Enterasys chairman, two other executives resign

Enterasys Networks Inc.’s chairman and two top officers resigned from the company on April 4 amid an anticipated revenue dip, an investigation by the U.S. Securities and Exchange Commission and the firm’s own internal accounting review.

Enrique P. (Henry) Fiallo stepped down as Enterasys’ chairman, CEO and president on Thursday. He will be replaced by interim CEO William O’Brien, a former PricewaterhouseCoopers LLP executive. Also resigning were J.E. Riddle, vice-chairman and executive vice-president of marketing, and COO Jerry Shanahan.

“The CEO resignation is due to a mutual determination between the former CEO and the board, and the realization that Enterasys needed different skills and experience to lead the company through the current challenges it faces,” Enterasys spokeswoman Kristen Sheppard told Reuters Group PLC on Thursday. The resignations are part of a restructuring effort spurred by the firm’s projected poor sales over the last two quarters, Chief Financial Officer Robert J. Gagalis said.

Enterasys also announced that its fourth quarter 2001 and first quarter 2002 revenue would be less than expected. The company notified the SEC in February that its fourth quarter earnings report – or 10K – would be delayed due to an internal review of the company’s finances by independent auditor KPMG.

Enterasys said it expects to post its first operating loss in the fourth quarter, ended Dec. 29, 2001, and that it also expects to lose money in the first quarter of 2002, which ended March 30. The expected fourth quarter loss is the first for the company since it was spun off from Cabletron Systems Inc. in August 2001.

Enterasys’ fourth quarter 2001 revenue will fall between US$145 million and US$155 million, while first quarter 2002 revenue is expected to be approximately US$110 million to US$120 million. Both expected revenue figures come in way below analysts’ revenue expectations of approximately US$190 million for each respective quarter. Enterasys attributes the poor first quarter revenue “the lengthening of the sales cycle due to difficult market conditions, poor sales execution, and the previously announced Securities and Exchange Commission investigation.”

The company may also have to restate revenue in prior quarters of 2001 as a result of its internal review, Reuters reported.

Enterasys’ showed trouble signs in February when it reported that it was delaying its SEC filings after it discovered discrepancies between different contracts pertaining to the same US$4 million account within its Asia Pacific region. Enterasys also announced in February that the SEC was investigating the company’s planned spin-off of network management firm Aprisma Management Technologies Inc., also a former Cabletron company. Then CEO Fiallo said the investigation and the Asia Pacific review were unrelated at the time.

Enterasys was third in the US$2.8 billion worldwide Ethernet switch market in the fourth quarter of 2001, with 5 per cent of the market, according to the Dell’Oro Group. The firm trailed Nortel Networks Corp. with 7.3 per cent and Cisco Systems Inc. with 60.2 per cent of the market.