Riverstone Oops! Level Rises

Riverstone Networks Inc. (Nasdaq: RSTNE) released a barrage of new information about its financial statements that reveal the company may be on even thinner ice than previously thought (see Riverstone Reveals Details).

In a release issued last night, the company nearly doubled the amount of revenues it said it had overstated for fiscal year 2002 and more than tripled the amount it had overstated for fiscal year 2003. Now the company says it overstated 2002 revenues by as much as $85.5 million and overstated 2003 revenues by $13.3 million. That's up from the previous estimates of $47.3 million and $4.2 million, respectively (see Riverstone Restates, Stock Falls).

"The company has determined that it overstated its previously reported net revenues for the fiscal year ended March 2, 2002 of $210.8 million by as much as $85.5 million and its previously reported net revenues for the nine months ended November 30, 2002 of $54.5 million by as much as $12.7 million," said the release (see Riverstone Rethinks Revenues).

The release continues: "In addition, the company has determined that previously announced net revenues for the fiscal year ended March 1, 2003 of $69.6 million were overstated by as much as $13.3 million."

Where does the madness stop? First-quarter 2003 restatements will receive a slightly positive revision, said the company. The company "anticipates a positive impact of as much as $700,000 on previously announced net revenues for the first quarter of fiscal 2004 ended May 31, 2003 of $12.7 million."

According to the press release and public filings with the Securities and Exchange Commission (SEC), the overstatements are primarily related to revenue recognized on sales to customers in which the company made investments -- and on "sales that were subject to rights of return, pricing discounts and other contingencies that were not accounted for at the time the transactions were originally recorded."

Many investors had been prepared for the worst after prior announcements about restatements. But Riverstone is still in danger of being delisted from the Nasdaq pending the filing of its 10-K, and it's also been under investigation by the SEC. Its shares fell $0.10 (8%) to $1.16, in early trading today.

As if the earnings statements weren't enough to worry about, the company issued a new round of 8-K filings with the SEC that included revised "Risk Statements," the usual disclosure about all the things that could possibly go wrong with a company. All public companies are required to make Risk Statements in their SEC filings.

Although Risk Statements typically consist of pages and pages of legal boilerplate, Riverstone's is a real page-turner. Here a few particular gems:

  • We have a general history of losses and cannot assure you that we will operate profitably in the future.

  • Because our accounting practices review is ongoing, we cannot state with certainty the scope and timing of any restatements.

  • We cannot state with certainty when we will be able to file our Form 10-K and Form 10-Q, the continued delay of which could result in the acceleration of the repayment of our convertible notes.

  • The pending SEC investigation and other litigation and regulatory proceedings regarding the restatement of our financial statements could seriously harm our business.

  • We generally do not have binding commitments from our customers and if significant customers cancel, reduce or delay a large purchase, our revenues may decline and the price of our stock may fall.

  • We expect the average selling prices of our products to decrease rapidly, which may reduce our gross margins or revenues.

  • Our former parent is claiming that we owe it money.
    (Riverstone says that former fellow Cabletron family member Enterasys Networks Inc. is claiming Riverstone owes it $39 million as a result of the allocation of certain assets and liabilities.)
All of these factors combined make for an interesting turnaround task for Riverstone's new CEO, Oscar Rodriguez, a former Nortel executive who took the job a week ago (see Riverstone's Got a New Chief).

— R. Scott Raynovich, US Editor, Light Reading

Belzebutt 12/4/2012 | 11:30:47 PM
re: Riverstone Oops! Level Rises We have a general history of losses and cannot assure you that we will operate profitably in the future.

photonalley 12/4/2012 | 11:30:43 PM
re: Riverstone Oops! Level Rises How can this company still be in business? Riverstone just annouced a new CEO last week. He had to know this was coming before he took the job. Is it a question of desperation or does he think he can work miracles? I can't see Riverstone in business much longer. I hope I am wrong for the employees sakes.

Photon alley
sailor 12/4/2012 | 11:30:38 PM
re: Riverstone Oops! Level Rises If any of us did our jobs with this lack of professionalism we would deserve to be fired. CEO's and CFO's deserve criminal prosecution for this level of incompetence. This is fraud by any other name.
BuckStopsHere 12/4/2012 | 11:30:27 PM
re: Riverstone Oops! Level Rises Fraud? I don't think so. In fact, I will go so far as to say that I am proud of Mr. Rodriguez. In less than two weeks in office, he has told you the truth about Riverstone. If more executives had done so over the last few years, we would find ourselves in a very different economic condition today.
firstmile 12/4/2012 | 11:30:23 PM
re: Riverstone Oops! Level Rises It's not Oscar. But I agree with Sailor...the rest of the boyz should go to jail. And yes, I am actually a shareholder in this fiasco!
dodo 12/4/2012 | 11:30:22 PM
re: Riverstone Oops! Level Rises How could a CFO who worked for blue chips companies like INTEL and HP mess up like this?

Where are the auditors and/or BOD finance committee in this case, assuming that the former CEO wanted the CFO to cook the books.
Hanover_Fist 12/4/2012 | 11:30:17 PM
re: Riverstone Oops! Level Rises The executive staff at a minimum (and possibly even the board of directors) were very well aware of their lack of fudiciary responsibility to Riverstone's employess and stockholders.

The excutives at Riverstone suffer the same shortcomings as those of Tyco, Enron, Martha Stewart, and the myriad other companies that put their own personal gain in front of their responsibility to the company that hired them.

For more information, you can read about how well the executives at Riverstone were 'tracking' their success...

"Despite having cash adjudged sufficient for several years continued operation, Mr Feldman stated that Riverstone Networks management monitors very closely the ongoing cash-burn rate. The company is confident that not only will it survive the present market downturn, but will be in a position to take full advantage of a market recovery - this confidence is stated to be shared by both Riverstone Networks customers and its investors."

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