it goes, I just don't think it goes nearly far
enough, and so I've introduced a bill, CIPA, The Comprehensive
Investor Protection Act, and it, too, has been co-sponsored by
a great many Members of our subcommittee and others within the
House.
Some of the witnesses in our past hearings have warned that
we should not overreact to the collapse of Enron and some other
companies. Well, I don't think we should overreact to anything,
but I don't think we should under-react, either.
The failure of Global Crossing, Enron, and so forth, is a
powerful reminder that this is not just about the foibles of
one or two companies, but it's about fundamental weaknesses
that afflict our financial reporting system. The safegaurds
intended to protect investors have been overwhelmed by the
temptation for companies to sometimes cheat, but more often,
overstate or obscure their financial disclosure to improve
short-term results, to improve market capitalization, to meet
analyst or investor expectations or analyst hype.
If we are to break out of this cycle of improprieties, I
believe that we must fundamentally do a number of things. We
must alter the relationship of the auditor to its client,
making sure that everybody realizes that the auditor's
responsibility is a fiduciary responsibility to the public.
We must strengthen corporate governance. I just think that
the line between the boards of directors and the offices
sometimes has been blurred, and boards of directors too often
become passive puppets of officers--not always, to be sure, but
too often. This is especially true with respect to audit
committees, and we must provide meaningful oversight to both
the accounting profession and the securities industry analysts.
I've introduced a bill, as I've said, that seeks to do
exactly that. I look forward to working with the Members of our
subcommittee as we seek to learn the facts of the failure of
Global Crossing and its management practices, its accounting
practices, as I look forward to hearing today from other
participants within the telecommunications industry to gain
their perspective. And I hope that we can create a legislative
response that will not simply follow the lead of either the
Chairman or the Ranking Member, but a legislative response that
will take each issue, issue-by-issue, and attempt to come up
with a response that is the best way to deal with a particular
issue, regardless of which side of the aisle it originated on.
I thank the Chair.
Chairwoman Kelly. Thank you very much, Mr. LaFalce.
We turn now to the Chairman of the full Committee on
Financial Services, Mr. Oxley.
Mr. Oxley. Thank you, Madam Chairwoman, for this timely
and, we hope, illuminating hearing today. It seems that each
day brings us new allegations about the use or misuse of
complex accounting practices that hide the information needed
by the markets to assess a company's health.
When this happens to a healthy company during a period of
growth, the company can work its way through it, but when the
company is already experiencing a severe downturn in its
business and then has its accounting question, as was the case
with Global Crossing, it can be devastating.
There are two sets of victims who get burned in this cycle:
Investors suddenly receive new and damaging information about
the company, and then lose confidence in it, and worse yet, the
employees then lose their jobs and their pensions when the
businesses turn bad and the capital markets freeze, because the
good news they had about the company was not necessarily true.
While the Enron bankruptcy first brought these issues to
our attention, it appears that Global Crossing, which has also
declared bankruptcy, and other telecom companies accounted for
key activities in a way that raises serious concerns. Employees
and investors need to know whether they engage in swaps of
capacity that had a legitimate business purpose or did not, and
whether they were accounted for properly or in a way that just
pumped up their projected cash flow and stock prices.
Global Crossing entered into these capacity swaps with a
number of companies, including Qwest, Cable and Wireless, and
WorldCom at a time when the entire telecom world was
experiencing an excess of capacity. We need to understand how
the industry's overall problems intersected with the use of
those swaps.
I want to thank the CEO and CFO of Global Crossing and
executives of Qwest, WorldCom and Cable and Wireless for
agreeing to appear before us today to explain these issues to
the subcommittee and to the American people. It is only by
investigating these practices that we can help investors to
base their decision upon a company's real financial condition,
not just a projection released without an objective opinion by
an independent party.
Just as important to my way of thinking is the desire to
protect shareholders and employees from the kinds of activities
that are often characterized as sweetheart deals that might
have had an adverse impact on shareholder's value. Some of
these practices include special treatments for loans, bonuses
and pension payouts.
We need to discuss the propriety of 401K blackout periods
wherein some employees are precluded from selling stock for
specified periods of time. This hearing will be of enormous
assistance in assuring that H.R. 3763, The Corporate and
Auditing Accountability, Responsibility, and Transparency Act
of 2002, or CARTA, is successful and effective.
In order for our Nation's economy to remain on sound
footing and to continue its recovery and anticipated growth, it
is vital for the American investor to have access to the most
recent, meaningful, and accurate information possible. Good
corporate governance is necessary for such an environment to
exist, and that is one of the things we are seeking to
accomplish by the introduction and implementation of the CARTA
legislation.
Madam Chairwoman, we were pleased to have testimony
yesterday from the Chairman of the SEC, who indicated very
strongly, his support of our legislation and for a new way of
looking at things in this modern world, particularly in the
telecommunications sector. And for that, I think all of us can
learn a great deal, not only from Mr. Pitt's testimony, but
certainly from our witnesses today. And I thank you for the
opportunity, and I yield back.
[The prepared statement of Hon. Michael G. Oxley can be
found on page 69 in the appendix.]
Chairwoman Kelly. Thank you very much, Mr. Chairman.
We turn now to Mrs. Jones.
Mrs. Jones. Thank you. To Chairwoman Kelly; Vice Chairman
Paul; Full Committee Chairman, Mr. Oxley; Ranking Member, Mr.
LaFalce; and Members of the subcommittee, the witnesses who
have come here this morning, thank you for coming.
In the wake of Global Crossing we have seen firsthand, the
effects of poor corporate governance, perhaps, and financial
irresponsibility, perhaps. The issues have been complicated, at
best. The misdirection, finger-pointing, and complexity of
personalities and accounting involved in the situation have
made the root issues difficult to parse.
However, when the Gordian Knot has been tied by the Globals
of the world, I think that it's best that we get back to basics
and move forward to evaluate our position as a Nation with
regard to corporate responsibility, governance, and ethics.
Let me first address those directly responsible for the
well being of those least able to protect themselves. At a
basic level, it is the role of the board of directors of any
company to protect and act in the best interest of the
shareholders. Protecting shareholders is a task simple enough
to speak of, but seemingly infinite in its difficulty to
perform.
Shareholders have no choice but to trust the board as
fiduciary agents to act in their best interest, and it is
because of this dependence that we must carefully evaluate what
led to the down fall of Global Crossing. Second, we must
examine the role that Global's corporate auditors had in
effecting the company's downward spiral.
Is it more than a coincidence that Global Crossing and
Enron were both audited by Andersen? Perhaps. But we are sure
that both Enron and Global shared the same fate in Chapter 11
bankruptcy.
The notion of true auditor independence is at issue, and,
specific to this hearing, how big of a factor it was in Global
Crossing's demise, we hope to learn today.
Finally, I would like to acknowledge the employees of
Global, who have often been overlooked in the media storm
surrounding its once proud employer. I received several letters
in my Congressional office from many of my constituents saying,
why isn't Global getting the same attention as Enron? To each
of my constituents who wrote to me, today we're going to
address that issue.
Over 9,000 people lost their jobs as a result of the Global
bankruptcy, most of which were unaware of the accounting
improprieties that may have cost the company its life. The
reach of the Global Crossing debacle into the
telecommunications sector was deep: By some estimates over
500,000 jobs and $2 trillion in market capitalization in the
sector was lost as a direct result of Global Crossing's
bankruptcy.
This is reason enough why we must continue to scrutinize
what happened to Global Crossing so that it will never happen
again. Madam Chairwoman, I am pleased that you are hosting this
hearing today. I thank everyone who has come out to testify,
and I trust that we will get to the bottom of many of the
issues that have been raised by both corporate leaders, by
shareholders, by auditors, and by the general public. I yield
the balance of my time; thank you very much.
[The prepared statement of Hon. Stephanie T. Jones can be
found on page 72 in the appendix.]
Chairwoman Kelly. Thank you very much, Mrs. Jones.
We turn to Mr. Tiberi. You have no opening statement at
this time? Thank you, Mr. Tiberi.
We turn to Mr. Capuano.
Mr. Capuano. Thank you, Madam Chairwoman. I have no opening
statement, because anything I said would probably be
unprintable, based on this issue.
Chairwoman Kelly. Thank you, Mr. Capuano.
We turn to Mr. Baker.
Mr. Baker. Thank you, Madam Chairwoman. I especially want
to express your appreciation for your courtesy, not being a
Member of the subcommittee, to allow my participation this
morning.
I'll be very brief, but, I hope, to a specific point. I
first want to express my appreciation for the gentlemen's
appearance here today in helping the subcommittee to understand
the mechanics of how this reporting difficulty occurred, and
hopefully leading us to some resolution. It appears,
preliminarily, that although there was compliance with the
letter of the law, the letters weren't necessarily in an order
that spelled anything.
In my review of the pro forma financials, even after the
July 1999 1043 revisions, it appears that compliance,
technically, with the warning statement, ``Read at Your Own
Risk,'' sort of like a Surgeon General's warning, that if
anyone wanted to get to the details of the content of corporate
structure, you would go primarily to the pro forma, because
there appeared to be more information than as to the GAAP
standards.
It does indicate to me, at least, preliminarily, that the
metrics included increasingly greater amounts of cash receipts
for future sales and services that were not provided at the
time of the revenue being reported, on the belief that those
sales would eventually close.
In my simple calculation, that's called counting your
chickens before they hatch, but there may be reasons for that
conduct. Clearly, there is extraordinary pressure from Wall
Street for corporations to meet quarterly expectations for cash
revenues and the adjusted EBITDA, as it's called, and I can
understand the pressure to generate a report that indicates
that the cash is coming or is in the bank.
However, the definitions that were utilized, whether it's
cash, cash receipts, adjusted EBITDA, are not apparently
consistent from one telecom company to another in the
methodology by which these quantities are measured or reported.
For example, a cash receipt in this instance would have
been for, I believe, the sale of broad band capacity for
portions of the network not yet complete. Madam Chairwoman, let
me make that point. If I'm understanding the reports properly,
they booked revenue in the current quarter for sale of broad
band capacity for a portion of the network which was not yet
constructed. I think that is something that needs to be
thoroughly discussed.
And, further, the company would incur substantial out-of-
pocket expenses to fulfill these obligations at a later time,
but that deduction was not taken in adjusted EBITDA. It appears
that some of the transactions were actually swaps and not cash
revenues, or, stated another way, money round tripped between
parties that did not add value.
All of this apparently is within the context of the law, as
I understand it, under the preliminary cover of legitimate
business purpose, which is not a regulatory not statutory
definition, but an accounting convention.
I think we need help in examining legitimate business
purpose. It appears that the reporting, although consistent
with rule and regulation, would lead a person to come to
conclusions about cash adequacy that were entirely
inappropriate in relation to the actual cash standing at the
time of the report.
Madam Chairwoman, I don't have sufficient time to examine
all of these questions this morning, and I would ask your
further diligence, Madam Chairwoman, if I could perhaps provide
more clarity with my questions in a written comment for the
Chair to consider forwarding at the appropriate time, and I
thank you for your courtesies.
Chairwoman Kelly. With unanimous consent.
Mr. Baker, you had mentioned that you were not a Member of
the subcommittee, but you are a Member of the full Financial
Services Committee, and, as such, you are welcome here at this
panel.
We turn now to Mr. Clay. Have you an opening statement, Mr.
Clay?
Mr. Clay. Madam Chairwoman, at this time, I will forego an
opening statement, and wish to hear from the panel and have
questions for them, thank you.
Chairwoman Kelly. Thank you very much.
Ms. Slaughter.
Ms. Slaughter. Madam Chairwoman, I thank you very much for
allowing me to be here this morning. As you know, I'm not a
Member of this subcommittee, and you are very gracious in
allowing me to come. I appreciate the opportunity to submit my
statement for the record.
And my interest in this hearing stems from the fact that
thousands of people from my district have been affected by
Global Crossing's bankruptcy filing. Actually, all the people
in my district have been affected by it, because the economic
displacement has the possibility of being quite profound.
Global Crossing's North American headquarters were located
in Rochester, New York, and I hope they still are. They owned
Frontier Communications which had an outgrowth from the
Rochester Telephone Company, which had given wonderful service
to the people of Rochester area for over 100 years. And then
their 13,000 workers were taken over by Global Crossing with
220 workers.
Now, as I said, the effect is devastating, and came as
quite a surprise, as we had every indication in Rochester that
Global was doing well, and, indeed, was planning to consolidate
and move, and had gotten from the local IDA some $400,000 to
help expedite that, on the grounds that they would immediately
hire 72 new workers.
The bankruptcy came as a surprise to a lot of people
because, indeed, the company still had adequate assets
according to most people that I've spoken to, to continue. As a
matter of fact, one of the first things that struck us as
strange was that the offer for Global Crossing of $750 million
was going--I think that was something like 69 percent ownership
of that company, which claimed to have assets of $22 billion.
On March 9th, we hosted a public forum in Rochester, and
over 250 people came to talk about their experiences, and it
was heartbreaking. I'd like to quote from an article I
received, written by a former employee, who summarizes the
general sentiment at the forum:
``Many former employees have been economically devastated
as the result of corporate greed and the mismanagement of
Global Crossing. People spent their life savings, they've had
to cash in their deflated--since the stock market plummeted--
retirement 401K plans, just to survive the last few months,
after Global Crossing abruptly ceased their promised severance
payments.
``Some former employees are forced to file bankruptcy
themselves, while others may lose their homes, have had to
drastically change their lifestyles, and are barely
surviving.'' Again, another impact on my community is that many
of those extraordinarily talented and gifted people may have to
leave our community altogether, because they are not able to
find jobs that they can take care of their family.
According to the press reports, there appears to be
striking parallels between the cases of Enron and Global
Crossing, including a lack of auditor independence,
questionable executive mismanagement, misleading accounting
methods, and questions on the accessibility of employees' 401K
accounts before the bankruptcy filing.
And unlike the small shareholders and company workers,
current and former top executives walked away the winners. This
hearing begins the process of Congress asking the tough
questions on how this occurred. Where did the system break down
and allow this to happen?
Hearings like this will serve as a wakeup call to Congress,
and, we hope, to corporate America, particularly those who are
organized in Bermuda, that these types of business practices
and bankruptcies can be neither sustained nor tolerated.
Additionally, current law must change to better protect the
workers and investors, and, across the board, investors are now
skiddish about relying on auditors' reports and analyst
recommendations and that is a tragedy.
I certainly look forward to listening to the witnesses'
views, their experience, and their suggestions on how Congress
can take effective action, and I thank you again, Madam
Chairwoman.
[The prepared statement of Hon. Louise Slaughter can be
found on page 73 in the appendix.]
Chairwoman Kelly. We thank you.
If there are no further opening statements, I will
introduce our distinguished panel of leaders of the
telecommunications industry. We sincerely appreciate the effort
that it took for you to prepare testimony on this difficult
issue, and to travel here today. Mr. McGrath, you came from
England, and I think you get our award for the longest traveled
visitor to get here today, and for that, you get a free glass
of water. I thank you all for making the effort.
