Riverstone Readies Restatement

Riverstone Networks Inc. (Nasdaq: RSTN) announced today it will restate financial results for seven quarters, including all of fiscal 2002 and the first three quarters of 2003 (see Riverstone to Restate Seven Quarters). The company, which is currently being investigated by the Securities and Exchange Commission (SEC), said that it has discovered accounting irregularities during an internal investigation.

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

Iipoed 12/4/2012 | 11:43:56 PM
re: Riverstone Readies Restatement Obviously they are history, no credibility left. They do have a fairly decent service organization however, no loyalty among their salespeople (understandable).
But at least they are keeping people employed and is the current tech economy this deserves an attaboy.
But can they survice through the end of the year?
lwyz 12/4/2012 | 11:43:56 PM
re: Riverstone Readies Restatement MR-- Look Suppiger is a nice guy but he chose not to be analytical or maybe even fair in his statements. Let's start with the press release:

"The decision to restate its financial statements results from the company's recent discovery of information calling into question the appropriateness and timing of revenues recognized from certain customers. In some cases, it appears sales to customers in which the company made investments were subject to rights of return and other contingencies that were not accounted for at the time the transactions were originally recorded"
According to 10k filed for FY2002 sales to strategic investee companies amounted to 16.2% of net revenues or roughly $36mm. Since that point sales to strategic investee companies dropped to 7% or 2.1mm and the remaining two quarters had virtually no sales amount to be questioned.

Terms like TIMING and APPROPRIATENESS refer to stuffing the channel. These sales being subject to "rights of return or other contingencies" does not mean Stanton intentially blew up revenues as Eric suggested--it means that he did not book them properly.
Look,I want to make it clear that if Riverstone illegally booked revenues in order to intentionally defraud their shareholders and peers--THEY DESERVE TO FRY--But in order for that story to plug we should have witnessed a huge amount of Insider Selling to match the strategy. In my view we didn't.. Also of note is the fact that Stanton is a really good guy not the sleazy, shifty eyed, Skilling type.

Now Marguerite you wrote that the company stated earnings that were "much higher" than they should have been--Why didn't you attempt to quantify that statement with numbers or why didn't Suppiger do the same in criticism--I am not saying that my stated numbers are correct but at least I tried and went through the 10k's. Neither of you did.

In closing, I have nothing to gain or lose in this situation except maybe regard for some acquaintances--but when you write stories in the future please try to do your homework or at least try to get your experts to quantify their statements with numbers especially when it comes to Accounting issues.

whyiswhy 12/4/2012 | 11:43:54 PM
re: Riverstone Readies Restatement Wha??

Look,I want to make it clear that if Riverstone illegally booked revenues in order to intentionally defraud their shareholders and peers--THEY DESERVE TO FRY--But in order for that story to plug we should have witnessed a huge amount of Insider Selling to match the strategy. In my view we didn't..

Are you saying that as long as THE INSIDERS APARENTLY didn't make any money on the cooking, it was OK? Or possibly unintended?

Sorry, that logic does not wash. More likely someone got cold feet and/or was going to out the scam and/or sue their pants off.

optical_man 12/4/2012 | 11:43:54 PM
re: Riverstone Readies Restatement Remember that Riverstone is part of the old Cabletron.
Cabletron spun out the Carrier switch division, hoping to 'unlock' the value.
A rose by any other name.....
Was only a matter of time.
Amazing it survived this long, but in any event, goodbye.
BobbyMax 12/4/2012 | 11:43:52 PM
re: Riverstone Readies Restatement Riversone with its management from another country tried to pull a fast one on its earnings. This is a very serious offense and Riverstone should be refrained from doing business in the US. False stements on earnings do require involvement on certain employees. These employees
need to be imprisonned for their activities.
lwyz 12/4/2012 | 11:43:51 PM
re: Riverstone Readies Restatement my logic doesn't wash?

how'bout yours--let's rob a bank--
make sure the cameras see us and leave the money in the vault--
yeah you're right right--that does make more sense
whyiswhy 12/4/2012 | 11:43:49 PM
re: Riverstone Readies Restatement Reiterate: your logic does not wash.

If you had any knwoledge of how business is really conducted, you would know this kind of SCAM happens alot, to greater or lesser degree, exactly the way this one did.

Usually the CROOKS exit with money in pocket, and nobody goes after them.

Like Muller over at JDSU claiming last year that the company would be cashflow breakeven by the end of this year. Now it comes out that it will be (another promise) yet another year.

"Oops, I meant to say 2004, but somehow, my tongue got tied and it came out 2003...."

Heck, can't throw a guy in jail for having tongue problems.

Riverstone: they bald face lied and thought they would be long gone before it came back to bite 'em. They didn't think of ENRON happening and accounting practice tightening up. That's why they didn't give a hoot about the "cameras" as you say.

Sheesh....lwyz...stands for (their) lawyers?

Think you are going to have to lean on their D&O to get paid buddy.


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