Losses, Lawsuits, and Scientology
Digital Lightwave Inc. (Nasdaq: DIGL) may currently take the cake for colorful troubles in the optical networking business. Not only is the company losing money, but it's juggling a variety of lawsuits and hearing whispers about its CEO, Bryan Zwan, who's been affiliated with the Church of Scientology and several years ago gave up the CEO spot but has now returned.
It may take more than faith to change the company. On Tuesday night, the maker of optical test equipment posted a second-quarter net loss of $12 million, or $0.38 per diluted share, with revenues declining some 33 percent from the first quarter of 2002 (see Digital Lightwave Reports Q2). Some question whether the company's lousy quarter speaks not just to the optical networking famine in general but to some of the company's wild-oats past.
CEO Zwan is a central, and controversial, figure. Entire Websites have been devoted to panning his leadership. Check out DIGL-watch, for instance, which is devoted to Zwan's Scientologist activities and how they may or may not have influenced his management of Digital Lightwave.
And that site's not the only place to read about what folk think of Zwan. There are claims that Zwan has used the company as a means of making money in part for his church -- allegations he vigorously denies. A June 2, 2002, article in Florida's St. Petersburg Times outlines a long history of how Zwan developed his company, for better or worse, with help from a range of alleged fellow Scientologists.
Zwan himself left the CEO post in late 1998, but returned earlier this year. Indeed, one of the anti-Zwan arguments is that he controls the company with an iron hand. And he owns most of it, with a whopping 60 percent stake. Indeed, the company's risk statements, as documented in Securities and Exchange Commission (SEC) filings, states "our principal stockholder has substantial influence over our company." Further, the company acknowledges that its history of having a revolving door in the executive suite (specifically, Zwan's), may also be a risk factor for investors.
There are other issues too:
- An SEC investigation Digital Lightwave wound up restating some of its financial results for 1997, which led to an investigation by the SEC followed by a settlement with some directors of the company, including Bryan Zwan. Reportedly, the SEC focused on the company's methods of accounting for its revenues. The upshot was a $10,000 penalty for Zwan, but the withdrawal, with prejudice, of all fraud allegations.
- Class-action suits – one lost Most public companies suffer class-action litigation from time to time, but Digital Lightwave lost one of these early on -- to the tune of $4.3 million in a settlement with plaintiffs -- resulting in $8.5 million in charges associated with the lawsuit. The company settled the issues by the end of 2000, but it continues to report the results in its SEC filings -- and to suffer the consequences in the press, which dredges the litigation up again and again.
- Employee lawsuits – one lost Digital Lightwave's SEC filings also contain references to at least two ongoing actions taken by former employees against the company. One involves a $3.9 million settlement awarded by an arbitrator to a former employee who maintains that Digital Lightwave resisted his efforts to report corporate misdeeds to the authorities under Florida's Whistleblower statute, which lets employees who quit instead of breaking the law sue their former employers. The company has appealed that verdict, but nothing's changed as yet.
In its SEC filings, the company emphasizes that the SEC investigation didn't result in any definitive ruling against Zwan. Separately, the employee settlements and litigation are being "vigorously" contested by the company. And a spokesperson says that, while Zwan has made no effort to hide his faith, there's absolutely no link between Digital Lightwave and Scientology. Further, he says the St. Petersburg Times article was "at least 50 percent inaccurate."
Analysts say they can't tell for sure how much Zwan's activities have affected customer or investor perceptions in this emotional marketplace. "I just don't know, frankly," says one Wall Street analyst, who asked for anonymity. "[Zwan's] definitely a weird guy. I don't know what's happened. Last quarter I came away feeling bullish, but there wasn't a great feel to [this quarter's] call."
Digital Lightwave reported sales were $4.2 million, down from $6.3 million sequentially -- and from $34.5 million for the second quarter of 2001. The company blames orders that failed to materialize in the quarter. What's more, the company estimates it must come up to $22 million in quarterly revenues in order to break even.
Can that happen? The company says yes, but it sees international, not North American, opportunities as key. It's opened sales offices in Australia, Latin America, and China, regions where it sees more optical network installations emerging. The company's also thinking of expanding its wares to include wireless networking, although nothing's been announced just yet.
Investors were apparently left cold by the earnings call -- and perhaps what came before it. At press time, Digital Lightwave was the loss leader in the http://www.lightreading.com