<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 22, 1999.
REGISTRATION NO. 333-74479
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
REDBACK NETWORKS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 3576 77-0438443
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
1389 MOFFETT PARK DRIVE
SUNNYVALE, CALIFORNIA 94089
(408) 548-3500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
DENNIS L. BARSEMA
PRESIDENT AND CHIEF EXECUTIVE OFFICER
REDBACK NETWORKS INC.
1389 MOFFETT PARK DRIVE
SUNNYVALE, CALIFORNIA 94089
(408) 548-3500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
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ROBERT V. GUNDERSON, JR. JEFFREY D. SAPER
RENEE F. LANAM KURT J. BERNEY
BRETT A. NISSENBERG ANIL P. PATEL
DAVID B. DAVIS WILSON SONSINI GOODRICH & ROSATI
GUNDERSON DETTMER STOUGH PROFESSIONAL CORPORATION
VILLENEUVE FRANKLIN & HACHIGIAN, LLP 650 PAGE MILL ROAD
155 CONSTITUTION DRIVE PALO ALTO, CALIFORNIA 94304
MENLO PARK, CALIFORNIA 94025 (650) 493-9300
(650) 321-2400
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) SHARE PRICE(2) REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------------------
Common Stock, $0.0001 par value.... 2,875,000 $14.00 $40,250,000 $11,190(3)
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</TABLE>
(1) Includes 375,000 shares that may be purchased by the Underwriters to cover
over-allotments.
(2) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(a).
(3) The Registrant previously paid a fee in the amount of $10,391.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SUCH SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS (Subject to Completion)
Issued April 22, 1999
2,500,000 Shares
LOGO
COMMON STOCK
------------------------
REDBACK NETWORKS IS OFFERING 2,500,000 SHARES OF ITS COMMON STOCK. THIS IS OUR
INITIAL PUBLIC OFFERING AND NO PUBLIC MARKET CURRENTLY EXISTS FOR OUR SHARES. WE
ANTICIPATE THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $12 AND $14
PER SHARE.
------------------------
WE HAVE APPLIED TO LIST OUR COMMON STOCK ON THE NASDAQ NATIONAL
MARKET UNDER THE SYMBOL "RBAK."
------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 5.
------------------------
PRICE $ A SHARE
------------------------
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS REDBACK NETWORKS
---------- ------------- ----------------
<S> <C> <C> <C>
Per Share................................. $ $ $
Total..................................... $ $ $
</TABLE>
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Redback Networks has granted the underwriters the right to purchase up to an
additional 375,000 shares of common stock to cover over-allotments. Morgan
Stanley & Co. Incorporated expects to deliver the shares of common stock to
purchasers on , 1999.
------------------------
MORGAN STANLEY DEAN WITTER
BANCBOSTON ROBERTSON STEPHENS
DAIN RAUSCHER WESSELS
a division of Dain Rauscher Incorporated
, 1999
<PAGE> 3
[GRAPHIC -- INSIDE FRONT COVER]
The heading for the page reads "All Services. All Users. One Solution."
The left third of the page graphically illustrates a variety of uses for
the Internet access infrastructure including a web page and an interactive video
game.
In the center of the page is a picture of a large crowd of people.
On the right third of the page is a picture of the SMS 1000.
Across the bottom of the page runs the following text:
"The Internet is exploding. Thousands of new users go on-line each month.
New high-speed data, audio and video services are constantly being created.
However, bringing large numbers of new users and bandwidth-intensive
services together compromises network performance and can delay the introduction
of new services.
Fortunately, Redback Networks has a solution. Our Subscriber Management
Systems(TM) (SMS), enable service providers to deploy high-speed services more
quickly and at lower cost than is currently possible.
The SMS bridges the operational gap between high-speed access concentrators
and routers. By providing the missing elements of subscriber management and
traffic translation, the SMS allows service providers to deploy high-speed
services without costly new investments in routers.
At the same time, the SMS allows the service provider to use existing
systems to manage subscribers, regardless of the access technology or equipment.
In addition, today the SMS architecture immediately scales to support 4,000
simultaneous subscribers, over 15 times the number available through most large
routers.
Service providers can deliver multiple services -- and generate multiple
revenue streams -- through a single connection. Carriers can create wholesale
services to multiple providers.
With so many features for speeding the deployment of high-speed services,
it's not surprising that the SMS is the choice of many of the largest U.S.
carriers, and leading service providers."
Also on the bottom of the page is a graphic. On the left side of this
graphic, three distinct Internet access modes, DSL, cable and wireless, are all
connected to our SMS 1000 product in the center, which is connected to both the
Internet and a corporate network.
In the bottom right corner is our logo.
<PAGE> 4
TABLE OF CONTENTS
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PAGE
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Prospectus Summary.................. 3
Risk Factors........................ 5
Use of Proceeds..................... 17
Dividend Policy..................... 17
Capitalization...................... 18
Dilution............................ 19
Selected Financial Data............. 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 21
Business............................ 28
</TABLE>
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PAGE
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Management.......................... 40
Certain Transactions................ 51
Principal Stockholders.............. 54
Description of Capital Stock........ 56
Shares Eligible for Future Sale..... 59
Underwriters........................ 61
Legal Matters....................... 63
Experts............................. 63
Additional Information.............. 64
Index to Financial Statements....... F-1
</TABLE>
-------------------------
We were incorporated in Delaware in August 1996. Our principal executive
offices are located at 1389 Moffett Park Drive, Sunnyvale, California 94089 and
our telephone number is (408) 548-3500. We have filed for trademark protection
for "REDBACK." This prospectus also contains trademarks of other companies.
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of the
prospectus or any sale of the common stock. In this prospectus, unless the
context indicates otherwise, the Company, Redback Networks, Redback, we, us, and
our refer to Redback Networks Inc.
Unless otherwise indicated, all information in this prospectus (1) gives
effect to the conversion of all outstanding shares of preferred stock into
shares of common stock effective upon the closing of the offering, (2) assumes
no exercise of the underwriters' over-allotment option and (3) assumes no
exercise of outstanding warrants to purchase, as of the closing, 133,971 shares
of our common stock.
UNTIL , 1999 (25 DAYS AFTER COMMENCEMENT OF THIS
OFFERING), ALL DEALERS THAT BUY, SELL OR TRADE OUR COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
For investors outside the United States: Neither we nor any of the
underwriters have done anything that would permit this offering or possession or
distribution of this prospectus in any jurisdiction where action for that
purpose is required, other than in the United States. You are required to inform
yourselves about and to observe any restrictions relating to this offering and
the distribution of this prospectus.
2
<PAGE> 5
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering and our financial statements and related notes appearing elsewhere in
this prospectus.
REDBACK NETWORKS
Redback Networks is a leading provider of advanced networking systems that
enable carriers, cable operators and service providers to rapidly deploy
high-speed access to the Internet and corporate networks. Our Subscriber
Management System, or SMS, combines a modular chassis with sophisticated
subscriber management software. The SMS connects and manages large numbers of
subscribers using any of the major high-speed access technologies, including
digital subscriber line, or DSL, cable and wireless. We sell our SMS product
family through our direct sales force, resellers and distribution partners, such
as Nokia and Nortel Networks. Bridging the gap between high-speed access
concentrators and routers connecting to the Internet backbone, our SMS is
currently being used by many of the largest carriers and service providers,
including UUNET, a subsidiary of MCI Worldcom, SBC, Southwestern Bell
Information Systems and Pacific Bell Internet, subsidiaries of SBC, GTE,
Ameritech, Bell Canada, Bell South, Concentric, Earthlink, Flashcom, Korea
Telecom, Verio and @Work, a division of @Home.
In recent years, there has been a significant increase in demand by
businesses and consumers for broadband, or high-speed, access to the Internet
and to corporate networks. While carriers, cable operators and service providers
are attempting to provide inexpensive and comprehensive broadband access, there
are several major challenges associated with scaling and configuring existing
network architectures to accommodate large numbers of new high-speed
subscribers. We believe widespread deployment of broadband services requires a
new model for subscriber management, which efficiently terminates subscriber
connections, manages broadband subscribers, provides flexibility for typical
point-to-point connections, and supports multiple broadband access technologies
simultaneously.
Our SMS meets the above requirements. Whether deployed at subscriber
aggregation points by telecommunications carriers, by cable operators or by
service providers, the SMS accepts a large concentration of high-speed data
traffic from such devices as DSL access multiplexers, or DSLAMs, cable modem
termination systems and wireless termination systems. Our SMS reduces the
processing requirements placed on routers connecting to the Internet backbone in
broadband networks. Our SMS product family includes the SMS 1000, our flagship
solution, which today supports up to 4,000 simultaneous subscribers, and the
recently introduced SMS 500, designed for smaller numbers of subscribers. The
key benefits of our solution include:
- Enhances Broadband Operations. Our SMS bridges the operational gap
between "last mile" access networks that serve businesses and homes and
the routers connecting to the Internet backbone and corporate networks.
- Supports All Major Access Technologies. Our SMS provides a consistent
operational model and supports all major access technologies, including
DSL, cable, wireless and dial.
- Facilitates Rapid and Scalable Deployment. Our SMS allows service
providers' to use existing access, accounting and management control
systems, including RADIUS databases, enabling them to quickly deploy
high-speed access and achieve rapid time-to-market for significant
revenue-generating services.
- Provides Platform for the Delivery of Value-Added Services. Our SMS
enables carriers, cable operators and service providers to create and
market new service offerings that extend broadband connectivity and
capabilities. For example, our solution enables service selection and
tiered services.
- Simplifies End-User Administration and Support. Our SMS allows easy
configuration and administration of end-user broadband modems, further
reducing the cost of providing service.
We are focused on delivering subscriber management solutions to carriers
and service providers and intend to use our position in the DSL market to
penetrate the cable and wireless broadband markets. We believe our software
differentiates our solution and provides a competitive advantage by delivering
advanced subscriber management services and functionality. We will continue to
develop features and functionality that further enhance the ability of carriers,
cable operators and service providers to deliver profitable services. We intend
to expand our product family to address a range of functionality, density and
application requirements.
3
<PAGE> 6
THE OFFERING
Common stock offered.......... 2,500,000 shares
Common stock to be outstanding
after the offering.......... 21,034,119 shares
Over-allotment option......... 375,000 shares
Use of proceeds............... We intend to use the proceeds for general
corporate purposes, including capital
expenditures and working capital. See "Use of
Proceeds."
Dividend Policy............... We do not anticipate paying cash dividends.
Proposed Nasdaq National
Market symbol................. RBAK
The foregoing information excludes 2,906,411 shares of common stock
issuable upon exercise of outstanding options as of March 31, 1999 at an average
exercise price of $3.49 per share, 133,971 shares of common stock issuable upon
exercise of outstanding warrants at an average exercise price of $1.89 per share
and 4,582,750 shares of common stock reserved for issuance under our stock plans
as of March 31, 1999.
