Riverstone Readies Restatement
In light of this news, the Nasdaq stock exchange announced that it has halted trading of the stock until the exchange is able to get more information from the company. Shares of Riverstone last traded at $1.27.
In April, the SEC launched its informal investigation, which later turned into a formal inquiry (see SEC Calls on Riverstone and Accounting for Riverstone's Problems). Since then, Riverstone shares have been plummeting in value as investors have lost confidence. But the scale of the restatement may yet surprise even the company's largest critics.
Specifically, Riverstone is questioning the appropriateness and timing of revenues recognized from certain customers. According to the company’s statement, sales to customers in which the company made investments, were subject to rights of return and other contingencies, but these sales may not have been accounted for appropriately. As a result, it’s likely that Riverstone’s stated earnings were much higher than they should have been.
The company said that investors should not rely on its historical financial statements and auditors' reports or its financial results announced for any period, while a special committee of the board of directors reviews the financials.
In September 2001, the company reported second-quarter earnings that topped growth estimates, suggesting it reached profitability ahead of expectations on a pro forma basis (see Riverstone Makes its Numbers). Six months later, revenues started to fall apart. The company’s stock took a serious hit on February 28, 2002, when Riverstone warned it would fall short of revenue expectations. The company blamed the shortfall on the telecom downturn, especially weakness among U.S. and European providers (see Riverstone Savaged on Warning).
“They posted some outstanding growth back in 2001,” says Erik Suppiger, an analyst with Pacific Growth Equities Inc.. “Some investors felt that demonstrated a compelling opportunity, and they felt the company was waiting for the market to revive. Today’s news will certainly cause people to revisit that assumption.”
Suppiger, who had already downgraded the company’s stock to an underweight rating, says he was not at all surprised by the company’s announcement today. He says he suspected that the SEC investigation would revolve around accounting issues related to certain customers.
While the company figures out what, how, and when to account for certain revenue items, it has delayed filing its 10-K annual report with the SEC (see Riverstone Delays 10-K). Because the delay breaks Nasdaq rules, Riverstone is currently defending itself in a delisting procedure (see Riverstone Branded 'E' by Nasdaq). In today’s release, the company said that it met with the Nasdaq Listing Qualifications Panel on July 17, 2002, to address its noncompliance with Nasdaq rules. The panel's decision is still pending. Nasdaq will use this decision to determine whether the company will still be listed on the exchange.
The company also said in its statement that further delay or failure to file the SEC reports could result in acceleration of the repayment of the company's convertible notes under the terms of the related indenture.
While a dark cloud looms above Riverstone, all investors can do is wait. When it last traded, the company’s stock price was trading below the value of the company's cash on hand. But Suppiger warns that the latest developments could eat away at the $196 million cash reserve.
“I’d definitely say that today’s actions make the stock riskier," he says. “It’s hard to know if their strong cash level is safe or if resulting lawsuits or penalties could erode it."
— Marguerite Reardon, Senior Editor, Light Reading