Enterasys Expects To Restate Financials In October

Enterasys

In the financial forecast, issued late Monday, the networking hardware vendor also said its internal review of historical revenue-recognition practices is "substantially" complete but that it's still reviewing complex accounting matters with independent auditors and the Securities and Exchange Commission.

Enterasys now expects to complete the financial review in October and restate results for the 10-month period ended Dec. 29, 2001, and the fiscal year ended March 3, 2001. The company said the restated results will contain "significant adjustments."

Enterasys hasn't filed financial results for the past three quarters amid an SEC investigation and an internal review of its revenue-recognition reporting practices. The vendor delayed reporting results for the 10-month period ended Dec. 29 after launching an internal probe in February to examine accounting irregularities related to revenue recognition. The company later delayed reporting results for the quarter ended March 30 as well.

In July, Enterasys provided a preliminary revenue estimate of $120 million to $125 million for its second fiscal quarter ended June 29. The company also said it had revised its revenue estimate for its first fiscal quarter, ended March 30, to between $122 million and $127 million, up from an original estimate of $110 million to $120 million.

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.

In April, Enterasys ousted Henry Fiallo, chairman, CEO and president; J.E. Riddle, vice chairman and executive vice president of worldwide marketing; and Jerry Shanahan, COO. At the same time, 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 its other market regions. The prolonged market slowdown and SEC investigation also contributed to the revenue decline, the company said.

In late February, Enterasys 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 report, 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 contain those terms.