SEC asks to see Qwest data

Accounting practices being questioned

Tuesday, March 12, 2002

By BARNABY J. FEDER
THE NEW YORK TIMES

Qwest Communications International said yesterday that the Securities and Exchange Commission had asked for documents related to its accounting practices, including Qwest's treatment of long-term contracts in which it sold capacity on its high-speed voice and data networks.

The SEC request also covered Qwest's reporting of deals in which it sold equipment to companies from which it bought Internet services as well as information about QwestDex, the company's huge telephone directories business.

Critics, some of whom have sued Qwest, have contended that accounting practices such as those covered in the inquiry had illegally inflated the company's reported revenue and earnings in 2000 and 2001. Qwest has said it believes its accounting was proper.

Qwest, the phone and data services company based in Denver, is Washington state's largest local phone service.

Qwest said the SEC told it that the informal inquiry was not an indication that the agency believed Qwest had violated any laws and should not be seen as an adverse reflection on any company or security.

Investors clearly felt otherwise. At the very minimum, many feared, the inquiry could restrict Qwest's options and increase the cost of shoring up its troubled finances.

Qwest's stock plummeted as low as $8.80 when trading began, before recovering somewhat to finish the day down 25 cents, to $9.46.

"A company under SEC investigation is a risky company," said Patrick Comack, who follows the company for Guzman & Co. in Miami.

The SEC has been investigating accounting standards at telecommunications companies for several weeks, but Qwest said that before Friday, its only contact with the agency was a request for records of the company's transactions with Global Crossing as part of the SEC's investigation of that bankrupt carrier.

Joseph Nacchio, Qwest's chairman and chief executive, tried to calm fears yesterday by saying the SEC inquiry was unexpected but not surprising in light of the SEC's investigation of Qwest's transactions with bankrupt Global Crossing and intense media scrutiny of the industry and its accounting practice.

Nacchio said Qwest had discussed the inquiry over the weekend with its commercial bankers, investment banks that would be the initial buyers of any bonds it sells and with credit-rating agencies. Qwest said that it came away from those talks confident that it would be able to complete the $1.5 billion bond issue it announced Friday by tomorrow as scheduled.

Nacchio and Robin Szeliga, Qwest's chief financial officer, also said the inquiry is not expected to affect the timing or major terms of new credit arrangements Qwest has been negotiating with its banks since last month when it surprised them by drawing down a $4 billion credit line.

Nacchio conceded that the uncertainty about the SEC's intentions, which could drag on for months, might make it harder for Qwest to raise funds by issuing short-term bonds that convert into stock. Qwest has been considering raising $1.25 billion through such equity-linked securities.

All of the items covered in the SEC letter to Qwest have been previously reported, although those relating to QwestDex had not been widely noted. A report in the January issue of Red Herring, a venture capital magazine, charged that Qwest had misleadingly reported a strong performance in the last quarter of 2000 by pulling forward into December the publication of Yellow Pages directories that had been scheduled for 2001.

Qwest said yesterday that the QwestDex concerns related to less than $40 million of its $18.95 billion in reported revenue in 2000 and a similar sliver of 2001's revenue of $19.74 billion. The inquiries about its sales of equipment to companies from which it bought Internet services -- companies that Qwest identified as KMC and Calpoint -- affect less than $20 million in revenue in 2000 and $178 million in 2001, Qwest said.

Far larger sums are involved in Qwest's accounting for sales of capacity on its fiber-optic networks. Unlike many rivals, Qwest recorded the entire value of such sales in the year they were made even though payments would be stretched out over years.

Seattle P-I

-- Anonymous, March 12, 2002