Screech.

At 8:27 a.m. this morning, officials at the Nasdaq stock market yanked on the brakes for shares of Covad Communications (Nasdaq: COVD), which have been parked at $2.88 all day.

Nasdaq officials say they're awaiting additional information from Covad following its early morning announcement that it will postpone the release of its fiscal year 2000 results so it can review some accounting items. Covad's earnings call had been set for Feb. 27.

Covad says that since it's taking the time to comply with the Securities and Exchange Commission's SAB-101 accounting procedures, a document that scrutinizes the way companies record revenues, it's losses for the year will be more than expected and it may have to restate revenue from previous quarters.

Here's why: Covad leases copper lines from RBOCs (regional Bell operating companies) so it can sell its DSL (digital subscriber line) service to end users and service providers. Unfortunately, Covad's service provider customers aren't doing so well and financing in the space has slowed (see DSL D-Day).

In fact, during its last quarterly report Covad noted that some 65,500 (about 32 percent) of its 205,000 lines are handled by service providers that aren’t paying their bills on time (if at all). As a result, Covad has bought back some of those lines and redeployed them to other, presumably more stable, service providers.

The problem is that, until late last year, Covad had been recognizing revenue from the bulk sales of DSL lines to service providers as the services were turned on, rather than when the bills were actually paid, analysts say.

While the practice isn't terribly uncommon, it gets messy when one of Covad's service provider customers goes sneakers up (as some have). When that happens, Covad has to go back and erase all the revenue it preemptively counted from all the lines managed by the moribund service provider.

Covad appears to be doing one better now by examining all its contracts and relationships to make sure it only counts revenues that should be counted. Indeed, Covad wants a clean filing as it wraps up its fiscal year 2000 and hopes to demonstrate to the world that it has both the funding and business plan to stay alive in 2001.

In many investors' eyes, however, Covad is trying to right a ship that's already run aground. "This announcement means investors have absolutely no visibility into this business," explains Todd Fernandez, an analyst with Epoch Partners. "You have no idea what this business can produce as a means of return on your investment. What you're holding now is vapor paper."

In the past year, Covad shares have lost 94.92 percent of their value. Covad executives did not respond to requests for comment.

-- Phil Harvey, senior editor, Light Reading http://www.lightreading.com