Qwest Restatement Cuts $2.5 Billion Deeper

Also: Another guilty plea at McKesson; small bank would rather go private than deal with Sarbanes-Oxley, but a former Arthur Andersen business does quite well by Sarbox; and more.

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Qwest Communications International Inc. finally restated its results for 2000 and 2001, and the revision was not pretty.

The telecom company, which is currently being investigated by the Securities and Exchange Commission and the Justice Department, said its net losses for those two years were about $2.5 billion larger than originally reported.

Qwest said its restated loss in 2000 ballooned to $1.04 billion on revenues of $14.1 billion. It originally reported an $81 million loss on revenues of $16.6 billion. In 2001, the restated loss rose to $5.6 billion on revenues of $16.5 billion, compared with the originally reported loss of $4 billion on revenues of $19.7 billion.

“With the restatement complete,” said Richard C. Notebaert, Qwest’s chairman and CEO, in a statement, “we are now focusing all of our resources to dramatically improve customer satisfaction and grow our key lines of business.” Notebaert told Dow Jones the completion of the restatements would also give the company greater access to the capital markets.

Qwest has not filed audited financial statements for the first half of 2003. The company must issue these reports by year-end to comply with conditions of its loan agreements, according to Reuters.

In 2002, the company reported a loss of $38.5 billion, including charges for accounting changes for goodwill, the write-down of assets and a gain on the early payment of debt.

The company had warned it would restate its results after uncovering questionable accounting practices. In a report of 200-plus pages filed with the SEC, the company said the restatements involve, among other matters, revenue recognition issues related to optical capacity asset transactions, equipment sales, directory publishing, and purchase accounting.

The company added that it is in settlement talks with the SEC on charges of accounting fraud.

Qwest also reported that Notebaert, who took over in June 2002, will receive a $1.1 million salary and a bonus of at least $825,000 this year. When he was hired, he was also given 200,000 restricted stock awards worth $1 million and 5 million stock options with an exercise price of $5.10.

After former chairman and chief executive Joseph Nacchio was forced to resign in June 2002, Qwest paid him $12.23 million in severance and awarded him a $3 million consulting contract, according to published accounts. Nacchio will also be paid a monthly fee of $125,000 through 2004. In addition, he and his wife will receive medical benefits for life and free long-distance services for 10 years.

Another Guilty Plea at McKesson

Another former executive of McKesson Corp. pleaded guilty to violating securities laws in connection with the health-care company’s accounting scandal, which cost shareholders $9 billion.

Albert Bergonzi became the fourth former executive of HBOC (he became executive vice president of McKesson HBOC after a 1999 merger) to enter guilty pleas for his part in a scheme that allegedly overstated revenue by more than $300 million. The others are former sales chief Dominick DeRosa, ex-treasurer Timothy Heyerdahl, and one-time co-president Jay Gilbertson, according to the San Francisco Chronicle.

In June, Albert Bergonzi and two other HBOC executives — former HBOC chief executive Charles W. McCall and former general counsel Jay Lapine — were charged with conspiring to “cook the books” beginning in 1998 by back-dating contracts and through secret deals related to software licensing contracts, according to Reuters.

“We falsely inflated quarterly software sales revenues, by among other things, recording revenue on contracts that were conditioned on ‘side letters’ that permitted customers to cancel the contract or return software… and backdating contracts to record revenue in prior quarterly periods,” Bergonzi said in the court filing, according to Reuters.

“I actively participated in the use of side letters and backdating, both in contracts I negotiated and by encouraging my subordinates to use them in contracts they negotiated,” he added. “I understood that, as a result of these activities, HBOC’s and McKesson HBOC’s accounting personnel would and did make false entries in company books and records at quarter end in order to increase revenue and net income.”

Bergonzi faces up to 15 years in prison, according to several published reports. U.S. District Judge Martin Jenkins’ told Bergonzi that any leniency depends upon his cooperation. “It really is in my sole discretion… to determine the sentence in this case,” the judge said, according to the San Francisco Chronicle. Outside the courtroom, federal prosecutor John H. Hemann reportedly noted that “It’s safe to say we’re still investigating this case.”

McKessonHBOC dropped HBOC from its name in July 2001.

Small Bank Would Rather Go Private than Deal with Sarbanes-Oxley

If you don’t like it, go private.

This is how one financial services firm has chosen to deal with the Sarbanes-Oxley Act, the sweeping governance law that has mandated a slew of reporting requirements.

Less than six years after going public, Mooresville, North Carolina-based Coddle Creek Financial Corp. wants to be private again, according to the Charlotte Business Journal.

Earlier this month it began offering a modest premium to buy the holdings of owners of 99 or fewer shares. The goal is to reduce the number of shareholders below 300 so the company can deregister its common stock with the SEC and become a private company.

Rising costs for compliance with the new rules on corporate accountability and their stringent reporting requirements are the leading reasons, according to the newspaper, citing company officials.

George Brawley Jr., the chairman, president, and chief executive of the $24 million company, told the paper that Coddle Creek’s auditing expenses have risen significantly, and that the company has been advised that compliance is going to become even more costly next year and beyond. Brawley added that Coddle Creek would continue as a public company had it not been for Sarbanes-Oxley.

He also thinks this will be the beginning of a trend. “I feel it has not been a failed experience,” Brawley told the paper, commenting on his years with the publicly traded company. “It has made us more recognized. More people are interested in the bank and how we do. It got us out from being an easy-going savings bank to being more active in our community and promoting ourselves.”

When Coddle Creek is again a private company — and not dealing with regulators — he and his team will have more time to meet and serve their customers, Brawley told the paper.

Coddle Creek went public in late 1997 and traded at nearly $85 in early 1998. It closed Friday around $35.

Former Arthur Andersen Business Does Well by Sarbanes-Oxley

While one small bank is bemoaning the passage of Sarbanes-Oxley, at least one other company clearly likes it.

Staffing company Robert Half International Inc. reported that revenues at its Protiviti consulting subsidiary more than doubled to $38.1 million, from $17.8 million in the third quarter of 2002, while revenue for the first nine months this year nearly quadrupled year-over-year.

RHI bought the former Arthur Andersen risk-consulting business in May 2002 and renamed it Protiviti.

“Protiviti continued to attract a significant number of new clients, with projects ranging from Sarbanes-Oxley Section 404 compliance to regulatory and forensic investigations, technology security and the establishment of new internal audit functions,” said Harold M. Messmer, Jr., chairman and chief executive officer of RHI, in a statement.

Short Takes

  • Northrop Grumman Corp. said Charles H. Noski, who currently sits on its board of directors, will become corporate vice president and chief financial officer, effective December 1, 2003, succeeding Richard B. Waugh Jr., who is retiring.

Noski will remain a director at Northrop. Last month he was nominated to the board of Microsoft Corp.

Noski retired from AT&T in November 2002 after having joined the company in December 1999 as senior executive vice president and chief financial officer. He was elected vice chairman of the board of AT&T in early 2002 and was responsible for broad aspects of the company’s strategy and operations. Prior to joining AT&T, Noski was president and chief operating officer and a member of the board of directors of Hughes Electronics Corp.

  • Black & Decker Corp. said its board of directors approved a 75 percent increase in the company’s common stock dividend. A company spokeswoman cited recent tax law changes that make dividends more attractive for investors, according to Reuters. She also said Black & Decker’s payout ratio has been relatively low compared with its peers and noted that the company had not changed its dividend since 1996.

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