SUMMARY FINANCIAL DATA
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THREE MONTHS ENDED
-----------------------------------------------------
MAR. 31, JUN. 30, SEPT. 30, DEC. 31, MAR. 31,
1998 1998 1998 1998 1999
-------- -------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues................................ $ 478 $ 1,294 $ 2,933 $ 4,501 $ 6,517
Gross profit................................ 212 618 1,761 3,012 4,546
Loss from operations........................ (2,007) (2,153) (2,574) (3,145) (3,775)
Net loss.................................... (1,981) (2,173) (2,579) (3,143) (3,801)
Pro forma basic and diluted net loss per
share..................................... $ (.18) $ (.18) $ (.19) $ (.22) $ (.26)
Shares used in computing pro forma basic and
diluted net loss per share................ 11,254 11,899 13,398 14,185 14,689
</TABLE>
The following table presents summary balance sheet data at March 31, 1999,
which has been adjusted for the conversion of Redback Networks preferred stock
outstanding as of March 31, 1999 into 10,520,153 shares of common stock and our
sale of 2,500,000 shares of our common stock in this offering and the
application of the estimated proceeds, less estimated expenses. See "Use of
Proceeds" and "Capitalization."
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AT MARCH 31, 1999
----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
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BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 5,264 $34,666
Working capital............................................. 1,701 31,103
Total assets................................................ 16,571 45,796
Long-term obligations, less current portion................. 1,370 1,370
Total stockholders' equity.................................. 4,444 33,669
</TABLE>
4
<PAGE> 7
RISK FACTORS
This offering and an investment in our common stock involve a high degree
of risk. You should carefully consider the following risk factors and the other
information in this prospectus before investing in our common stock. Our
business, results of operations and financial condition could be seriously
harmed by any of the following risks. The trading price of our common stock
could decline due to any of these risks, and you may lose all or part of any
investment you make in our common stock.
RISKS RELATED TO OUR BUSINESS
OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE WE HAVE A LIMITED OPERATING
HISTORY
We were founded in August 1996 and only began shipping products in material
quantities in the second quarter of 1998. You should consider the risks and
difficulties frequently encountered by companies like ourselves in a new and
rapidly evolving market. From February 28, 1998 to March 31, 1999, we have
experienced significant growth -- from 39 employees to 127 employees. Our
ability to sell products and services, and the level of success, if any, we
achieve, depends, among other things, on the level of demand for broadband
access services, which is a new and rapidly evolving market. See "Risk
Factors -- Sales of our products are dependent on the widespread adoption of
broadband access services." Our business strategy may be unsuccessful and we may
not successfully address the risks we face.
WE HAVE A HISTORY OF LOSSES AND WE EXPECT TO INCUR FUTURE LOSSES
We incurred net losses of $142,000 from our inception in August 1996
through December 31, 1996, $4.4 million for the year ended December 31, 1997,
$9.9 million for the year ended December 31, 1998 and $3.8 million for the three
months ended March 31, 1999. As of March 31, 1999, we had an accumulated deficit
of approximately $18.2 million. We have not achieved profitability and we expect
to continue to incur net losses in the future. To date, we have funded our
operations from the sale of equity securities, from bank borrowings and by means
of equipment lease financing. We expect to continue to incur significant product
development, sales and marketing, and general and administrative expense. As a
result, we must generate significant revenues to achieve profitability. We may
not sustain recent growth rates in our revenues, and we may never achieve
sufficient revenue levels to achieve profitability. If we do achieve
profitability in some future period, we cannot be certain that we would sustain
profitability on a quarterly or annual basis in the future.
OUR OPERATING RESULTS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY
Factors likely to cause quarterly fluctuations in revenues and operating
results include:
- Fluctuations in demand for broadband access services;
- The timing and size of sales of our products and services;
- The lack of any significant backlog;
- Announcements of new products and product enhancements by competitors;
- The entry of new competitors into our market, including by acquisition;
- Unexpected delays in introducing new or enhanced products, including
manufacturing delays;
- Our ability to control expenses;
- Our ability to ship products on a timely basis and at a reasonable cost;
and
- The mix of our products sold and the mix of distribution channels through
which our products are sold.
5
<PAGE> 8
A high percentage of our expenses, including those related to engineering,
sales and marketing, research and development, and general administrative
functions, are essentially fixed in the short term. As a result, if we
experience delays in generating or recognizing revenue, our quarterly operating
results are likely to be materially adversely affected. In addition, we plan to
increase our operating expenses to expand our engineering and sales and
marketing operations, broaden our customer support capabilities, develop new
distribution channels, fund increased levels of research and development and
build our operational infrastructure. If growth in our revenues does not outpace
the increase in these expenses, our business, results of operations and
financial condition could be materially adversely affected.
We rely on a single third-party manufacturer to build our products. Any
interruption in the operations of this manufacturer would adversely affect our
ability to meet our scheduled product deliveries to our customers. This would
cause significant variations in our quarterly operating results and our
business, results of operations and financial condition would be materially
adversely affected.
Due to these and other factors, we believe that quarter-to-quarter
comparisons of our operating results may not be meaningful. You should not rely
on our results for one quarter as any indication of our future performance. It
is likely that in some future quarter our operating results may be below the
expectations of public market analysts or investors. If this occurs, the price
of our common stock would likely decrease.
OUR LENGTHY AND VARIABLE SALES CYCLE MAKES IT DIFFICULT FOR US TO PREDICT
IF OR WHEN A SALE WILL BE MADE
The timing of our sales revenue is difficult to predict because of the
length and variability of the sales cycle for our products. Customers often view
the purchase of our products as a significant and strategic decision. As a
result, customers typically undertake significant procedures relating to the
evaluation, testing, implementation and acceptance of our products. This
evaluation process frequently results in a lengthy sales cycle, typically
ranging from three months to over one year. While our customers are evaluating
our products and before they place an order with us, we may incur substantial
sales and marketing expenses and expend significant management efforts. In
addition, product purchases are frequently subject to unplanned administrative,
processing and other delays. This is particularly true for larger customers for
whom our products represent a very small percentage of their overall purchase
activities. As a result, if sales forecasted from a specific customer for a
particular quarter are not realized in that quarter, our business, results of
operations and financial condition could be materially adversely affected.
IN ANY QUARTER, A SMALL NUMBER OF CUSTOMERS ARE LIKELY TO ACCOUNT FOR A
SUBSTANTIAL MAJORITY OF OUR REVENUE
In each of the last five quarters in the period ended March 31, 1999, we
had at least one customer that accounted for 15% or more of our total revenue in
the quarter. In the fourth quarter of 1998, UUNET, Nortel Networks and GTE and
its affiliated entities accounted for 28%, 13% and 12%, respectively, of our
total revenue. In the first quarter of 1999, UUNET, Southwestern Bell
Information Systems and GTE and its affiliated entities accounted for 43%, 10%
and 7%, respectively, of our total revenue. We anticipate that a small number of
customers with large orders will continue to account for a majority of our
quarterly revenue. If we fail to receive a large order in any future period, our
business, results of operations and financial condition would be materially
adversely affected.
WE ARE ENTIRELY DEPENDENT ON OUR SMS PRODUCT FAMILY.
To date, the SMS product family is our only product family, and the SMS
1000 and SMS 500 are the only products that we currently sell. We intend to
extend the offerings under the SMS product family in the future, both by
introducing new SMS products and by introducing enhancements to existing SMS
6
<PAGE> 9
products. Our inability to timely and successfully introduce new SMS products
and SMS product enhancements, or the failure of these new products or
enhancements to achieve market acceptance, could materially adversely affect our
business, results of operations and financial condition.
THERE IS A LIMITED NUMBER OF POTENTIAL CUSTOMERS FOR OUR SMS 1000
To date, substantially all of our revenues have been derived from sales and
service related to the SMS 1000 product. The SMS 1000 and any other new high-end
SMS product that we may develop and introduce in the future are marketed
primarily to large customers. There are only a limited number of large existing
and potential customers and this number is not expected to increase
significantly in the future.
WE FACE NEW RISKS WITH THE INTRODUCTION OF OUR SMS 500 PRODUCT
We recently introduced the SMS 500, which is designed for use by customers
that intend to provide services to a smaller number of subscribers than those
using the SMS 1000. Given this targeted market, sales of the SMS 500 may involve
sales to smaller customers. Sales to smaller customers entail certain risks,
including increased credit risks, the need for additional sales and support
personnel to support an increased volume of customers and the need to develop a
leasing program to facilitate market acceptance. Our business, results of
operations and financial condition could be materially adversely affected if any
of these risks materialize. The SMS 500 may not achieve a significant degree of
market acceptance. If the SMS 500 is not successful, our ability to generate
revenues will be limited to sales of the SMS 1000 to our customers with a large
number of subscribers, which will have a material adverse effect on our
business, results of operations and financial condition.
OUR PRODUCTS MUST ANTICIPATE AND MEET SPECIFIC CUSTOMER REQUIREMENTS AND
DEMANDS
Many of our customers require product features and capabilities that our
SMS products may not have. The requirement that we add features to our products
in order to achieve a sale may result in a longer sales cycle, increased
research and development expenses and reduced margins on our products. To
achieve market acceptance for our products, we must effectively and timely
anticipate and adapt to customer requirements and offer products and services
that meet customer demands. Our failure to develop products or offer services
that satisfy customer requirements would materially adversely affect our
business, results of operations and financial condition.
We intend to continue to invest in product and technology development. The
development of new or enhanced products is a complex and uncertain process that
requires the accurate anticipation of technological and market trends. We may
experience design, manufacturing, marketing and other difficulties that could
delay or prevent the development, introduction or marketing of new products and
enhancements. The introduction of new or enhanced products also requires that we
manage the transition from older products in order to minimize disruption in
customer ordering patterns and ensure that adequate supplies of new products can
be delivered to meet anticipated customer demand. Our inability to effectively
manage this transition would materially adversely affect our business, results
of operations and financial condition.
WE NEED TO GAIN ACCEPTANCE IN OTHER BROADBAND ACCESS MARKETS
To date, we have derived substantially all of our revenues from sales of
the SMS 1000 for use in the DSL market for broadband access. We intend to expend
a substantial amount of time and resources to achieve market acceptance of our
products in other markets, including the cable and wireless markets. We may be
unable to simultaneously or effectively address evolving demands in these
markets, and customers in these markets may choose to implement competing
technologies or products. In addition, if we are not first in these markets,
competitors may gain market acceptance first, thereby making it difficult, if
not impossible, for us to gain subsequent market acceptance. If we are unable to
achieve
7
<PAGE> 10
acceptance of our products in these markets, our ability to generate revenues
will be limited, and our business, results of operations and financial condition
would be materially adversely affected.
