Riverstone deal marks end of era

Cabletron Systems’ last remaining public vestige – Riverstone Networks – is no more, at least as far as the stock market is concerned.

On Friday, Feb. 10, Riverstone stock could no longer be traded publicly, its securities license has been revoked, its assets are about to be sold off in bankruptcy court and its shareholders stuck with whatever is left after the bidding process is complete.

“Now the investors get to wait and see,” said Howard Kolt, spokesperson for Riverstone.

All in all, the bankruptcy and potential sale of the company’s assets marks the relatively sudden demise of a company that was once one of Cabletron’s greatest assets. In recent years, the company became a shadow of its former self – it never filed accurate financial statements and has been plagued by investigations and lawsuits.

At this point, shareholders will be lucky if they get a tenth of the price the stock was worth when it spun off from Cabletron in 2001.

On Feb. 7, Riverstone — a provider of Ethernet routers — announced that it was filing for Chapter 11 bankruptcy as part of a pending $170 million sale of assets to Lucent Technologies.

Bankruptcy papers revealed that the company was nearly $32 million in the hole, much more than investors previously had believed. And the company said it was losing about $4 million to $5 million a month.

Then on Friday, Feb. 10, the Securities and Exchange Commission revoked Riverstone’s registration to publicly trade stock, ending a long-standing investigation against the company, though not necessarily against individuals associated with the company.

The SEC revocation didn’t mention pending investigations into revenue inflation revealed by the company in earlier SEC filings. Instead, the revocation was linked to failure to file required audited financial statements.

This failure to file prompted the Nasdaq two years ago to delist the company’s stock. It had been traded on the Pink Sheets – a more loosely regulated Internet trading exchange.

Brokers registered with the SEC are no longer allowed to buy or sell Riverstone stock through any exchange. Shareholders can either directly trade their stock privately or wait to see what they get through bankruptcy proceedings.

Shareholders are usually the last in line in bankruptcy proceedings, but in this case Riverstone’s share price nearly doubled to slightly over $1 after news Feb. 7 of its impending sale to Lucent, largely because investors believed that the company had a strong cash position. In its last unaudited earnings release, the company said it had $120 million in cash in securities at August 27, 2005.

However, in the bankruptcy filing the company said that on Dec. 24 it had $98 million in assets (with $91 million as “cash on hand”) and $130 million in liabilities.

The only major debt listed by the company was $66 million to bondholders, and in the text of the filings it mentioned another $6 million in trade debt and other current payables.

Kolt said that the discrepancy in the amount of debt — which amounts to $58 million – would be explained in subsequent bankruptcy filings.

Although the plan is to sell the assets to Lucent, other companies may bid on Riverstone. Bidders would have to submit bids prior to March 16 if Riverstone’s bankruptcy filing is accepted by the court. A hearing on the bids (known as a sales hearing) would be scheduled to take place a week later, March 23.

Sales through bankruptcy are becoming increasingly common, according to Andrew Troop, a Boston corporate bankruptcy attorney. Using the process, a company can deliver a “very clean title, a clean break from all the problems that plagued the company.” (The Lucent-Riverstone sales agreement for instance doesn’t cover any pending SEC investigation into the company.)

Bankruptcy courts are particularly eager to approve such sales when there is a willing and able buyer. Lucent, itself a spin-off from AT&T, would appear to fit that category. However, said Troop, Lucent also could be a “stalking horse” for other bidders.

But investors on the Riverstone electronic bulletin board say they feel cheated of their chance to sell their shares, arguing that the company’s bankruptcy filing didn’t make it clear when the company would be delisted by the Pink Sheets, or if shares could be traded elsewhere. Before being able to decide what to do, they were suddenly stuck with shares that they could not sell.

Now the hope is that the company will fetch more than its $1.07-a-share closing price on Feb. 10.

Another Cabletron spin-off, Enterasys Networks, has since moved to Massachusetts. Its shareholders are scheduled to vote later this month on the company’s sale to private investors, at a price that amounts to about an eighth of the stock’s value at the time of the spin-off in 2001.

Enterasys itself has faced years of turmoil, eventually settling an SEC investigation into fraudulently inflated revenue as well as related class action lawsuits. Several former executives, including a ex-CEO, Enrique “Henry” Fiallo, pleaded guilty to fraud. Five other executives, including former CFO Robert Gagalis, are scheduled to go on trial in March.

The revocation of Riverstone’s securities license ends an investigation into the company because the SEC will no longer have a publicly traded company to investigate. However, that doesn’t mean individuals are off the hook, officials said, but they would not confirm or deny whether such an investigation is ongoing.

Recent filings in the Enterasys criminal case show that the two probes may be linked. The Enterasys defendants are fighting attempts to introduce evidence concerning Riverstone into the Enterasys prosecution.

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