Our panel consists of Mr. John Legere, the Chief Executive
Officer; and Mr. Dan Cohrs, the Executive Vice President and
Chief Financial Officer of Global Crossing, Ltd. Next, we have
Mr. Afshin Mohebbi. I'm pronouncing that wrong. Mr. Mohebbi, is
that correct?
Mr. Mohebbi. Yes.
Chairwoman Kelly. Thank you, Afshin Mohebbi, the President
and Chief Operating Officer of Qwest Communications
International; Mr. Michael Salsbury, Executive Vice President
and General Counsel of WorldCom, Incorporated, and, Mr.
Salsbury, we welcome you; and finally, Mr. Andrew McGrath,
President of Service Providers Channel, Cable and Wireless
Global.
We welcome you all here today, and we are looking forward
to your testimony, and we thank you for appearing here. We
begin with you, Mr. Legere.
Mr. LaFalce. Madam Chairwoman, a parliamentary inquiry.
Chairwoman Kelly. Yes, sir?
Mr. LaFalce. It is my understanding--not that it is
necessary to tell the witnesses, but it won't hurt--the laws of
perjury that obtain when you are asked to stand and be sworn in
are the same, even though you're not asked to stand and be
sworn in. The mere fact that you're testifying before Congress
makes you fully subject to all the laws of perjury; is that
correct, Madam Chairwoman?
Chairwoman Kelly. That is correct.
Mr. LaFalce. Thank you, Madam Chairwoman.
Chairwoman Kelly. You are still liable for your statements
in front of this subcommittee, even though we are not swearing
you in as witnesses. We all look forward to listening to your
views on these important issues we touched on in our opening
statements, and without objection, your written statements and
any attachments will be made part of the record.
You will each now be recognized for 5 minutes for a summary
of your testimony. There are lights in front of you and they
indicate the amount of time you have. The green light signifies
that you're in your first of the 4 minutes. The yellow light
will turn on when you have 1 minute remaining; the red light
will turn on when your time has expired. If possible, I would
like to ask you to keep your summaries within the 5-minute
sequence, so that people can ask questions.
And we'll begin with you, Mr. Legere.
STATEMENT OF JOHN J. LEGERE, CHIEF EXECUTIVE OFFICER, GLOBAL
CROSSING, LIMITED
Mr. Legere. Good morning, Chairwoman Kelly and Members of
the subcommittee. We prepared a longer statement, which I
understand will be filed for the record. Now, this is my first
appearance before a Congressional subcommittee, and I'm honored
to contribute to your effort to take a serious look and a
substantive look at the difficult financial issues facing the
telecommunications industry.
Our difficulties at Global Crossing and the measures we are
taking as we continue our restructuring in bankruptcy, is a
microcosm of an industry under tremendous economic pressure.
I'm accompanied here today by Dan Cohrs, Global Crossing's
Chief Financial Officer, and Ralph Ferrara, who is our outside
counsel.
In response to the questions posed in your letter of
invitation, we would like to respond to the three issues you
raised. Dan Cohrs will respond to the first two of your
questions, and I would like to provide a brief overview of
Global Crossing and our efforts to rebuild our company.
My written statement amplifies on these remarks to respond
to your final question, and to address steps that can be taken
to enhance investor confidence in the accounting for and
disclosure of financial information in the telecommunications
industry.
Now, it's all too easy to dismiss Global Crossing's
bankruptcy as the failure of yet another dot.com company or to
attribute its collapse to fancy or misleading accounting. The
media in this post-Enron environment, continue to focus on
these issues.
The reality is that thousands of our employees continue to
operate the real Global Crossing. Today, Global Crossing has
over 85,000 customers, corporations, governments, associations,
and organizations in over 200 cities in 27 countries who
transmit voice and data over our global network.
Every day our employees keep coming to work, keep helping
the customers keep the data moving, and keep their spirits
high. I want to take this opportunity to thank them publicly
and to thank our thousands of loyal customers who have
supported us through this challenging time.
A few facts about what Global Crossing really does: We
transmit over $5 trillion U.S. dollars in financial
transactions every business day. We connect over 7,000
financial institutions and hundreds of scientific research
centers across the globe.
The Global Crossing network carries CNBC's video between
Ft. Lee and London, over our high-capacity sub-sea fiber optic
cables, something previously only satellites could do. NBC
transported hundreds of hours of Winter Olympic news broadcasts
to its affiliate stations across America over our network.
Because of our network, customers in KB Toy Stores can
charge their purchases five times faster, and diplomats in over
240 British Embassies and Consulates can correspond with their
colleagues, 24/7, reliably and securely. Many people who will
see these hearings on television and reported on the nightly
news shows, will be watching signals transmitted over our
network.
Now, our pride in what we have accomplished is, of course,
offset by tremendous disappointment. Although our network
infrastructure is unique and unparalleled in the industry,
building it came at a very high price, in excess of $15 billion
U.S. dollars.
Global Crossing, like many other telecommunications
companies, built aggressively as the forecasts of industry
analysts, financial analysts, and technology experts predicted
that our world would soon be one where classrooms would reside
on computer desktops; movies would flow electronically on
demand; and millions of people would be able to communicate
through millions of personal channels.
And though we continue to believe that people will one day
be able to take advantage of this expansive infrastructure, the
demand simply hasn't materialized as quickly as predicted. In
what became a very volatile environment for the entire
telecommunications industry, our company simply could not cut
costs back fast enough to accommodate the sudden changes.
We need to take a more realistic approach. Part of what
we're doing through the Chapter 11 bankruptcy process and
through a continued series of painful cost reductions, is to
restructure our balance sheet and realign our operations.
Since my arrival 6 months ago, my prime focus has been to
realize the true potential of our company. With our
restructuring now well underway, and despite the necessary and
often painful actions we have had to take, my belief is that we
will come back stronger than ever.
You asked for our views on H.R. 3763. We believe it
provides a useful framework for discussions on auditing
accountability, and we have offered several specific
suggestions in our written testimony.
While our company and our industry continue the
challenging, critical process of building the new business
model in the more realistic context, we fully support the
efforts of this subcommittee to develop, in parallel, ways of
encouraging financial accountability that will enhance investor
confidence in financial reporting in the telecommunications
industry.
We have an opportunity, working together with you, with the
SEC, with the accounting industry, and with our
telecommunications industry colleagues here today, to improve
the way we communicate. Whether this is through reformed
accounting principles or clearer and more timely reporting
practices, we support and intend to be the market leader, not
only in how we run our business, but also in how we report on
what we're doing. I'm confident, with our joint efforts, this
industry, and Global Crossing, in particular, will once again
be in a position to contribute strongly to this great Nation's
prosperity. Thank you very much.
[The prepared joint statement of John J. Legere and Dan J.
Cohrs, Ph.D., can be found on page 74 in the appendix.]
Chairwoman Kelly. We turn to you, Mr. Cohrs. Do you have a
statement?
STATEMENT OF DAN J. COHRS, Ph.D., EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER, GLOBAL CROSSING, LIMITED
Mr. Cohrs. Yes, ma'am, if I may. Good morning, Chairwoman
Kelly and Members of the subcommittee and also the Full
Committee. John Legere has asked that I briefly address the
accounting issues raised in your invitation to appear here.
Our industry and the accounting profession have struggled
with how to adapt historic concepts of accounting for leases
and real estate to purchases and sales of fiber optic capacity.
Global Crossing settled upon an accounting model that our
independent accountants advised was most appropriate to our
business.
The accounting for the majority of our revenue, which is
derived from providing voice and data services to our 85,000
customers, is not controversial. The accounting for the
company's sales to other carriers of fiber optic capacity on
its network raises the issue of the proper accounting for
transactions known as sales of IRUs.
An IRU, which is an indefeasible right of use, is a
contract like a lease, granting the right to use a fixed amount
of capacity for a specified period. IRUs have been used in the
telecom business for many years.
Typically, the sale of an IRU involves an up-front cash
payment of the full contract amount. However, revenue from the
sale of an IRU is recorded only over the life of the lease. For
example, for a 20-year lease for $20 million of capacity, only
$1 million is recorded as GAAP revenue in the income statement
for the first year and each year thereafter.
The other $19 million of cash paid up front on the contract
is not recorded as revenue, but is recorded on Global
Crossing's GAAP balance sheet as a liability called deferred
revenue. Although Global Crossing has the cash in its bank
account and the cash is non-refundable, it earns the revenue
only over the 20-year life of the lease.
Not surprisingly, banks and investment analysts who need to
assess the company's ability to service its debt were
interested in our cash flow, including the amount of cash
collected through IRU sales, which was shown as deferred
revenue. The cash entering the deferred revenue account was not
reflected in GAAP revenue or earnings.
To present a clearer picture of cash flow, two measures--
cash revenue and adjusted earnings before interest, taxes,
depreciation and amortization, which we called adjusted
EBITDA--were reported to the market to supplement our GAAP
revenue and earnings. These measures included the cash from IRU
sales; they were clearly defined, and we believe they were well
understood by the marketplace.
Some questions have been raised about the quality of the
company's disclosure respecting cash revenues and adjusted
EBITDA. We are confident that Global Crossing fully and fairly
disclosed the meaning of these terms in its press releases and
SEC filings, and we believe that the additional information
provided by these measures was useful to investors.
The focus of virtually all the attention to Global
Crossing's accounting model has been directed at how the
company accounted for the relatively simultaneous purchase and
sale of IRUs to the same counterparty. As the Global Crossing
network grew, we and other carriers understood that it was
sometimes cheaper and faster to buy capacity from another
carrier than to build it ourselves.
In our case, we needed additional capacity on certain
routes, redundant capacity to provide backup for potential
network problems, and extensions of our network into new
markets where building would not have been economic.
Accordingly, we purchased IRUs for cash, as well as sold IRUs
for cash, sometimes with the same counterparty.
These were two, independent transactions, each evaluated on
its own merits. Nonetheless, due to the proximity in time of
the two transactions, the question has been presented of
whether revenue should be recognized on these sales with the
purchases recorded as capital expenditures, rather than simply
netting the sale and purchase amounts.
According to the accounting model that was developed and
approved by our independent accountants, revenue and capital
expenditures should be recognized on the two transactions, if,
first, there was a valid business purpose for the asset we
bought, and, second, the assets bought and sold embodied
different risks and rewards of ownership.
In our case, the second test can be satisfied if the rights
to the capacity sold had the risk profile of an operating lease
and the rights to the capacity purchased had the risk profile
of a capital lease. Today, some have raised questions as to
whether the process we conducted adequately established the
valid business purpose for our purchase of assets; that is, did
we satisfy the first test? And that is the crux of the
controversy.
It's the subject of a detailed review by our Board of
Directors and its independent counsel. The SEC and our
independent accountants are also reviewing these transactions.
As we conduct these reviews, it's critically important to
consider only the facts and circumstances that existed at the
time the transactions were closed, not use hindsight. We now
know that since the second quarter of 2001, the astounding
deflation in the demand for fiber optic capacity has devastated
our industry.
As demand waned in the industry, there was less need for
both the capacity that we had built and for the capacity that
we had purchased. These difficulties have also been experienced
by others in our industry.
We hope to have fully considered conclusions on these
matters in the very near future, and I'll be pleased to respond
to any of your questions, thank you.
Chairwoman Kelly. Thank you very much, Mr. Cohrs.
We turn to you, Mr. Mohebbi.
STATEMENT OF AFSHIN MOHEBBI, PRESIDENT AND CHIEF OPERATING
OFFICER, QWEST COMMUNICATIONS INTERNATIONAL
Mr. Mohebbi. Thank you, Madam Chairwoman, and Members of
the subcommittee. My name is Afshin Mohebbi, President and
Chief Operating Officer of Qwest Communications International,
Incorporated. I want to thank you for inviting me to appear
today at your hearing.
Permit me to tell you a little bit about Qwest. Qwest is
the fourth largest local telephone company in the United States
with 25 million customers. We provide local services in a 14-
state area that covers nearly 40 percent of the land mass of
the United States. We have about 60,000 employees and annual
revenue of more than $19 billion.
About 80 percent of our revenues, and more than 90 percent
of our profits come from our local phone service. We also
provide data and long distance services to businesses in 27
cities outside our 14-State local area, and we are the Nation's
fourth largest long distance company.
In addition, we have about half a million high-speed
internet service customers, more than a million wireless
customers, and a large Yellow Pages business, and a product
line that ranges from the most basic telephone service to the
most sophisticated internet and data technologies available.
We're also very proud that we just completed one of the
most technically trouble-free Olympics in history in Salt Lake
City, where Qwest was one of the primary providers of
communications services to the Olympics event.
Qwest has a state-of-the-art, worldwide fiber optic network
in the United States, Asia, and Latin America and through its
related company KPN Qwest in Europe. In addition to its fiber
optics network, Qwest has 16 web-hosting centers that safeguard
the critical data of banks, corporations, healthcare providers,
and Government agencies, among others. Qwest does business with
60 percent of the Fortune 1000 companies around the world.
Qwest's strategy in building its domestic network was to
provide facilities for our own use, as well as constructing
facilities for sale. Conduit, fiber, and capacity sales have
paid for substantial portions of the cost of building our U.S.
network.
As we completed our domestic network, we began to expand
overseas. We made decisions whether to build or buy these
international facilities. Based upon the analysis of time and
cost, we purchased facilities to connect our network to Europe,
Asia, and Latin America.
It was in this context that we entered into IRU
transactions with a number of companies, including Global
Crossing. The IRUs Qwest sold to Global Crossing were
principally on domestic routes we built to sell. The IRUs that
Qwest purchased from Global Crossing enabled us, quickly and
cost-efficiently, to build our network internationally to
locations that we could not otherwise serve.
An IRU is an indefeasible right of use, which is the
exclusive right to use a specific amount of capacity or fiber
for a specific period of time, usually 20 years or more. An
indefeasible right is one that cannot be revoked or voided.
IRUs are for specific point-to-point assets. IRUs are not
services and are generally asset sales.
Once sold, they belong to the customer and cannot be moved
without the consent of the customer. An IRU allows the
purchaser to carry voice, data, video, or other traffic on that
specific fiber or channel asset.
In some cases, Qwest enters into two transactions that
occur at about the same time: One, to sell IRUs to companies;
and, second, to acquire optical capacity from such companies.
The agreements for the sale of such optical capacity are
separate legal agreements that are enforceable, regardless of
whether the other company performs under the separate purchase
contract.
In accounting for the purchase and sale of IRUs, Qwest
complies with Generally Accepted Accounting Principles known as
GAAP. Qwest's auditors review our IRU transactions in the
context of reviewing our financial statements each quarter.
When Qwest sells IRUs, the customer receives the exclusive
rights to a specific asset, and the risks and rewards of
ownership passes to the buyer. Under the relevant accounting
rules, Qwest recognizes revenue when Qwest delivers the asset,
the buyer accepts it, and Qwest receives adequate consideration
for those assets.