WE EXPECT INCREASED COMPETITION
We may be unable to compete successfully with current or future
competitors. If we do not compete successfully against current or future
competitors, our business, results of operations and financial condition will be
materially adversely affected. Currently, competition in our market is intense.
The broadband access markets we are targeting, including DSL, cable and
wireless, are new and rapidly evolving and we expect these markets to become
highly competitive in the future. In addition, we expect new competitors to
emerge in the broadband access market as that market evolves due to
technological innovation and regulatory changes. We face actual and potential
competition from public and private companies providing routers connecting to
the Internet, access concentrators and subscriber aggregation systems.
Cisco, the leading provider of routers connecting to the Internet backbone,
offers products that compete directly with our SMS products, and also provides a
comprehensive range of broadband access systems. We expect companies that offer
access concentrators and routers to incorporate some subscriber management
functionality into their products. These companies include Nortel Networks which
recently agreed to acquire Shasta, a private company providing subscriber
management services, and Ascend, which has announced its pending acquisition by
Lucent. In addition, there are several other private companies that provide
subscriber management features in access concentrators or routing platforms.
Many of our principal competitors, including Cisco, Alcatel, Nortel
Networks/Shasta, Lucent/Ascend, and some companies that may compete with us in
the future, are large public companies that have longer operating histories and
significantly greater financial, technical, marketing and other resources than
we have. As a result, these competitors are able to devote greater resources to
the development, promotion, sale and support of their products. In addition, our
competitors that have large market capitalizations or cash reserves are much
better positioned than we are to acquire other companies, including our
competitors, and thereby acquire new technologies or products that may displace
our product lines. Any of these acquisitions could give our competitors a
strategic advantage that would materially adversely affect our business, results
of operations and financial condition.
Many of our competitors have significantly more established customer
support and professional services organizations than we do. In addition, many of
our competitors have much greater name recognition and have a more extensive
customer base, broader customer relationships and broader product offerings than
our company. These companies can leverage their customer bases and broader
product offerings and adopt aggressive pricing policies to gain market share. We
have encountered, and expect to continue to encounter, potential customers that,
due to existing relationships with certain of our larger competitors, are
committed to the product offerings of these competitors. As a result, these
potential customers may not consider purchasing our products. We expect to face
competition in the following areas:
- Product pricing;
- Breadth of product lines;
- Sales and distribution capability;
- Product features and enhancements, including product performance,
reliability, size, compatibility and scalability;
- Product ease of deployment;
- Conformance to industry standards; and
- Technical support and service.
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<PAGE> 11
We expect that competitive pressures may result in price reductions,
reduced margins and loss of market share, which would materially adversely
affect our business, results of operations and financial condition.
WE ARE DEPENDENT ON A SINGLE CONTRACT MANUFACTURER
We rely on a single third-party manufacturer, Electromax, to build our
products. We may not be able to effectively manage our relationship with
Electromax and Electromax may not meet our future requirements for timely
delivery. We have no written agreement with Electromax. Any interruption in the
operations of Electromax would adversely affect our ability to meet our
scheduled product deliveries to our customers, which could cause the loss of
existing or potential customers and could materially adversely affect our
business, results of operations and financial condition. In addition, the
products that Electromax builds for us may be insufficient in quality or in
quantity to meet our needs. Electromax or any other manufacturer may not meet
the technological or delivery requirements of our current products or any future
products that we may develop and introduce. The inability of Electromax or any
other of our contract manufacturers in the future to provide us with adequate
supplies of high-quality products, or the loss of Electromax or any other of our
contract manufacturers in the future, would cause a delay in our ability to
fulfill customer orders while we obtain a replacement manufacturer and would
have a material adverse effect on our business, results of operations and
financial condition.
SOME OF THE KEY COMPONENTS IN OUR PRODUCTS COME FROM SINGLE OR LIMITED
SOURCES OF SUPPLY
We currently purchase several key components used in the manufacture of our
SMS 1000 product from single or limited sources of supply. These manufacturers
include Altera, Brooktree, Connector Technologies, Foresight, Intel, Level One,
Powerspec, Siemens and Ziatech. We have no guaranteed supply arrangement with
these suppliers, and we or our manufacturers may fail to obtain these supplies
in a timely manner in the future. Financial or other difficulties faced by these
suppliers or significant changes in demand for these components could limit the
availability to us of these components. Any interruption or delay in the supply
of any of these components, or the inability to obtain these components from
alternate sources at acceptable prices and within a reasonable amount of time,
would adversely affect our ability to meet scheduled product deliveries to our
customers and would materially adversely affect our business, results of
operations and financial condition. In addition, qualifying additional suppliers
is time-consuming and expensive.
WE MAY BE UNABLE TO MATCH PRODUCTION WITH PRODUCT DEMAND
We currently use a rolling six-month forecast based on anticipated product
orders, product order history and backlog to determine our materials
requirements. Lead times for the materials and components that we order vary
significantly and depend on numerous factors, including the specific supplier,
contract terms and demand for a component at a given time. If actual orders do
not match our forecasts, we may have excess or inadequate inventory of certain
materials and components, which could materially adversely affect our business,
results of operations and financial condition.
WE MAY BE UNABLE TO PROPERLY MANAGE GROWTH
We have expanded our operations rapidly since our inception. The number of
our employees increased from 39 in February 1998 to 127 in March 1999. We intend
to continue to expand in order to pursue existing and potential market
opportunities and are in the process of hiring additional engineering and sales
personnel. We intend to hire a significant number of engineers in 1999. Our
ability to continue to attract and retain highly skilled personnel is a critical
factor in determining whether we will be successful in the future. Competition
for highly skilled personnel is intense, especially in the San Francisco Bay
Area. We may fail to attract, assimilate or retain qualified personnel to
fulfill our current or future needs. If we so fail, our business, results of
operations and financial condition could be
9
<PAGE> 12
materially adversely affected. Our planned rapid growth places a significant
demand on management and financial and operational resources. In order to grow
and achieve future success, we must:
- Retain existing personnel;
- Hire, train, manage and retain additional qualified personnel; and
- Effectively manage multiple relationships with our customers, suppliers
and other third parties.
We are currently seeking to lease additional office space to accommodate
our growing operations. We may be unable to locate necessary office space on
commercially reasonable terms or in a timely manner. Failure to do so would have
a material adverse effect on our business, results of operations and financial
condition. Our current office lease expires in September 1999. Any required
relocation may be disruptive to our business.
OUR PLANNED EXPANSION TO INTERNATIONAL MARKETS WILL INVOLVE NEW RISKS
In 1998, we derived approximately 15% of our revenues from sales to
customers outside of the United States. Our ability to achieve future success
will depend in part on the expansion of our international sales and operations.
International operations are generally subject to a number of risks, including:
- Expenses associated with customizing products for foreign countries;
- Protectionist laws and business practices that favor local competition;
- Dependence on local vendors;
- Multiple, conflicting and changing governmental laws and regulations;
- Longer sales cycles;
- Longer accounts receivable cycles;
- Increased difficulties in collecting accounts receivable;
- Difficulties in managing operations across disparate geographic areas;
- Difficulties associated with enforcing agreements through foreign legal
systems;
- Reduced or limited protection of our intellectual property rights in some
countries;
- Foreign currency exchange rate fluctuations; and
- Political and economic instability.
In addition, if we grow internationally, we will need to expand our
worldwide operations and enhance our communications infrastructure. If we fail
to implement and improve these systems, our ability to accurately forecast sales
demand, manage our supply chain and record and report financial and management
information would be adversely affected. This could materially adversely affect
our business, results of operations and financial condition.
UNDETECTED SOFTWARE OR HARDWARE ERRORS COULD HAVE A MATERIAL ADVERSE EFFECT
ON US
Networking products frequently contain undetected software or hardware
errors when first introduced or as new versions are released. We have
experienced minor errors in the past in connection with new products. We expect
that errors will be found from time to time in new or enhanced products after we
begin commercial shipments. These problems may cause us to incur significant
warranty and repair costs, divert the attention of our engineering personnel
from our product development efforts and cause significant customer relations
problems. The occurrence of these problems could result in the delay or
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<PAGE> 13
loss of market acceptance of our products and would likely have a material
adverse effect on our business, results of operations and financial condition.
Our customers use our products to provide broadband access to their
customers. Defects, integration issues or other performance problems in our
products could result in financial or other damages to our customers or could
damage market acceptance for our products. Our customers could also seek damages
for losses from us, which, if they were successful, could have a material
adverse effect on our business, results of operations and financial condition. A
product liability claim brought against us, even if unsuccessful, would likely
be time consuming and costly.
OUR FAILURE AND THE FAILURE OF OUR KEY SUPPLIERS AND CUSTOMERS TO BE YEAR
2000 COMPLIANT COULD NEGATIVELY IMPACT OUR BUSINESS
The Year 2000 computer issue creates a variety of risks for us. If systems
do not correctly recognize date information when the year changes to 2000, our
business, results of operations and financial condition could be materially
adversely affected. The risks involve:
- Potential warranty or other claims by our customers;
- Errors in systems we use to run our business;
- Errors in systems used by our suppliers;
- Errors in systems used by our customers; and
- Potential reduced spending by other companies on broadband Internet
access products as a result of significant information systems spending
on Year 2000 remediation.
Our internal systems include both our information technology, or IT, and
non-IT systems. We have conducted an initial audit of our material internal IT
systems, including both our own software products and third-party software and
hardware technology. We have not yet initiated an assessment of our non-IT
systems. To the extent that we are unable to test the technology provided by
third-party vendors, we are seeking assurances from these vendors that their
systems are Year 2000 compliant. We may experience material unanticipated
problems and costs caused by undetected errors or defects in the technology used
in our internal IT and non-IT systems. These unanticipated problems and costs
could have a material adverse effect on our business, results of operations and
financial condition.
We intend to contact our critical suppliers to determine if the suppliers'
operations and the products and services provided to us are Year 2000 compliant.
Where practicable, we will attempt to mitigate our risks with respect to the
failure of our suppliers to be Year 2000 compliant by locating Year 2000
compliant replacement suppliers. However, our failure to mitigate our Year 2000
risks remains a possibility and could have a material adverse impact on our
business, results of operations and financial condition.
We have been informed by Electromax, our contract manufacturer, that its
manufacturing systems are Year 2000 compliant. However, Electromax may
experience material unanticipated problems and costs caused by undetected errors
or defects in the technology used in their internal IT and non-IT systems. These
unanticipated problems and costs could cause manufacturing delays or
difficulties for our products and harm Electromax's operations. Additionally,
Electromax has not yet ascertained whether any of its suppliers is Year 2000
compliant. The failure of a supplier of Electromax to be Year 2000 compliant
could also adversely affect Electromax's operations. Any of these events could
materially adversely affect our business, results of operations and financial
condition.
