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Qwest rewrites accounts, fights for survival

Another telco scandal

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ComputerWire: IT Industry Intelligence

Qwest Communications International Inc is now fighting for survival after admitting that it incorrectly recognized optical-capacity revenue amounting to $1.16bn in the years 1999, 2000 and 2001. Other secrets could still be lurking in its accounts, and the new management team at the debt-laden company faces a battle to keep the support of the company's bankers in the weeks ahead.

While a restatement by Qwest had been long expected after the SEC announced in April a formal inquiry into network swaps by the company, the revelations come at a time when the Denver, Colorado-based company is being hammered by the downturn in the telecoms sector.

Qwest withdrew guidance it had given in April that revenue this year would be in the range of $18bn to $18.4bn and it expected free cash flow to be break even or slightly positive. It said it wanted to reassess the impact of continuing weakness in the telecoms sector, competitive pressures, and the regional economies in the 14 states where it offers local services.

Chairman Dick Notebaert said he doesn't feel confident about making any predictions about recovery. Such a bleak industry background makes turning around a company mired in scandal and facing both a criminal investigation and SEC probe an almost impossible task. Qwest is in the process of selling its QwestDex directories business and is hopeful this will yield around $10bn to cut its $25bn debt burden.

Yet QwestDex's accounts may also give a flattering view of the operation's financing. Auditor KPMG is analysing accounting policies at the operation, and in particular looking at changes in the production schedules and lives of some of the directories.

Qwest's accounts first came under question with the collapse of Global Crossing Ltd, with the suspicion that the companies had engaged in "hollow swaps" of bandwidth to inflate revenue.

The SEC also looked at a deal that Qwest conducted with Bedminster, New Jersey-based company KMC Telecom Holdings Inc under which Qwest sold equipment worth $450m to the company and then bought internet services from it.

Qwest now says it expects to restate its financial statements for three transactions related to the sale of equipment where revenue and profit were incorrectly recognized upfront.

Qwest's shares dropped 20% to $1.20 on the news, valuing the company at just $1.9bn. The company's recent history uncannily mirrors that of WorldCom and the errors in the accounts came to light after former chief executive Joe Nacchio was ousted in June. Given the state of the market, it will be hard put to meet covenants agreed with its bankers and the shadow of Chapter 11 now hangs over Qwest.

© ComputerWire

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