Day 7 Afternoon Session

Grant Graham’s cross by John Richilano continued, which led to a discussion of classified government contracts. Graham admitted that he did not know anything about those contracts beyond what Jim Payne, who handled the classified contracts for the Global Business Unit, and others told him in the budgeting process.

The redirect was fairly brief, with the most notable exchange coming when Hearty asked, “Is there a relationship between Qwest’s internal budget and external guidance to investors and analysts?” to which Graham replied, “One would hope that the external targets are reflective of the internal targets that we hope to achieve.”

Later in the session, Mark Schumacher began his testimony. Schumacher is the former CFO of the National Mass Markets (NMM) business unit and former Controller of Qwest. Direct of Schumacher was conducted by Colleen Conry. The questioning mostly dealt with the nature of the NMM’s business and its earnings growth projections. The budget for 2001 required a doubling of the subscriber base in both the DSL and PCS services. More significantly, the plan called for channel net sales revenue growth of 20% which he referred to as “very aggressive” and revenue per sales person increase of 44% that he called “highly significant.” When asked by Conry if he had been “sand bagging” the budget, Schumacher quickly interjected, “No I was not. This was going to be very, very challenging to produce.”

Probably the most dramatic portion of Schumacher’s testimony involved his purported reasoning for not exercising his stock option grants. Schumacher held options in Qwest that he described as “vested and in the money” during 2001, which he chose not to exercise. When questioned as to his motivation for refraining from trading, Schumacher explained that he felt Qwest’s failure to disclose its degree of reliance on IRUs was a “significant disclosure that was not reflected in share price” and that exercising his options while in possession of that information would be improper.

Cross examination of Schumacher was handled by Jeffrey Speiser, who expended a great deal of effort eliciting from Schumacher that the strike price of his stock options was actually below Qwest’s stock price from January 2001 until after June 2001. However, Schumacher emphasized that this was the case only for his options granted by Qwest and not the ones granted by USWest. Speiser then moved on to a series of questions about Audit Committee meetings attended by Schumacher and Mark Iwan, head of the auditing team from Arthur Anderson. Schumacher expressed his concerns about the non-disclosure of the IRUs to Szeliga but never to the members of the audit committee. When asked why he didn’t bring his concerns to the audit committee, Schumacher responded, “It was her [Szeliga’s] signature on the document.”

Schumacher’s cross examination will continue tomorrow morning at 8:45am.