Qwest Communications International Inc. paid US$44 billion for US West Inc. in 1999, but the weakness of the telecommunication market and a new accounting rule add up to Qwest taking a write-down of $20 billion to $30 billion for the value of the assets acquired, the company said.
In a conference call recorded Monday, Qwest executives also said they expect the U.S. 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.
Qwest should have more clearly disclosed results under generally accepted accounting principles (GAAP) as well as pro forma accounting for the fourth quarter of 2000, a spokeswoman said in the call. The SEC was concerned that investors weren't explicitly shown how the pro forma results reflecting the company's performance after the U.S. West merger could be related to its GAAP results, she said.
GAAP results are standardized earnings reports filed quarterly by companies 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 information or to overemphasize positive parts of their businesses.
Qwest's press release announcing fourth-quarter results for 2000 did not contain GAAP results, only the pro forma 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 chief executive officer, during the conference call. GAAP numbers wouldn't have made sense to analysts and investors looking to compare the company's performance to 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 expects the SEC to fail in a court challenge because Qwest did nothing illegal with its press releases, he said.
The SEC is also conducting an informal review of the Denver local and long-distance carrier's accounting practices in conjunction with its investigation of Global Crossing Holdings Ltd. Bankrupt Global Crossing was accused by a former finance executive of improper swaps of fiber-optic capacity with other carriers to boost revenues. Qwest denies wrongdoing and is complying with the SEC investigation, the company said.
The write-down of goodwill comes from 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. FASB is an independent, private-sector board responsible for setting financial accounting and reporting standards governing financial report preparation.
Qwest expects the charge to come during the second quarter of 2002 and the charge does not affect current operations, Nacchio said.
"When Qwest merged with U.S. 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 telecommunication companies, he said.
The company is also mulling over a write-down of its European joint telecommunication venture KPNQwest NV. KPNQwest has lost almost half of its stock value in the last three months, and is jointly owned by Qwest and Dutch carrier Koninklijke KPN NV.