Qwest might be next to restate results

CEO reportedly seeks to restore confidence

July 13, 2002|By NEW YORK TIMES NEWS SERVICE

Qwest Communications International could become the latest telecommunications company to review its published financial results. A new team of top executives is considering a restatement that would erase about $1 billion of revenue from last year's results, people briefed on the matter said yesterday.

Richard C. Notebaert, who replaced Joseph Nacchio as chief executive of Qwest last month, is said to be considering the restatement, these people said, as a way to restore investor confidence in the company's finances.

Tyler Gronbach, a spokesman for Qwest, declined to comment on the matter.

For last year, Qwest reported revenue of $19.7 billion. A restatement affecting $1 billion in revenue would increase the $4 billion loss Qwest reported for last year by around $600 million, according to Susan B. Kalla, an analyst at Friedman, Billings, Ramsey.

Kalla and other analysts said it made sense that Notebaert and his new team, some of whom have been on the job for less than a week, would want to restate last year's financial results. In December, the company told analysts that $1 billion in transactions involving fiber-optic routes that were swapped with other telecommunications companies had been booked as revenue.

It later repeated the figure in regulatory filings. In April, the company said the Securities and Exchange Commission was investigating the accounting methods used in those transactions.

Such swap deals were common in the communications industry until companies became aware last year that an overwhelming glut of fiber-optic capacity had resulted from the rapid buildup of rival, often overlapping communications networks in the late 1990s.

With the glut painfully apparent, prices for capacity plunged, and carriers resorted to swapping capacity on their networks in an effort to convince investors that revenue was climbing despite downward pressure on prices. In addition to Qwest, the SEC is also investigating swap transactions at Global Crossing, which filed for bankruptcy protection in late January.

Jeffrey Halpern, an analyst at Sanford C. Bernstein, said he assumed that the company would have discussed any possible restatement with the SEC.

"If Notebaert is doing this, he has talked with the SEC and will remove the things they object to most strenuously in the financials," Halpern said. A restatement "starts to clean up some of the questions that have been plaguing the company," Halpern said.

Kalla called the plan by Qwest's new executive team "very clever."

"All savvy managers do this: Do whatever they can to lower the baseline expectations and then grow from there," Kalla said.

Even if Qwest satisfies the SEC, the company faces challenges from the Justice Department.

This week, the company was informed by the U.S. attorney's office in Denver that it was the subject of a criminal investigation. Qwest said it had not been informed of the scope of that investigation.

Word that the company was considering a restatement was received after the stock market closed yesterday. On the New York Stock Exchange, Qwest shares rose 6 cents to $1.93 a share. The shares have lost more than 86 percent of their value this year.

The restatement would be made as Qwest goes through substantial internal changes. In recent days, Notebaert replaced the chief financial officer, Robin R. Szeliga, with Oren G. Shaffer, who was an executive at the telephone company Ameritech during Notebaert's term as chairman at that company.

As part of the shake-up, executives overseeing Qwest's consumer and Asia businesses have left the company in recent days.

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