Responds to allegations by a former employee regarding the company’s accounting practices

February 4, 2002

5 Min Read

MADISON, N.J. -- Global Crossing today issued more details on previously reported allegations by a former employee regarding the company’s accounting practices.In August 2001, Global Crossing received a letter from Roy Olofson, who was at that time a vice president–finance of the company, raising concerns about certain accounting and financial reporting matters of Global Crossing and its subsidiary Asia Global Crossing. Mr. Olofson claimed that it was improper for the company to have reported pro forma values for cash revenue and adjusted EBITDA (earnings before interest, taxes, depreciation andamortization) because the numbers are not measures of cash receipts or earnings and because the amounts were allegedly inflated by including amounts for which cash was not received or where there had been non-monetary exchanges of capacity.After a review of the letter and consultation with outside counsel, the company determined that the financial and reporting topics raised in the letter had been reviewed by its internal finance and accounting personnel and by Arthur Andersen in connection with the audit of the company's annual financial statements and its review of the company’s interim financial statements. The company also determined that there had been appropriate disclosure in the company’s press releases and filings with the U.S. Securities and Exchange Commission (SEC) describing how the pro forma numbers were prepared and making it clear that this information should not be considered as an alternative to any measure of performance defined under GAAP (generally accepted accounting principles). The company also determined that there were reasons to question the motives of Mr. Olofson. Accordingly, no further action was taken in response to Mr. Olofson’s allegations.As disclosed in the company’s filings with the SEC, the company’s management has used recurring adjusted EBITDA to monitor compliance with the financial covenants contained in its debt instruments and to measure the performance and liquidity of its business segments. The company’s press releases and filings with the SEC have also disclosed the fact that the company has purchased significant amounts of assets from carriers who were also customers of the company. The disclosures have presented the amounts of cash received by the company and included in cash revenue and adjusted EBITDA, as well as the amounts of the cash commitments to those customers.Shortly after Mr. Olofson wrote to the company, and notwithstanding the fact that he was still an employee, the company received a letter from an attorney alleging that Mr. Olofson had been “constructively terminated” from his employment and therefore would no longer be reporting to work. Furthermore, the employee and his counsel demanded, as a condition to dropping his wrongful termination claim, an up-front multi-million dollar payment and a minimum seven figure annual cash compensation package for a five year period. After a review of this claim and consultation with outside counsel, the company concluded that this claim was without merit and refused to agree to this demand.Subsequently, Mr. Olofson’s attorney provided the company with a draft complaint which elaborated on the allegations expressed in the employee's August 2001 letter and added an allegation that the company had delayed the announcement of a downward revision of its guidance for 2001 earnings because of recent stock transactions entered into by senior executives of the company. After a review of these additional allegations and consultation with outside counsel, the company concluded that the allegations were without merit.The company continued to refuse to agree to the employee's multi-million dollar demand and, over the following months, the employee's attorney gradually reduced his settlement demand to an amount representing less than one-tenth of the original demand. The company terminated the employee's employment on November 30, 2001 in connection with a substantial reduction in its workforce.On January 18, 2002, the company received a letter from a different attorney for Mr. Olofson, attaching a revised draft of the initial complaint and containing renewed threats to commence an action for wrongful termination against the company and certain of its officers and directors unless a multi-million dollar payment was made by February 1, 2002. The company again refused to agree to this demand.Although the company had determined that the allegations made by Mr. Olofson were without merit and that the issues raised in his letter had been properly addressed in the company’s news releases and its filings with the SEC, the company’s January 28, 2002 bankruptcy filing and recent events not involving the company have created a heightened sensitivity to any alleged accounting improprieties. Accordingly, on January 28, 2002, the company first disclosed to Arthur Andersen the existence of Mr. Olofson’s letter and on January 29, 2002 provided a copy of the letter to Arthur Andersen. On January 29, 2002, the company also first disclosed the letter’s existence to the current members of the company’s audit committee and on January 30, 2002 provided copies to these individuals.The company has provided a copy of Mr. Olofson’s letter to the SEC and has received an inquiry from the SEC for the voluntary production of certain additional information regarding the issues raised in Mr. Olofson’s letter. The company is cooperating with the SEC in providing this information.Although the company continues to believe that Mr. Olofson’s motivations are questionable and continues to believe that its accounting and reporting are entirely appropriate, at the request of the company’s audit committee and Arthur Andersen, it has decided to form a special committee of independent directors, including members of its audit committee, to conduct a further review of the allegations made in the August 2001 letter and related draft complaints. The special committee will retain independent counsel and a firm of independent accountants other than Arthur Andersen to review the matter.Global Crossing Ltd.

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