Where the purchase and sale transactions occur at about the
same time, Qwest applies the more restrictive rule for revenue
recognition on what the accountants called a non-monetary
transaction. The revenues attributable to IRU sales that
occurred at the same time as purchases of an IRU in 2000 and
2001, were approximately 2 percent in 2000 and 3.5 percent of
total reported revenues of Qwest, respectively.
Qwest publicly disclosed the network expansion plans and
the nature, size, and the accounting treatment of the IRU
transactions undertaken to further that strategic objective. In
various press releases and filings with the Securities and
Exchange Commission, Qwest made appropriate disclosure of the
existence of the IRU transactions and the way Qwest accounted
for them.
In conclusion, as part of our business strategy to build a
worldwide fiber optic network, we bought and we sold IRUs. When
appropriate and in compliance with GAAP, we recognized revenue
as well as costs from these transactions, when we entered into
them, and although IRUs were not a material component of our
revenues in the last 2 years, we publicly disclosed them and
how we accounted for them.
We're proud of the state-of-the-art network we have built
and the services it enables us to provide, and I will be glad
to answer any questions that you may wish to ask. Thank you for
the opportunity.
[The prepared statement of Afshin Mohebbi can be found on
page 104 in the appendix.]
Chairwoman Kelly. Thank you very much, Mr. Mohebbi.
And we now turn to Mr. Salsbury.
STATEMENT OF MICHAEL H. SALSBURY, EXECUTIVE VICE PRESIDENT AND
GENERAL COUNSEL, WORLDCOM, INC.
Mr. Salsbury. Thank you, and good morning. My name is
Michael Salsbury, and I am the General Counsel of WorldCom,
Incorporated. The questions and issues that the subcommittee
seeks to address in this hearing, how accounting standards and
Federal policies may have contributed to the problems
experienced by Global Crossing and the industry are valid and
important.
There has been a lot of press recently about swap
transactions, whereby carriers record revenue from selling
capacity that is not likely to be used, in return for a
purchase of capacity that is not used and is capitalized rather
than expensed. WorldCom does not participate in such
transactions.
WorldCom sells IRUs and occasionally purchases them where
needed, but in all cases, accounts for them appropriately. To
put this into perspective, during 2001, WorldCom recorded
recurring revenues of approximately $23 million out of total
2001 revenues for WorldCom of $35.2 billion from the sale of
IRUs.
During December 2001, WorldCom entered into two IRU
transactions with Asia Global Crossing--not Global Crossing.
WorldCom purchased needed capacity on AGC's East Asia Crossing
Cable and AGC purchased capacity on WorldCom's Australia-Japan
Cable.
Each transaction was for $20 million over a 10-year term.
Because neither lease has yet become operational, WorldCom has
not yet recognized either transaction on its P&L. As each IRU
becomes operational, WorldCom will recognize approximately one-
half million dollars per quarter in revenue and in operating
expense over a 10-year period. Again, to place this into
perspective, our 2001 revenues were $35.2 billion.
The subcommittee also asked to what extent certain factors
served as a trigger for industry problems. WorldCom does not
use unique accounting standards and does not issue pro forma
revenue projections.
As many companies do, WorldCom issues pro forma profit and
loss statements in conjunction with our regular financial
statements to show the effect of acquisitions or of revenue
from consolidated entities. WorldCom believes such statements
assist investors in understanding the impact of certain
transactions.
It has become fashionable recently to blame the large
number of failures in competitive sectors of the
telecommunications industry on bad planning. These claims,
which generally emanate from the monopoly sectors of the
industry and their pundits, but occasionally also from
regulators, suggest that new entrants invested too much in new
facilities and mis-forecast the demand for telecom services.
There may well have been invalid assumptions by new
entrants, but they related more to the expectation that Federal
regulators would fairly and vigorously enforce the
telecommunications and antitrust laws than to assumptions about
consumer demand. By repeatedly favoring monopoly interests and
undermining competition, these regulators increased the costs
for new entrants, which led directly to higher prices and lower
consumer demand for local telephone services and high-speed
data services such as DSL.
The current problems in the competitive sectors of the
telecommunications industry were not caused primarily or even
significantly by accounting issues or assumptions about
capacity utilization; rather, those problems resulted directly
from the unrelenting efforts of the Bell Companies to retain
their monopoly power, and the fundamental failure of the FCC
and the DOJ to properly and effectively implement and enforce
the law.
In WorldCom's view, those failures have destroyed far more
market capitalization and robbed far more value from
shareholders' investments than any accounting issues. Thank
you.
[The prepared statement of Michael H. Salsbury can be found
on page 118 in the appendix.]
Chairwoman Kelly. Thank you very much, Mr. Salsbury.
Mr. McGrath.
STATEMENT OF ANDREW McGRATH, PRESIDENT, SERVICE PROVIDERS
CHANNEL, CABLE & WIRELESS GLOBAL
Mr. McGrath. Good morning, Chairwoman Kelly, Congressman
LaFalce, and Members of the subcommittee. My name is Andrew
McGrath, and I am the President of Cable & Wireless's Service
Providers Division. Cable & Wireless is a global provider of
telecommunications services, headquartered in the United
Kingdom.
Cable & Wireless, with annual revenues of $11 billion,
provides services ranging from local telephone services to
internet backbone and web-hosting services in more than 70
countries. Cable & Wireless has been in business for over 100
years. It is well financed and has no net debt.
We are proud to have a substantial presence in the United
States, where we provide IP and data services and solutions to
business customers. I have been with Cable & Wireless since
1991, and currently head the Global group within Cable &
Wireless that provides a broad range of services to carriers,
ISPs and content owners.
I hold an engineering degree from Surrey University in the
United Kingdom, and an MBA from London Business School. I have
been invited to appear today to address the subcommittee's
inquiry regarding telecommunications capacity transactions,
typically called Indefeasible Rights of Use, or IRUs.
The nature of the telecommunications industry makes it
essential for carriers to contract with each other to provide
services to their respective customers. It is not always cost-
effective for a carrier to build all aspects of its global
network for its own exclusive use.
It has been a long-established industry practice for
carriers to interconnect with other carriers and to purchase
network capacity from other carriers, either through leases or
IRUs. Cable & Wireless has undertaken IRU purchases for the
purpose of obtaining the network capacity necessary to support
its customer requirements.
Our internal governance policies are designed to ensure
that, in each case, our acquisition of capacity serves a
legitimate commercial need. Cable & Wireless has also sold
network capacity to other carriers.
These IRU sales are a very small part of Cable & Wireless'
business. At their peak, in the year ending March 31, 2001,
such sales accounted for less than 5 percent of Cable &
Wireless' revenues and have since declined as carriers have
largely completed their network build-out programs.
In building its global network, Cable & Wireless has
purchased capacity from several operators. A small proportion
of these transactions has been with Global Crossing. As always,
the network capacity we obtained through these transactions
served specific commercial needs.
Cable & Wireless states its accounts in accordance with
Generally Accepted Accounting Principles--GAAP--as adopted in
the United Kingdom, as it must do as a U.K. public limited
company. As an additional disclosure, Cable & Wireless
separately reports the amount of its IRU sales.
Our accounting policies with regard to the treatment of
such transactions are disclosed as part of our financial
statements and are readily available to the public. Because
Cable & Wireless ADRs--American Depository Receipts--trade on
the New York Stock Exchange, it also discloses its financial
results in SEC Form 20-F.
For these purposes, Cable & Wireless states its results,
including IRU transactions in accordance with U.S. GAAP. A
reconciliation of the net income under U.K. GAAP and that under
U.S. GAAP is disclosed as part of our financial statements and
is also readily available to the public.
Thank you for the opportunity to appear today. I welcome
any questions from the Members of the subcommittee.
[The prepared statement of Andrew McGrath can be found on
page 126 in the appendix.]
Chairwoman Kelly. We thank you, Mr. McGrath.
One of the issues that I'm most concerned about here is the
issue of the pro forma financial statements by
telecommunications companies. I'd like the entire panel to
respond to my first question, and I'd appreciate it then, if
you will, answer my followup questions.
I'd like to know how common pro forma financial statements
are in your industry, and we will begin with anyone who wants
to start the answer, but I'm going to ask each one of you to
answer that. Mr. Cohrs, Mr. Legere?
Mr. Cohrs. Yes, Ms. Chairman. My understanding is that in
the industry, the use of pro forma statements is relatively
common for the purposes of explaining the impacts of merger and
acquisition activities, so that the presentation of pro forma
statements can provide an apples-to-apples comparison from one
period to the next when a significant number of companies have
been either bought or sold by the company. And, in fact, I know
that Global Crossing has used that to provide fair comparisons
between one quarter and the next.
I believe that your question probably refers to the use of
measures like cash revenue and adjusted EBITDA, which are pro
forma measures, and those measures became common as the
industry of selling fiber optic capacity developed. It's a new
industry.
I indicated in my opening remarks that there's a big
divergence between the cash coming into the company and what's
reflected in the GAAP statements, that is, in my example, $20
million IRU sale only is recorded as $1 million of revenue,
even though the cash is in the bank and non-refundable. And so
in our case, we adopted the practice of using pro forma
measures to supplement our GAAP reporting so that we were
showing investors the full picture of cash in addition to the
GAAP picture.
Now, that practice was adopted by a number of other
companies who went public after Global Crossing. Global
Crossing was essentially the pioneer among publicly traded
companies in the sub-sea business, and therefore, I believe we
were the first to use those particular measures, and they were
adopted by others in the industry after that.
Chairwoman Kelly. Mr. Mohebbi.
Mr. Mohebbi. Madam Chairwoman, in terms of Qwest, the
primary reporting vehicle that we have is GAAP revenues and
GAAP accounting. However, Qwest is a company that was created
as a result of six acquisitions, so sometimes as a supplement
to our GAAP reporting, we provide, for the purposes of the
investors who have specifically asked for it, pro forma numbers
as a supplement, but our purpose, our main purpose of reporting
and way or reporting our results are GAAP financials.
Chairwoman Kelly. Mr. Salsbury.
Mr. Salsbury. I think I would sort of reiterate what the
others have said.
Chairwoman Kelly. Well, the others said two different
things, sir, I'm sorry.
Mr. Salsbury. Right. As I said in my testimony, our primary
method of conveying our financial results is GAAP accounting
and our regularly reported financial statements. Occasionally,
as noted earlier, I think by Mr. Cohrs, we have obviously had
acquisitions, and it's useful to supplement our financial
statements with pro formas showing the effect of acquisitions
over time, so that you have an apples-to-applies comparison.
Most companies, not just in telecommunications, do this. I
certainly have been reading about occasions where companies
have not done this. I was reading the paper this morning, and
that's been criticized, because it gives a misleading--looks
like companies are growing faster, when you don't show the
effect of acquisitions.
We also have an investment in Embratel in Brazil, and it's
not a consolidated entity, but it's often useful to show, with
a pro forma statement to our investors, the effects of--a pro
forma statement, with Embratel and without. So those are the
two examples I'm aware of. I'm not an accountant, and I don't
pretend to know every single instance that the company may have
used them, but we do not use pro forma revenue statements.
Chairwoman Kelly. Thank you.
Mr. McGrath.
Mr. McGrath. Cable & Wireless provides a full disclosure of
its accounts, consistent with U.K. GAAP. In addition, we
provide separate disclosure of all IRU transactions. Our
accounts are audited by KPMG, who have always provided an
unqualified, clean audit report.
We find that with that level of disclosure, that we don't
need to provide pro forma statements, and we haven't done so.
Chairwoman Kelly. Thank you. Mr. McGrath, you were saying
that you do not file pro forma statements; is that correct?
Mr. McGrath. That is correct.
Chairwoman Kelly. Just for clarification, could you all
just answer with a simple yes or no, did all of your companies
file pro forma statements last year.
Mr. Salsbury.
Mr. Salsbury. I don't know the answer.
Chairwoman Kelly. Mr. Mohebbi.
Mr. Mohebbi. I believe we did, but I'm not sure of it.
Chairwoman Kelly. Mr. Cohrs.
Mr. Cohrs. Yes, we did.
Chairwoman Kelly. Do you all know if you all used the same
methodology, if you filed pro forma statements?
Mr. Cohrs.
Mr. Cohrs. I just can't speak to any other companies'
statements. I haven't studied them, so I just don't know the
answer to your question.
Chairwoman Kelly. Do any of the rest of you know the
answer?
Mr. McGrath. No, ma'am.
Chairwoman Kelly. So you don't know if there is a
consistent methodology in preparing a pro forma; is that
correct? I'd like an answer from the three of you, since Mr.
McGrath doesn't have a background in the pro formas.
Mr. Cohrs. Well, if I may respond?
Chairwoman Kelly. Yes, Mr. Cohrs.
Mr. Cohrs. The objective of a pro forma statement can serve
various purposes. For example, if the pro forma statement is
designed to normalize for the results of merger and acquisition
activity, then the methodology, I believe, is relatively
consistent across companies, because it's an attempt to show
apples-to-apples comparison, as if that merger had not
happened.
In the case of measures like cash revenue and adjusted
EBITDA, as I said, I just don't know the details of other
companies' disclosures, and so I'm just not aware if there are
any differences. I believe that the measures are, you know,
relatively similar, but I'm just not aware if there are
differences in reports from other companies.
Chairwoman Kelly. Mr. Mohebbi, do you have any knowledge of
that?
Mr. Mohebbi. Madam Chairwoman, I certainly have no
knowledge of how other companies, obviously, report on the pro
forma basis, so I cannot say that there is a uniform or a non-
uniform way. I do know that in some cases, again, as an
appendix or a supplement to our GAAP reporting, which is our
primary reporting of revenues, profits, and activities
financially, we have provided pro forma to show the investors
the differences between before and after acquisitions, but I
can't give you an answer on an industrywide basis or multi-
company look.
Chairwoman Kelly. Mr. Salsbury, is it safe to assume that
your answer would be similar?
Mr. Salsbury. Yes.
Chairwoman Kelly. I guess the nature of my question is, the
investing public will look at a pro forma and try to make some
sense out of it. And if the pro formas are not based on the
same types of procedures, the same type of methodology, it
would be very difficult, if you wanted to invest in the
industry itself, to determine between companies, which company
had a better pro forma, if there is no structure that's a solid
methodology underneath each one of the pro forma statements.
Would that be a correct statement? And you can just answer
quickly by saying yes or no.
Mr. Legere.
Mr. Legere. I think inherent in your statement is that the
answer would have to be yes. I mean, when we were reviewing
H.R. 3763 and looking at some of the things that the industry
could benefit from, one item is that at times when an industry
is going through revolutionary change, as opposed to an
evolutionary process, sometimes accounting or information
disclosure could use some assistance from an otherwise staid
set of rules.
And, you know, in the period we're talking about, this may
have been an environment where some governing body could have
enhanced the ability for the industry to have consistency in
understanding so that this transparency that you speak to could
be attained.
Certainly we look to our individual sets of auditors to
provide us guidance from an industry expertise standpoint, but
looking forward, I think we would all benefit from some
knowledge about industry standards, things that we could apply
to ensure that our information would be consistently viewed.
