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The Honolulu Advertiser
Posted on: Monday, July 29, 2002

Qwest to restate finances

By Jennifer Hamilton
Associated Press

DENVER — Qwest Communications International Inc. said yesterday it expects to restate its financial results for 1999 to 2001 because of accounting errors related to optical capacity and equipment sales, and telephone services.

"Most of these things are going to deal with timing," said Chief Financial Officer Oren Shaffer in an interview last night. "Should this have been in this period or in another period?"

Company officials declined to estimate the effect of the revenue adjustment, or when a possible restatement of revenues would be completed.

"We would rather it happen sooner than later, and we have a great sense of urgency," said Chief Executive Dick Notebaert. "But we do want to do it with diligence. We do imagine it will take months and not days."

Qwest, whose accounting practices are under investigation by federal regulators and prosecutors, also said it would miss the Aug. 14 deadline set by the Securities and Exchange Commission for the nation's biggest companies to certify the accuracy of their financial statements.

The SEC is investigating Qwest's fiber-optic capacity swaps with Global Crossing, Enron and others in 2000 and 2001.

At issue is whether the swaps were done for legitimate business reasons, priced at fair market values and properly accounted for.

Qwest bought telephonic capacity on another company's system and booked it as a capital expense, which is recorded slowly over several years, while selling the same amount of capacity to the other firm and booking that immediately as revenue.

The expected restatement comes at a time when the federal government is pledging a thorough crackdown on corporate misdeeds after a series of scandals at major companies that have eroded investor confidence.

Qwest hired KPMG LLP to examine its books in June, after dismissing Arthur Andersen LLP.

WorldCom Inc. filed for the largest Chapter 11 bankruptcy in history July 21. Global Crossing Ltd. and its top executives were charged with deceptive accounting, with founder and chairman Gary Winnick cashing out $734 million in stock before the company crashed.

The Justice Department is investigating Qwest, and the General Services Administration is reviewing government contracts with the Denver-based telecommunications company.

"It is our intent to fully cooperate with every government agency and be totally transparent and responsive," Notebaert said.

The company reported yesterday that accounting policies were incorrectly applied to optical capacity sales in 1999, 2000 and 2001, totaling about $1.1 billion, or 18 percent of the optical capacity transactions during that time.

Qwest said the errors caused it to book approximately $874 million as revenue for 2000 and 2001. The company also said it understated its expenses in 2001 by $113 million, but overstated them by $15 million in 2000.

The expected restatement of the company's financial reports will also include adjustments for three transactions related to equipment sales that totaled $283 million in 2000 and 2001.

The company has determined that revenue and profit in those transactions were incorrectly recognized up front and should be deferred.

Additionally, Qwest improperly recorded cost entries for services it purchased from third-party telecommunications providers in 2000 and 2001.

Qwest overstated costs by $15 million in 2000, and by $113 million in 2001.

Once part of the Bell System under AT&T Corp., Qwest is the local phone company for 14 states, from Minnesota west to Washington and southwest to Arizona and New Mexico.

In the last year it has faced a sinking stock price and a downgrade of its credit rating to junk status.

Longtime CEO Joseph P. Nacchio resigned last month.