EXHIBIT 99.1
[COMPANY LOGO OMITTED]
Qwest Communications Provides Current Status Of Ongoing
Analysis Of Its Accounting Policies And Practices
Company Withdraws Guidance For Full-Year 2002; Will Report Results For Second
Quarter 2002 And Guidance For 2002 On August 8
DENVER, July 28, 2002 - Qwest Communications International Inc. (NYSE: Q) today
announced the current status of the ongoing analysis of its accounting policies
and practices, including its policies and practices with respect to revenue
recognition in connection with sales of optical capacity assets (IRUs). Earlier
this year the company and its board of directors began an analysis of, among
other things, revenue recognition and accounting treatment for optical capacity
sales (particularly sales to customers from which the company agreed to purchase
optical capacity assets), the sale of equipment by the company to certain
customers and changes in the production schedules and lives of some of its
directories.
Based on the analysis to date, the company has determined that it has in some
cases applied its accounting policies incorrectly with respect to certain
optical capacity asset sale transactions in 1999, 2000 and 2001. Certain
adjustments may be required to correct the period in which the revenue was
recognized with respect to some transactions, and other adjustments may be
required to reverse the recognition of revenue with respect to other
transactions. In addition, further adjustments are required to account for
certain sales of equipment in 2000 and 2001 that the company had previously
determined had been recorded in error. In the fourth quarter of 2001, the
company reduced revenue and adjusted EBITDA related to these equipment
transactions. The company has also determined that in a limited number of
transactions it did not properly account for certain expenses incurred for
services from telecommunications providers in 2000 and 2001.
The company is continuing to analyze its accounting policies and practices in
consultation with its new auditor, KPMG LLP. When the company completes its
analyses, it expects to restate its financial statements for prior periods. The
company will attempt to conclude these analyses promptly. However, as a result
of the change in the company's auditors and the ongoing investigation by the
Securities and Exchange Commission, the company cannot state with certainty when
a restatement will be completed. In the meanwhile, the company will seek to
comply with its reporting requirements under the securities laws and the rules
of the New York Stock Exchange in light of the constraints on completing the
restatement.
The company also announced it is withdrawing its financial guidance for the full
year 2002 as management reassesses the impact of continuing weakness in the
telecommunications sector and the regional economy in the company's 14-state
local service area, as well as competitive pressure. The company announced that
it will report its results for the second quarter of 2002 and revised guidance
for the full year on Thursday, August 8, 2002.
Optical Capacity Sales
The company analyzed its application of the revenue recognition policies
approved by its previous auditor, Arthur Andersen LLP, with respect to optical
capacity sales and concluded that those policies were incorrectly applied to
optical capacity asset transactions in 1999, 2000 and 2001 which totaled
approximately $1.16 billion in recognized revenue, and which represented
approximately 18 percent of the optical capacity asset transactions in this
period. Of this amount, revenue of $591 million was recognized by the company
after June 30, 2000, the effective date of the merger of Qwest and U S WEST Inc.
(the company that was deemed the accounting acquirer and whose financial
statements were carried forward as those of the combined company). $571 million
was recognized by Qwest before June 30, 2000 and therefore not included in the
company's historical financial statements. KPMG has not participated in this
initial analysis of these transactions.
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The $591 million of revenue recognized with respect to the optical capacity
asset sales identified in the company's initial analysis represented 1.4 percent
and 1.8 percent of total revenue in 2000 and 2001, respectively, and 24.5
percent and 34.5 percent, respectively, of total revenue from optical capacity
asset sales in those years. The gross margin for those transactions represented
1.7 percent and 2.4 percent of total adjusted EBITDA in 2000 and 2001,
respectively, and 20.2 percent and 35.2 percent of total gross margin for
optical capacity asset sales in those years.
The company, in consultation with KPMG, is now analyzing the application of the
company's accounting policies to all of the company's optical capacity sales
transactions. The company, in consultation with KPMG, is also analyzing the
appropriateness of the accounting policies themselves. The company believes
that, whether as a result of these continuing analyses or the ongoing
investigation by the SEC, the company may conclude that the company recognized
revenue inappropriately with respect to the transactions identified in the
initial analysis and other optical capacity sales and that the amount of the
additional revenue adjustments may be significant. For example, if the company
were to determine that certain of the policies as applied to all optical
capacity sales were inappropriate, the company may be required to restate its
financial statements with respect to optical capacity sales affected by such
policies, which could be all optical capacity sales in the relevant periods.