Chairwoman Kelly. OK, thank you. I am out of time. I am
turning now to Mr. LaFalce.
Mr. LaFalce. Thank you very much, Madam Chairwoman. Mr.
Legere, first of all, thank you for coming to my office before
the meeting. I'm sorry we didn't have more of an opportunity to
discuss the issues.
I have the honor of representing over 90,000 in Monroe
County and all of the almost 45,000 people in Orleans County,
most of whom are serviced by Global Crossing, formerly
Frontier, formerly Rochester Telephone. In this morning's
Rochester Democrat and Chronicle, Mr. Legere, there's an
article on the business page, entitled ``Ex-Frontier Group to
Bid on Global.''
It is written by Richard Mullins, and it says ``A Rochester
group of former Frontier executives wants to buy a major part
of the now-bankrupt Global Crossing. Leading the group is
Anthony Casara, the former President of Frontier's Carrier
Services Division. Also involved is Louis Massaro, the former
Chief Financial Officer of Frontier. `The group knows the
business, the customer requirements, the infrastructure, and we
understand how to realize its underlying potential with the
right strategy,' said Casera. `I believe there isn't a
management team better suited for this opportunity than the
team who originally built Frontier's North American business.'
''
Mr. Legere, as the ranking Democrat of the Financial
Services Committee, I just want you to know that I strongly
endorse, support, the effort by this local group of Rochester
businessmen to repurchase that portion of Global Crossing. And
I know that this is a business judgment that you, under the
auspices of the Bankruptcy Court, will have to make, but I hope
that our judgments will coincide. Fair enough?
Mr. Legere. Congressman, we know these individuals. They're
fine telecommunications people, and at this point in time, as
part of the Chapter 11 restructuring process, we are engaged in
period of time where any interested bidder can come forward
through our advisors, the Blackstone Group, and make a proposal
that they believe can maximize the return to all constituents
who have a piece of the estate. And we look forward to seeing
their proposal, along with, right now, over 40 interested
parties that have gone to the point of non-disclosures to look
further at the company. So, we certainly look forward to it.
Mr. LaFalce. I appreciate that there are 40 bidders. I also
appreciate the fact that these individuals are from Western New
York; they're from Monroe County, in particular. They are the
ones who originally built Frontier's North American business;
they are the ones who are most likely best suited to enhance
the future prospects for the company, its employees, the
community in which it exists, and I think that that should be
given great, great weight.
Now, Mr. Legere, I have about 20 questions, and I'm not
going to be able to get through more than a few of them. And so
I am going to submit them to you in writing, and ask you to
respond for the record to each of them. Would you be willing to
do that?
Mr. Legere. Anything that can be provided to our counsel,
I'll be glad to do that.
Mr. LaFalce. We will do that.
Chairwoman Kelly. If the gentleman will yield.
Mr. LaFalce. Yes.
Chairwoman Kelly. Its my intention to hold the record open
for 30 days. There are Members who are unable to be here today,
and we will hold the record open for written questions and
written answers to be inserted into the record, thank you.
Mr. LaFalce. I thank the Chairlady for that.
Sir, it's my understanding that the auditor was hired by
Global Crossing to become the Executive Vice President for
Finance; is that correct?
Mr. Legere. Joseph Perone, who is currently our controller
of the company is a former Andersen employee; that's correct.
Mr. LaFalce. OK, well, did the Audit Committee ever think
that this might compromise the independence of the audit to
have the CFO, the former partner in charge of the audit from
the auditing firm?
Mr. Legere. This hiring took place before I arrived, but it
is my understanding that those were considered by the Audit
Committee.
Mr. LaFalce. OK, well, do we know if the Audit Committee
ever spoke with the auditor out of the presence of the
corporate officers? Do we know that?
Mr. Legere. I'll defer to Mr. Cohrs, who was there.
Mr. Cohrs. Yes, Congressman, our Audit Committee had the
practice, at each Audit Committee meeting, which were held
regularly, of asking the senior executives to leave the room
and to speak privately with the auditors.
Mr. LaFalce. For 5 minutes? Was this done regularly? Was it
done in-depth? Did they spend a half a day going over the
various books, or was this just a pro forma thing?
Mr. Cohrs. Well, since I wasn't in the room, I actually
don't know the content of the conversations, but that was the
purpose of asking me to leave the room.
Mr. LaFalce. About how long did these meetings usually
last, when you weren't in the room?
Mr. Cohrs. It was done regularly.
Mr. LaFalce. But about how long did they last?
Mr. Cohrs. I would say that they lasted anywhere from 10
minutes to an hour. And they were done regularly at every
meeting of the Audit Committee.
Mr. LaFalce. OK. My point is, very often the Audit
Committee--that's a superficial meeting. Let me go on to two
other areas, securities analysts and attorneys:
When representatives of Global Crossing met with securities
analysts, did they ever ask you or your colleagues about these
swap transactions or your pro forma presentations? Did they
have any questions about them?
And who were these security analysts, especially those that
were hyping the Global Crossing stock?
Mr. Cohrs. Yes, Congressman, we had regular contact with
securities analysts, and since the beginning of the company,
there were----
Mr. LaFalce. Did they ever question the swap transactions
or your pro forma presentations?
Mr. Cohrs. We had discussions about swap transactions, so-
called swap transactions, which were----
Mr. LaFalce. Did they ever challenge the so-called swap
transactions?
Mr. Cohrs. They asked questions about the transactions, and
we explained to them, actually, an explanation which is very
much the same as was in my opening remarks, which was that
these were independent transactions, separately negotiated, and
that the proper accounting for the transactions was not to
account for them as swaps. And we explained the economic reason
for buying the assets and for selling the assets. We did have
those discussions with securities analysts.
Mr. LaFalce. Well, I'm going to be going into the economic
reasons for buying and selling at considerably greater length.
I can't do it now; I don't have time. But I'm going to question
the so-called economic rationale.
What was the role of your outside counsel in reviewing your
public disclosure, outside a formal capital-raising scenario,
and did they look at your 10K before it was filed? Did they
look at your 10Qs?
Mr. Cohrs. Our outside counsel reviewed all of our filings,
and they reviewed our earnings releases, as well as all of our
SEC filings, and all of the filings that we made in the process
of the public securities offerings that we did. Those filings
were reviewed by our outside counsel and by our outside
auditors at some length.
Mr. LaFalce. Let me just tell you what I'm getting at right
now. I think it's imperative that we look at the propriety of
the actions of corporate officers, who I have a lot of
questions about, because so often their salary is based upon
their stock options--or their compensation is based upon their
stock options, and, therefore, they have a tremendous interest
in enhanced market capitalization.
The same thing is true with respect to the audit
committees, and then the accounting firms have their own
conflicts. And the primary focus has been placed upon the
auditing profession, but I think we need to put much greater
focus, too, on the securities industry and the quality of their
analysis.
Most investors don't look to what's said by corporate
presidents--they expect puffery--or even the boards of
directors or even the accountants. And most investors don't
look at your statements, your 10Ks, your 10Qs, your financials,
your pro formas; they look to the recommendations of the
securities analysts.
And so I really think we need to focus in on them more,
because I think that sometimes there's an awful lot to be seen
that wasn't seen and conveyed by the securities industry. And
also there's a fiduciary responsibility on the part of
attorneys, too, and attorneys hired by a firm should not be in
the business of giving firms advice and counsel that the firm
wants to hear, but they should be in the business of giving
companies the advice and counsel that they need to hear. And I
don't know that that has been done.
My time has expired, Madam Chairwoman. I appreciate that. I
will submit the balance of my questions in writing.
Chairwoman Kelly. Thank you very much, Mr. LaFalce.
We go to the Committee Chairman, Mr. Oxley.
Mr. Oxley. Thank you, Madam Chairwoman.
Mr. Legere and Mr. Cohrs, in his letter to the Global
General Counsel on August 6th, Mr. Roy Olafson asserted, among
other things in his letter, that the terms that the company
used do not really mean what you said that they mean; that
there were amounts included in the cash flow definitions that
shouldn't have been included, and that although Asia Global
Crossing was a global subsidiary, it defined and calculated its
cash flow differently.
Can both of you address the points made in Mr. Olafson's
letter?
Mr. Cohrs. Yes, Congressman, the first question had to do
with an allegation that the measures that we reported were
somehow not what we claimed them to be. The pro forma measures,
the cash flow and adjusted EBITDA, were very precisely defined
in every one of our filings. Our press releases and our SEC
filings defined exactly what these terms meant.
In fact, the origin of cash revenue and adjusted EBITDA was
in our loan covenants. The bankers who were lending money to
the company designed the loan covenants using adjusted EBITDA,
and so these were very well understood by the banking community
as representations of cash flow. The definitions were precise
and they were well understood by the banking community and by
the securities analyst community.
Mr. Oxley. So, there was really full disclosure--from your
perspective, there was full disclosure and transparency going
forward with that issue?
Mr. Cohrs. We believe there was.
Mr. Oxley. Let me ask you also, in this complaint, Mr.
Olafson referred to swaps of about $100 million in capacity
between Qwest and Global in each of the first two quarters of
2001, but that each company accounted for the transactions
differently, despite having the same outside auditor.
It's not clear from your quarterly statements if that is
true. Did the swaps actually happen?
Mr. Cohrs. We did transactions with Qwest and, you know, we
had transactions, capacity transactions, with Qwest. We
accounted for them in the manner I described in my remarks, and
I just couldn't comment on any accounting practices at Qwest.
I would say that the accounting treatment for any
transaction depends on the facts and circumstances of that
transaction, and accounting treatments can differ, based on
different facts and circumstances, but I certainly couldn't
comment on how Qwest did any accounting.
Mr. Oxley. Mr. Mohebbi, would you care to comment on that?
Mr. Mohebbi. Congressman Oxley, again, we did transactions
with Global Crossing in 2001. The specific amount is not
exactly $100 million, as you indicated. However, the
transaction involved Qwest buying capacity, international
capacity that we needed to build our business strategy, which
was to expand our international network.
And we had a number of bids from, if I'm not mistaken,
three different providers, and Global Crossing's terms and
conditions for those purchases were deemed to be the best, and
we purchased those assets from Global Crossing.
Mr. Oxley. Do you recall who the other bidders were?
Mr. Mohebbi. I don't exactly recall, but I believe that
there were a number of providers in this particular transaction
who I believe were in Asia, and I believe that there are a
number of providers in Asia that have the capacity where we
wanted it, and we received bids from them. But I don't remember
the specific names, Congressman.
Mr. Oxley. Was that a common practice, to bid that out and
to have a competitive arrangement for that capacity?
Mr. Mohebbi. As an internal process in Qwest, again, as we
are buying capacity, part of the process is to look at the
market-based pricing and see what other providers have as
price. So that's one of the conditions in the process for
reviewing what the winning proposal looks like, Congressman.
Mr. Oxley. Are you able to supply for the subcommittee at a
later date, the identification of the other bidders?
Mr. Mohebbi. I will be certainly happy to go back to our
files and look at the information that we had on those
transactions.
Mr. Oxley. I would appreciate that.
Let me ask actually all of you on the panel, in Mr.
Legere's testimony, he said that the IRUs did not play a
significant role in Global Crossing's problems, but have the
revelations about the cash flow presentations of a number of
telecom companies has that led to a loss of confidence by the
investing public? Or what has happened with the overall
perception of stock in the telecom sector, and has this led to
a lack of support and confidence in that sector by the
investing public? Anybody?
Mr. Salsbury. Congressman, let me just take a crack at it.
I do believe that the--as I mentioned in my testimony--that
some of the policies that have been followed by the FCC and the
Department of Justice clearly have had a negative impact on the
results of companies in the competitive sector. And I think
that has led, with a combination of other events like the
downturn in the economy last year, and so forth, to having poor
results. And I think that has led to the sector somewhat being
out of favor. I think accounting issues are a relatively small
part of it.
Mr. Legere. Congressman, if I could just add that I think
there is a cause-and-effect situation. I'd just like to go back
to some of my initial comments. The bankruptcy of Global
Crossing is not the reason for the loss of 9,000 jobs. The
500,000 jobs that have been lost in the industry are indicative
of an industry that has for a period of time, going across the
board, pretty significant declines in market capitalization,
because many companies in the sector found themselves over-
capitalized, needing to reduce costs significantly, just to
survive. So the restructuring that Global Crossing has gone
through, which unfortunately led to a Chapter 11 restructuring,
is similar to what the entire industry has gone through, and, I
believe, you know, needs to go through in order to prepare
itself for, hopefully, the return to normalcy of the industry.
But certainly that has been a period of shareholder
concern, not only about the situations of reporting, but about
the industry and the ability to make returns on the significant
amount of capital that has been put into the industry over the
last several years.
Mr. Oxley. So it is--at least the perception by the layman
would be--and I think you touched on it--that over-capacity in
that sector really caused the downturn and the ultimate loss of
confidence in the market; is that correct?
Mr. Legere. Well, it's important to note that the
perception of over-capacity is just as damaging in customer
purchases as real over-capacity, because, in effect, carriers
who are larger purchasers of capacity, will delay purchases in
anticipation of huge amounts of increase in capacity, which
generally will lead to significant price declines.
So we have, at least as a minimum, a perception of an over-
capacity of supply, globally. There are differing opinions,
including this morning's USA Today, which are presenting
information that suggests that the capacity and the supply of
fiber optic capacity may not be as over-supplied as perceived.
But, I think we did have a time in the industry where
demand was suppressed, because of a perception, at a minimum,
of over-capacity, and, therefore, the value of the investments
made by many players in capacity was, and still is, suppressed.
Mr. Oxley. And do other witnesses share that same view,
from the other companies?
Mr. McGrath. Yeah, I think, from my perspective in Cable &
Wireless, I think that one of the visible signs that the
industry is becoming extremely competitive is that companies
start to fail and exit the market.
I think that's a very visible sign which is seen by
shareholders, and it will affect confidence. It's a visible
sign that there has been potentially over-supply, real or
perceived; that the shareholders will see that and will demand
increased scrutiny and be more conservative about investing in
the sector. I think the simple answer to your question is yes.
Mr. Oxley. And that's not necessarily a bad thing; is it?
Mr. McGrath. I think increased scrutiny, greater
understanding in detail and the reality of business plans being
understood is probably a good thing.
Mr. Oxley. I think that's been shared, Madam Chairwoman, by
other witnesses that we've had in Mr. Baker's subcommittee as
well as yours, that perhaps after all of this, we will have
learned some valuable lessons in the marketplace, and that,
indeed, markets can be very punishing, perhaps even more so
than the Government as we work our way through some of these
difficult problems. I thank the Chairlady for her indulgence,
and I yield back.
Chairwoman Kelly. Thank you, Mr. Chairman.
Mrs. Jones.
Mrs. Jones. Thank you, Madam Chairwoman. There are so many
questions I want to ask that 5 minutes won't allow me, but let
me try and get started.
