Riverstone Networks Completes Financial Statements for Fiscal Year 2003 and First Three Quarters of Fiscal Year 2004

Business Wire, Sept 2, 2004

SANTA CLARA, Calif. -- Riverstone Networks, Inc. (Pink Sheets:RSTN), a leading provider of carrier class solutions for next generation Metro Ethernet networks, today announced that it has completed its audited financial statements for fiscal year 2003 and unaudited financial statements for the first three quarters of fiscal year 2004. The statements were submitted to the Securities and Exchange Commission before the open of the market. Financial statements for the fiscal year ended March 1, 2003, including the report thereon by the company's independent registered public accounting firm, were furnished on Form 8-K; and the first three quarters of fiscal year 2004 ended May 31, August 30 and November 29, 2003 were filed on Forms 10-Q. The company said it intends to submit audited financial statements for the fiscal year ended February 28, 2004 in the near future, and will provide an update on the timing of this filing in mid-September.

As a result of the previously announced review of its accounting practices, the company uncovered previously undisclosed communications by former company employees, as well as other information calling into question the appropriateness and timing of revenues recognized from certain customers. Among the matters discovered were: (i) unauthorized side arrangements and other evidence of unauthorized promises made by certain former company employees that provided customers, particularly resellers, with undisclosed rights of return or other forms of concession not previously communicated and, therefore, which were not previously accounted for in the company's consolidated financial statements, (ii) evidence indicating revenue was improperly recognized on sales to customers in which the company had an investment interest that did not have business substance, and (iii) improper accounting for barter transactions.

Fiscal Year 2003

The audited financial statements for the fiscal year 2003 reflect a previously reported opening accumulated deficit balance of $72.2 million as of March 2, 2002. As a result of adjustments discovered in the course of the accounting practices review, this opening balance has been increased by $95.0 million, resulting in a restated accumulated deficit of $167.2 million as of March 2, 2002. The components of the restatement adjustments include the following items:

--The company made a significant change in its revenue recognition accounting policy for sales to resellers from recognition on shipment (i.e., on a "sell-in" basis) to recognition upon sale by the reseller (i.e., on a "sell-through" basis). The impact of the change in accounting was to increase the previously reported accumulated deficit by $31.4 million.

--The investigation disclosed that certain of the company's previously recorded sale/investment transactions lacked business substance. The company reevaluated those transactions and reversed substantially all of those investments, as well as revenue previously recorded prior to, contemporaneously with, or after acquiring an equity interest in those customers. The impact of the related adjustments was to increase the previously reported accumulated deficit by $51.7 million, and had a significant impact on previously reported assets.

--Lastly, in the course of preparing the restated consolidated balance sheet at March 2, 2002 to properly reflect its sales and investment transactions, the company identified improper accounting for barter transactions and other items and errors for which accounting adjustments were necessary. The impact of these adjustments was to increase the previously reported accumulated deficit by $11.9 million.

For the fiscal year ended March 1, 2003, the company reported audited results of:

--  Net revenues of $69.9 million,

    --  Gross profit of $22.3 million,

    --  Operating expenses of $101.5 million, including:

        --  Offsetting gain on settlement in a reseller litigation
            matter in the amount of $11.5 million,

        --  Restructuring charges of $6.6 million,

    --  Operating loss of $79.2 million,

    --  Net loss of $87.8 million, or $0.71 per basic and diluted
        share, including a non-operating charge for the previously
        announced class action and derivative securities litigation
        settlements totaling $20.2 million offset by a gain on
        extinguishment of debt of $10.5 million.

Fiscal Year 2004

The company also reported the following unaudited results for the first three quarters of fiscal year 2004, as compared to the unaudited restated results for the prior year period:

--  First Quarter Ended May 31, 2003:

        --  Net revenues of $16.3 million vs. $17.2 million (as
            restated for the prior year period),

        --  Gross profit of $4.2 million vs. $5.9 million (as restated
            for the prior year period),

        --  Operating expenses of $25.3 million vs. $27.8 million (as
            restated for the prior year period),

        --  Operating loss of $21.1 million vs. $21.9 million (as
            restated for the prior year period),

        --  Net loss of $19.4 million, or $0.15 per basic and diluted
            share, which in fiscal year 2004 included a gain on
            extinguishment of debt reflected in other non-operating
            income of $2.9 million, vs. a net loss in fiscal year 2003
            of $22.1 million, or $0.18 per basic and diluted share (as
            restated for the prior year period).

    --  Second Quarter Ended August 30, 2003:

        --  Net revenues of $14.5 million vs. $17.8 million (as
            restated for the prior year period),

        --  Gross profit of $3.5 million vs. $4.2 million (as restated
            for the prior year period),

        --  Operating expenses of $34.8 million, which in fiscal year
            2004 included $2.7 million of restructuring charges vs.
            $34.5 million (as restated for the prior year period)
            which in fiscal year 2003 included restructuring charges
            of $5.5 million,

        --  Operating loss of $31.3 million vs. $30.4 million (as
            restated for the prior year period),

        --  Net loss of $32.5 million, or $0.26 per basic and diluted
            share, vs. a net loss of $51.4 million, or $0.42 per basic
            and diluted share (as restated for the prior year period),
            which in fiscal year 2003 included a non-operating charge
            for the previously announced class action and derivative
            securities litigation settlements totaling $20.2 million.

    --  Third Quarter Ended November 29, 2003:

        --  Net revenues of $9.2 million vs. $18.8 million (as
            restated for the prior year period),

        --  Gross profit of $1.5 million vs. $8.6 million (as restated
            for the prior year period),

        --  Operating expenses of $24.8 million vs. $11.7 million (as
            restated for the prior year period), which in fiscal year
            2003 included an offsetting gain on settlement in a
            reseller litigation matter in the amount of $11.5 million,

        --  Operating loss of $23.3 million vs. $3.1 million, (as
            restated for the prior year period),

        --  Net loss of $24.1 million, or $0.19 per share, vs. net
            income of $10.0 million, or $0.08 per basic and diluted
            share (as restated for the prior year period), which in
            fiscal year 2003 included a gain on extinguishment of debt
            reflected in other non-operating income in the amount of
            $10.5 million.