We believe that the SMS 1000 is Year 2000 compliant. However, despite
testing by us and by current and potential customers, and despite assurances
from developers of products incorporated into the SMS 1000, the SMS 1000 may
contain undetected errors or defects associated with Year 2000 date
11
<PAGE> 14
functions. We believe that, based solely on internal testing, the recently
introduced SMS 500 is Year 2000 compliant. We have made assurances to our
customers that the SMS 1000 and the SMS 500 are Year 2000 compliant. The failure
of our SMS products to be Year 2000 compliant would result in numerous customer
claims, which could have a material adverse impact on our business, results of
operations and financial condition.
We do not currently have any information concerning the Year 2000
compliance status of our customers. Our current or potential customers may incur
significant expenses to achieve Year 2000 compliance. If our customers are not
Year 2000 compliant, they may experience material costs to remedy problems, or
they may face litigation costs. In either case, spending on Year 2000 issues
could reduce or eliminate the budgets that our current or potential customers
could have for purchases of our products. As a result, our business, results of
operations and financial condition could be materially adversely affected.
To date, our Year 2000 related costs have not been material. We have funded
these costs from available cash without separately accounting for these costs.
Although our future Year 2000 compliance costs are not expected to be
significant, we may experience unanticipated material problems and costs
associated with Year 2000 compliance that could adversely affect our business,
results of operations and financial condition. We have not yet developed any
contingency plan to address situations that may result if we are unable to
achieve Year 2000 readiness of our critical operations. The cost of developing
and implementing a Year 2000 contingency plan may be material.
If our internal systems, our SMS products or the internal systems at our
manufacturers are not Year 2000 compliant, our business, results of operation
and financial condition would be materially adversely affected.
WE MAY BE UNABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY
We rely on a combination of patent, copyright, trademark and trade secret
laws and restrictions on disclosure to protect our intellectual property rights.
We have filed one U.S. patent application. There can be no assurance that this
application will be approved, that any issued patents will protect our
intellectual property or that any issued patents will not be challenged by third
parties. Furthermore, other parties may independently develop similar or
competing technology or design around any patents that may be issued to us. We
attempt to protect our intellectual property rights by limiting access to the
distribution of our software, documentation and other proprietary information.
In addition, we enter into confidentiality agreements with our employees and
certain customers, vendors and strategic partners. These steps may fail to
prevent the misappropriation of our intellectual property, particularly in
foreign countries where the laws may not protect our proprietary rights as fully
as in the United States.
Others may allege that our products infringe upon their proprietary rights.
Any parties asserting that our products infringe upon their proprietary rights
would force us to defend ourselves or our customers, manufacturers or suppliers
against alleged infringement of intellectual property rights. We could incur
substantial costs to prosecute or defend this litigation. In addition,
intellectual property litigation could force us to do one or more of the
following:
- Cease selling, incorporating or using products or services that
incorporate the challenged intellectual property;
- Obtain from the holder of the infringed intellectual property right a
license to sell or use the relevant technology, which license may not be
available on acceptable terms, if at all; or
- Redesign those products or services that incorporate the disputed
technology.
In the event of a successful claim of infringement against us and our
failure or inability to develop non-infringing technology or license the
infringed technology on acceptable terms and on a timely basis,
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<PAGE> 15
our business, results of operations and financial condition would be materially
adversely affected. We may be subject to these claims in the future.
We may in the future initiate claims or litigation against third parties
for infringement of our proprietary rights in order to determine the scope and
validity of our proprietary rights or the proprietary rights of competitors.
These claims could result in costly litigation and the diversion of our
technical and management personnel. As a result, our business, results of
operations and financial condition could be materially adversely affected.
WE MAY NEED ADDITIONAL CAPITAL, WHICH MAY NOT BE AVAILABLE
At March 31, 1999, we had approximately $5.3 million in cash, cash
equivalents and short-term investments. In April 1999, we used approximately
$2.5 million of these amounts to repay outstanding debt obligations. In April
1999, we also secured a commitment for a $2.0 million asset based borrowing
facility. We believe that these amounts, combined with proceeds from this
offering and cash anticipated to be available from future operations, will
enable us to meet our working capital requirements for at least the next 12
months. However, if cash from available sources is insufficient, or if cash is
used for acquisitions or other unanticipated uses, we may need additional
capital. The development and marketing of new products and the expansion of
reseller channels and associated support personnel will require a significant
commitment of resources. In addition, if the market for broadband access
develops at a slower pace than anticipated or if we fail to establish
significant market share and achieve a meaningful level of revenue, we may
continue to incur significant operating losses and utilize significant amounts
of capital. As a result, we could be required to raise substantial additional
capital. Additional capital may not be available to us at all, or if available,
may be available only on unfavorable terms. Any inability to raise additional
capital when we require it would materially adversely affect our business,
results of operations and financial condition. Any additional issuance of equity
or equity-related securities will be dilutive to our stockholders.
RISKS RELATED TO THE BROADBAND ACCESS INDUSTRY
WE ARE DEPENDENT ON THE WIDESPREAD ADOPTION OF BROADBAND ACCESS SERVICES
Sales of our products depend on the increased use and widespread adoption
of broadband access services, and the ability of our customers to market and
sell broadband access services. Our business, results of operations and
financial condition would be materially adversely affected if the use of
broadband access services does not increase as anticipated or if our customers'
broadband access services are not received well by the marketplace. Certain
critical issues concerning use of broadband access services are unresolved and
will likely affect use of broadband access services. These issues include:
- Security;
- Reliability;
- Bandwidth;
- Congestion;
- Cost;
- Ease of access; and
- Quality of service.
Even if these issues are resolved, if the market for products that provide
broadband access to the Internet and to corporate networks fails to develop, or
develops at a slower pace than anticipated, our business, results of operations
and financial condition would be materially adversely affected.
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<PAGE> 16
THE BROADBAND ACCESS SERVICES MARKET IS SUBJECT TO RAPID CHANGE
The broadband access services market is new and is characterized by rapid
technological change, frequent enhancements to existing products and new product
introductions, changes in customer requirements and evolving industry standards.
We may be unable to respond quickly or effectively to these developments. The
introduction of new products by competitors, market acceptance of products based
on new or alternative technologies, or the emergence of new industry standards,
could render our existing products obsolete, which would materially adversely
affect our business, results of operations and financial condition.
The emergence of new industry standards might require us to redesign our
products. If our products fail to comply with widely adopted industry standards,
our customers and potential customers may not purchase our products. This would
have a material adverse effect on our business, results of operations and
financial condition.
OUR BUSINESS MAY BE ADVERSELY AFFECTED BY GOVERNMENT REGULATION OF THE
COMMUNICATIONS INDUSTRY
The jurisdiction of the Federal Communications Commission, or FCC, extends
to the communications industry, to our customers and to the products and
services that our customers sell. Future FCC regulations, or regulations set
forth by other regulatory bodies, may adversely affect the broadband access
services industry. Regulation of our customers may have a material adverse
affect on our business, results of operations and financial condition. For
example, FCC regulatory policies that affect the availability of data and
Internet services may impede our customers' penetration into certain markets. In
addition, international regulatory bodies are beginning to adopt standards for
the communications industry. The delays that these governmental processes entail
may cause order cancellations or postponements of product purchases by our
customers, which would materially adversely affect our business, results of
operations and financial condition.
RISKS RELATED TO THE SECURITIES MARKETS
OUR STOCK PRICE MAY BE VOLATILE
Prior to this offering, you could not buy or sell our common stock
publicly. An active public market for our common stock may not develop or be
sustained after this offering. The market for technology stocks has been
extremely volatile. The following factors could cause the market price of our
common stock to fluctuate significantly from the price paid by investors in this
offering:
- Our loss of a major customer;
- Our addition or the departure of key Redback Networks personnel;
- Variations in our quarterly operating results;
- Announcements by us or our competitors of significant contracts, new
products or product enhancements, acquisitions, strategic partnerships,
joint ventures or capital commitments;
- Changes in financial estimates by securities analysts;
- Our sales of common stock or other securities in the future;
- Changes in market valuations of broadband access technology companies;
- Changes in market valuations of networking and telecommunications
companies; and
- Fluctuations in stock market prices and volumes.
OUR BUSINESS MAY BE ADVERSELY AFFECTED BY CLASS ACTION LITIGATION DUE TO
STOCK PRICE VOLATILITY
Securities class action litigation has often been brought against a company
following periods of volatility in the market price of its securities. If our
stock price is volatile, we may be the target of similar
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<PAGE> 17
litigation. Our management's attention and resources may be diverted by any
securities litigation, and we may incur substantial related costs, possibly
resulting in a material adverse effect to our business, results of operations
and financial condition.
CONTROL BY EXISTING STOCKHOLDERS MAY LIMIT YOUR ABILITY TO INFLUENCE THE
OUTCOME OF DIRECTOR ELECTIONS AND CERTAIN TRANSACTIONS
Upon completion of this offering, our executive officers, directors and
principal stockholders and their affiliates will beneficially own approximately
48.7% of our outstanding common stock (47.9% if the underwriters' over-allotment
option is exercised in full). These stockholders, if acting together, would be
able to significantly influence all matters requiring approval by our
stockholders, including the election of directors and the approval of mergers or
other business combination transactions.
OUR MANAGEMENT HAS BROAD DISCRETION IN USE OF PROCEEDS
The net proceeds from this offering will be added to our general working
capital upon completion of this offering. We cannot specify with certainty how
we will use the net proceeds. Accordingly, our management will have considerable
discretion in the application of the net proceeds. See "Use of Proceeds."
SUBSTANTIAL SALES OF OUR COMMON STOCK COULD ADVERSELY AFFECT OUR STOCK
PRICE
Sales of a substantial number of shares of our common stock after this
offering could adversely affect the market price of our common stock by
potentially introducing a large number of sellers of our common stock into a
market in which our common stock price is already volatile, thus driving our
common stock price down. In addition, the sale of these shares could impair our
ability to raise capital through the sale of additional equity securities. Based
on shares outstanding as of March 31, 1999, upon completion of this offering, we
will have 21,034,119 shares of common stock outstanding, or 21,409,119 shares if
the underwriters' over-allotment option is exercised in full. Our directors,
executive officers and current stockholders have executed lock-up agreements
that limit their ability to sell shares of our common stock. These stockholders
have agreed, subject to limited exceptions, not to sell or otherwise dispose of
any shares of our common stock for a period of at least 180 days after the date
of this prospectus without the prior written approval of Morgan Stanley & Co.
Incorporated. When these lock-up agreements expire, these shares and the shares
of common stock underlying any options held by these individuals will become
eligible for sale, in some cases pursuant only to the volume, manner of sale and
notice requirements of Rule 144. See "Management -- Stock Plans" and "Shares
Eligible for Future Sale."