Mr. Legere, in an article around the time of the filing of
the bankruptcy of Global Crossing, you're quoted as saying:
``Ours is a balance sheet issue, not an operational one.
Today's actions are intended to directly address this issue.
Even with financial uncertainty, we've recently experienced
that customers have continued to choose our network over many
others.'' And it goes on and on and on.
But, I want to go back to ``ours is a balance sheet issue,
not an operational one.'' Would you be a little more specific
and tell me what you meant?
Mr. Legere. I'd be glad to. When I became the chief
executive on October 3rd, I immediately started a process of
refocusing the company, lowering its cost structure, and
significantly preparing it to do what every family in American
needs to do, which is live on existing means.
We have over $3 billion in service revenue, and I had
prepared the company to start to generate enough cash to
service its operating capital expenditures. The issue we have
is, we were paying between $2 and $3 million a day on interest
to service our debt. And that debt burden was just too large
for us to be able to, as a young company, to be able to create
the underpinnings of an organization and operations to support
that debt.
Mrs. Jones. Thank you. Now, however, the debt was not so
large as for them to pay you. How much did you receive to
become the CEO of Global Crossing?
Mr. Legere. I think my salary is public information.
Mrs. Jones. I asked you, what did you receive, sir?
Mr. Legere. My salary is $1.1 million a year.
Mrs. Jones. And you received a signing bonus, also, sir?
Mr. Legere. I had a $3.5 million signing bonus.
Mrs. Jones. And in another article, there is a young lady
by the name of--let me see if I can find her name real quickly.
I just had it cleared--ah-hah--oh, here she goes--a Ms. Hinton
said that: I was required to take--her severance pay in spread-
out payments, rather than a lump sum. Note that all of her
medical benefits were terminated, all of her 401K retirement
plan was held for more than 30 days. Is that a correct
statement, sir?
Mr. Legere. I'm not familiar with the situation.
Mrs. Jones. Well, assume its a correct statement for
purposes of this question. The employees of Global Crossing
weren't able to receive a lump sum payment to pay their debts.
They weren't able to receive any medical benefits, but what did
you tell me your salary was, again, sir?
Mr. Legere. My salary is $1.1 million.
Mrs. Jones. And you got a signing bonus of how much?
Mr. Legere. $3.5 million.
Mrs. Jones. And if Ms. Hinton made $79,000 a year, how many
Ms. Hintons could you have paid or could your company have
helped with the $3.5 million bonus that you received, sir?
Mr. Legere. Well, first of all, you know----
Mrs. Jones. My question is, how many Ms. Hintons could you
have helped if you had paid----
Mr. Legere.----tremendous--for the issues----
Mrs. Jones. Hold on a second. I asked a question.
Mr. Legere. And I also----
Mrs. Jones.----and you give the answer.
Mr. Legere. I also believe that my pay----
Mrs. Jones. Sir, Mr. Legere, stay with me, sir. My question
is, how many Mrs. Hintons could you have helped or paid if they
made $79,000 a year, with your $3.5 million bonus?
Mr. Legere. As a rule, I don't do math in public.
Mrs. Jones. Well, as a rule, would you pull out a
calculator and do it for me, please?
Mr. Legere. Well, I don't----
Mrs. Jones. I mean, I don't want--I'm trying to be real
clear in my questions, and I'm not looking for smart answers,
sir. You're here to help Congress come up with some decisions
about how they handled this situation, Mr. Legere.
Mr. Legere. I understand.
Mrs. Jones. And I do not appreciate the quirk.
Mr. Legere. I certainly understand as well----
Mrs. Jones. And I hope you will apologize.
Mr. Legere.----That there's a difficulty in trying to
understand the complexities of a Chief Executive Officer in a
turnaround situation of a major telecommunications company. To
believe that anyone would have those skills is an
understatement of the complexity of the task that we face.
Mrs. Jones. Mr. Legere, I don't believe that's what I said.
I merely asked you, how many Ms. Hintons could you have helped
with your $3.5 million, and seeing how you don't choose to do
my math, let me proceed.
Is Arthur Andersen still your auditor, sir?
Mr. Legere. Yes, they are.
Mrs. Jones. And you've chosen to stick with them, even
amidst all that's been going on; is that a fair statement?
Mr. Legere. Yes, we have.
Mrs. Jones. Can you give me a statement as to how much
information is provided to your Audit Committee from Arthur
Andersen, and are they serving also as consultants in addition
to auditors?
Mr. Legere. I'll defer to Mr. Cohrs on that question.
Mr. Cohrs. Well, on your first question, Congresswoman, we
provide all of the information that we need to provide to the
auditor and all the information that they request. And so they
have full access to any information that they need to do their
audit.
The second question is, have we used Arthur Andersen as
consultants? Yes, we have.
Mrs. Jones. But are you using them currently as a
consultant, sir?
Mr. Cohrs. We have some consulting engagements. For
example, Arthur Andersen has helped us collect the information
required, which is a massive amount of information, to prepare
our bankruptcy filings.
Mrs. Jones. Are they still your auditors, sir?
Mr. Cohrs. Yes, they remain our auditors today.
Mrs. Jones. Are you aware, Mr. Legere--I'm going to go back
to him--that of the question in the industry with regard to the
impropriety, ethically, of having auditors as both accountants
and consultants? And I'm going to terminate in this area, Madam
Chairwoman, if you'll allow me.
Mr. Legere. I don't believe there is any impropriety
associated with the roles that Andersen is playing in our
company.
Mrs. Jones. That wasn't the questions. I said, are you
aware, sir, in the industry, the concern about an auditor
serving both as an auditor and as a consultant?
Mr. Legere. I'm aware of it from the standpoint that I
reviewed H.R. 3763 and understand that it's one of the issues
that is potentially going to be addressed, so, in that sense, I
do understand.
Mrs. Jones. And you just did tell me, sir, that you have
all these great qualifications to be a CEO, and so forth, in
the industry, and that's why you were paid $3.5 million?
Mr. Legere. The pay was decided by the Compensation
Committee with outside experts; the Committee offered me to
take on the role.
Mrs. Jones. The point I'm trying to make to you, sir, is,
right now, in these United States, there are investors and
shareholders, and employees out here who are concerned about
auditors serving both as auditors and consultants, but that
doesn't appear to be an issue for your company; is that a fair
statement, Mr. Legere?
Mr. Legere. In my understanding, I don't believe there's
anything improper in the roles that our auditors are playing
inside of our company.
Mr. Oxley. [Presiding] The time of the gentlelady has
expired. The gentleman from Massachusetts, Mr. Capuano.
Mr. Capuano. Thank you, Mr. Chairman.
Mr. Legere or Mr. Cohrs, whoever is appropriate to answer,
has your company ever received a qualified audit?
Mr. Cohrs. I'm sorry, Congressman, are you referring to a
qualified audit?
Mr. Capuano. Has your audit ever come back with a
qualification?
Mr. Cohrs. No, it has not.
Mr. Capuano. Has it ever had a disclaimer?
Mr. Cohrs. No, it hasn't.
Mr. Capuano. Has it ever had an adverse opinion of any
kind?
Mr. Cohrs. No, our audit opinions have been unqualified.
Mr. Capuano. Thank you. Mr. Mohebbi, relative to Qwest,
have you ever had a qualified report?
Mr. Mohebbi. I'm not aware of one, Congressman.
Mr. Capuano. Have you ever had a disclaimer of any kind or
an adverse opinion of any kind.
Mr. Mohebbi. I'm not aware of one.
Mr. Capuano. OK, Mr. Salsbury, has your company ever had an
adverse report, a disclaimer, or a qualification?
Mr. Salsbury. Not to my knowledge.
Mr. Capuano. Mr. McGrath, you earlier said that you had not
qualifications of any kind. I would take all of you and suggest
to you that Enron also never had a qualification or a
disclaimer or an adverse report, so, therefore, when you tell
me you have clean audit reports, at this point in time with
your auditors, it doesn't mean anything to me, and I would just
suggest that it doesn't mean much to the general public as
well.
Mr. McGrath, I would also suggest that--I don't know
exactly the makeup of your company, but I know very well that
the auditing rules and accounting rules in England are much
more strict than we have in the United States, and for whatever
businesses you do here, keep your eyes open; use your English
requirements as opposed to your American requirements; you'll
be safer and we won't have to call you back here at a future
time.
Mr. McGrath. Thank you.
Mr. Capuano. I guess it's not a real surprise that my
understanding is that four of the five companies sitting in
front of us have the same auditor and the same auditing
company, and it is no surprise at all to me that Global
Crossing has retained Arthur Andersen. When they were here,
they did a very good job defending their relationship with you,
so, therefore, I'm not surprised at all that the camaraderie is
a two-way street.
But I'm going to tell you that I don't have a whole lot of
questions, because, honestly, I don't like the answers I'm
getting. I don't think we're going to get the answers, I don't
think. I think this is the greatest forum. I think the SEC and
the appropriate legal jurisdictions will be the ones who will
ask tougher questions and will get the appropriate answers, and
I will have to trust them at this point in time.
But I've got to tell you, from where I sit, the whole thing
you're talking about is nothing more than a much more fancy
and, you know, certainly larger Ponzi scheme, nothing new. You
bought something you didn't need with money you didn't have,
and sold it to somebody who didn't need it and didn't have any
money, and you hid the bookings.
Gee, never heard that before. You're just doing it with a
lot bigger money, nice, fancy technical terms, because you're
in a new business. But the result is the same. The result is
the same.
And that's why earlier I didn't have a whole lot of opening
statements. I don't appreciate the way you do your business. I
do appreciate the businesses you do. I find it unfortunate, to
be perfectly honest, for the American public and for the entire
business community, that we have to be sitting here having
these hearings.
I don't like doing them. I don't like overreacting to
individuals in the business community that do these kinds of
things. And I'm not going to sit here and blame any one of you
individually. I'll leave that to the appropriate people as
well, including your shareholders, who may or may not come
after you.
But I will tell you that what you have done or what your
companies have done or what your predecessors have done, no
matter how you measure it, and no matter what you have said
here today on the record, we all know in our hearts what you
have done. I hope--I don't think--I'm sure you're not
embarrassed. I'm not sure you're not repentant, and it's not
for me to make you so.
But I will tell that that's why I'm not asking questions
today, because I don't expect to get answers that are going to
be clear and concise. I don't expect to get answers that are
going to do anything to help the employees that you have hurt,
the shareholders that you have hurt, and I don't see any way
that we can take steps to reconstitute the trust the American
people once had in the American business community.
It will take time, and these kinds of auditing procedures,
this kind of greed, absolute, unfettered greed, I don't think
it's good for America. And I'm sorry that you or your
predecessors did it, and I'm terribly sorry that your auditors
allowed you to do it.
Mr. Oxley. The gentleman's time has expired.
The gentlelady from New York, Ms. Slaughter.
Ms. Slaughter. I thank you, Mr. Oxley.
Mr. Legere, I can appreciate the difficulty that you face
in trying to reconstitute a company, but I want to add on to
what my colleague, John LaFalce, said, and to make a plea to
let my people go in Rochester, and look favorably, if you can,
to trying to reconstitute Frontier. The 13,000 jobs there mean
the world to us.
Mostly I want to talk about some things that I've read in
the papers that I'm really dying to talk to you about. First
there's a piece from the New York Times on February 19th which
says ``Mr. Perone authored a memo dated February 10, 1999,
before his hiring by Global Crossing, in which he recommended
how to best account for capacity swaps. The suggestions
contained in the memo were to keep the contracts 60 days apart,
apparently to avoid suspicion that the deals were reached
merely to help each party meet its quarterly financial
objectives, and to require each party to submit separate cash
payments, apparently to create the look of a valid deal.''
To the untrained eye, gentlemen, that looks like you were
trying to fool the public. Actually, I think that Global
Crossing did decide that this was a pretty smart fellow over
there at Andersen, and frankly, you decided to hire him for the
company, perhaps to overlook this or look it over. I understand
that he did have several relatives that he was also able to
contribute.
What was the intent, other than fooling the investors and
Wall Street, to have that kind of a system put together, which
basically said that this will make it look all right?
Mr. Cohrs. Congresswoman, there are a number of memos, as I
described in my testimony. The accounting for the transactions
that we're talking about, any IRU transaction, whether they are
relatively simultaneous or whether they are stand-alone IRU
transactions, there are very difficult accounting questions.
We were struggling to adapt accounting rules that were
originally applied in real estate and the leasing industry,
because those were the only accounting standards available. And
so our industry--the entire industry, as well as the entire
accounting profession--was struggling to understand the right
way to account for these transactions.
I described in my opening remarks that the GAAP treatment
that's used now bears no relationship to the cash flow of the
company. Now, for example, there was a meeting sponsored by
Arthur Andersen, in which Global Crossing participated, in
which all of the major accounting firms, the SEC, the FASB, at
least one law firm, and participants from the industry met to
try to develop the correct accounting for these transactions.
So that's the environment that we----
Ms. Slaughter. But, Mr. Cohrs, what I read here, what I
understood from this, is that you were not looking for correct
accounting procedures.
Mr. Cohrs. Well, if I could----
Ms. Slaughter. But you were looking for a way that if you
didn't--that your revenue appears to have come from
bookkeeping, right?
Mr. Cohrs. Well, if I could just finish.
Ms. Slaughter. All right.
Mr. Cohrs. In that context, the accounting memos that were
developed by Arthur Andersen were extensive, going through a
great deal of accounting theory on how these transactions
should be developed, and a particular accounting model was
developed that we applied.
And we were advised that that was proper GAAP accounting.
But in addition----
Ms. Slaughter. But when it says that it is being done to
avoid suspicion, wouldn't that make you feel a little peculiar
about it?
Mr. Cohrs. Congresswoman, we applied the accounting to the
best of our ability. In addition to applying the accounting, in
our press releases, when we did these transactions that were
relatively simultaneous, we disclosed the transactions. We
described the transactions that we were doing. We can provide
you with the earnings releases that we issued in the first,
second, and third quarter of 2001.
Ms. Slaughter. In which you never made a profit; isn't that
true?
Mr. Cohrs. Well, as I said, we disclosed these transactions
in those releases. In those releases----
Ms. Slaughter. Because that was the only transaction----
Mr. Cohrs.----We also----
Ms. Slaughter.----That you had, were the swaps. Let me go
on.
Mr. Cohrs. No, that's----
Ms. Slaughter. I don't want to use my time up here.
Mr. Cohrs. They were a small number of the transactions
that we had, to correct the facts.
Ms. Slaughter. Let me just comment on this, because this is
another statement. ``Instead of a stampede of customers to fill
up the fiber optic highways, the industry found itself with too
many vacant lanes, way too many. What had once seemed a
brilliant idea, carriers buying and selling future access on
the networks to meet expected demand, became a swap meet unto
itself with its own peculiar bookkeeping,'' which reiterates,
again, what you were saying.
But their own peculiar bookkeeping and the fact that Arthur
Andersen was so close with what you were doing that you hired
the man who authored it, I think is really a matter of some
suspicion.