The company has previously disclosed in its annual report on form 10-K that the
amounts of revenue and gross margin attributable to all optical capacity sales
in 2000 and 2001 were as follows: (1) revenues of $468 million, or 2.8 percent
of total revenue, in 2000 and $1.013 billion, or 5.1 percent of total revenue in
2001 and (2) gross margin of $232 million, which is 3.4 percent of adjusted
EBITDA, in 2000 and $486 million, which is 6.6 percent of adjusted EBITDA, in
2001. On an after-tax basis, the gross margin of all optical capacity sales was
approximately $140 million and $290 million in 2000 and 2001, respectively. Any
adjustment of all revenue for optical capacity sales may have a material affect
on operating income, net income or earnings per share. Depending upon the
ultimate determination of the appropriate accounting treatment, any decreases in
these amounts in the periods in which they have been recorded would be partially
offset by the amounts that would be recognized over the lives of the agreements
if the optical capacity asset sales were instead treated as operating leases or
services contracts. The company has previously disclosed that it does not plan
on any sales of optical capacity in 2002 that would be treated as sales type
leases and require recognition of revenue up front.
The company expects to restate its financial statements for prior periods when
it completes its analyses of its accounting policies and practices for optical
capacity sales. At this time, the company is unable to estimate the effect of
the revenue adjustments in any period, since the determination of the amounts of
revenue that may be reversed altogether or deferred to subsequent periods will
depend upon which accounting policies, if any, are determined to be
inappropriate.
Equipment Sales
The expected restatement of the company's financial statements will also include
adjustments for three transactions relating to the sale by the company of
equipment to other parties. Two transactions involved related agreements to
provide services to or buy services from the company. The variances that were
identified were the result of the determination that the revenue and/or profit
in these transactions were incorrectly recognized upfront and should be
deferred. The total amount of revenue and adjusted EBITDA of all these equipment
sales in 2000 and 2001 is as follows: (1) revenues of $100 million or 0.6
percent of total revenue, in 2000 and $183 million, or 0.9 percent of total
revenue, in 2001 and (2) adjusted EBITDA of $80 million, which is 1.2 percent of
adjusted EBITDA, in 2000 and $82 million, which is 1.1 percent of adjusted
EBITDA, in 2001. The company has already reduced revenues and adjusted EBITDA by
$73 million and $124 million, respectively, in the fourth quarter of 2001 to
adjust for these transactions. The proposed further adjustments either defer the
revenue and gross margin originally recognized up front or adjust the previous
correction in the appropriate quarter. The company is continuing to discuss the
accounting for these transactions with KPMG.
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QwestDex
The company, in consultation with KPMG, is also analyzing certain accounting
policies and practices with respect to its QwestDex directories business,
including, among other things, the changes in the production schedules and lives
of some of its QwestDex directories. If the company were to determine that any
of these policies and practices were inappropriate, the company believes a
restatement would include adjustments as to the timing of the revenue recognized
under such polices and these adjustments may be significant.
Telecommunications Services
During 2000 and 2001 the company received services from third party
telecommunications providers and paid such providers but did not record the cost
entry for such services properly. The company has preliminarily estimated that
2000 costs were overstated by $15 million, which is 0.2 percent of adjusted
EBITDA and 2001 costs were understated by approximately $113 million, which is
1.5 percent of adjusted EBITDA.
CEO and CFO Statements
An order issued by the SEC in June 2002 requires the chief executive officer and
chief financial officer of the company, and 944 other publicly traded companies,
to state or assert (or to explain why they are unable to state) in a filing with
the SEC by August 14, 2002 that, to the best of their knowledge (based upon a
review of the respective company's annual report on Form 10-K for the most
recent fiscal year and all reports on Form 10-Q, all reports on Form 8-K and all
definitive proxy materials of the company filed with the SEC after the Form 10-K
and except as corrected or supplemented in a subsequent covered report), the
covered reports (1) did not contain an untrue statement of material fact as of
the end of the period covered by the respective report (or in the case of a
report on Form 8-K or definitive proxy materials, as of the date on which it was
filed with the SEC) and (2) did not omit to state a material fact necessary to
make the statements in the respective report, in light of the circumstances
under which they were made, not misleading as of the end of the period covered
by the report (or in the case of a report on Form 8-K or definitive proxy
materials, as of the date on which it was filed). The company's chief executive
officer and chief financial officer joined the company in June 2002 and July
2002, respectively.
The company said that these officers currently intend to explain in the sworn
written statements, which they intend to submit to the SEC by August 14, 2002,
that they will be unable to make the statement specified in the SEC order
because of the expected restatement of the company's financial statements, the
ongoing analyses by the company and KPMG of the accounting policies and
practices of the company and the ongoing investigation by the SEC, among other
reasons.
Review of Second Quarter Financial Statements
KPMG has informed the company that due to the identification of the adjustments
that the company believes it is required to make in its financial statements,
the ongoing analyses by the company and KPMG of the accounting policies and
practices of the company and the inability of the company's chief executive
officer and the chief financial officer to make the assertion referred to above,
KPMG is not able to complete all the procedures necessary to finalize its review
of the financial statements to be included in the second quarter 2002 report on
Form 10-Q required by the regulations under the federal securities laws.
Although the company does not anticipate that the failure to obtain this review
will have a material adverse effect on the company, there can be no assurances
in this regard.
