April 28, 2004 11:02 AM PDT
Nortel fires CEO, other top execs
On Wednesday, the telecommunications equipment maker announced that it has fired CEO Frank Dunn, Chief Financial Officer Douglas Beatty and Controller Michael Gollogly. Beatty and Gollogly were placed on paid leave of absence on March 15.
"The actions taken by Nortel's board are about accountability for financial reporting," Lynton Wilson, board chairman, said during a conference call with analysts. "The board believes these actions are important steps in restoring confidence in the company's leadership."
When asked if the dismissal of Dunn and the two other executives were the result of fraud, Wilson said that he could not comment. "The investigations are ongoing, and it's inappropriate to provide specifics," he said. Wilson said he was unaware of any criminal investigation.
Dunn joined Nortel, which was then called Northern Electric, in 1976, straight out of school. He spent his career in various positions within Nortel. In 1999 he was appointed CFO of the company, and two years later became CEO.
"The decision to terminate Frank Dunn was difficult," Wilson said. "His service with the company spans some 28 years. He has worked extremely hard and has had some great successes."
William Owens, a Nortel board member since 2002, has been appointed president and CEO. Previously, Owens served as CEO of Teledesic, a satellite communications company. He also once held the second-highest rank in the U.S. military.
William Kerr, who has been acting chief financial officer, and MaryAnne Pahapill, who stepped in as controller on March 15, will now hold these positions permanently.
The board of directors also announced that four others who worked as finance executives during the periods under review have been placed on paid leave of absence pending further investigation.
The management shakeup comes as Nortel conducts an internal investigation of its accounting practices. Nortel's internal auditors began looking into the company's finances after it was discovered that roughly $900 million in liabilities had been either recorded incorrectly in prior periods or had not been properly released in the appropriate periods.
In October and then in March, the company announced that it would likely restate results for certain periods. It has already restated earnings from 2000, 2001 and 2002, along with figures for the first two quarters of 2003.
Earlier this month, the Securities and Exchange Commission launched a formal investigation into Nortel's restatements.
Nortel provided an update on the investigation in a statement released Wednesday. While the company did not provide exact details, it said that unaudited results for the year ended Dec. 31, 2003, will need to be revised. The company estimates that net earnings for 2003 will likely drop by 50 percent and that the company will likely report a net loss for the first half of 2003. Results reported for each quarter in 2003 and for earlier periods including 2002 and 2001 will also likely be restated.
Wall Street analysts reacted positively to the news of the dismissals, saying that they think the worst is now behind the company. Stephen Kamman, an analyst with CIBC World Markets, said he expects the company to deliver "squeaky-clean financials" when it finally reports restated earnings. He upgraded the company's stock to "Sector Outperform" from "Sector Perform."
"We applaud Nortel's board for taking quick action to respond to the situation and see this as a very positive sign for investors," he wrote in a research note to investors. "We do not believe underlying fundamentals at Nortel have changed at all."
But Kamman also notes that Nortel isn't completely out of the woods yet. The company could still face problems with its $3.8 billion in debt if it does not file its financial results with the SEC by June 30. The company has already missed a filing deadline of March 30, which means that it is not in compliance with agreements on $1.8 billion in long-term debt. Currently, debt holders have chosen not to accelerate the debt payments, but Kamman notes that they could.
In addition, the company could lose its New York Stock Exchange ticker symbol if it fails to meet the second reporting deadline.