Enterasys Under Fire

Enterasys Networks is undergoing a crash course in crisis management after disclosing two
investigations: an internal audit of a $4 million Asia-Pacific contract; and an apparently unrelated Securities and Exchange Commission probe.

As a result, the Portsmouth, N.H., telecom equipment maker has delayed the
spinout of Aprisma Management Technologies and the release of fourth-quarter and fiscal 2001 financial report.

“Within hours of uncovering the Asia-Pacific we were informed of the SEC investigation,” an Enterasys executive said.

The Asia-Pacific inquiry centers on contract inconsistencies and raises questions about whether revenue from the deal can be recognized. Three Enterasys
employees have been placed on administrative leave pending an investigation.

Enterasys has instructed its auditors KPMG to review the sale practices and revenue recognition in its Asia Pacific operation, which accounts for 13 percent of
overall sales. In addition, a Deloitte & Touche “forensic accounting” team has been called in.

Company officials said legal action against the employees could follow depending on the result of the investigation.

In a development apparently unrelated to the Asia Pacific review, Enterasys said the SEC has issued an order of investigation relating to Enterasys and certain
affiliated companies, including Aprisma.

The company intends to fully cooperate with the SEC’s investigation, which it said was in the “early stages,” but would give no further information about its focus.

News of the investigations was announced after markets closed on Friday. Shares of ETS dove 6.2, or 57.4 percent, to 4.6. in a selloff this morning. In the last 52 weeks, the issue has traded between 4.9 to 24.5.

Several investment
firms have already downgraded the issue on news of the inquiries.