INVESTORS WILL EXPERIENCE IMMEDIATE DILUTION
The initial public offering price of our common stock is expected to be
substantially higher than the book value per share of our outstanding common
stock immediately after the offering. Accordingly, if you purchase our common
stock in this offering, you will incur immediate dilution of approximately
$11.40 in the book value per share of our common stock from the price you pay
for our common stock. This calculation assumes that you purchased our common
stock for $13.00 per share.
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<PAGE> 18
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD
PREVENT OR DELAY A CHANGE IN CONTROL OF OUR COMPANY
Provisions in our bylaws and in our certificate of incorporation, both as
amended and restated upon the closing of this offering, may have the effect of
delaying or preventing a change of control or changes in management of our
company. These provisions include:
- The stipulation that a special meeting of stockholders may only be called
by stockholders owning at least 50% of our outstanding shares;
- The ability of our board of directors to issue preferred stock without
stockholder approval; and
- The right of our board of directors to elect a director to fill a vacancy
created by the expansion of the board of directors.
Furthermore, we are subject to the provisions of section 203 of the Delaware
General Corporation Law. These provisions prohibit a stockholder owning 15% or
more of our outstanding voting stock from consummating a merger or combination
with us unless this stockholder receives board approval for the transaction or
unless 66 2/3% of the outstanding shares of our voting stock not owned by this
stockholder approve the merger or combination.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These statements
relate to future events or our future financial performance. In some cases, you
can identify forward-looking statements by terminology such as "may," "will,"
"should," "expect," "plan," "anticipate," "believe," "estimate," "predict,"
"potential," "intend" or "continue," the negative of such terms or other
comparable terminology. These statements are only predictions. Actual events or
results may differ materially. In evaluating these statements you should
specifically consider various factors, including the risks outlined under "Risk
Factors." These factors may cause our actual results to differ materially from
any forward-looking statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of the forward-looking
statements. You should not place undue reliance on these forward-looking
statements, which apply only as of the date of this prospectus.
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<PAGE> 19
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the 2,500,000 shares of
common stock we are offering will be approximately $29.2 million, or $33.8
million if the underwriters exercise their over-allotment option in full, at an
assumed initial public offering price of $13.00 per share and after deducting
estimated underwriting discounts and commissions and our estimated offering
expenses of $1.0 million.
We expect to use the net proceeds from this offering for general corporate
purposes, including capital expenditures and working capital. A portion of the
net proceeds may also be used to acquire or invest in complementary businesses,
technologies, product lines or products. We have no current plans, agreements or
commitments with respect to any such acquisitions or investments, and are not
engaged in any negotiations with respect to any such acquisitions or
investments. Our management will have broad discretion concerning the use of the
net proceeds of this offering. We intend to invest the net proceeds of this
offering in investment grade, interest-bearing securities pending their use.
DIVIDEND POLICY
We have never declared or paid cash dividends on our common stock or other
securities and do not currently anticipate paying cash dividends in the future.
Our bank line of credit currently prohibits the payment of dividends.
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<PAGE> 20
CAPITALIZATION
- - The following table sets forth our capitalization as of March 31, 1999.
- - The pro forma information reflects the filing of an amendment to our amended
and restated certificate of incorporation to provide for authorized capital
stock of 80,000,000 shares of common stock and 10,000,000 shares of
undesignated preferred stock and the conversion of all outstanding shares of
preferred stock into 10,520,153 shares of common stock on the closing of this
offering.
- - The pro forma as adjusted information reflects the sale of the shares of
common stock offered hereby at an assumed initial public offering price of
$13.00 per share and after deducting estimated underwriting discounts and
commissions and our estimated offering expenses.
The outstanding share information excludes 2,906,411 shares of common stock
issuable upon exercise of outstanding options as of March 31, 1999 at an average
exercise price of $3.49 per share, 133,971 shares of common stock issuable upon
exercise of outstanding warrants at an average exercise price of $1.89 per share
and 4,582,750 shares of common stock reserved for issuance under our stock plans
as of March 31, 1999. This table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and the related notes.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
------------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
---------- ------------- ---------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C>
Long-term obligations, less current portion..... $ 1,370 $ 1,370 $ 1,370
-------- -------- --------
Stockholders' equity (deficit):
Preferred stock, $.0001 par value; 13,500,000
shares authorized; 10,520,153 shares issued
and outstanding, actual; 10,000,000 shares
authorized, pro forma and pro forma as
adjusted; no shares issued or outstanding,
pro forma and pro forma as adjusted........ 19,375 -- --
Common stock, $.0001 par value; 22,500,000
shares authorized; 8,013,966 shares issued
and outstanding, actual; 80,000,000 shares
authorized, 18,534,119 shares issued and
outstanding, pro forma; 80,000,000 shares
authorized, 21,034,119 issued and
outstanding, pro forma as adjusted......... 10,137 29,512 58,737
Deferred stock compensation................... (6,627) (6,627) (6,627)
Notes receivable from stockholder............. (211) (211) (211)
Accumulated deficit........................... (18,230) (18,230) (18,230)
-------- -------- --------
Total stockholders' equity............ 4,444 4,444 33,669
-------- -------- --------
Total capitalization.................. $ 5,814 $ 5,814 $ 35,039
======== ======== ========
</TABLE>
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DILUTION
The pro forma net tangible book value of our common stock as of March 31,
1999, giving effect to the conversion of all shares of preferred stock
outstanding as of March 31, 1999 into common stock on the closing of this
offering, was $4,267,000, or approximately $.23 per share of common stock. Pro
forma net tangible book value per share represents the amount of our total
tangible assets reduced by the amount of our total liabilities divided by
18,534,119 shares of common stock outstanding after giving effect to the
conversion of the preferred stock outstanding as of March 31, 1999 into common
stock. After giving effect to the issuance and sale of shares of our common
stock in this offering at an assumed initial public offering price of $13.00 per
share and after deducting estimated underwriting discounts and commissions and
our estimated offering expenses, our pro forma net tangible book value as of
March 31, 1999 would have been $33,669,000, or approximately $1.60 per share of
common stock. This represents an immediate increase in pro forma net tangible
book value of $1.37 per share to existing stockholders and an immediate dilution
in net tangible book value of $11.40 per share to new investors. The following
table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $ 13.00
Pro forma net tangible book value per share as of March
31, 1999.............................................. $ .23
Increase in pro forma net tangible book value per share
attributable to new investors......................... 1.37
-----
Pro forma net tangible book value per share after the
offering.................................................. 1.60
-------
Dilution per share to new investors......................... $ 11.40
=======
</TABLE>
The following table summarizes on a pro forma basis, giving effect to the
conversion of all outstanding shares of preferred stock into common stock on the
closing of this offering, as of March 31, 1999, the difference between the
number of shares of common stock purchased from Redback Networks by existing
stockholders and by new investors, the total consideration paid to Redback
Networks by existing stockholders and new investors at an assumed initial public
offering price of $13.00 per share and the average price per share paid by
existing stockholders and by new investors, before deduction of estimated
underwriting discounts and commissions and our estimated offering expenses.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders........... 18,534,119 88.1% $20,014,000 38.1% $ 1.08
New investors................... 2,500,000 11.9 32,500,000 61.9 13.00
---------- ----- ----------- -----
Totals................ 21,034,119 100.0% $52,514,000 100.0%
========== ===== =========== =====
</TABLE>
As of March 31, 1999, there were options outstanding to purchase a total of
2,906,411 shares of common stock at a weighted average exercise price of
approximately $3.49 per share; 133,971 shares of common stock issuable upon
exercise of outstanding warrants at a weighted average exercise price of $1.89
per share; and 4,582,750 shares of common stock reserved for issuance under our
stock plans. To the extent outstanding options or warrants are exercised, there
will be further dilution to new investors. See "Management -- Stock Plans."
19
<PAGE> 22
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
our Financial Statements and related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this prospectus. The statement of operations data for the period from August 30,
1996 (inception) through December 31, 1996 and for the fiscal years ended
December 31, 1997 and December 31, 1998, and the balance sheet data at December
31, 1997 and December 31, 1998 are derived from audited financial statements
included elsewhere in this prospectus. The statement of operations data for the
three months ended March 31, 1998 and 1999 and the balance sheet data at March
31, 1999 are derived from unaudited financial statements included elsewhere in
this prospectus. In the opinion of management, these statements have been
prepared on the same basis as the audited financial statements and include all
adjustments, consisting only of normal recurring adjustments, necessary for the
fair statement of the results of these periods. The balance sheet data at
December 31, 1996 is derived from audited financial statements not included in
this prospectus.
<TABLE>
<CAPTION>
PERIOD FROM THREE MONTHS
AUGUST 30, 1996 YEAR ENDED ENDED
(INCEPTION) THROUGH DECEMBER 31, MARCH 31,
DECEMBER 31, ------------------ ------------------
1996 1997 1998 1998 1999
------------------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues........................ $ -- $ 48 $ 9,206 $ 478 $ 6,517
Cost of revenues.................... -- 29 3,603 266 1,971
----- ------- ------- ------- -------
Gross profit........................ -- 19 5,603 212 4,546
----- ------- ------- ------- -------
Operating expenses:
Research and development.......... 124 3,249 5,727 863 2,829
Selling, general and
administrative.................. 19 1,317 8,875 1,333 4,414
Amortization of deferred stock
compensation.................... -- -- 880 23 1,078
----- ------- ------- ------- -------
Total operating expenses... 143 4,566 15,482 2,219 8,321
----- ------- ------- ------- -------
Loss from operations................ (143) (4,547) (9,879) (2,007) (3,775)
Other income (expense).............. 1 136 3 26 (26)
----- ------- ------- ------- -------
Net loss............................ $(142) $(4,411) $(9,876) $(1,981) $(3,801)
===== ======= ======= ======= =======
Basic and diluted net loss per
share............................. $(.22) $ (4.10) $ (3.57) $ (1.06) $ (.91)
===== ======= ======= ======= =======
Shares used in computing net loss
per share......................... 658 1,076 2,769 1,874 4,182
===== ======= ======= ======= =======
Pro forma net loss per share:
Basic and diluted net loss per
share........................... $ (.78) $ (.26)
======= =======
Shares used in computing net loss
per share....................... 12,684 14,689
======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------------------- ----------
1996 1997 1998 1999
----- ------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................. $ 119 $ 3,084 $ 8,189 $ 5,264
Working capital....................................... 12 5,630 4,461 1,701
Total assets.......................................... 216 7,849 14,682 16,571
Long-term obligations, less current portion........... -- 827 1,275 1,370
Accumulated deficit................................... (142) (4,553) (14,429) (18,230)
Total stockholders' equity............................ 83 6,081 6,254 4,444
</TABLE>
20
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following commentary should be read in conjunction with the financial
statements and related notes contained elsewhere in this prospectus. The
discussion contains forward-looking statements that involve risks and
uncertainties. These statements relate to future events or our future financial
performance. In many cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential," "intend" or "continue," or the
negative of such terms and other comparable terminology. These statements are
only predictions. Our actual results may differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including, but not limited to, those set forth under "Risk Factors" and
elsewhere in this prospectus.