There are a couple of other things here that I want to
comment on: One is that in an August, 2001, letter Mr. Olafson
said that Global Crossing's Chief Financial Officer, Daniel J.
Cohrs, had sent an e-mail message to Thomas Casey, who was
chief executive, and to other high-ranking executives,
expressing concern about a news release that Qwest had issued,
giving the details of the IRU agreements, because Mr. Cohrs was
worried that the Qwest statement would draw unwanted attention
to Global Crossing's IRUs, Mr. Olafson said. Would you comment
on that? You may not have had an opportunity to comment on that
since it was printed.
Mr. Legere. I'll comment on it, Dan. I think the most
important thing was----
Ms. Slaughter. I was asking Mr. Cohrs, since he was the
author of the memo.
Mr. Legere. Well, I think that since it refers to Mr.
Cohrs, if I could make one quick comment?
Ms. Slaughter. Certainly, Mr. Legere.
Mr. Legere. And that is that, as was mentioned before, the
SEC is doing a very detailed investigation of all the items
that you spoke about. Our Board is doing the same, and we very
much look forward to participating in those. I think the
information that we can jointly share is the output, which will
answer a lot of these questions, including most of what was
written in Mr. Olafson's letter.
Ms. Slaughter. All right, well, let me just close with
reiterating what Ms. Tubbs Jones said, and that is that it's
very real, the pain in Rochester. I've talked to people who
have had to put their homes up for sale, people who have no
jobs, brilliant people who had very high positions in your
company who are looking to see if they can run filling stations
or something for a little while until they can tide themselves
over; people who have lost their healthcare; people who are
terrified of the future, young people, and scared that they're
going to have to move and start all over again and look at
something else.
Then there are the other people. The people who worked
forever for Rochester Telephone, going out in the dreadful
weather at night, going up those poles, making sure that the
phone service worked. They are going; they have great concern
about their pensions. And in that regard, I want to say that we
are very much concerned that Global has not turned over the
pensions to Citizens Communication. That, in itself, would
moderate a great deal, I think, some of the fear of the workers
up there.
But those who were let go who were promised severance and
didn't get it, I don't think, unless you've had an opportunity
to talk to them or look into their faces, that you could ever
gauge the depth of the pain. These were people who liked your
company, Mr. Legere. These were people who invested everything
they had in it. Many of them left good jobs, enticed over
because they thought that they saw the future.
Suddenly, 4 years later, it's all over, and they are left
in an economy that's pretty bad, with very little hope, and
it's devastating. So, let me say again to you, if there is an
opportunity for us to back up and reconstitute Frontier, please
give us every consideration to let us do it.
Rochester's economy really needs it, and we ask you most
sincerely to give that your utmost attention and to let that
survive, so that these people can again have a job and a decent
wage.
Mr. Oxley. The Congresswoman's time has expired.
Mr. Legere. We feel the pain more than I think you
understand. It's a very horrible thing that we've had to do to
try to do something that I believe is in the best interests of
Rochester, which is to save this company, save the jobs that
exist, and hopefully get back to a time when we can grow jobs
and bring new jobs back into Rochester.
Ms. Slaughter. We do want you to save those jobs; they're
very important to us. Thank you.
Mr. Oxley. The gentleman from Washington State.
Mr. Clay. Mr. Legere, one of the great outrages in the
Enron collapse was the decision by management to black out
their employees' ability to sell their stock while the
executives retained their ability to sell their stock as the
company was collapsing.
I've been told--and I'll just ask you--that there was a
similar blackout for almost a month in your situation from
December 14th to January 18th, while your employees were
essentially blocked out, shackled, not allowed to sell their
stock, and executives were allowed to sell theirs.
Regardless of what was happening in the market at that
time, was that the case, and if so, how would you justify
blacking out, locking down, your employees during that
situation, particularly in light of the fact that the world
came to know what happened to the Enron employees, even before
you ordered that lockdown?
Mr. Legere. I appreciate the opportunity to address this,
and I'll start, and then ask Mr. Cohrs for some specifics.
What you're referring to is a lockdown period of our 401K
plan, and it was locked down for everyone who participates,
regular employees, as well as executives. It was announced
first to the employees on October 2nd, and it was part of a
move from Putnam to Fidelity as the manager of the plan.
Between October 2nd and the time from December to January
when it was shut down, they were notified multiple times. And
just for the record, one of the major differences here is on
October 5th, our stock was trading at 83 cents. On October 9th,
our stock was trading at 38 cents.
When the plan closed down on December 18th, approximately,
the stock was trading at 67 cents. When it reopened in the
middle of January with plenty of time to continue to sell, the
stock was trading at 54 cents, so we're dealing with a very
different scenario from the standpoint of what happened during
the period of time. It was a planned, scheduled change between
Putnam and Fidelity. It was announced many times in the time
period going up to it, so it does have the similarities in that
there was a blackout, but that's where the similarities cease
to exist.
Mr. Cohrs. If I could just add, Congressman, the reason for
the blackout period, as it's called, as Mr. Legere said, was
the transition from one provider to the other. That was
necessary because we had multiple 401K plans because of the
acquisitions we had done.
So we had multiple plans with different levels of service,
and we were in the process of consolidating those plans so that
we could actually provide better service in the plans. And it's
just necessary when you change providers to freeze the activity
so that all the data can be transferred over. But as Mr. Legere
said, this was announced 2\1/2\ months before the blackout
period began.
Mr. Clay. And the executives who held stock themselves were
free to sell their stock outside the 401K during that time; is
that the situation?
Mr. Legere. All 401K participants were blacked out at the
same time. All shareholders could sell under the rules, and
executives who were not subject to a blackout period or a
period of time that's normal for officers, could trade.
Mr. Clay. Well, do you think it makes sense to allow
executives, in that context, to be able to sell their stock
while the company's falling apart, and lock down the employees
who are in the 401K? Do you think that should be the rules of
engagement, if you will?
Mr. Legere. I don't have the data, but maybe it would be
important to look. During the blackout period of the 401K, I
don't believe any people were trading shares outside of the
program, either.
Mr. Clay. That's one thing we'll appreciate. I want to ask
about swaps. And this has been a eye-opener for me, and, I
think, for a lot of Americans. There is an old movie called
``The Flim-Flam Man,'' and it starred George C. Scott.
And why he didn't use swaps, I don't know, because to me,
this has enormous potential for abuse, where you essentially
buy an asset, spread out the cost over many years, with a
counterparty and then sell it and take the revenue in 1 year,
just has tremendous potential for abuse, it seems to me.
Now, I'm told that in your situation there was substantial
swapping with other parties or counterparties, even though
there was excess capacity pretty well known in the industry at
that time. Tell us, to the extent you can, what economic
rationale there was for those, and tell us, to the extent there
was, if you will, simply a transfer by both parties, of a
potential stream of revenue to something you book immediately
as a stream of revenue?
Mr. Legere. If I could start, Congressman, I think the
important difference between what you've described and what was
taking place here is the notion almost sounds as if you're
dealing with people sitting in empty rooms who are walking out,
buying something, holding on to it, and then selling it to
another.
We've constructed a 101,000 route-mile network that
connects 27 countries and over 200 cities in the world. And it
was through the process of building and acquiring the routes on
this network, which is not just to sell capacity, but to serve
enterprise customers advance data requirements. That's the
requirement that drove us to looking to capacity that we would
require to finish that network.
And when you have 101,000 route-miles of network, you also
are a logical place for people who need to buy things from
someone, to come to, because you have the broadest reach. And,
Dan, if you want to add----
Mr. Cohrs. If I could just address the accounting points
that you mentioned, Congressman, it is quite often repeated
improperly in the newspapers that these transactions generated
revenue and spread the costs out over many years. That is
simply not true.
As I explained in my opening remarks, an IRU transaction
has the revenue recognized over the life of the lease, and the
cost is amortized actually over a shorter period. So, in our
GAAP accounting, the revenue on a 20-year IRU is only
recognized, ratably, over 20 years. It is not recognized up
front.
The cost of those assets is depreciated, just like any
other asset that we would buy or build, generally over a
shorter period, generally 12 to 15 years. And so the
amortization of our cost on these transactions is actually much
faster than the rate at which we booked the revenue.
The confusion comes because we also reported as a
supplemental report, the number we called cash revenue. In
addition to the GAAP revenue that I just described, we reported
cash revenue because the cash was collected up front, and we
felt it was important to our investors and our lenders and the
markets as a whole to give both views, the GAAP view, of
course, which we were required and which is the proper GAAP
accounting, but also the view that more closely corresponded to
the cash coming into the company.
I'd just like to say and repeat that it is not true that
these transactions generated up-front revenue with costs
amortized over a long period of time. It's actually almost the
opposite.
Mr. Oxley. [Presiding.] The gentleman's time has expired.
Mr. Clay. Thank you.
Mr. Oxley. Let me thank this panel for your participation.
As the subcommittee Chair indicated, the record will remain
open for 30 days for written questions from the Members, and
they will be forthcoming. Again, gentlemen, we thank you for
your participation, and this panel is dismissed.
Chairwoman Kelly. [Presiding] I would like to thank the
second panel for joining us today. And our second panel is
going to discuss the accounting principles involved in the
company's filings and disclosures, the state of the industry,
and how some of the energy companies also tread into the
telecom world and were caught in the vortex.
For our second panel, we welcome John Morrissey, Deputy
Chief Accountant for the Securities and Exchange Commission;
Scott Cleland, CEO of the Precursor Group; and a noted
telecommunications industry analyst, Will McNamara, Director of
Energy Industry Analysis for SCIENTECH, Incorporated.
I want to thank each of you for testifying here before us
today, and I welcome you on behalf of the Full Committee.
Without objection, your written statements and any attachments
that you have, will be made part of the record.
You will each now be recognized for a 5-minute summary of
your testimony. Your full written testimony, as I said, will be
a part of the record. We begin with you, Mr. Morrissey.
STATEMENT OF JOHN M. MORRISSEY, DEPUTY CHIEF ACCOUNTANT, U.S.
SECURITIES AND EXCHANGE COMMISSION
Mr. Morrissey. Congresswoman Kelly, Congressman LaFalce,
and Members of the subcommittee. I'm John Morrissey, Deputy
Chief Accountant at the United States Securities and Exchange
Commission. Thank you for the opportunity to testify today on
behalf of the Commission concerning several accounting issues
affecting the telecommunications industry.
As the subcommittee has requested, my testimony will
address the accounting by providers of indefeasible rights of
use of telecommunications network capacity, the accounting for
non-monetary transactions, including swaps, and the reporting
of pro forma financial information. My written testimony
addresses those matters in more detail, and I ask that it be
included in the record.
As Global Crossing has disclosed, the SEC is investigating
certain issues associated with the company's accounting and
disclosure practices. The Commission appreciates the
subcommittee's recognition of the non-public nature of its
investigation. The Commission also asks that, in light of its
ongoing investigation, the subcommittee understand our
reluctance to address specific issues related to compliance
with Federal securities laws at this time. You can be assured
that the Commission staff is thoroughly investigating
allegations of financial reporting improprieties.
Confidence in our markets begins with the quality and
transparency of financial information available to help
investors decide whether and when to invest their hard-earned
dollars. The goal of the Federal securities laws is to promote
honest and efficient markets and informed investment decisions
through full and fair disclosure of all material facts.
Transparency in financial reporting, that is, the extent to
which financial information about a company is visible and
understandable to investors and other market participants,
plays a fundamental role in making our markets the most
efficient, liquid, and resilient in the world.
The SEC's responsibility is to ensure that the financial
markets are transparent and hospitable to all investors.
Congress wisely ingrained in the Federal securities laws the
philosophy that investors have the right to be fully informed
of all material factors and to use markets that are free from
fraudulent, deceptive, and manipulative conduct.
Telecommunications service providers often sell access to
the networks on the basis of an Indefeasible Right of Use, or
an IRU. Accounting for such capacity sales raises a number of
issues that can become quite complex.
Perhaps the most important and basic accounting issue is
when to recognize revenue from an IRU sale. My written
testimony provides more detailed information on some of the
considerations that go into this evaluation, and I will not
repeat them here. However, I will note that the specific terms
of the network capacity agreements between a provider and a
purchaser can have a significant impact on how and when to
recognize income from such sales under Generally Accepted
Accounting Principles.
For example, network capacity purchase agreements that
qualify to be accounted for as leases could result in up-front
revenue recognition, provided that certain criteria are met.
Alternatively, network capacity purchase agreements that are
not leases must be accounted for as service contracts, which
typically requires that the related revenue be recognize into
income over time as the access to the capacity is provided.
Several recent articles in the financial press have focused
on the business practices of telecommunications companies
swapping network capacity. These articles raise a number of
legitimate questions about the accounting for network capacity
swap transactions, which is discussed in my written statement.
While I cannot comment on specific companies or specific
transactions, I assure you that if any financial reporting
improprieties or violations of Federal securities laws have
occurred, the Commission staff will not hesitate to seek
appropriate remedies to protect investors.
Furthermore, recent press articles have focused on the use
of pro forma financial information in Global Crossing's and
others' earnings releases. While pro forma financial
information can serve useful purposes, the Commission is
concerned that pro forma financial information, under certain
circumstances, can mislead investors if it obscures GAAP
results.
On December 4, 2001, the Commission issued cautionary
advice that companies and their advisors should consider when
releasing pro forma financial information. The cautionary
advice is part of our ongoing commitment to improve the
quality, timeliness, and accessibility of publicly available
financial information.
At the same time, the Commission is focusing on ways in
which our current periodic reporting and disclosure system can
be updated to fill the void that pro forma statements may be
attempting to fill.
Thank you for the opportunity to appear today. I am happy
to try to respond to any questions that the Members of the
subcommittee may have.
[The prepared statement of John M. Morrissey can be found
on page 132 in the appendix.]
Chairwoman Kelly. I thank you very much, Mr. Morrissey.
Mr. Cleland.
STATEMENT OF SCOTT C. CLELAND, CHIEF EXECUTIVE OFFICER, THE
PRECURSOR GROUP
Mr. Cleland. Yes, thank you for the honor of testifying
today, Chairwoman Kelly. I'm Scott Cleland, founder and CEO of
the Precursor Group, an independent, research broker/dealer
that provides telecom-tech investment research to institutional
investors. I will try to provide the subcommittee with a
broader, big-picture perspective today.
Global Crossing's bankruptcy is not unique; it's part of a
broader telecom spiral, debt spiral in the sector. And we
believe that the recession was not the cause of many of these
telecom bankruptcies; it was only the trigger.
Nor is the cause what Federal Reserve Chairman Alan
Greenspan called irrational exuberance. I surmise that the
causes were the rational manipulation of the capital market
system and the irrational economics of the telecom-internet
sector, which created and burst the NASDAQ market bubble.
I suspect there is some rational manipulation going on
here. Global Crossing's bankruptcy is a wakeup call to us all.
First, we must improve our clearly inadequate investment
research system that can't even expose a trillion-dollar fib.
