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Table: Qwest's Books: Under the Microscope


Two analysts at Morgan Stanley Dean Witter are in a dispute with Qwest CEO Nacchio that has erupted into a public battle over the company's prospects and management's credibility. Here are some of the key issues:

KPNQWEST

Morgan Stanley Claims: In a June report, the firm argued that Qwest's stake in KPNQwest, a European telecom network, had to be written down because it was carried on the books at more than $7 billion, even though its market value had dropped to less than $2 billion.

Qwest's Response: On June 20, Qwest said it would write down

KPNQwest to $4.8 billion because that's what an independent appraiser said it was worth. However, in July,

it decided to write down its stake to $1.3 billion. It later explained it

wanted a "very conservative treatment" of the holding.

Conclusion: Morgan Stanley got it right.

PENSION ASSUMPTIONS

Morgan Stanley Claims: Qwest made more optimistic assumptions about its pension plan. For example, it boosted the return on plan assets to 9.4%, from 8.8%. The result: Qwest could report credits in its pension plans as income.

Qwest's Response: It was only changing pension assumptions to get them in line with other companies. It hammers Morgan Stanley for not detailing the assumed rates of return at other telecom companies.

Conclusion: Morgan Stanley concedes that Qwest's assumed rate of return is in line with other telecoms. But the firm says it is concerned that Qwest moved from conservative accounting to a riskier approach.

SELLING OFF CAPACITY

Morgan Stanley Claims: Qwest was boosting revenue growth through unsustainable means. It cited Qwest's selling of pieces of its network, something called indefeasible rights of use (IRUs). Qwest's revenue growth in the second quarter was 12.2% with the capacity sales, but 7.5% without them.

Qwest's Response: The IRU sales are part of its normal business. It says it has so much capacity that there is no chance it will run out in the foreseeable future.

Conclusion: On Sept. 10, less than a month after Morgan Stanley's claims, Qwest conceded it won't make its financial targets this year because demand--for IRUs, among other things--dropped.


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