April 2, 2002
(IDG News Service)
Although Qwest Communications International Inc. paid $44 billion for US West Inc. in 1999, the weakness of the telecommunications market and a new accounting rule mean Qwest is taking a write-down of $20 billion to $30 billion for the value of the assets acquired, the company said.
In a conference call yesterday, Qwest executives also said they expect the Securities and Exchange Commission (SEC) to recommend administrative or legal action against the company regarding the reporting of pro forma financial results for the fourth quarter of 2000.
Denver-based Qwest should have more clearly disclosed results under generally accepted accounting principles (GAAP) as well as pro forma accounting for that quarter, a spokeswoman said during the call. The SEC is concerned that investors weren't explicitly shown how the pro forma results reflecting the company's performance after the US West merger related to its GAAP results, she said.
GAAP results are standardized earnings reports that companies file quarterly with the SEC, while pro forma results usually reflect the structural changes of a company after merging with another company or selling or closing part of its business. The SEC has accused companies of hiding poor performance by using pro forma accounting to hide bad news or to overemphasize positive parts of their businesses.
Qwest's press release announcing fourth-quarter results for 2000 contained the pro forma results, but not the GAAP results.
There was no SEC rule or proposed rule at the time requiring GAAP earnings be stated in a press release, said Joe Nacchio, Qwest's chairman and CEO, during the conference call. GAAP numbers wouldn't have made sense to analysts and investors looking to compare the company's performance with its performance in the previous year, he said.
The SEC could hold a hearing or take action in federal court, Nacchio said. Fines are a possibility, but Nacchio said he expects the SEC to fail in a court challenge because Qwest did nothing illegal with its press releases.
The SEC is also conducting an informal review of the local and long-distance carrier's accounting practices in conjunction with its investigation of bankrupt Global Crossing Holdings Ltd. in Hamilton, Bermuda (see story). Global Crossing was accused by a former finance executive of improper swaps of fiber-optic capacity with other carriers to boost revenue. Qwest has denied any wrongdoing and said it's complying with the SEC investigation.
Qwest's write-down of goodwill is the result of new accounting rules passed last year by the Financial Accounting Standards Board (FASB) requiring companies to periodically review the value of their mergers and to take write-downs immediately. Goodwill reflects the difference between what a company paid for an acquisition and its value as reflected on the company's books. The Norwalk, Conn.-based FASB is an independent, private-sector board responsible for setting financial accounting and reporting standards governing financial report preparation.
The charge, which is expected to come during the second quarter, won't affect current operations, Nacchio said.
"When Qwest merged with US West, we agreed to terms at the time that reflected the fair value of the transaction," Nacchio said. No one in 1999 could have predicted the tough economy and overcapacity problems that damaged the long-distance data transportation market and investor confidence in telecommunications firms, he said.
The company is also mulling a write-down of its European joint telecommunications venture KPNQwest NV. Netherlands-based KPNQwest has lost almost half of its stock value in the past three months and is jointly owned by Qwest and The Hague-based carrier Royal KPN NV.
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