Update on SFAS 142 Impairment Charge
As stated in the company's Form 10-Q for the period ended March 31, 2002, the
company expected an impairment of the carrying amount of its goodwill upon
adoption of the transition provisions of FASB Statement No. 142. That impairment
was estimated to be in the range of $20 to $30 billion. The methodology used to
calculate this range is being evaluated by our new auditors KPMG. Prior to
filing its Form 10-Q for the period ended June 30, 2002, the company will either
have to determine whether any changes to the methodology will require a change
in the previously disclosed estimate or the company will have to update its
disclosure of the estimated impairment charge.
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Definitions: For purposes of this release, "adjusted earnings before interest,
taxes, depreciation and amortization" ("adjusted EBITDA") does not include
non-recurring and non-operating items, which for the relevant periods includes
restructuring changes, merger-related and other charges, asset write-offs and
impairments, gains/losses on the sale of investments and fixed assets,
gains/losses on sales of rural exchanges, and changes in the market values of
investments. The company uses adjusted EBITDA as a measure of its operating
performance. The company believes that adjusted EBITDA is important to investors
in the company's debt and equity securities and to analysts that cover these
securities because it is one measure of the income generated that is available
to service debt. Adjusted EBITDA does not represent cash flow for the periods
presented and should not be considered as an alternative to cash flows as a
source of liquidity. Moreover, the items excluded from the calculation of
adjusted EBITDA are significant components in understanding and assessing the
company's financial performance. The company's definition of adjusted EBITDA is
not necessarily comparable with EBITDA (earnings before interests, taxes,
depreciation and amortization) or adjusted EBITDA as used by other companies or
with similar concepts used in the company's debt instruments. Adjusted EBITDA is
reported as a complement to the financial results in accordance with generally
accepted accounting principles and is presented to provide investors additional
information concerning the company's operations.
About Qwest
Qwest Communications International Inc. (NYSE: Q) is a leader in reliable,
scalable and secure broadband data, voice and image communications for
businesses and consumers. The Qwest Macro Capacity(R) Fiber Network, designed
with the newest optical networking equipment for speed and efficiency, spans
more than 175,000 miles globally. For more information, please visit the Qwest
Web site at www.qwest.com.
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This release may contain projections and other forward-looking statements that
involve assumptions, risks and uncertainties. Readers are cautioned not to place
undue reliance on these statements, which speak only as of the date of this
release. These statements may differ materially from actual future events or
results. Readers are referred to the documents filed by Qwest Communications
International Inc. (together with its affiliates, "Qwest", "we" or "us") with
the Securities and Exchange Commission (the "SEC"), specifically the most recent
reports which identify important risk factors that could cause actual results to
differ from those contained in the forward-looking statements, including but not
limited to: the duration and extent of the current economic downturn in our
14-state local service area, including its effect on our customers and
suppliers; any adverse outcome of the SEC's current inquiries into Qwest's
accounting policies, practices and procedures; adverse results of increased
review and scrutiny by regulatory authorities, media and others (including any
internal analyses) of financial reporting issues and practices or otherwise;
rapid and significant changes in technology and markets; failure to achieve the
projected synergies and financial results expected to result from the
acquisition of U S WEST, and difficulties in combining the operations of the
combined company; our future ability to provide interLATA services within our
14-state local service area; potential fluctuations in quarterly results;
volatility of Qwest's stock price; intense competition in the markets in which
we compete; changes in demand for our products and services; adverse economic
conditions in the markets served by us or by companies in which we have
substantial investments; dependence on new product development and acceleration
of the deployment of advanced new services, such as broadband data, wireless and
video services, which could require substantial expenditure of financial and
other resources in excess of contemplated levels; higher than anticipated
employee levels, capital expenditures and operating expenses; adverse changes in
the regulatory or legislative environment affecting our business; adverse
developments in commercial disputes or legal proceedings; and changes in the
outcome of future events from the assumed outcome included by Qwest in its
significant accounting policies. The information contained in this release is a
statement of Qwest's present intention, belief or expectation and is based upon,
among other things, the existing regulatory environment, industry conditions,
market conditions and prices, the economy in general and Qwest's assumptions.
Qwest may change its intention, belief or expectation, at any time and without
notice, based upon any changes in such factors, in Qwest's assumptions or
otherwise. The cautionary statements contained or referred to in this release
should be considered in connection with any subsequent written or oral forward
looking statements that Qwest or persons acting on its behalf may issue. This
release may include analysts' estimates and other information prepared by third
parties for which Qwest assumes no responsibility. Qwest undertakes no
obligation to review or confirm analysts' expectations or estimates or to
release publicly any revisions to any forward-looking statements to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
The Qwest logo is a registered trademark of, and CyberCenter is a service mark
of, Qwest Communications International Inc. in the U.S. and certain other
countries.
Contact Information:
Corporate Media Contact Investor Contact
Tyler Gronbach Stephanie Comfort
(303) 992-2155 800-567-7296
tyler.gronbach@qwest.com IR@qwest.com
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