Bankrupt Summit
gets outside auditor

The telecom firm makes a deal
to avoid an appointed trustee

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By Tim Ruel
truel@starbulletin.com

Bankrupt telecommunications services firm Summit Communications Inc. has agreed with state and federal government officials to appoint an independent accountant to audit the firm's financial records.

As part of the agreement, the U.S. Attorney's Office is holding off on its request for a court-appointed bankruptcy trustee to manage and investigate Summit's financial affairs. Summit, which filed for Chapter 11 reorganization bankruptcy in February, will be allowed to continue running under its current management. Once the auditor's report is released, the firm will have 30 days to submit a plan of reorganization for approval by creditors and U.S. Bankruptcy Judge Robert Faris.

Summit must also reduce its annual payroll by $68,000, under the new agreement. The firm has 34 employees. The government wants to examine management salaries to see if compensation fits the job descriptions, according to the agreement.

Summit owes more than $1 million, or about one-third of its total debt, in unpaid state and federal taxes. In early August, the U.S. Attorney's Office asked the bankruptcy court to appoint a trustee to oversee Summit, alleging the firm had been mismanaged, a request that was supported by the state Department of Taxation and the U.S. Trustee's Office.

In response, Summit says it is recovering from financial disarray caused by outside accountants and bookkeepers. "My understanding is they just simply didn't do a good job," said Grant Johnston, who became president of Summit when the firm filed for bankruptcy protection.

The sheer size of the tax delinquency caused the government to raise an eyebrow, Johnston said.

"I think the size of the tax debt, it was just natural for them to question how it happened," he said.

Since filing bankruptcy, the firm has submitted major revisions to its court-filed financial statements, a point seized upon by the government in asking for a trustee.

Summit has made no more accounting errors in recent months, Johnston said. In early August, around the time the government asked for a trustee, Summit retained a new outside accountant, Landis Char. Johnston said he sees the firm's accounting cleanup as a positive step toward its financial rehabilitation.

Summit's tax problem was caused when the firm ran into major cash-flow problems a few years ago, Johnston said. The firm, founded in 1996, had not yet turned a profit and faced going out of business if it didn't pay certain bills, Johnston said. If the company had closed, the government would not have received any tax payments, he added. New management came in and discovered the tax liability in 2001.

The government wants a financial review to see if it is feasible for Summit to reorganize its debt under the bankruptcy process, said James Duca, attorney for Summit.

Johnston said he is confident the company can emerge from bankruptcy successfully, and pay its debts. The firm has been profitable since June, and plans to set aside at least $15,000 each month to pay its tax debt over several years, Johnston said. Summit provides local- and long-distance telephone services, and call center services. Since filing bankruptcy, the firm has not lost any customers, and has added six call-center customers, as well as 150 new phone lines on its share-tenant service.

An independent auditor for Summit has not been named yet.