Investors depend on investment research for an objective
assessment of the facts and due diligence on a company.
However, they were not informed that the single most important
trend buttressing Global Crossing's business model and that of
most all the data traffic models, was hugely overstated and
inflated for years.
The conventional wisdom, repeated by almost everyone for a
few years, was, from 1997 to 2001, that the data traffic growth
was exploding; that it was doubling every 3 to 4 months. But
that is an 800 to 1600 percent annual growth rate through 1996
to 2001.
Unfortunately, it simply wasn't true. The actual growth
rate was closer to 100 to 200 percent. Now, if you can see the
chart that we brought with us, you can see then that roughly 14
companies, predicated on this exploding data thesis, that their
market capitalization increased during that period by over a
trillion dollars. That's the T-world, over a trillion dollars,
and then it fell by over a trillion dollars as the bubble burst
and the hype on data traffic was exposed.
But more troubling than that is that this is not an
isolated incident. It appears that there may be a pattern of
misrepresentation in the telecom-internet sector.
In addition to this trillion-dollar data traffic fib, U.S.
investors lost almost another trillion dollars of shareholder
wealth on the internet dot.com investment thesis, where
everybody thought or everybody was told that the virtual
economy was purported to obsolete the old economy.
Now, second, I think it's pretty obvious from this that we
do not have a well-functioning market. If these kinds of
misrepresentations can go largely unchallenged in the system of
investor protections, the system simply does not produce what
investors need--trustworthy audits and investor research.
Effectively, the Big Five auditors function as a cartel
where it's hard for investors to find a pure audit company that
would best serve investor interest. Effectively, Wall Street
functions as an investment banking cartel, where it is hard for
investors to get objective investment research that's free of
investment banking bias, that may be better at discovering the
problems behind a Global Crossing.
In response, the Precursor Group, along with Argus Research
and Egan-Jones, we're forming the Investor Side Research
Association, and our mission is to increase the investor and
pensioner trust in the U.S. capital market system through the
promotion and use of investment research that is aligned with
investor interests.
We're currently recruiting additional members, and
recruiting organizations that support our mission, and our
website will be www.investorsideresearch.org.
Now, third, we believe we must make our capital market
system much less prone to manipulation. Growth or story stocks
like Global Crossing have become very prone to manipulation,
and, moreover, the options compensation culture that we have
created for company management now, can perversely incent the
management of publicly-traded companies to engage in very high
risk behavior that this hearing is about today.
It's the one-way nature of options that's the problem. It
is that they only have something to gain on the way up, but in
a down market or if there is a problem, they have nothing to
lose on the way down, and, therefore, they can use the balance
sheet as a piggy bank, as a way to goose the stock.
So, like a car, we believe that this system is badly out of
alignment, which can allow it to dangerously veer off the road.
And our capital market system is badly out of alignment,
essentially leaving investors and pensioners potentially
wounded in the ditch. It's skewed toward company interests over
investor interest, and the system is skewed toward equity
markets over credit markets.
In conclusion, I'm testifying today to try and bring the
overall problem into better perspective. We believe there's no
easy solution, however, the Government can improve the
inadequate research investment system to prevent future
trillion-dollar fibs. It can discourage the rational
manipulation of the capital markets by better protecting
investor interest, and it can also undo the irrational
economics that led to the telecom and the internet debacle.
Thank you very much again, Madam Chairwoman, for the
opportunity to testify.
[The prepared statement of Scott C. Cleland can be found on
page 145 in the appendix.]
Chairwoman Kelly. Thank you, Mr. Cleland.
Mr. McNamara.
STATEMENT OF WILL McNAMARA, DIRECTOR, ENERGY INDUSTRY ANALYSIS,
SCIENTECH, INC.
Mr. McNamara. Thank you, Chairwoman Kelly and Members of
the subcommittee. I thank you for the opportunity to appear
before you today. My name is Will McNamara, and I'm Director of
Energy Industry Analysis for Scientech, an energy consulting
firm focused on energy trends, both domestically and
internationally.
The purpose of my testimony today is to discuss the recent
trend of energy companies that may have expanded into the
telecom sector through significant investments, and may have
incurred financial or accounting problems as a result of the
downturn in the telecom sector.
Deregulation of both the energy and the telecom sectors
enabled the convergence between the two. An argument could be
made and was often made that it was a strategic move for energy
companies and electric utilities to expand into telecom, based
on the following conditions:
Most of the companies already had the trenches in which to
lay fiber optic cable. In addition, pushing voice and data
files seemed similar to electricity distribution.
There were great expectations for the growth of dot.com
companies, and energy companies traditionally have low-growth
prospects, and many were looking for other revenue-drivers.
Companies such as Enron Corporation and Williams Companies led
the movement by buying or constructing many miles of fiber
optic capacity. However, the prognosis for energy companies
that expanded into telecom is virtually the same for the pure-
plate telecom companies.
What we are witnessing is that demand was greatly
overestimated; there was a glut of capacity or a perceived glut
of capacity; there were heavy debt loads for telecom units and
diminished opportunities for sales.
To provide you with some specific examples of energy
companies that moved into telecom and suffered the
consequences, I provide the following data: Enron Corporation,
former CEO of Enron, Jeffrey Skilling, had previously
anticipated a $450 billion worldwide market for band-width
trading by 2005, and specifically evaluated the valuation of
Enron's own broad band unit at $35 billion.
However, in the second quarter of 2001, Enron reported a
$102 million loss in its broad band unit, and by the third
quarter of 2001, although the company had stopped separating
telecom earnings, the company also reported that losses had
continued. In addition, Enron acknowledged that its sales
prospects for the telecom sector had dried up.
Williams Company, based on Tulsa, Oklahoma, had spun off
its telecom unit, Williams Communications, but in March of
2002, said it could face a loss due to a stock-backing
arrangement between the two companies. Williams Communications
has about $5.16 billion in debt, currently.
Houston-based Dynergy, Inc., lost $31 million in telecom
during the first 6 months of 2001. The company says it won't
make any money from telecom for a year or more.
Butte, Montana, Montana Power, and Touch America, as it is
now known, is the extreme example of an electric utility
transforming into a pure-plate telecom company. The move has
been met with financial losses, a lawsuit from shareholders,
and community backlash due to rate increases that occurred as a
result of the transformation.
Moreover, expansion into telecom has not been a successful
strategy for energy companies thus far, although some companies
maintain that their telecom investments will prove financially
lucrative in the long term.
The degree of current financial impact on energy companies
that moved into telecom depends on the extent of their
investment. In terms of recommendations, energy companies will
need to manage their own financial risk exposure to the telecom
sector as most are currently doing.
To protect investors and enable analysts to have accurate
financial data about energy companies, the SEC is widely
working to revise financial disclosure and accounting rules,
along with potential legislation supported by this
subcommittee.
I thank you for the opportunity to appear before you. I
have gone into much greater detail in my written testimony, and
I welcome the opportunity to address any of your questions.
Thank you.
[The prepared statement of Will McNamara can be found on
page 160 in the appendix.]
Chairwoman Kelly. I thank you, Mr. McNamara.
I want to get back to the issue of the pro forma financial
statements by the telecommunications companies. Mr. Morrissey,
in your testimony you discuss that there is the new SEC
guidance on pro forma financial statements. I wonder if you'd
be willing to discuss what the SEC is planning to do in the
future to address your concerns about those statements?
Mr. Morrissey. I'd be happy to. First of all, the
Commission is very concerned about the misuse of pro forma
financial information. This concern is translated into
tangible, substantive action on a number of different fronts:
On one front, we recently issued cautionary advice on the
use of pro forma financial information. This cautionary advice
acknowledges that pro forma information, when properly
presented, can provide very useful and meaningful information
to investors to help them understand what's going on.
But it also reminded individuals and preparers that the
anti-fraud provisions of the Federal securities laws apply to a
company issuing pro forma financial information. In addition,
we offered some guidance in order to help avoid misleading
investors in terms of preparation of this pro forma financial
information.
For example, we said that they need to clearly disclose the
basis of the presentation. They need to not omit material
information that is meaningful to investors. They need to do it
in plain English, so people can understand what the deviations
are from GAAP, and, I think, very importantly, companies need
to compare that information to GAAP-reported numbers, so that
investors can be able to understand where the numbers come
from, and have that basis of comparison.
And I think this has all been very well received within the
community, the investment community and investors. Some
information I received is that companies have welcomed this
because if their desire is to present more meaningful
information, to try to explain their results, they also want it
to be perceived as being credible. And this is a way for them
to comply with these guidelines and give it the type of
credibility that, theoretically, they're looking for.
Second, on the other front, the Commission has been very
active in also pursuing violations of the securities laws with
respect to material misrepresentation. We recently brought a
case against Trump Hotels, in which there is evidence to show
that there was misleading financial information, pro forma
financial information being disclosed, and we went after them
and we prosecuted them and we brought that case.
So I think that one of the things that we've seen is that
the new cautionary advice is now out there. It's being digested
by preparers of financial information, and I think we're
already seeing benefits from that now.
Where do we go from here? We need to, I think, wait and see
a little bit to see how the improvement goes.
Chairwoman Kelly. Thank you.
Mr. Cleland.
Mr. Cleland. Yes, could I add a point? The problem with pro
forma is, it tends to be--it can be--not all times--it can be
spin. And when it's put out, it is designed to then go to the
investor relations department, to the public relations
department as their press releases, where they may have had a
GAAP accounting loss, however, on a pro forma basis, they're
showing an improving financial situation.
And they know that by putting the pro forma first, in
advance of the GAAP, that the headline will be, you know,
``Company Beats Expectations,'' or ``Company Showing Improving
Results.'' And by baring the GAAP at the end, the perception of
the public, through the media and through Wall Street, which
loves the pro forma--and they'll talk about the pro forma, pro
forma, pro forma--they don't get an accurate picture of what
the real financial situation is that can be compared to other
companies, because that's what GAAP is all about, is to know,
should I invest in Company A, Company B, or in Bond A or Bond
B?
You need to have a common language, and that's what GAAP
accounting is. And so the trouble is that pro forma contributes
to a perception game that can mislead investors.
Chairwoman Kelly. Mr. Cleland, there are statements on the
pro forma statements that are caveats. It seems to me that Mr.
Morrissey--and, Mr. Morrissey, you may join in answering here--
there may be a need for a stronger statement or for a pro forma
to carry something that says very clearly, up front--Mr. Baker
talked about the Surgeon General's terse warning on every pack
of cigarettes. Well, maybe there should be--my question to you
really is, should there be a terse warning, large type, up
front, on every one of these pro forma statements, so that
everybody gets it, and the perception is, this is--what the
company is saying, this is not an audited statement.
I know that you do require some things, but perhaps we need
to take a look at how that's working. Mr. Cleland, Mr.
Morrissey, would you want to jump in there?
Mr. Cleland. Where I jump in is that the problem isn't
necessarily with one individual piece of the system; it's how
the system behaves together, in the sense that the pro forma,
by itself, might be innocuous, and the way investor relations
may decide to put it out, it may be innocuous by itself. But it
is the system that comes together, where everybody has an
interest to say the good stuff about the stock and not the bad
stuff about the stock.
And so what you get is the perception created. And we all
know that the average investor reads the headlines and reads
the first paragraph, or that's what we take away. We hear the
radio announcement or the TV announcement, which is just the
best stuff, and all of the other stuff just tends to fritter
away. So, 99 percent of the perception is the good stuff, and
you have to go digging for the bad stuff.
Chairwoman Kelly. Mr. Cleland, let me just follow up on
that for 1 minute, and then I'd like to have Mr. Morrissey kind
of jump in on that original question. But, in recent years, the
telecom industry has really just gone right straight up in
terms of markets and so forth.
My interest in asking you this question is, whether or not
there was any kind of a Government action, any kind of a
Government policy that made this an arc rather than a continued
curve up? I'm wondering if this was policy or if this was
something that was driven by the companies themselves?
Mr. Cleland. Well, it's a very good question, and when you
look at the result on that chart, you see that the NASDAQ,
which everybody thought was a bubble and went up, it went up
287 percent. And these data traffic stocks went up 1800
percent, so there is something extraordinary going on in that
segment, and that segment helped drive that NASDAQ up 287
percent.
Now, the bubble that we all talk about was driven largely
by telcom and tech. There was this culture of what I call
rational manipulation of a system. It may not be any one
individual, but they all said the same thing and they all knew
they all benefited from hyping the traffic growth. That was the
essence of it.
But there was also a Government problem in the sense that
the Government created a set of irrational economics. Number
one, you know, the Government commercialized essentially a not-
for-profit peering system, so the entire industry structure of
internet data traffic is not profitable.
On top of that, the Government massively subsidized data at
the expense of voice, billions of dollars every year. And what
it did is, it added more cost to the telecom voice system and
subsidized data, so it created this kind of free-lunch
atmosphere.
Then you had the Telecom Act come in and said that
everybody should build out these new data networks, and the
problem was that this is a capital-intensive business where if
you add risk, all the people that own the debt freak out and
they don't want to necessarily be invested in it. So the
Telecom Act essentially took an industry where capital was
welcome and changed it into an industry where capital wasn't
welcome.
And then the other thing that Government policymakers did
is, they added the internet tax moratorium, which gave the
perception that the internet was special. Essentially, if we
transacted business over the internet, we didn't have to pay a
tax, but if I did it over the phone or if we did it in person,
the exact same purchase would be taxed, and so we created this
unreal tax haven.
So all four of those things, the Government policy tended
to inflate the bubble, and the market looked at the Government
and the Government was the main cheerleader. So this is a dual
problem.
Chairwoman Kelly. Would either Mr. Morrissey or Mr.
McNamara like to get in here? Now, Mr. Morrissey, I said I'd
come back to you, so let's start with you.
Mr. Morrissey. I guess I'd like to respond to your original
suggestion and say I think that it has a lot of merit. It's a
good idea to have a statement that may say something to the
effect that these statements do not represent full financial
information in accordance with Generally Accepted Accounting
Principles and should be read in conjunction with financial
statements prepared in accordance with Generally Accepted
Accounting Principles. I think that idea has a lot of merit,
and I appreciate the suggestion.
One of the tensions you have, though, in reporting
information, is that, we desire to have material information
reach the market as quickly as possible. And one of the issues
you have is that you may have some financial information that's
of interest to investors, but not yet have prepared your
financial information, financial statements in their entirety.
So the question is, do you withhold that information until
the financial statements are ready, or do you go and do them at
different times? And that's just one of the tension issues that
needs to be addressed as we try to work through these different
types of issues with respect to pro forma earnings releases.
Chairwoman Kelly. Mr. McNamara.
Mr. McNamara. I would add that we spoke earlier about
methodologies that companies use for pro forma accounting, and
how often they vary from company to company and may not be
disclosed to the public. So along with the disclaimer
recommendation, which I think has a lot of merit, I think that
the methodologies that companies use for their pro forma
accounting projections should also be disclosed in the line of
greater transparency. Certainly that is something that the SEC
appears to be moving toward.