OVERVIEW
Redback Networks provides advanced networking systems that enable carriers,
cable operators and service providers to rapidly deploy high-speed access
technologies such as DSL, cable and wireless. We sell our products to a number
of different types of carriers, including incumbent local exchange carriers, or
ILECs, competitive local exchange carriers, or CLECs, cable operators and
service providers. Our products are sold through a direct sales force,
resellers, and strategic distribution partners.
We recognize revenues, net of allowances, when we ship products to our
customers, provided no significant outstanding vendor obligations remain and
collection is considered probable. We recognize support revenue ratably over the
support period and service revenues as services are performed. Currently, all of
our product sales and service arrangements provide for pricing and payment in
U.S. dollars. Since we have no other product line, our business, financial
condition and results of operations are dependent on acceptance of our SMS
solution in the broadband market.
From inception through December 1997, our operating activities consisted
primarily of research and development activities and building our management
team. We shipped our first products in December 1997, but did not begin shipping
our products in material quantities until the second quarter of 1998. To date,
we have derived substantially all of our revenues from sales of our flagship
product, the SMS 1000, in the DSL market. Our success will depend on our ability
to sell products not only in the DSL market, but also in other markets,
including the cable and wireless markets. We released the SMS 500 in early March
1999. The SMS 500 is targeted at service provider facilities supporting a
smaller number of subscribers than facilities using the SMS 1000. We cannot be
certain that the SMS 1000, the SMS 500 or any future products will achieve
widespread market acceptance.
To date, a significant portion of our revenues has resulted from a small
number of relatively large orders. Substantially all of our sales are made on
the basis of purchase orders rather than long-term agreements. As a result, we
may commit resources to the production of products without having received
advance purchase commitments from customers. If we are unable to sell products
to which we have devoted significant resources or if orders for our products are
cancelled or delayed, our inventory levels could become excessive. Any
subsequent write-off of inventory could have a material adverse effect on our
business, results of operations and financial condition.
We anticipate that our operating results for any given period will continue
to be dependent to a significant extent on large purchase orders, which can be
delayed or cancelled by our customers without penalty. In addition, we
anticipate that our operating results for a given period will continue to be
dependent on a small number of customers. In the fourth quarter of 1998, UUNET,
Nortel Networks and GTE and its affiliated entities accounted for 28%, 13% and
12%, respectively, of our total revenue. Sales to UUNET, a subsidiary of MCI
Worldcom, Southwestern Bell Information Systems and GTE and its affiliated
entities accounted for 43%, 10% and 7%, respectively, of our total revenues for
the quarter ended March 31, 1999. If we fail to receive a significant purchase
order that we expected for a
21
<PAGE> 24
given quarter, our revenues for that quarter, or following quarters, will be
adversely affected. This could adversely affect our business, results of
operations and financial condition. Furthermore, if any of our customers
experience financial difficulties, our sales to these customers may be reduced
and we may have difficulty in collecting accounts receivable from these
customers. Any delay in large customer orders or customer financial difficulties
could have a material adverse effect on our business, results of operations and
financial condition.
We currently use Electromax to assemble our products. We also rely on
single or limited source suppliers to manufacture certain key components of our
products. A significant portion of our cost of revenues is related to these
outsourcing arrangements. These relationships are subject to a variety of risks.
Currently, competition in our market is intense. We continue to add
features to our products based on the needs of our customers. This has resulted
in increased research and development expenses and may result in reduced
operating margins on our products and a longer sales cycle. We expect
competition to increase in the future. This competition may also result in price
reductions and loss of market share. We expect that product life cycles will
remain relatively short and that the average selling price and gross margins for
our products will decline as each product matures. Accordingly, we must
introduce new products on a timely basis with improved performance
characteristics. Further, we must reduce production costs and sell sufficient
volumes in order to maintain gross margins. If we fail to reduce our production
costs or achieve volume shipment requirements, our product margins will decline
rapidly. Any of the above events could have a material adverse effect on our
business, results of operations and financial condition.
In 1998, we recorded total deferred stock compensation of approximately
$5.6 million in connection with stock and stock options granted during 1998 at
prices subsequently deemed to be below fair market value on the date of grant.
Options granted are typically subject to a four year vesting period. Stock
grants are generally subject to our right to repurchase the stock, which lapses
over a four year period. We are amortizing the deferred stock compensation over
the vesting periods of the applicable options and the repurchase periods for the
restricted stock. We amortized $880,000 of deferred stock compensation in the
year ended December 31, 1998, leaving approximately $4.7 million to be amortized
over the remaining vesting periods. In 1999, we recorded approximately $3.0
million in additional deferred stock compensation for stock options granted in
the three months ended March 31, 1999 at prices subsequently deemed to be below
fair market value on the date of grant. We amortized approximately $1.1 million
of deferred stock compensation in the three months ended March 31, 1999.
22
<PAGE> 25
RESULTS OF OPERATIONS
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth our unaudited quarterly results of
operations, in dollars and as a percentage of net revenues, for the five
quarters ended March 31, 1999. You should read the following table in
conjunction with the financial statements and related notes contained elsewhere
in this prospectus. We have prepared this unaudited information on the same
basis as the audited financial statements. This table includes all adjustments,
consisting only of normal recurring adjustments, that we consider necessary for
a fair presentation of our financial position and operating results for the
quarters presented. You should not draw any conclusions about our future results
from the results of operations for any quarter.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------
MAR. 31, JUN. 30, SEPT. 30, DEC. 31, MAR. 31,
1998 1998 1998 1998 1999
-------- -------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net revenues............................. $ 478 $ 1,294 $ 2,933 $ 4,501 $ 6,517
Cost of revenues......................... 266 676 1,172 1,489 1,971
------- ------- ------- ------- -------
Gross profit............................. 212 618 1,761 3,012 4,546
------- ------- ------- ------- -------
Operating expenses:
Research and development............... 863 1,062 1,583 2,219 2,829
Selling, general and administrative.... 1,333 1,656 2,519 3,367 4,414
Amortization of deferred stock
compensation........................ 23 53 233 571 1,078
------- ------- ------- ------- -------
Total operating expenses....... 2,219 2,771 4,335 6,157 8,321
------- ------- ------- ------- -------
Loss from operations..................... (2,007) (2,153) (2,574) (3,145) (3,775)
Other income (expense)................... 26 (20) (5) 2 (26)
------- ------- ------- ------- -------
Net loss................................. $(1,981) $(2,173) $(2,579) $(3,143) $(3,801)
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF NET REVENUES
---------------------------------------------------------
MAR. 31, JUN. 30, SEPT. 30, DEC. 31, MAR. 31,
1998 1998 1998 1998 1999
-------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Net revenues............................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues......................... 55.6 52.2 40.0 33.1 30.2
------- ------- ------- ------- -------
Gross profit............................. 44.4 47.8 60.0 66.9 69.8
------- ------- ------- ------- -------
Operating expenses:
Research and development............... 180.5 82.1 54.0 49.3 43.4
Selling, general and administrative.... 278.9 128.0 85.9 74.8 67.7
Amortization of deferred stock
compensation........................ 4.8 4.1 7.9 12.7 16.6
------- ------- ------- ------- -------
Total operating expenses....... 464.2 214.2 147.8 136.8 127.7
------- ------- ------- ------- -------
Loss from operations..................... (419.8) (166.4) (87.8) (69.9) (57.9)
Other income (expense)................... 5.4 (1.5) (.1) .1 (.4)
------- ------- ------- ------- -------
Net loss................................. (414.4)% (167.9)% (87.9)% (69.8)% (58.3)%
======= ======= ======= ======= =======
</TABLE>
Net Revenues. Our net revenues increased in each of the five quarters ended
March 31, 1999 due to the sale of an increasing number of SMS 1000s, our
principal product. Significant revenues from GTE began in the third quarter of
1998 and from UUNET and Nortel Networks in the fourth quarter of 1998.
23
<PAGE> 26
Cost of Revenues; Gross Profit. Cost of revenues includes all costs
associated with the production of our product, including cost of materials,
manufacturing and assembly costs paid to contract manufacturers and related
overhead costs associated with our manufacturing personnel. Additionally, all
warranty costs and any inventory provisions or write-downs are expensed as cost
of revenues. Cost of revenues, expressed in absolute dollars, increased in each
of the five quarters ended March 31, 1999 primarily as a result of increased
product sales. Gross margin, expressed as a percentage of net revenues,
increased in each quarter primarily due to reduced costs of certain key
components, a decrease in related overhead costs resulting from shipments of our
products in material quantities and changes in product configuration.
Specifically, over the last two quarters of 1998 and the first quarter of 1999,
our customers have been purchasing the SMS 1000 with more interface slots
filled, which increases gross margins. Changes in product configuration will
cause our gross margins to vary in future periods.
Research and Development. Research and development expenses consist
primarily of salaries and related costs of employees engaged in research and
development activities, as well as related cost of materials. Our research and
development expenditures increased in absolute dollars in each of the five
quarters ended March 31, 1999 primarily as a result of increased personnel
costs. This increase reflects research and development efforts associated with
new products, such as the SMS 500, and new features and functionality for the
SMS 1000. To date, we have expensed research and development expenses as
incurred. Because the market for our products is characterized by rapidly
changing technology, industry standards and customer demands, we expect our
research and development expenses to increase in absolute dollars.
Selling, General and Administrative. Selling, general and administrative
expenses consist primarily of employee-related expenses, including commissions
paid to sales representatives and marketing and facility-related expenses.
During each of the five quarters ended March 31, 1999, selling, general and
administrative expenses increased in absolute dollars. These increases were
mainly due to the hiring of additional sales and administrative personnel, the
payment to sales representatives of increased commissions resulting from
increased sales, and additional marketing expenses. We anticipate that selling,
general and administrative expenses will continue to increase in absolute
dollars as a result of increases in sales force personnel, commissions on higher
revenues, additional marketing activities and costs associated with public
company reporting requirements.
Amortization of Deferred Stock Compensation. Amortization of deferred stock
compensation increased during each of the five quarters ended March 31, 1999.
This increase was a result of a greater number of shares of stock and stock
options granted during the last two quarters of 1998 and the first quarter of
1999, which was associated with our increased hiring efforts and the
amortization of deferred compensation on prior grants.
Other Income (Expense). Our other income consists of interest earned on our
cash and cash equivalents offset by other expenses, principally interest expense
paid on our capital leases and borrowings.
We have not recorded a provision for income taxes because we experienced
net losses from inception through 1998. As of March 31, 1999, we had net
operating loss carryforwards of approximately $14.6 million. These carryforwards
will expire at various dates beginning in 2004 through 2018, if not utilized.
