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TELECOMMUNICATIONS—Accelerated Boots CEO After Rough Fourth Quarter

Twelve years after founding the software firm ACT Networks, Suresh Nihalani left in 1999 to establish Accelerated Networks Inc., hoping to cash in on the growing broadband market for voice and data equipment and services. Nihalani’s plans to leave ACT to take on the highly competitive market struck a chord with many on Wall Street, who watched the company’s stock grow from its initial public offering value of $15 on June 23 to $60 on June 26, before eventually topping out on July 12 at $63.50. Wall Street is still watching, but for a different reason. On Feb. 14, Accelerated Networks’ board of directors ousted its founder, chairman and CEO just two weeks after disastrous fourth-quarter figures showed a $10.2 million net loss, bringing to a close a dismal year that saw the company lose $31.7 million in 2000. The company lost $21.2 million in 1999. Just last July the company signed a marketing agreement with German conglomerate Siemens AG to resell its integrated access devices in Europe and Accelerated Networks stock reached $63. Siemens now owns 20 percent of the company stock, having funded part of its startup capital. Others with significant shares in the company are U.S. Venture Partners and New Enterprise Associates, both with 14.6 percent stakes in the company. Nihalani, who was earning $218,400 a year according to company documents, was only the latest of several top executives to leave a company that once seemed poised to take a leadership role in the fast-growing broadband industry. New York-based Internet fund manager Steve Tuen had classified the stock a “buy” just after its June IPO. But by year’s end, Tuen’s optimism had dimmed and he placed a firm “hold” recommendation on the troubled stock. Like many tech firms that saw their fortunes head south along with the Nasdaq index of top stocks, Accelerated Networks felt the pinch as its customers cut back on orders. In a company press release last month, Nihalani blamed tightening financial markets and increasing pressure on customers to reduce costs. At that time, the Moorpark-based company revised upward its loss estimates for 2000, from 14 cents a share to between 21 cents and 23 cents a share. Its already battered stock price went from $3.12 to $2 in nine days. The company’s net loss for the year was $49.2 million on $35.9 million in revenue. The company’s rapid decline was due in part to the loss of a key contract with one of its major customers, Nihalani said. Last week, company officials would not elaborate on his earlier statement or identify the major customer. According to documents filed with the Securities and Exchange Commission, CTC Communications, FirstWorld Communications and Siemens accounted for 54 percent, 20 percent and 16 percent respectively of Accelerated’s total sales in 2000. Analyst Frank McEvoy of Piper Jaffray said some of the company’s troubles stem from its narrow customer base. He said the company has struggled under Nihalani’s leadership over the past year as revenue figures declined steadily. “They felt they needed a change and they brought someone else in to take over. It’s as simple as that,” McEvoy said. “But it’s good for investors that the board of directors stepped in.” A new CEO The same day it ousted Nihalani, the Accelerated Networks board named so-called “turnaround artist” Gary J. Sbona chairman and chief executive officer. The board also ousted chief financial officer Frederic Boyer from his $151,750-a-year post and replaced him with H. Michael Hogan, formerly CFO with 3D Systems Inc. in Valencia. Company executive Benjamin DiLello was promoted to the newly-created position of vice president of worldwide sales and marketing in an effort to beef up the company’s overall sales. Sbona said new appointments are a first step in moving the company toward profitability. “Our immediate objective is to get the business into a position of financial strength on which we can effectively execute in the current market environment,” Sbona said. Accelerated makes so-called “voice gateways” that convert voice signals from broadband networks into the format recognized by phone networks. It also makes equipment to send data over broadband networks. The company, which employs 174 people, is one of several broadband equipment makers at the low end of an industry dominated by giants like Lucent Technologies, Inc. and Nortel Networks. According to Chicago-based Zacks Investment Research, Accelerated is ranked 121 of 138 companies in its industry, sales-wise. Steve Krausz, Accelerated board member and a partner of U.S. Venture Partners, which pumped $10.6 million into the company last year, thanked Nihalani for leading the company through the initial public offering period, but said the firm must now move in a different direction. Krausz said he believes the company will be able to strengthen its customer base and solidify its place in a competitive marketplace. As head of Regent Pacific Management, Sbona took over the red ink-drenched Sunnyvale tech firm, Verity, Inc., in 1998 and returned it to profitability. After its stock crashed in 1997, Sbona cut costs at Verity, increased sales and brought back employees who had left in disgust. The company eventually posted its first profit in years, going from a $16.5 million loss in 1998 to $33 million in net income. Verity’s revenue has grown from $33 million in 1998 to nearly $100 million last year. Sbona still leads Verity after signing an extension of a management contract that expires in August. Whether he can turn around Accelerated Networks is a question few are willing to answer. James P. Parmalee, an analyst with Credit Suisse First Boston, said he’s cautiously optimistic about the company’s future. Jaffray’s McEvoy has downgraded the stock from a buy in December to neutral now, reducing his price objective from $25 to $3. ACT was founded in 1987 as a manufacturer of software and hardware that later went on to make devices which carry voice traffic on Internet networks, while carrying data and video. ACT was acquired last year by telecommunications and software maker, Clarent Corp. of Redwood City, Calif.

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