Chairwoman Kelly. Do you want to respond to that, Mr.
Morrissey? Are you moving toward that?
Mr. Morrissey. As I said, with respect to pro forma, we had
this recent initiative. It is something that we're watching
very closely. We're hoping to see a significant shift in the
market reaction to the issuance of pro forma information, in
conjunction with the guidelines that we have established. And
we have to watch and see the progress that's being made.
Chairwoman Kelly. I would like now to just kind of go to
swaps, the swaps issue. In July of 1999, the FASB mandated that
the companies could not recognize all revenue earned from the
new swaps in the current year. That was a change.
And they required then that the contract be amortized over
its life. How did that affect the telecommunications companies'
financial projections? And this is for all of you.
Mr. Morrissey. Do you want me to go first? Basically what
was occurring within the industry and with an interpretation of
the accounting literature was that it was progressing,
evolving, and becoming more refined. And the statement that I
believe you're referring to added clarification as to what type
of lease these IRUs should be accounted under.
And what that statement said is that basically they have to
be accounted for under the literature that applies to real
estate transactions. Associated with real estate transactions
are a whole series of criteria that you have to meet in order
to recognize the revenue up front on one of these types of IRU
transactions.
And my understanding is that when that statement came out,
it effectively presented a significant hurdle that was very
difficult to overcome for many of these types of transactions
that had been recorded in the past with up-front revenue
recognition. So my understanding is that, from an industry
perspective, it had a significant impact, and that it reduced
companies' ability to recognize the revenue up front.
Chairwoman Kelly. Thank you.
Mr. Cleland.
Mr. Cleland. You know, the problem here is that you have a
set of irrational economics in the industry. You have this
extraordinary hype and expectations that were created. When you
have, you know, 1800 percent increase in the market
capitalization of 14 companies, you've created an unreal
circumstance.
Then you have a culture which has a lot riding on keeping
that stock up, because the options culture is one way; they
want it to have momentum and to go up. And so what it does, it
created enormous pressure, and investors wanted that money
created. So, investors, the investment bankers, the auditors,
the lawyers, everybody, had an interest in making sure that
this bubble didn't get burst.
And so in that context of an unreal world and overextended
expectations, I think people looked to the accountants and
said, you know, how can we, within the rules, make this look
the best possible? And what I think is important is, lots of
times people can address the letter of the law, but not address
the spirit of the law, and they'll say, well, I did this right;
I did this right; and I did this right; there isn't anything
wrong. When doing the three of those things together, you add
them up, and it is a clear, obvious misrepresentation of the
circumstance.
So we need to step back and look at these things in context
to see whether or not there was rational manipulation or
misrepresentation going on.
Chairwoman Kelly. Mr. McNamara.
Mr. McNamara. I would just add that I think Mr. Cleland's
assessment is accurate. There is a parallel between the
telecom's use of IRUs and the energy industry's use of the
mark-to-market technique, although they're vastly different and
involve different businesses and different commodities.
What essentially would be the same is that the pressure is
to inflate current earnings on the basis of transactions that
may not materialize until down the line. And so as changes
regarding rules governing pro forma accounting emerge, it would
be helpful to look at both industries.
Chairwoman Kelly. Mr. McNamara, you have delivered some
really interesting testimony today. Any subsequent figures and
facts that you can bring to flesh that out, the subcommittee
would appreciate, because I think you've had some very
interesting testimony.
I'm going to ask you just a couple of very straightforward
questions, and basically I'm concerned that companies over-
valued earnings. And I'm concerned that investors really didn't
get a clear picture here. And it seems to me your testimony is
saying that, and all I want to know is, if my perception is a
correct one? And you can just answer that yes or no, and you
can just start down the line and give me a quick answer.
Mr. McNamara. I would say that the answer is yes, but I
would say that both pro forma and real-time financial earnings
are important, and why not offer both to investors and
analysts, and they can choose which one they want to follow.
Chairwoman Kelly. Mr. Cleland.
Mr. Cleland. I think you can have as quick a disclosure and
as complete a disclosure, and then you want to have a system
that has people that are looking out for investors, either
auditors that are pure audit companies or investor-side
research, because we have a systemic problem here where the
system is no longer working for investors. That's how Enron,
Global Crossing, the bubble, happened. It is that the system
got out of alignment and then it always wanted to go up.
And the thing is, markets don't always go up; they have ups
and downs; they have corrections and whatever, but this system
is out of alignment, and it will continue to veer off into the
ditch until you figure out a way to let the free market and
competitive use of ideas flourish. Because if somebody would
have stood up and said there's a problem with Enron early on,
and because they're paid by the system to find those things, or
if, you know, if somebody was paid to find those things with
Global Crossing and the telecom debacle, you would have
identified those things. But the system didn't pay for capital
preservation; it paid for stock promotion. It's a problem.
Chairwoman Kelly. Mr. Morrissey.
Mr. Morrissey. I guess the way I would answer the question
is, at the Securities and Exchange Commission, we fully expect
companies to comply with the Federal securities laws and comply
with Generally Accepted Accounting Principles, and to reflect
transactions based upon their substance.
And that to the extent that mere compliance with the
technicalities of the literature does not present a fair
picture of what's happening, they have an obligation to
disclose what really is going on in management's discussion and
analysis, so that investors have a clear understanding of
really what is happening.
If that is not occurring, they're going to have a serious
problem with my fellow colleagues in the Division of
Enforcement, and we expect that from all investors.
Chairwoman Kelly. All right, thank you. I have a few more
questions, but I'm going to submit those in writing.
This has been a relatively long hearing. The Chair notes
that some Members will have, in all probability, additional
questions for this panel, and they will submit them in writing,
so without objection, the hearing record is going to remain
open for 30 days for the Members to submit written questions to
these witnesses and to place their responses in the record.
We thank you very much for your patience in waiting through
the first panel, and for your subsequent testimony here. This
second panel is excused with our great appreciation for your
time.
I want to briefly thank the Members who are here and other
Members of this subcommittee who have shown a great deal of
interest in this topic, and I also want to thank especially the
staff that we have, my staff, and the staff on the Financial
Services Committee. They have been terrific in making this
hearing possible, and with that, this hearing is adjourned.
[Whereupon, at 12:40 p.m., the hearing was adjourned.]
A P P E N D I X
March 21, 2002
[GRAPHIC] [TIFF OMITTED] T8601.001
[GRAPHIC] [TIFF OMITTED] T8601.002
[GRAPHIC] [TIFF OMITTED] T8601.003
[GRAPHIC] [TIFF OMITTED] T8601.004
[GRAPHIC] [TIFF OMITTED] T8601.005
[GRAPHIC] [TIFF OMITTED] T8601.006
[GRAPHIC] [TIFF OMITTED] T8601.007
[GRAPHIC] [TIFF OMITTED] T8601.008
[GRAPHIC] [TIFF OMITTED] T8601.009
[GRAPHIC] [TIFF OMITTED] T8601.010
[GRAPHIC] [TIFF OMITTED] T8601.011
[GRAPHIC] [TIFF OMITTED] T8601.012
[GRAPHIC] [TIFF OMITTED] T8601.013
[GRAPHIC] [TIFF OMITTED] T8601.014
[GRAPHIC] [TIFF OMITTED] T8601.015
[GRAPHIC] [TIFF OMITTED] T8601.016
[GRAPHIC] [TIFF OMITTED] T8601.017
[GRAPHIC] [TIFF OMITTED] T8601.018
[GRAPHIC] [TIFF OMITTED] T8601.019
[GRAPHIC] [TIFF OMITTED] T8601.020
[GRAPHIC] [TIFF OMITTED] T8601.021
[GRAPHIC] [TIFF OMITTED] T8601.022
[GRAPHIC] [TIFF OMITTED] T8601.023
[GRAPHIC] [TIFF OMITTED] T8601.024
[GRAPHIC] [TIFF OMITTED] T8601.025
[GRAPHIC] [TIFF OMITTED] T8601.026
[GRAPHIC] [TIFF OMITTED] T8601.027
[GRAPHIC] [TIFF OMITTED] T8601.028
[GRAPHIC] [TIFF OMITTED] T8601.029
[GRAPHIC] [TIFF OMITTED] T8601.030
[GRAPHIC] [TIFF OMITTED] T8601.031
[GRAPHIC] [TIFF OMITTED] T8601.032
[GRAPHIC] [TIFF OMITTED] T8601.033
[GRAPHIC] [TIFF OMITTED] T8601.034
[GRAPHIC] [TIFF OMITTED] T8601.035
[GRAPHIC] [TIFF OMITTED] T8601.036
[GRAPHIC] [TIFF OMITTED] T8601.037
[GRAPHIC] [TIFF OMITTED] T8601.038
[GRAPHIC] [TIFF OMITTED] T8601.039
[GRAPHIC] [TIFF OMITTED] T8601.040
[GRAPHIC] [TIFF OMITTED] T8601.041
[GRAPHIC] [TIFF OMITTED] T8601.042
[GRAPHIC] [TIFF OMITTED] T8601.043
[GRAPHIC] [TIFF OMITTED] T8601.044
[GRAPHIC] [TIFF OMITTED] T8601.045
[GRAPHIC] [TIFF OMITTED] T8601.046
[GRAPHIC] [TIFF OMITTED] T8601.047
[GRAPHIC] [TIFF OMITTED] T8601.048
[GRAPHIC] [TIFF OMITTED] T8601.049
[GRAPHIC] [TIFF OMITTED] T8601.050
[GRAPHIC] [TIFF OMITTED] T8601.051
[GRAPHIC] [TIFF OMITTED] T8601.052
[GRAPHIC] [TIFF OMITTED] T8601.053
[GRAPHIC] [TIFF OMITTED] T8601.054
[GRAPHIC] [TIFF OMITTED] T8601.055
[GRAPHIC] [TIFF OMITTED] T8601.056
[GRAPHIC] [TIFF OMITTED] T8601.057
[GRAPHIC] [TIFF OMITTED] T8601.058
[GRAPHIC] [TIFF OMITTED] T8601.059
[GRAPHIC] [TIFF OMITTED] T8601.060
[GRAPHIC] [TIFF OMITTED] T8601.061
[GRAPHIC] [TIFF OMITTED] T8601.062
[GRAPHIC] [TIFF OMITTED] T8601.063
[GRAPHIC] [TIFF OMITTED] T8601.064
[GRAPHIC] [TIFF OMITTED] T8601.065
[GRAPHIC] [TIFF OMITTED] T8601.066
[GRAPHIC] [TIFF OMITTED] T8601.067
[GRAPHIC] [TIFF OMITTED] T8601.068
[GRAPHIC] [TIFF OMITTED] T8601.069
[GRAPHIC] [TIFF OMITTED] T8601.070
[GRAPHIC] [TIFF OMITTED] T8601.071
[GRAPHIC] [TIFF OMITTED] T8601.072
[GRAPHIC] [TIFF OMITTED] T8601.073
[GRAPHIC] [TIFF OMITTED] T8601.074
[GRAPHIC] [TIFF OMITTED] T8601.075
[GRAPHIC] [TIFF OMITTED] T8601.076
[GRAPHIC] [TIFF OMITTED] T8601.077
[GRAPHIC] [TIFF OMITTED] T8601.078
[GRAPHIC] [TIFF OMITTED] T8601.079
[GRAPHIC] [TIFF OMITTED] T8601.080
[GRAPHIC] [TIFF OMITTED] T8601.081
[GRAPHIC] [TIFF OMITTED] T8601.082
[GRAPHIC] [TIFF OMITTED] T8601.083
[GRAPHIC] [TIFF OMITTED] T8601.084
[GRAPHIC] [TIFF OMITTED] T8601.085
[GRAPHIC] [TIFF OMITTED] T8601.086
[GRAPHIC] [TIFF OMITTED] T8601.087
[GRAPHIC] [TIFF OMITTED] T8601.088
[GRAPHIC] [TIFF OMITTED] T8601.089
[GRAPHIC] [TIFF OMITTED] T8601.090
[GRAPHIC] [TIFF OMITTED] T8601.091
[GRAPHIC] [TIFF OMITTED] T8601.092
[GRAPHIC] [TIFF OMITTED] T8601.093
[GRAPHIC] [TIFF OMITTED] T8601.094
[GRAPHIC] [TIFF OMITTED] T8601.095
[GRAPHIC] [TIFF OMITTED] T8601.096
[GRAPHIC] [TIFF OMITTED] T8601.097
[GRAPHIC] [TIFF OMITTED] T8601.098
[GRAPHIC] [TIFF OMITTED] T8601.099
[GRAPHIC] [TIFF OMITTED] T8601.100
[GRAPHIC] [TIFF OMITTED] T8601.101
[GRAPHIC] [TIFF OMITTED] T8601.102
[GRAPHIC] [TIFF OMITTED] T8601.103
[GRAPHIC] [TIFF OMITTED] T8601.104
[GRAPHIC] [TIFF OMITTED] T8601.105
[GRAPHIC] [TIFF OMITTED] T8601.106
[GRAPHIC] [TIFF OMITTED] T8601.107
[GRAPHIC] [TIFF OMITTED] T8601.108
[GRAPHIC] [TIFF OMITTED] T8601.109
[GRAPHIC] [TIFF OMITTED] T8601.110
[GRAPHIC] [TIFF OMITTED] T8601.111
[GRAPHIC] [TIFF OMITTED] T8601.112
[GRAPHIC] [TIFF OMITTED] T8601.113
[GRAPHIC] [TIFF OMITTED] T8601.114
[GRAPHIC] [TIFF OMITTED] T8601.115
[GRAPHIC] [TIFF OMITTED] T8601.116
[GRAPHIC] [TIFF OMITTED] T8601.117
[GRAPHIC] [TIFF OMITTED] T8601.118
[GRAPHIC] [TIFF OMITTED] T8601.119
[GRAPHIC] [TIFF OMITTED] T8601.120
[GRAPHIC] [TIFF OMITTED] T8601.121
[GRAPHIC] [TIFF OMITTED] T8601.122
[GRAPHIC] [TIFF OMITTED] T8601.123
[GRAPHIC] [TIFF OMITTED] T8601.124
[GRAPHIC] [TIFF OMITTED] T8601.125
[GRAPHIC] [TIFF OMITTED] T8601.126
[GRAPHIC] [TIFF OMITTED] T8601.127
[GRAPHIC] [TIFF OMITTED] T8601.128
[GRAPHIC] [TIFF OMITTED] T8601.129
[GRAPHIC] [TIFF OMITTED] T8601.130
[GRAPHIC] [TIFF OMITTED] T8601.131
[GRAPHIC] [TIFF OMITTED] T8601.132
[GRAPHIC] [TIFF OMITTED] T8601.133
[GRAPHIC] [TIFF OMITTED] T8601.134
[GRAPHIC] [TIFF OMITTED] T8601.135
[GRAPHIC] [TIFF OMITTED] T8601.136
[GRAPHIC] [TIFF OMITTED] T8601.137
[GRAPHIC] [TIFF OMITTED] T8601.138