Utilization of the net operating losses may be subject to a substantial annual
limitation due to the ownership change limitations contained in the Internal
Revenue Code and similar state provisions. There is sufficient uncertainty
regarding the reliability of the deferred tax assets such that a full valuation
allowance has been recorded. The annual limitation may result in the expiration
of the net operating loss and credits before utilization. See note 4 of the
notes to Financial Statements.
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
Net Revenues. Our net revenues increased from $478,000 for three months
ended March 31, 1998 to $6.5 million for the three months ended March 31, 1999.
The increase is due to limited sales of our product prior to March 31, 1998, as
we had recently introduced our initial product, the SMS 1000.
24
<PAGE> 27
Cost of Revenues; Gross Profit. Our cost of revenues increased from
$266,000 in the three months ended March 31, 1998 to $2.0 million for the three
months ended March 31, 1999, due to increased shipments of our SMS 1000. Gross
margin increased from 44% for the three months ended March 31, 1998 to 70% for
the three months ended March 31, 1999 primarily due to reduced costs of certain
key components, a decrease in related overhead costs as a percentage of revenues
resulting from an increase in shipments, and changes in product configuration.
Research and Development. Our research and development expenses increased
from $863,000 for the three months ended March 31, 1998 to $2.8 million in the
three months ended March 31, 1999. This increase was due mainly to an increase
in the number of research and development personnel and related costs associated
with the development of the SMS 500 and new features and functionality of the
SMS 1000.
Selling, General and Administrative. Our selling, general and
administrative expenses increased from $1.3 million for the three months ended
March 31, 1998 to $4.4 million for the three months ended March 31, 1999 due to
the addition of sales and administrative personnel, commissions on higher sales
and additional marketing and facility-related expenses.
Amortization of Deferred Stock Compensation. Our amortization of deferred
stock compensation increased from $23,000 for the three months ended March 31,
1998 to $1.1 million for the three months ended March 31, 1999. This increase is
due to shares of stock and stock options granted during the three months ended
March 31, 1999, which was associated with our increasing hiring efforts, and the
amortization of deferred compensation on prior grants.
INCEPTION TO DECEMBER 31, 1996 AND YEARS ENDED DECEMBER 31, 1997 AND 1998
Net Revenues. We did not generate any revenues until December 1997. Our net
revenues increased from $48,000 in 1997 to $9.2 million in 1998 as we began
shipping the SMS 1000 in volume.
Cost of Revenues; Gross Profit. Our cost of revenues increased from $29,000
in 1997 to $3.6 million in 1998 as we began shipping the SMS 1000 in material
quantities. Gross margin increased from 40% in 1997 to 61% in 1998 primarily due
to reduced costs of certain key components, a decrease in related overhead costs
as a percentage of revenues resulting from an increase in shipments, and changes
in product configuration.
Research and Development. Our research and development expenses increased
from $124,000 for the period from inception to December 31, 1996 to $3.2 million
in 1997 and $5.7 million in 1998. These increases were due mainly to an increase
in the number of research and development personnel and related costs associated
with the development of the SMS 500 and new features and functionality of the
SMS 1000.
Selling, General and Administrative. Our selling, general and
administrative expenses for the period from inception to December 31, 1996 were
not material. These expenses increased from $1.3 million in 1997 to $8.9 million
in 1998 due to the addition of sales and administrative personnel, commissions
on higher sales and additional marketing and facility-related expenses.
Amortization of Deferred Stock Compensation. In 1998, we recorded
amortization of deferred stock compensation of $880,000 in connection with stock
and stock options granted during 1998 at prices subsequently deemed to be below
fair market value on the date of grant.
Other Income (Expense). Our other income, net of expenses, for the period
from inception to December 31, 1996 was not material. Our other income, net of
expenses, decreased from $136,000 in 1997 to $3,000 in 1998 due primarily to
higher interest expense charges resulting from increases in the amount of
capital equipment we leased, partially offset by interest earned on our cash and
cash equivalents.
25
<PAGE> 28
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations through private sales
of securities and, to a lesser extent, bank borrowings and equipment lease
financing. During 1998, we used $6.6 million in cash for operating activities,
compared to $3.8 million in 1997. During the three months ended March 31, 1999,
we used $3.7 million for operating activities. This increase resulted from the
significant expansion of our operations during this period, including increases
in inventory and accounts receivable. We expect that accounts receivable and
inventory will continue to increase if our revenues continue to rise and that we
will continue to increase our investment in capital assets to expand our
operations.
Our principal source of liquidity as of March 31, 1999 consisted of $5.3
million in cash and cash equivalents. As of March 31, 1999, we had a credit
facility that includes a term loan and a revolving line of credit that provides
for borrowings up to the lesser of $5.0 million or 80% of eligible accounts
receivable, as defined in the credit facility. Our line of credit bears interest
at the bank's prime lending rate plus .5% and expires on July 31, 1999. As of
March 31, 1999, we had $2.8 million in outstanding bank indebtedness, consisting
of $329,000 under the term loan and $2.5 million under the line of credit. In
April 1999, we repaid the amount outstanding under the line of credit. There is
currently no amount outstanding under this line of credit. As of December 31,
1998, we were not in compliance with the profitability covenant under the line
of credit. We obtained a waiver of this covenant as of December 31, 1998. We do
not expect to be in compliance with this covenant on April 30, 1999. We do not
expect to use this facility. In April 1999, we secured a commitment for a $2.0
million asset-based borrowing facility with less restrictive covenants.
Purchases of property and equipment, including equipment purchased under
capital leases, increased from $1.5 million in 1997 to $2.7 million in 1998 and
$1.3 million in the three months ended March 31, 1999 and consisted primarily of
purchases of computer equipment, including workstations and servers to support
our increased research and development activities. We expect our capital
expenditures to increase as we further expand our research and development
efforts and as our employee base grows. The timing and amount of future capital
expenditures will depend primarily on our future growth. We expect to spend
approximately $3.0 million for capital expenditures during the remainder of
fiscal 1999 for computer equipment, including workstations and servers to
support our increased research and development activities.
We believe that the net proceeds from this offering, together with our
existing cash balances, anticipated cash flows from operations and credit line
and capital lease financing, will be sufficient to meet our operating and
capital requirements for at least the next 12 months. However, we could be
required, or could elect, to raise additional funds during that period and we
may need to raise additional capital in the future. Additional capital may not
be available at all, or may only be available on terms unfavorable to us. Any
additional issuance of equity or equity-related securities will be dilutive to
our stockholders.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants, or
AICPA, issued Statement of Position, or SOP, No. 98-1, Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use. SOP No. 98-1
requires that entities capitalize certain costs related to internal-use software
once certain criteria have been met. We expect that the adoption of SOP No. 98-1
will not have a material impact on our financial position, results of operations
or cash flows. We will be required to implement SOP No. 98-1 for the year ending
December 31, 1999.
In April 1998, the AICPA issued SOP No. 98-5, Reporting on the Costs of
Start-Up Activities. SOP No. 98-5 requires that all start-up costs related to
new operations must be expensed as incurred. In addition, all start-up costs
that were capitalized in the past must be written off when SOP No. 98-5 is
adopted. We expect that the adoption of SOP No. 98-5 will not have a material
impact on our financial position, results of operations or cash flows. We will
be required to implement SOP No. 98-5 for the year ending December 31, 1999.
26
<PAGE> 29
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards, or SFAS, No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. Because we currently
hold no derivative instruments and do not engage in hedging activities, we
expect that the adoption of SFAS No. 133 will not have a material impact on our
financial position, results of operations or cash flows. We will be required to
implement SFAS No. 133 for the year ending December 31, 2000.
YEAR 2000 COMPLIANCE
Historically, computer programs used two digits -- rather than four -- to
designate specific years. Computer programs that use two digits to designate a
specific year may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices or engage in normal business activities.
This is known as the Year 2000 problem.
We have relationships with, and are to varying degrees dependent upon, a
large number of third parties that provide information, goods and services to us
or who manufacture and ship our products. Our business, results of operations
and financial condition could be materially adversely affected if any of the
third parties with whom we have relationships were to experience significant
Year 2000 related problems. In addition, our business, results of operations and
financial condition could be materially adversely affected if any of our key
customers encounter significant Year 2000 related problems that cause them to
delay or cancel substantial purchase orders or product deliveries.
We have been informed by Electromax, our contract manufacturer, that its
manufacturing systems are Year 2000 compliant. However, Electromax may
experience material unanticipated problems and costs caused by undetected errors
or defects in the technology used in their internal IT and non-IT systems. These
unanticipated problems and costs could have a material adverse effect on their
business, results of operations and financial condition. Additionally,
Electromax is unable to ascertain whether any of its suppliers is Year 2000
compliant. The failure of a supplier of Electromax to be Year 2000 compliant
could adversely affect Electromax's operations, which could materially adversely
affect our business, results of operations and financial condition.
Our products are ultimately used with a number of different hardware and
software products, and to the extent any third-party products are not Year 2000
compliant, the interoperability of our products could be adversely affected.
Given the large number of third-party components used in conjunction with our
products and our limited resources, we do not expect to review third-party
products for Year 2000 compliance.
We have conducted an initial audit of our critical internal financial,
informational and operational systems to identify and evaluate those areas that
may be affected as a result of the Year 2000 problem. To date, we have not
incurred material expense associated with our efforts to become Year 2000
compliant and do not anticipate that any future costs associated with our Year
2000 remediation efforts will be material.
Although we plan to complete modifications or upgrades of our systems prior
to the Year 2000, we may not be able to develop and implement a plan that
adequately addresses the Year 2000 problem in a timely manner. If we are not
able to address the Year 2000 problem adequately, we may be unable to conduct
our business. This would have a material adverse effect on our results of
operations and financial condition.
27
<PAGE> 30
BUSINESS
OVERVIEW
Redback Networks is a leading provider of advanced networking systems that
enable carriers, cable operators and service providers to rapidly deploy
high-speed access to the Internet and corporate networks. Our Subscriber
Management System, or SMS, combines a modular chassis with sophisticated
subscriber management software. The SMS connects and manages large numbers of
subscribers using any of the major high-speed access technologies, including
digital subscriber line, or DSL, cable and wireless. We sell our SMS product
family through our direct sales force, resellers and distribution partners, such
as Nokia and Nortel Networks. Bridging the gap between high-speed access
concentrators and routers connecting to the Internet backbone, our SMS is
currently being used by many of the largest carriers and service providers,
including UUNET, a subsidiary of MCI Worldcom, SBC, Southwestern Bell
Information Services and Pacific Bell Internet, subsidiaries of SBC, GTE,
Ameritech, Bell Canada, Bell South, Concentric, Earthlink, Flashcom, Korea
Telecom, Verio and @Work, a division of @Home.
