Thursday, August 25, 2005

China Deals Can Pose Accounting ConflictsRadvision

-Control Tech Dispute Reveals Potential Problems That Can Develop

By Peter S. Goodman Washington Post Foreign Service Monday, August 22, 2005; A13

SHANGHAI -- It began as a joint venture aimed at capturing customers in China, the world's largest potential market for pretty much everything.

Radvision Ltd., an Israeli company whose stock trades on the Nasdaq Stock Market, had the products -- sophisticated videoconferencing equipment. Beijing Control Tech had the relationships with purchasing agents at government ministries and state-owned companies, which make up more than three-fourths of the market for such goods in the People's Republic of China.

But as Control Tech tells the story, the relationship soon devolved into a crude arrangement that could bring Radvision into conflict with the accounting rules that govern in the United States, where its stock rises and falls with its earnings. Nearly every quarter, Radvision pressured Control Tech to buy more gear even as unsold inventories mounted. Twice, these end-of-quarter sales allowed Radvision to meet its earnings targets, Control Tech executives said.

Radvision's general counsel, Arnold Taragin, issued a blanket denial, characterizing the company's dispute with Control Tech as simply a commercial relationship gone awry. "We do not negotiate commercial disputes in public," Taragin said by phone from Israel. "If Control Tech wants to do something, they can call me or they can sue us."

As China continues its relentless development, attracting more than $100 billion in foreign investment in the past two years alone, business is becoming a larger slice of overall revenue for many multinational firms. But as the Radvision case illustrates, the appeal of China profits may be compelling some managers for American and U.S.-listed companies to test the limits of acceptable bookkeeping, risking conflict with the Securities and Exchange Commission.

Two years ago, Radvision -- which has offices in Israel, New Jersey, the United Kingdom and Hong Kong -- gave Control Tech the exclusive rights to sell its high-end videoconferencing system in China.

According to Control Tech's general manager, this mutually beneficial arrangement changed late last year when Radvision brought in a new Asia-Pacific general manager, Eitan Livne.

Lean, fit and in his thirties, Livne was known to wear casual attire at business meetings, once showing up to negotiate a purchase in blue jeans and a black T-shirt, recalled Carrie Hartwick, president of Hartcourt Cos., which purchased Control Tech in February. The first time she met him, she was struck by what she termed Livne's "wheeler dealer" style.

"He told me that he had lived in China for six or seven years and he knew how to play the China game," Hartwick recalled. "He said 'In China, a contract means nothing. I can sign any contract you want, but at the end of the day we can do what we want.' I was shocked that an executive at a U.S.-listed company could so totally deviate from the expected level of corporate practice."

Reached by telephone in Hong Kong, Livne denied that account. "Nothing like this ever happened," he said, before asking for a list of written questions to which he did not respond.
According to Ren Qi, general manager of Beijing Control Tech, in December Livne flew to Beijing to press Control Tech for an end-of-year order. They met in a conference room at Radvision's China headquarters.

Ren says he demurred, because Control Tech was already sitting on more than $2 million in unsold equipment. Ren told Livne that he could only buy another $500,000, he said.

"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.


Post a Comment

<< Home