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Optical/IP

WorldCom Goes Boom

Just when you thought things couldn't get any worse in the telecommunications market, they got much worse.

In disclosing possibly the largest corporate accounting fraud in history, WorldCom Inc. (Nasdaq: WCOM) said Tuesday night it will restate all of its financial earnings for 2001 and the first quarter of 2002 (see WorldCom: 'Oops!').

The accounting errors stem from "transfers" of expenses to capital costs that were not taken in accordance with generally accepted accounting principles (GAAP), says the company. The amount of these transfers was $3.055 billion for 2001 and $797 million for first-quarter 2002, according to the company.

According to a company release, "it was determined that certain transfers from line cost expenses to capital accounts during this period were not made in accordance with generally accepted accounting principles (GAAP)."

Scott Sullivan, the chief financial officer and secretary of WorldCom, has been fired. The company has also accepted the resignation of David Myers as senior vice president and comptroller.

Accounting firm Arthur Andersen LLP was WorldCom's auditor until May of this year. In today's statement, WorldCom said that it recently brought in KPMG to undertake a comprehensive audit of its financial statements for 2001 and 2002.

The internal investigation showed that without the transfers, the company’s reported EBITDA would be reduced to $6.339 billion for 2001 and $1.368 billion for first-quarter 2002, and the company would have reported a net loss for 2001 and for the first quarter of 2002, the company statement says. Given the scale of the restatement, WorldCom’s problems may even exceed Enron's woes.

The news comes as a culmination of WorldCom's many troubles, which have been building over the months and have included credit problems, mounting losses, shareholder lawsuits, and an SEC investigation into its accounting practices (see WorldCom Accounting: What's Up?, WorldCom's Woes Mount, Is It Too Late to Rescue WorldCom? , WorldCom's Junk Status Fuels Fears, and Stockholders Sue WorldCom).

In a statement today, the SEC announced that it is stepping up its investigation of the company (see SEC Comments on WorldCom). Even the President of the United States jumped into the brouhaha. Speaking to reporters at the Group of Eight summit in Canada today, President Bush indicated that there would be a federal investigation into WorldCom's accounting practices.

"The good news is, most corporate leaders in America are good, honest, open people who care deeply about shareholders and employees, and our economy is strong,” the President said. “But when we find egregious practices such as the one revealed today, we'll go after them."

The accounting discoveries cast major doubt on WorldCom's survival prospects. Although it currently has enough cash to support operations, WorldCom’s $32 billion debt load had already subjected the company to speculation that it might soon be forced to file for bankruptcy. And after yesterday’s revelation, observers say that the new financing the company was seeking from several banks will certainly not materialize, and that there is no longer any way around a bankruptcy filing.

"My strong feeling is that WorldCom is hosed,” says Bart Schachter, a general partner at Blueprint Ventures. “It’s going to go into bankruptcy and force a consolidation in the industry.”

Many of WorldCom's potential accounting and financial problems have been detailed by Light Reading's own paid research product, Optical Oracle (see LR Analyzes Carrier Financial Crisis).

"Of the 'big three' telcos, potential insolvency issues are most prevalent at WorldCom," wrote the Optical Oracle in its March newsletter, Carrier Crisis Report: "Management and sell-side analysts completely dismiss this notion, citing WorldCom’s strong balance sheet and access to capital. There are, however, some very disturbing items that could lead to trouble in coming months. If one believes that the market is the best discounting vehicle for future performance, WorldCom’s outlook is bleak."

In the post-Enron (and Global Crossing) world, the news rocked telecommunications and financial markets, sending the indexes spiraling downward. In the first half-hour of trading, the Nasdaq Composite Index dropped 32.58 (2.29%) to 1,391.41; and the Light Reading Index dropped 4.21 (3.75%) to 108.14, an all-time low since the Index was launched in 2000.

Many of the large service providers have already started feeling the sting of what observers call guilt by association. Qwest Communications International Inc. (NYSE: Q), which has been plagued by many of the same problems that WorldCom has been facing (and which also until recently was audited by Arthur Andersen), saw its stock price plummet by nearly 50 percent in trading today.

Fears that WorldCom will soon be filing for bankruptcy have also affected the stock prices of several equipment vendors that claim the company as a customer. Juniper Networks Inc. (Nasdaq: JNPR), which gets more than 10 percent of its revenues from the carrier, has seen its stock price plummet nearly 22 percent. And although Nortel Networks Corp. (NYSE/Toronto: NT) claims to have no material exposure to WorldCom, the scandal probably played a role in its stock price dropping to a year-low of $1.33 a share.

Like Nortel, Lucent Technologies Inc. (NYSE: LU) claims to have minimal exposure to WorldCom, but other vendors, including Alcatel SA (NYSE: ALA; Paris: CGEP:PA), Ciena Corp. (Nasdaq: CIEN), Fujitsu Ltd. (KLS: FUJI.KL), Redback Networks Inc. (Nasdaq: RBAK), and Riverstone Networks Inc. (Nasdaq: RSTN), will almost certainly be hit hard if the carrier files for bankruptcy.

With a scandal of this proportion, the guilt by association has, however, not only affected the telecom sector. There are already indications that WorldCom’s demise will prolong the crunch in the overall economy. “The ripple effects are severe,” says Frank Dzubeck, president and CEO of Communications Network Architects, saying that he spent the night in interviews with foreign news agencies trying to convince them that fraudulent behavior is not endemic to the American business system. “The nuclear winter keeps going.”

This morning, trading in WorldCom stock was halted after dipping below $1 for the first time on Monday. It last traded at $0.83.

