Nortel revealed Wednesday that the RCMP have also made informal inquiries.
UPDATE: Nortel fires CEO Dunn 'with cause', delays Q1 report
By Leo Valiquette, Ottawa Business Journal Staff
Wed, Apr 28, 2004 8:00 AM EST
Frank Dunn at Nortel's AGM in April 2003.
Nortel Networks fired CEO Frank Dunn and its two top financial executives "with cause" Wednesday morning and postponed the release of its first-quarter results, sending its stock price into a tailspin.
Board member and Gulf War veteran William Owens has been named to replace the 49-year-old Dunn as CEO.
CFO Doug Beatty and controller Michael Gollogly, who were suspended last month, have also been handed their walking papers.
William Kerr has been named the new chief financial officer and MaryAnne Pahapill as controller. They were appointed to these positions on an interim basis on March 15 after Beatty and Gollogly were suspended with pay.
The news hammered Nortel's stock as soon as the markets opened Thursday morning. At 11:30 a.m., the stock was down by 26.1 per cent on the TSX, or $1.98, to $5.60. Its low of the morning was $5.50.
In a statement, Nortel said four other individuals "who were senior line of business finance executives of Nortel Networks during the periods under review have been placed on paid leave of absence pending further progress of the independent review."
During an early morning conference call with analysts and the media, Nortel chairman Lynton "Red" Wilson said, "the decision to terminate Frank Dunn was particularly difficult. But it is the right decision for the company."
At this point, with its audits still ongoing and the full extent of any restatements unknown, the company remains tight-lipped as to exactly why these executives have been shown the door.
Wilson said only that the shuffle related to "accountability for financial reporting."
In a statement earlier Wednesday morning, Wilson said the "the actions announced today are about accountability for our financial reporting and are in the best interests of the company and all of its stakeholders, including our investors, customers and employees."
The surprising shuffle relates to the company's ongoing efforts to bring its books for the past three years in order.
The ongoing audits have prompted formal investigations by both the U.S. Securities and Exchange Commission and the Ontario Securities Commission. Nortel revealed Wednesday that the RCMP have also made informal inquiries.
A number of U.S. law firms have also lined up, eager to pursue class action suits on behalf of shareholders who bought in after the company's upbeat year-end earnings report in January.
"We will do this (review) with full openness and transparency. We will cooperate with the authorities in every way possible. We will put this behind us...this company is fundamentally strong," Owens said during the conference call.
RESTATEMENT ROLLER COASTER
Last fall Nortel announced a series of restatements that ended up benefiting the bottom line. The company said it had overstated the costs of its massive downsizing and restructuring of the past three years. The market believed the restatements had largely wrapped up in December. Nortel stock once again became a market darling when the company announced in January its first full-year profit since 1997.
Nortel beat Street estimates with a fourth-quarter net profit of $499 million, or 11 cents a share, on revenues of $2.83 billion thanks largely to the strength of its wireless business (all figures in U.S. dollars). The consensus among analysts polled by Reuters Research was for a net profit of two cents per share on revenues of $2.44 billion.
For the year, Nortel reported a profit of $732 million, or 17 cents a diluted share, compared to a net loss of $3.27 billion, or 85 cents a share, in 2002.
At the time, Dunn called 2003 a "tremendous year." Analysts used adjectives such as "fantastic" and a "blowout" quarter.
The romance died quickly in March with word of a continuing auditing process that was expected to yield additional restatements.
Nortel did not specify if those restatements were expected to be good or bad news. The suspensions of CFO Doug Beatty and controller Michael Gollogly left the market fearing the latter.
On Thursday, Nortel offered some details of what it expects from the audit.
The company said it believes it will now have to restate results for the last fiscal year and "restate the financial results reported in each of its quarterly periods of 2003 and for earlier periods including 2002 and 2001."
At this point, the company said it expects that it will have to reduce previously announced net earnings for 2003 by 50 per cent and report a net loss for the first half of 2003 rather than the net profit previously announced.
However, the company said it sees no material impact to prior period revenues and no material impact to its cash balance as reported for the year ended on Dec. 31, 2003.
Nortel did say that it believes it finished the first quarter on March 31 with a cash balance of about US$3.6 billion, down from $4 billion at Dec. 31, 2003.
Nortel attributed the decline to payments made in the first quarter under its employee incentive compensation plans as well as cash outlays for restructuring and a real estate transaction.
Nortel added that it remains in compliance with its debt securities holders. However, if any of its creditors were to demand an acceleration of its debt securities, Nortel would have to obtain some fresh source of financing to prevent being in default.
