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Qwest's Accounting Mistakes Could Go Deeper

Aug 20, 2002 | USA Today

Ailing phone company Qwest Communications reiterated Monday that it doesn't know how deep its accounting mistakes go, or when it'll be able to restate earnings for 2000 and 2001, and possibly this year.

The company, in a Securities and Exchange Commission filing, said it had no estimate for expenses that might have been improperly accounted for. Last month, it said it overstated expenses for purchases from telecom firms by $15 million in 2000 and understated similar costs by $113 million in 2001.

The change ''suggests there may be more under the surface,'' says telecom analyst Tom Friedberg.

Qwest, facing federal probes of its accounting, also said it could violate loan terms next month unless it renegotiates them. Such a violation could prompt lenders to demand payment of the $3.4 billion Qwest owes them, which could force it to seek bankruptcy protection. ''It is theoretically possible, but highly, highly unlikely,'' says Tavis McCourt of Morgan Keegan & Co. ''Typically these covenant issues get resolved. Qwest has a real business behind it, and the lenders understand that.''

Qwest is talking to lenders, including Bank of America, to ease the loan restrictions. Qwest's debt, at more than $26 billion, can't be more than 4.25 times greater than its cash flow as of Sept. 30. With its long-distance unit struggling and its local phone unit in 14 states slowing, Qwest won't meet that requirement, it says. The company also is looking to sell all or part of its QwestDex yellow-pages unit to pay down debt.

Qwest was unable to certify its financial statements for the SEC because of a review by audit firm KPMG that is expected to lead to the restatement.

Qwest shares fell 4 cents in after-hours trading Monday. In regular trading, they rose 16% to $2.24.

The filing also says Qwest improperly booked revenue for various transactions, including:

QwestDex. Qwest says it incorrectly recognized revenue from QwestDex dating back to 1999, when it began booking revenue from phone books upfront instead of over their shelf life.

Network sales. For the six months ended June 30, 2001, Qwest got $857 million from capacity sales on its fiber-optic network. For all of 2001, such sales totaled $1 billion. Such sales are controversial because some companies, including Qwest, were booking revenue upfront that should have been spread over the life of the deals.

Qwest said July 28 that it identified $1.2 billion in improper capacity sales back to 1999. After revisions are made, that could affect its financial results for this year and future years. Qwest also says the questionable sales could grow. It no longer uses such accounting.

Equipment sales. Qwest expects earnings restatements from deals with three companies regarding sales of telecom equipment. The biggest involved the sale of $148 million of equipment to KMC Telecom Holdings last year. Qwest has said that it should not have recognized revenue from these types of deals upfront.

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