ride the light [GRAPHIC OMITTED] NEWS
Qwest
QWEST COMMUNICATIONS UPDATES STATUS OF ANALYSIS OF OPTICAL CAPACITY ASSET
TRANSACTION ACCOUNTING POLICIES AND PROCEDURES
COMPANY ANNOUNCES RESTATEMENT OF APPROXIMATELY $950 MILLION IN
REVENUE FROM OPTICAL CAPACITY ASSET TRANSACTIONS
DENVER, SEPTEMBER 22, 2002 -- Qwest Communications International Inc. (NYSE: Q)
today announced further restatement of its 2000 and 2001 financial statements as
a result of its ongoing analysis of the complex accounting policies and
practices relating to revenue recognition and accounting treatment for exchanges
and sales of optical capacity assets (IRUs). In restating its 2000 and 2001
financial statements with respect to these matters to be in conformance with
generally accepted accounting principles, the company will reverse $950 million
in revenues and related costs related to exchanges of optical capacity assets
previously recognized. Some of the transactions included in this restatement
were the subject of the company's July 28, 2002, announcement of determinations
reached as of that date.
The company historically accounted for contemporaneous exchanges of optical
capacity assets based on accounting policies approved by its previous auditor
Arthur Andersen LLP. After analyzing its prior policies and practices, including
the underlying accounting records, and in consultation with its new auditors,
KPMG LLP, the company has concluded its policies and practices do not support
the accounting treatment to allow for recognition of revenue from these exchange
transactions. In conducting its analysis, the company considered discussions it
had in late July 2002 with the staff of the Office of the Chief Accountant of
the Securities and Exchange Commission.
The company also historically accounted for its sales of optical capacity assets
for cash to third parties based on accounting policies approved by Arthur
Andersen. Qwest has preliminarily concluded in consultation with KPMG that its
accounting practices intended to follow these policies do not support the
historical accounting treatment with respect to these optical capacity asset
sales. The accounting for each of these transactions is being reviewed to assess
whether and to what extent a restatement is required. Consequently, in
connection with the company's restatement of its financial statements for 2000
and 2001 the approximately $531 million in revenue previously recognized from
these sales of optical capacity assets for cash may require adjustment; however,
the magnitude of the adjustments and the periods affected have not yet been
determined.
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This announcement relates to optical capacity asset transactions recorded in
periods following the merger of Qwest and U S WEST, Inc. on June 30, 2000.
Approximately $1.48 billion in total revenue was recognized in these periods
from all IRU transactions and is made up of the $950 million from exchanges of
optical capacity assets and the $531 million from sales of optical capacity
assets for cash.
Out of the $1.48 billion in total revenue, $1.016 billion and $464 million were
recognized in 2001 and 2000, respectively. These represented 5.2% and 2.8 % of
total reported revenue in 2001 and 2000, respectively. The company recognized
$490 million and $231 million of gross margin from optical capacity asset
transactions in 2001 and 2000, respectively, which represented 6.7 % and 3.3 %
of total reported adjusted EBITDA in 2001 and 2000, respectively. Of the total
amounts recognized from all optical capacity asset transactions in each year,
the company has concluded that $685 million and $265 million in revenues from
exchanges of optical capacity assets will be reversed in 2001 and 2000,
respectively, and $331 million and $200 million in sales of optical capacity
assets for cash in those respective periods are subject to review to determine
whether adjustment is required. The amounts for 2000 represent only those
transactions entered into after the merger and the percentages are based upon
the full year results as reported in the company's annual report on Form 10-K.
The company has previously disclosed that it does not anticipate any sales of
optical capacity assets in 2002 that would be impacted by the announcement
today.
The restatement and possible adjustment of revenues described in this
announcement do not include revenues reported by Qwest with respect to optical
capacity asset transactions before the merger. Qwest generally applied these
same accounting policies and practices with respect to these IRU transactions.
The total revenue recognized in optical capacity asset transactions in 1999 and
2000 prior to the merger is approximately $1.32 billion. The revenue recognized
from pre-merger optical capacity asset transactions are not reflected in the
company's financial statements since U S WEST was deemed the accounting acquirer
in the merger.
The restatement announced today includes some of the optical capacity asset
transactions reflected in the $1.16 billion of revenues from similar
transactions in 1999, 2000 and 2001 covered in the company's July 28
announcement. Out of that amount, the company announced that $591 million in
post-merger revenues was the subject of restatement by the company as of that
date. This announcement includes an additional $894 million in post-merger
revenues subject to restatement from additional transactions not covered in the
previous announcement.
The company is continuing to analyze, in consultation with KPMG, its accounting
policies and practices with respect to the transactions in which optical
capacity assets were sold for cash and the company recognized revenue
post-merger to determine the magnitude of adjustments that may be required. In
addition, Qwest is continuing to analyze certain accounting policies and
procedures with respect to other transactions, and KPMG has been engaged to
re-audit certain historical financial statements. Although the company cannot
yet disclose the magnitude of the anticipated restatement, the company considers
the announcements today to represent a significant development in its ongoing
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assessment of its accounting policies and their application. The company cannot
state with certainty when a restatement will be completed.
The company is continuing to evaluate the recoverability of the long-lived
assets of its traditional telephone network and global fiber optic broadband
network, along with related assets, including inventory. Once this evaluation
has been completed, the company expects to record charges in the third quarter
of 2002 to write-down these assets. These write-downs will reduce operating
income in the third quarter of 2002 and will result in a reduction of future
depreciation expense.
As previously disclosed, the company remains under investigation, including with
respect to the matters that are the subject of this announcement, by the SEC and
the Department of Justice. Qwest continues to cooperate with these
investigations, but it cannot predict how the restatements announced today may
impact their outcome. Although the company has not had discussions with the
staff of the SEC about resolution of the investigation, Qwest is optimistic that
today's announcement represents a first step toward a possible resolution.
As a result of the announcements by Qwest regarding its expected restatement,
the company cautions that its historical financial statements in 2000, 2001 and
the first three months of 2002 should not be relied on.
DEFINITION: For purposes of this release, "adjusted EBITDA" refers to adjusted
earnings before interest, taxes, depreciation and amortization and 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 leading provider of
voice, video and data services to more than 25 million customers. The company's
55,000 employees are committed to the "spirit of service" and providing
world-class services that exceed customers' expectations for quality, value and
reliability. 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; the effects of our anticipated restatement of historical financial
statements including delays in or restrictions on our ability to access the
capital markets or other adverse effects to our business and financial position;
our substantial indebtedness, and our inability to complete any efforts to
de-lever our balance sheet through asset sales or other transactions; any
adverse outcome of the SEC's current inquiries into Qwest's accounting policies,
practices and procedures; any adverse outcome of the current investigation by
the U.S. Attorney's office in Denver into certain matters relating to us;
adverse results of increased review and scrutiny by Congress, regulatory
authorities, media and others (including any internal analyses) of financial
reporting issues and practices or otherwise; the failure of our chief executive
and chief financial officers to provide certain certifications relating to
certain public filings; 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;
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.
Contacts: MEDIA CONTACT: INVESTOR CONTACT:
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Tyler Gronbach Stephanie Comfort
303-992-2155 800-567-7296
tyler.gronbach@qwest.com IR@qwest.com
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