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China Deals Can Pose Accounting Conflicts
"First, he asked me for a favor," Ren said. "Then he said that if I didn't agree to the order, Radvision wouldn't do business with us anymore."
Ren took the threat seriously, he said, because Control Tech was already worried that Radvision was seeking other distributors in China. Control Tech was trained in selling Radvision's gear and had been sinking $250,000 a year into marketing its products.
"We agreed," Ren said. "We had no choice."
In exchange for the $800,000 order, Ren said Livne made a verbal promise that Control Tech would remain Radvision's sole China distributor.
In early February, Radvision chief executive Gadi Tamari told Wall Street analysts that 2004 had been "a record year for our company," according to a transcript of the firm's quarterly conference call. When analysts asked about China, Tamari said, "China remains our largest market overall in Asia-Pacific." He added: "We still have a very good relationship with Control Tech."
In March, with the end of another quarter approaching, Livne returned to Beijing, Ren said, this time accompanied by Radvision's chief executive.
"At first, they were very polite, very discreet," Ren said. "But then they were desperate. They said, 'If you want to continue the relationship, you have to give us $600,000 for the first quarter and $5.1 million for the year.'"
Radvision's chief executive did not return phone calls.
Ren again reluctantly assented, he said. Control Tech placed the order on March 18 via a Chinese import agent, according to the purchasing document. But on March 28, Taragin, Radvision's general counsel, issued a letter to Control Tech: "Your rights to represent Radvision will terminate immediately as of the date of this letter."
"They blatantly lied to me," Ren said.
Reached by phone in Israel, Taragin said Radvision ended its relationship with Control Tech because of the Chinese company's "substantial and material breaches of the contract," declining to offer specifics. Since then, he said, Control Tech has neither returned Radvision's corporate seal nor relinquished rights to the Radvision name on its Web site.
On March 31, three days after it cut ties with Control Tech, Radvision shipped the $600,000 worth of gear from Tel Aviv to Shanghai, according to an air waybill.
Hartwick said she figures Radvision wanted to book the revenue from the shipment to achieve its sales target, but then make it impossible for Control Tech to actually sell the gear so it could open up new channels with other local agents. Today, the Radvision gear sits in boxes in a warehouse in Shanghai. Control Tech has repeatedly pressed Radvision to take it back and refund its money but has been refused, Hartwick said.
Without the rights to represent Radvision, Control Tech maintains that it cannot sell its inventory -- particularly as Radvision has been telling customers that any goods brought into China by unauthorized firms should be considered "illegal imports," according to a letter issued by Radvision's China office.
Two former SEC enforcement branch lawyers said the timing of these transactions raises legal questions, suggesting that Radvision may not be able to book the sale as revenue.
The SEC often considers unusual end-of-quarter transactions as "highly suspicious," said Jason P. Lee, a former commission attorney who co-chairs the Securities Enforcement Defense Group at Shartsis Friese LLP in San Francisco.
Taragin dismissed as "ridiculous" suggestions of impropriety. "If the SEC feels they have a problem," he said, "they know how to contact me."
Without the $600,000 deal, Radvision's revenue would have come in at $15.7 million -- $300,000 below forecasts -- according to the company's earnings statement. On April 20, Radvision declared that its first-quarter revenue had "exceeded the company's forecast," reaching $16.3 million.
In a conference that day with Wall Street analysts, Tamari, Radvision's chief executive, again highlighted strong sales in China.
"China remained our largest market in Asia-Pacific," he said. "This Asia-Pacific market, which is obviously a very promising market in the world, is doing well for us."
In June, with the end of another quarter in sight, Tamari and Livne flew back to China and tried to settle matters with Hartwick.
They met in a hotel bar near Radvision's office, Hartwick recalled. Livne made a plea for another order, she said.
"He said that if we would give him another order for $1.2 million, we could go back to how things were before," Hartwick said.
Hartwick refused. On July 19, Radvision disappointed the market, announcing earnings of $17.5 million -- less than its forecast of $18 million.