The company said its board has retained William R. McLucas, of the law firm of Wilmer, Cutler & Pickering, and former Chief of the Enforcement Division of the SEC, to conduct an independent investigation.

"Our senior management team is shocked by these discoveries," said John Sidgmore, WorldCom CEO, in today’s statement.

The company said it expects to further cut capital expenditures for 2002 and that it is continuing its downsizing effort, reducing the workforce by 17,000, beginning this Friday. This is a continuation of cost-cutting efforts that had been previously announced (see WorldCom Strips Down).

— R. Scott Raynovich, US Editor, and Eugénie Larson, Reporter, Light Reading
http://www.lightreading.com Check out Light Reading's July Research Poll on this topic to find out what others think about who's to blame for Worldcom's woes, and whether there are other skeletons in its closet.



Editor's Note: Light Reading is not affiliated with Oracle Corporation.
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willywilson 12/4/2012 | 10:11:11 PM
re: WorldCom Goes Boom Do you have to comment on every single article, every single response, every single tidbit ... enought already .... go away!

---------

See that "ignore author" switch?
literight 12/4/2012 | 10:11:06 PM
re: WorldCom Goes Boom "1. A $100 million fine to Merrill Lynch is not a slap on the wrist according to any metric"

Ahem-- in 1947 GM was found guilty of destorying the public transportation system in Greater Los Angeles. There was a plan to build a public transport system from suburbs and surroundings to main workareas in the industrialized parts of the city for a few hundreds of millions.

GM thwarted this plan by subversively breaking down the transport systems- economically and politically, and were found guilty by the US Courts/Grand Jury.

GM were asked to pay less than $1000 fine and they laughed all the way to court.

Guess how much the new "LA underground" is costing taxpayers and the Government- in the tune of billions to construct the same system.

To draw parallels, the likes of the RBOCs benefit today but repurcussions a few decades down the road are even more horrific to think about...
pro zack 12/4/2012 | 10:11:04 PM
re: WorldCom Goes Boom "Cisco: Behind the hype" (Business Week Cover Story, Jan. 21) quotes Abraham J. Briloff, professor emeritus at Baruch College, as saying that Cisco Systems Inc. "suppressed a grand total of $18.2 billion in costs" when it accounted for certain acquisitions by the pooling-of-interests method.

IsnGÇÖt it a bit unfair to single out WorldCom when others are also doing it GÇô using the same GÇ£principleGÇ¥?
willywilson 12/4/2012 | 10:11:03 PM
re: WorldCom Goes Boom IsnGÇÖt it a bit unfair to single out WorldCom when others are also doing it GÇô using the same GÇ£principleGÇ¥?

---------

First off, WorldCom's fraud was not related to acqusition costs. It might help if you actually went out and learned something before expressing an opinion on it. Secondly, whether it's "fair" to catch one criminal while another one goes free is an interesting philosophical debate but it's not an argument on behalf of the one who was caught.
LaserZelig 12/4/2012 | 10:11:00 PM
re: WorldCom Goes Boom WillyWilson.....
re $100 million not being significant to Merrill Lynch....

1. $100 million is about 17.5% of Merrill's 2001 net income. Seems significant to me.
2. Merrill trades at about an 18 PE.... so $100 million translates into $1.8 billion in market cap!
3. $1.8 billion is 5% of Merrill's entire market cap

Pretty soon we will be talking about real money.
willywilson 12/4/2012 | 10:10:57 PM
re: WorldCom Goes Boom 1. $100 million is about 17.5% of Merrill's 2001 net income. Seems significant to me.
2. Merrill trades at about an 18 PE.... so $100 million translates into $1.8 billion in market cap!
3. $1.8 billion is 5% of Merrill's entire market cap

Pretty soon we will be talking about real money.

=========

Look, the shareholders will pay it. The executives couldn't care less. I wonder if their fine is a deductible business expense.
Twistall 12/4/2012 | 10:10:55 PM
re: WorldCom Goes Boom "Look, Bernie, I gave you $10 to get wood so you could build a better lemonade stand, and you and your buddies took it and spent it down at the candy store. You promised me you'd pay me back $15 because you'd be making so much more with the fancy signage. Looks like you owe me a couple lawn mowings."

"Aw, c'mon dad! I told everyone we were goin' fishin' today!"

So, how 'bout it, Bernie? I'm sure all those stockholders would forgive you if you came by and mowed their lawns, raked a few leaves, or washed a couple windows. Remember, you promised.
literight 12/4/2012 | 10:10:47 PM
re: WorldCom Goes Boom "Secondly, whether it's "fair" to catch one criminal while another one goes free is an interesting philosophical debate but it's not an argument on behalf of the one who was caught."

Tell YOU what-- sysco's basic tenement is to change the rules to look better in any situation. Using a bunch of shylocks they have been able to get away with the WORST accounting practices in the history of hi-tech as we know it for shareholders, unsuspecting customers and to their own employees.

Right now, the strategy at Tasman is to sit on it, and make it worse for everyone so they hope to emerge as the winner. But this cold winter will drive into them the cold dagger that history is made on intelligent substance, not marketing. And substance they do not have nor the brains to sustain.

They are burning more than can be sustained.
willywilson 12/4/2012 | 10:10:43 PM
re: WorldCom Goes Boom sysco's basic tenement is to ...

---------

- Sysco is a food service distributor
- A tenement is a bad apartment
- This is a bulletin board where telecom issues are discussed
literight 12/4/2012 | 10:10:36 PM
re: WorldCom Goes Boom "- Sysco is a food service distributor
- A tenement is a bad apartment
- This is a bulletin board where telecom issues are discussed"

That's right so what are they doing in Telecom distributing food to bad apartments?
<<   <   Page 15 / 15
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