Enterasys To Restate Revenue For Past Two Fiscal Years

Enterasys

The company said it plans to file results for its fiscal 2001 fourth quarter in the next several weeks. Enterasys said it also plans to make significant adjustments to revenue in restated results for the fiscal year ended March 3, 2001, and the 10-month period ended Dec. 29, 2001.

Enterasys delayed reporting results for that 10-month period after launching an internal investigation in February into accounting irregularities related to revenue recognition. The company later delayed reporting results for the quarter ended March 30 as well.

The upcoming restated results primarily involve revenue recognized in connection with investment transactions and the amount and timing of revenue associated with sales to certain distributors that were granted rights of return or extended payment terms, the company said.

"Since April, we have made substantial progress on our objectives of stabilizing the business, improving execution and resolving revenue recognition issues from prior periods," said Enterasys CEO Bill O'Brien in a statement. "I am encouraged by our customers' loyalty, our employees' determination, and our second quarter performance, which affirms Enterasys' position as a leading provider of broad-line networking solutions for enterprise-class customers." O'Brien, who was appointed interim CEO in April, has been named CEO.

"We have identified the issues, improved our business processes and are making substantial progress toward putting these matters behind us," O'Brien said. "We do not expect the problems that have been identified to impact our ability to continue serving our customers and the enterprise market successfully."

Meanwhile, Enterasys CFO Robert Gagalis plans to resign from his position. Gagalis, who joined Enterasys late last year, has agreed to remain with the company for a transition period to assist with completion of the pending audit and the finalization of the company's financial statements, which will be filed with the Securities and Exchange Commission. Richard Haak, Enterasys vice president of finance since October of 2001, will assume the role of CFO when Gagalis leaves.

Since it launched the internal review in February, Enterasys ousted its CEO, executive vice president and COO.

In April, the company cut 30 percent of its staff to align its cost structure with its revenue base after warning of a significant revenue drop in its first quarter.

The company said it lowered its first-quarter earnings estimate because of revenue-recognition issues in the Asia-Pacific region and a comprehensive analysis of revenue recognition in the remaining regions of the company. The prolonged market slowdown and an SEC investigation of the company also contributed to the revenue decline, the company said.

A company spokesperson said the projected revenue shortfall prompted the April resignations of Henry Fiallo, chairman, CEO and president; J.E. Riddle, vice chairman and executive vice president of worldwide marketing; and Jerry Shanahan, COO.

Enterasys in late February terminated three senior employees in its Asia-Pacific operations in response to its internal investigation of accounting irregularities. The employees had been on administrative leave since Feb. 1, when Enterasys discovered irregularities in at least one contract, valued at $4 million, in its Asia-Pacific unit.

Enterasys said that while preparing its 2001 fourth-quarter earnings it discovered that its independent auditor, KPMG, was provided with a version of the $4 million contract with terms that supported revenue recognition, while the vendor's own version of the contract did not.