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Boulder Telecom's Accounting Fix Brightens Future, but Lawsuits Loom

Posted on: Sunday, 14 August 2005, 12:00 CDT

Aug. 15--The ride has been a wild one for Carrier Access Corp. in the four years following the collapse of the telecommunications industry.

Share prices for the Boulder-based mobile telephone and broadband equipment maker plummeted and the company lost millions when national telecom giants foundered and stopped spending money in 2001 in order to survive.

Carrier Access seemed like an industry darling when, two years later, it revived equipment sales to mobile phone companies and Internet telephone services.

Investors drove its stock prices from 35 cents per share on New Year's Eve 2002 to $16.78 two weeks into 2004. That stretch coincided with two consecutive profitable years, and helped Carrier Access raise $72 million in a stock offering.

But since last summer, an unexpected dip in Carrier Access' wireless phone equipment sales and the departure of high-ranking employees socked the company before revelations that accounting mistakes had rendered its 2003 and 2004 earnings results inaccurate and the company would need to restate them.

Lawyers rushed in, filing 12 lawsuits on behalf of shareholders and accusing Carrier Access' leaders of misleading investors with inflated earnings. The Securities and Exchange Commission has begun an informal inquiry looking into what happened.

On Thursday, in federal district court in Denver, three of the lawsuits -- "derivative" lawsuits that seek to get Carrier Access executives to pay back bonuses and stock profits and reform the company's accounting controls -- were combined into one.

Restatements often result from companies puffing up their numbers to drive up stock prices and allow executives to cash in -- and Carrier Access seems like such a case, said Bill Federman, a lawyer for Oklahoma City-based Federman & Sherwood, who is lead attorney for the plaintiffs in the derivatives cases.

Carrier Access' executives and attorneys declined to comment about the allegations, citing the fact that the court cases are pending.

Should the lawsuits complete their course through the courts, how the company tallied its successes in 2003 and 2004, what it told investors and what stock trades its leaders made over that time will come under intense scrutiny.

At issue will be the bonuses and stock profits the company leaders received for the period when Carrier Access' mistakes were made.

"They were clearly moving revenue between quarters to benefit themselves," Federman said. "Are they going to pay that money back?"

Whether the accounting irregularities were the result of executives manipulating the books or were simple mistakes, shareholders who lost money as a result deserve some accountability from the company's executives and board of directors, he said.

On Aug. 2, Carrier Access released corrected numbers for 2003 and 2004, saying it reported $6 million in sales at the wrong time due to discrepancies in some customer contracts and slowness in distributors' ability to pay Carrier Access.

Instead of a small 2004 profit, the company now reports a $1.8 million loss for that year, and its profit in 2003 was $1.5 million, 38 percent smaller than previously believed.

About $4.5 million of the mistakenly recorded sales revenue will reappear on balance sheets in the first half of this year, the company said. That seemed to reassure stock analysts who follow the company and say that Carrier Access' future looks solid.

"What I heard suggests they're substantially out of the woods, but not entirely out of the woods," said Eric Buck, a Denver-based managing director of research for Janco Partners Inc, which owns no shares in Carrier Access.

If the company meets Nasdaq requirements to file its second-quarter earnings report in early September -- something that would keep Carrier Access' shares traded on the exchange -- the company's troubles may well be over, Buck said.

Carrier Access has long-standing customers in Cingular Wireless, T-Mobile and Verizon, he said. It's ahead of many other companies in getting into the Voice over Internet Protocol, or VoIP, industry, he said, and Carrier Access' technology is good.

He predicts that the shareholder lawsuits still hanging over the company will change little about Carrier Access' prospects and worthiness to investors.

"I think what's fundamentally important is the company's business performance," he said.

In an era of heightened scrutiny of corporate accounting, lawsuits frequently follow when a company restates past earnings.

Hundreds of them have been filed in recent years against a wide variety of companies including several, such as IBM or Coca-Cola, that are household names.

Some analysts on Wall Street view shareholders' class action lawsuits with a jaundiced eye, seeing their prevalence as the financial world's equivalent of ambulance chasing.

Federman, whose firm is handling 35 ongoing securities suits, says they're necessary to ensure businesses are accountable to the investment groups, employees and regular people who own shares in publicly traded companies.

"If the accountants and the government aren't going to do it, it's left to the lawyers," he said.

Shareholder class action suits peaked in the stock downturn year of 2001, when accounting scandals rocked Wall Street and shareholders filed 495 suits against companies, according to the Securities Class Action Clearinghouse managed by the Stanford University Law School.

Since then, the lawsuits have slowed but still come in at a pace of one every two days. The lawsuits against Carrier Access are among 121 filed so far in 2005, the clearinghouse reports.

The lawsuits target Carrier Access' executives that served in 2003 and 2004, its board of directors for that period and a side company called KELD LLC, which was set up by the company's married co-founders, Chief Executive Officer Roger Koenig and Corporate Development Officer Nancy Pierce.

All the KELD LLC stock sales reported to the SEC -- $7.6 million worth -- occurred in the two years in which the company's revenue reports were wrong and had to be restated.

If the lawsuits are successful, that money may have to be surrendered. The 2002 Sarbanes-Oxley Act would require forfeiture of executive profits made from bonuses stock sales in years for which Carrier Access restated earnings if related misconduct is proven in court. It's a key point for the derivatives lawsuits.

The lawsuits estimate the forfeiture provision could affect $15.8 million in stock transactions by various company executives.

The biggest single chunk of those stock sales were done by KELD.

It sold 702,000 of Koenig's and Pierce's shares in 2003 and the first seven months of 2004, while the company's stock price was high. The sales ended in early July 2004, before bad news started coming out and the company's share prices dropped.

KELD LLC still holds more than 9 million shares of the couple's Carrier Access stock, representing most of their holdings, SEC filings show.

The first public sign of trouble at Carrier Access pointed to by the suing shareholders was a July 21, 2004, warning by the company in a conference call with Wall Street analysts that suggested it might not make its projected sales numbers for the rest of the year due to consolidation in the wireless telephone industry.

For months prior to that call, the company had increased sales and Koenig made optimistic public statements about the prospects for continued growth.

The change in forecast shook investors. The company's share price dropped 37 percent the next day.

The revised revenue projections were driven by the fact that Cingular Wireless, the nation's largest mobile phone company, had just bought AT&T Wireless and was freezing spending on infrastructure while it sorted through the logistics of the merger. Cingular is Carrier Access' largest customer, so its spending slowdown hurt the Boulder company's sales.

Carrier Access' stock price fell for months before leveling out. It never has completely recovered.

The company then saw its Chief Financial Officer Tim Anderson resign in November and take a job with another industry player. Carrier Access sued him, claiming he violated the no-compete provisions of his employment agreement.

Anderson counter-sued, alleging that his resignation was motivated by his discomfort with how Carrier Access was run and how it reported revenue.

The company said Anderson's claims had no merit. The two sides settled the lawsuit last month. Neither will talk about it due to confidentiality provisions of the agreement.

Some of the analysts following the company say they don't expect the remaining lawsuits to mean much to Carrier Access in the long run.

"I think most investors don't expect them to go anywhere," said George Notter, a communications equipment research analyst with Jefferies & Co. Notter and Jefferies & Co. don't beneficially own any Carrier Access shares.

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Source: Daily Camera

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