Global Crossing bankruptcy clouding future of spinoff. (Corporate Focus).

IN declaring bankruptcy, Global Crossing Ltd. left an orphan -- Asia Global Crossing Ltd., operator of Global Crossing's undersea fiber-optic system to Asia.

Asia Global Crossing is 59 percent owned by Global Crossing, but it wasn't part of the bankruptcy filing. So what happens to Asia Global Crossing?

It's hard to say. If it can avoid bankruptcy, it will remain in control of whichever entity or entities wind up owning Global Crossing. But it's hard to imagine that Asia Global Crossing will retain its current financial structure while its parent reorganizes.

Asia Global Crossing was spun off from Global Crossing in November 2000 in a $480 million initial public offering. Like Global Crossing, Asia Global Crossing is headquartered in Bermuda, and both are run from Beverly Hills. It shares some of its parent's financial characteristics, and their businesses and leadership are intertwined -- although some steps were taken recently to reduce board overlap.

Gary Winnick is chairman of both companies, and John Legere, Global Crossing's chief executive, came over on a lend-lease from Asia Global Crossing in October, when the companies were planning to merge. Legere ran both companies before shifting to Global Crossing in January. The initial bidders for Global Crossing, Hutchison Whampoa Ltd. and Singapore Technologies Group, are already joint-venture partners of Asia Global Crossing.

Like Global Crossing, Asia Global Crossing has a lot of debt, about $1.1 billion worth. But the interest rates are low, and it doesn't have to make payments on a substantial piece of it for several years. (In the third quarter ended Sept. 30, interest expense totaled $12.8 million.)

Asia Global Crossing hasn't reported its financial results for the fourth quarter ended Dec. 31, but spokeswoman Madelyn Smith said it ended the year with more than $500 million in cash.

However, Asia Global Crossing does have problems.

Like Global Crossing, Asia Global Crossing has used indefeasible rights (IRUs) to sell capacity on its network. The IRUs -- which Asia Global Crossing officials insist are proper, and even required by generally accepted accounting principles -- obligate Asia Global Crossing to deliver capacity on its network to the customer at a future date. The company receives the cash up front, but it may use some of it to buy capacity from other carriers or partners to complete the customer's circuit.

Under GAAP, the payments received from IRUs can't be recognized as revenue until they're earned -- until the customer uses the service.

Asia Global Crossing, like Global Crossing, emphasizes pro forma presentations that include these payments in "proportionate cash revenue" that is much higher than GAAP allows -- $128.9 million in the third quarter, for instance, vs. $33.6 million in GAAP revenue.

Asia Global Crossing's accountant (Andersen), Wall Street analysts and lenders have, in general, signed off on this approach.

Meanwhile, the capacity purchases on other networks are treated as capital investments, rather than operating expenses. The net result is, to the layman's eye, operating results that look better than they ought to, and a balance sheet that has difficult-to-understand assets and liabilities. Reconciliation of those assets and liabilities comes later, when capacity is drawn down by the customer.

"From a GAAP point of view, when we sell something, that's revenue -- fair and square," said senior finance manager Brian Lee. "When we buy something, the rules vary. None of these rules are created by us."

In the first nine months of 2001, Asia Global Crossing's deferred revenues, which represent future obligations to customers who already have paid their bills, rose by $542 million, to $831 million. Meanwhile, its investments m property and equipment totaled $683 million. These include capacity purchases, which become assets on the balance sheet because Asia Global Crossing is extending its network, Lee said.

Any way you look at it, Asia Global Crossing needs more cash.

At Sept. 30, it was still committed to pay $200 million to complete construction of its Asian network. It tried to draw down $400 million that Global Crossing had agreed to lend it, but Global Crossing refused.

Now, Asia Global Crossing is likely in breach of one of the covenants governing the credit facility for Pacific Crossing1 -- its link from the United States to Japan. Such a failure, the company said, would force Asia Global Crossing to pay to its lenders all of the excess cash flow it generates, under the pro forma formulas in the credit agreement.

Asia Global Crossing has no immediate plans to file for bankruptcy protection, Smith said, although it did hire Lazard Freres to evaluate financing and restructuring options. "We can't rule out any of the options," she said.

[Graph Omitted]

Asia Global Crossing Ltd.

Stock Prices

Jan. 31, 2001  $11.18
Jan 31, 2002    $0.71

Note: Table made from line graph
YEAR (Dec.31)                     2000   1999

Revenue (millions)              $153.6     $0
Operating Expenses (millions)    243.1    1.2
Operating Loss (millions)       (89.4)  (1.2)
Net Income (Loss) (millions)   (146.9)   13.4
Earnings (Loss) Per Share      ($0.29)  $0.03

SUMMARY

Business: Pan-Asian telecommunications carrier

Headquarters: Hamilton, Bermuda

CEO: John (Jack) Scanlon

Market Cap: $413.2 million

Total Liabilities: $2.5 billion

Long-Term Debt: $1.1 billion

Dividend Yield: N/A (*)

P/E Ratio: N/A

(*) Asia Global Crossing Ltd does not pay dividends

RELATED ARTICLE: Winnick Under Fire

GLOBAL Crossing Ltd. Chairman Gary Winnick has endeared himself to plenty of powerful people, many of whom have been enriched by his business or philanthropic largesse.

But several prominent LA-area financiers are less flattering -- though none will speak on the record.

They point to RB Furniture, Ortho Mattress and Republic Health Corp. as examples of companies in which Winnick was heavily involved with and that ultimately were forced into financial restructurings.

While conceding that's true, Winnick spokesman Mike Sitrick said the Beverly Hills financier was a creditor of Republic and "ended his involvement (in RB and Ortho) a year or so prior to either company's (bankruptcy) filing." Furthermore, Sitrick said, Winnick personally made no money from his involvement in either of those companies.

That certainly hasn't been the case with Global Crossing. Though Winnick's 8 percent equity stake is expected to be wiped out in the restructuring, he sold $730 million worth of Global Crossing stock before it tanked.

That and related topics were the subject of heated exchanges in online chat rooms last week, where Winnick and Global Crossing Chief Executive John Legere were being castigated. Addresses and descriptions of the executives' private residences were being posted, with chat room participants advocating retribution.

"Someone in L.A. go by and throw a $50000 egg at (Winnick's $90 million Bel-Air estate) for me," read one posting from Paris.

Winnick spokesman Sitrick responded, "Every businessman has people who don't like them -- have people who don't like me."

Most of Winnick's detractors will speak only under the cloak of anonymity, for fear of being excluded from future deals. But Allan Browne, nameplate partner at the Beverly Hills law firm Browne & Woods, is happy to criticize Winnick in the open.

Browne represents Douglas Shooker, who is suing Winnick and other defendants for $1 billion. Shooker alleges that, as a former partner in Winnick's investment firm, Pacific Capital Group, he was promised 15 percent of any profits generated by the entity that ultimately became Global Crossing.

"We are going to trial in Los Angeles Superior Court in July," Browne said. "I can hardly wait to get Mr. Winnick on The stand."

Winnick's attorney in the case, Marshall Grossman, described Shooker as a "professional litigant who has filed numerous cases alleging oral agreements and has been singularly unsuccessful in the past."

He added, "We fully expect to prevail."

Michael Stremfel