Riverstone, Tellabs in Contract Dispute


In a case of dueling lawsuits, Riverstone Networks Inc. said Thursday it
has filed a complaint against Tellabs Inc., claiming that Tellabs failed to
fulfill obligations connected to a strategic alliance between the companies.

The complaint, filed in the Superior Court of California in Santa Clara
County, alleged that Tellabs failed to make a minimum number of purchases linked
to the original agreement.

Riverstone's complaint comes in the wake of one Tellabs filed on Tuesday
(Aug. 28) in Cook County, Ill., charging Riverstone with breach of contract,
fraud, misappropriation of trade secrets and deceptive trade practices.

Tellabs is seeking $10 million plus punitive damages to be determined by a
jury, a company spokeswoman said.

Tellabs claimed that Riverstone's products have not met contractual
requirements to handle voice traffic, and missed product development milestones.

Further, Tellabs said
it will no longer sell the 'CABLESPAN 2700,' the result of the
original equipment deal with Riverstone.

Instead, Tellabs will attempt to integrate the voice components of the
CABLESPAN system with existing CMTS and routing equipment from other

Under terms of the original deal announced last November, Tellabs agreed to
resell Riverstone's cable-modem-termination system, which is qualified for
DOCSIS 1.0 and EuroDOCSIS 1.0 specifications.

In a Thursday morning conference, Riverstone CEO Romulus Pereira told
analysts that Tellabs had sent a 'letter' to Riverstone to terminate the
contract. During the call, Pereira did not mention that Tellabs had also filed a
legal complaint against his company earlier in the week.

However, Pereira did disclose that Tellabs was obligated to generate $100
million in sales of Riverstone equipment during the life of the contract, which
was to run for a period of 18 to 24 months.

To date, Tellabs sales of Riverstone gear has generated about $5 million in
revenue, he said. By leaving the contract early, Tellabs is subject to a
financial penalty equal to about 60 percent of the total contract, or roughly
$55 million, when previous Tellabs sales of Riverstone equipment are factored
in, Pereira said.

In response, a Tellabs spokeswoman said the vendor was not subject to the
financial penalty because Riverstone's equipment did not perform up to Tellabs'

Riverstone said the complaint against Tellabs does not impact previous
guidance, and was confident that the company could bridge that gap through
direct deals and partnership sales to carriers such as Qwest Communications
International Inc., Cox Communications Inc, United Pan-Europe Communications
N.V. and Korea Telecom. Terayon Communication Systems Inc. is among Riverstone's
reselling partners.

Pereira said the Tellabs partnership showed early signs of success, but that
Tellabs had encountered difficulties due to recent workforce reductions and a
realignment of its business focus.

late August, Tellabs said it would lay off about 1,000 employees,
or 12 percent of its staff, shutter facilities in Drogheda, Ireland and
Chelmsford, Mass. and absorb a $50 million restructuring charge in the third

Tellabs said the move was necessitated by reduced capital spending by its