INDUSTRY BACKGROUND
INCREASING DEMAND FOR BROADBAND ACCESS SERVICES
In recent years, there has been a significant increase in demand by
businesses and consumers for broadband, or high-speed, access to the Internet
and to corporate networks. Increasing numbers of users are relying on Internet
Protocol, or IP, based networks to access corporate intranets and the World Wide
Web and to participate in network-dependent activities such as email, electronic
commerce, telecommuting and on-line entertainment. Consumers are seeking
low-cost, high-speed access to bandwidth-intensive Internet content and services
such as highly graphical Web sites, audio, video and high-speed data.
International Data Corporation, or IDC, predicts that by the end of 1999, one in
three U.S. households will be online. Businesses have even greater requirements
for high-speed access in order to implement electronic commerce strategies or
Web-based business models, and to provide employees and others with robust
telecommuting capabilities. These applications often require the transmission of
large, multimedia-intensive files, which is practical only with high-speed data
access services.
EMERGING BROADBAND INTERNET ACCESS OPTIONS
Carriers, cable operators and service providers are responding to this
demand for high-speed access by providing inexpensive and comprehensive
broadband services. These services deliver "always on" availability that
eliminates the tedious dial-up process associated with analog modem
technologies. Changes in telecommunications regulations have facilitated the
development of broadband strategies by local access providers, using the
following technologies:
DSL. The market for digital subscriber line, or DSL, services is expanding
rapidly. DSL operates over standard copper telephone wires, utilizing an
extensive network infrastructure that can be upgraded for broadband services.
Various implementations of DSL are being developed and deployed, including
full-rate ADSL, or Asymmetrical DSL, and G.lite for consumer applications and
SDSL, or Symmetrical DSL, for business applications. DSL can also serve as an
affordable replacement for dedicated lines used to deliver high-speed data
services. Incumbent local exchange carriers, or ILECs, including Ameritech, Bell
Atlantic, Bell South, GTE, Pacific Bell, SBC and US West, have deployed DSL
services. Telecommunications regulatory reform has enabled the new competitive
local exchange carriers, or CLECs, and leading Internet exchange carriers
including Covad Communications, MCI Worldcom, NorthPoint Communications, Rhythms
NetConnections, and Sprint, to provide DSL service over the same telephone
infrastructure used by the ILECs.
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Interactive Cable. High-speed interactive communication across the cable
infrastructure is made possible by the combination of two-way cable, cable
modems installed in the home and cable modem termination systems installed at
major cable concentration points. Several companies are currently deploying
broadband access services across two-way cable, including @Home and TimeWarner,
through its Roadrunner service. IDC estimates that, as of the end of 1998, there
were 95 million homes passed by cable. With upgrades to two-way cable, cable
operators are well positioned to deploy broadband access services.
Wireless. As an alternative to wireline access, certain carriers and
service providers are using wireless technologies to provide cost-effective
broadband access. Many of these providers are in the early stages of using their
licenses to deploy broadband wireless access services.
Fiber-to-the-Curb. Fiber optic cable supports an alternative broadband
access technology based on light and photonics that offers nearly unlimited
bandwidth capacity. Where deployment costs are justified by service opportunity,
fiber optic cable is being deployed in the "last mile" from the telephone
central office to the subscriber. Recent fiber-to-the-curb initiatives have been
pursued by several ILECs.
OBSTACLES TO DEPLOYING BROADBAND ACCESS
Regardless of the type of broadband access delivered, deployments of
broadband services pose several major challenges associated with scaling and
configuring existing architectures to accommodate large numbers of new
high-speed subscribers. The traditional dial network model, relying on analog
modems and standard telephone lines, is structured so that service providers can
aggregate subscribers using remote access servers, or RASs, located at the
service providers' data centers. Although constrained by speed, this network
model allows service providers not only to aggregate subscriber connections and
pass the traffic to routers, but also to manage subscriber provisioning,
authentication and accounting in the RAS.
With broadband access technologies, however, subscriber connections are
first concentrated by the carriers and cable operators using technology-specific
access concentrators such as DSL access multiplexers, or DSLAMs, and cable modem
termination systems. From there, high-speed data circuits are aggregated at a
central facility by carriers, cable operators or other service providers who
terminate subscriber connections and provide backbone connectivity to the
Internet. These service providers therefore need to manage thousands of
subscribers' connections and to route subscribers' data to and from the
Internet. While service providers have been using traditional routers to provide
both the circuit termination and Internet connectivity functions, routers were
only designed to address the Internet connection task and are limited to
managing several hundred subscribers, significantly less than the thousands of
potential subscribers associated with a widely deployed service. In addition,
unlike existing RASs used in the traditional analog modem dial network model,
routers were not designed to provide broadband subscriber management functions
such as provisioning, authentication and accounting.
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Broadband technologies pose additional challenges for service providers
interested in offering more than one type of broadband service. Each broadband
access technology uses different equipment at the service provider's facility.
As a result, service providers offering multiple broadband services
significantly increase their costs, as they must purchase different routers and
deploy different operational models for each broadband service they choose to
offer to their subscribers. The traditional broadband network model is depicted
below:
SEPARATE NETWORKS FOR EACH ACCESS TECHNOLOGY
[DIAGRAM]
Another obstacle to deploying broadband services is the point-to-point, or
dedicated, nature of broadband access technologies. Whether the access method is
DSL, cable or wireless, each of these technologies provides a dedicated link
from one starting point, such as a home or small office, to a single destination
network, such as a service provider or a corporation. Thus, a telecommuter who
purchases a DSL service for connecting to a corporate network is unable to use
the same line to access directly a consumer service provider for personal Web
surfing.
There is a growing demand from carriers, cable operators and service
providers to address these issues so that they are able to provide their
customers with reliable, scalable, easy-to-use high-speed access on a
cost-effective basis. Carriers, cable operators and service providers require
highly scalable networks and the ability to manage and groom individual
subscriber data streams into simplified IP flows for routers connecting to the
Internet backbone. Service providers must be able to rapidly and cost-
effectively aggregate data streams from diverse broadband access technologies
from different carriers and cable operators.
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THE REDBACK NETWORKS SOLUTION
Redback Networks provides solutions that make it possible for carriers,
cable operators and service providers to connect and manage large numbers of
subscribers using high-speed access technologies such as DSL, cable and
wireless. Our Subscriber Management System, or SMS, lets carriers, cable
operators and service providers connect thousands of subscribers quickly and
cost-effectively, as well as manage subscriber accounts and service profiles.
Carriers, cable operators and service providers are able to deliver different
kinds of high-speed access and a variety of service offerings with a single
operational structure. Our SMS network model is described below:
REDBACK SUPPORTS ALL MAJOR BROADBAND TECHNOLOGIES
[DIAGRAM]
Key benefits of our solution include the following:
Enhances Broadband Operations. The SMS bridges the operational gap between
"last mile" access networks that serve businesses and homes and the routers
connecting to the Internet backbone used by service providers. The SMS accepts a
large concentration of high-speed data traffic from multiple access
concentrators and translates it to an IP data stream, relieving routers
connecting to the Internet backbone of traffic translation and management
responsibilities. In this process, the SMS manages individual subscriber
connections and reduces the number of routers required for widespread deployment
of broadband services.
Supports All Major Access Technologies. The SMS provides and supports a
consistent operational model across major access technologies including DSL,
cable, wireless and dial, and can be deployed by all types of access providers,
including ILECs and CLECs, cable operators and service providers. For example, a
service provider, using the SMS, can offer DSL services today and later add or
resell a cable or wireless service offering through the same SMS. With the SMS,
providers are able to utilize one product and one familiar operational model to
deliver multiple broadband access technologies to serve thousands of
subscribers.
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Facilitates Rapid and Scalable Deployment. The SMS supports service
providers' existing accounting and management software systems. This enables
service providers to quickly deploy new high-speed access services and thus gain
a critical advantage in the highly competitive Internet access market. For
example, the SMS has built-in support for RADIUS, the industry standard for
accounting and security databases, as well as support for the major DSL
protocols and implementations. To further facilitate rapid deployment, we
designed our products to be interoperable with equipment from multiple vendors,
for each integration into existing networks. The SMS is compatible with existing
routers and supports high performance levels thereby eliminating the need to
purchase new routers. Once in place, the SMS architecture is inherently more
scalable than a router-based architecture. The SMS 1000 currently supports 4,000
simultaneous subscriber sessions, nearly fifteen times the number of subscribers
supported by conventional routers.
Provides Platform for the Delivery of Value-Added Services. Our SMS enables
providers to create and market new service offerings that leverage basic
broadband connectivity and capabilities. The multiple context functionality of
the SMS lets service providers configure subscribers to access multiple services
across a single physical link. For example, a telecommuter can access a
corporate network from home while his or her family simultaneously accesses
consumer Internet services through the same connection. Thus, a service provider
previously generating a flat monthly access fee can offer value-added services
and generate multiple revenue streams through "re-profiling". In addition, a
wholesale provider of network services can partition high-speed transport
services among multiple service providers or corporate customers through a
single SMS with "re-selling". A large provider can use this capability to
provide wholesale access to up to 20 smaller providers per SMS chassis -- a
significant improvement for wholesale transactions.
Simplifies End-User Administration and Support. Our approach allows easy
configuration and administration of end-user broadband modems, reducing service
providers' costs and enhancing their ability to rapidly deploy services to
thousands of subscribers. For example, we utilize a standard networking protocol
to provide individualized services for multiple users sharing a single
connection, such as multiple PCs in a home or office. The SMS also supports a
variety of means to manage users, resulting in reduced training and lower
operational expenses.
STRATEGY
Our objective is to be the leading provider of advanced networking systems
that enable carriers, cable operators and service providers to rapidly deploy
high-speed access to the Internet and corporate networks. Key elements of our
strategy include the following:
Extend Leadership in the Carrier and Service Provider Market. We are
focused on delivering subscriber management solutions to carriers and service
providers and have established early market leadership in the DSL market through
account wins in several major networks. We currently have orders or
installations at four of the five RBOCs, including SBC, Bell Atlantic, Bell
South and Ameritech, as well as installations at other national and
international carriers, including Bell Canada, GTE and Korea Telecom.
Additionally, we have several leading service providers as customers, including
UUNET, a subsidiary of MCI Worldcom, Earthlink, Concentric, Southwestern Bell
Information Services and Pacific Bell Internet, subsidiaries of SBC, and @Work,
a division of @Home. We plan to extend our market leadership position by
continuing to invest in sales and marketing efforts that let us further
penetrate existing accounts, develop early customer relationships and win new
service provider accounts for all types of broadband access.
Penetrate Cable and Wireless Broadband Markets. We intend to use our
leadership position in DSL subscriber management to penetrate other critical
broadband access markets, such as cable, wireless and fiber-to-the-curb. We plan
to continue to enhance our solutions that support multiple broadband access
technologies and to expand our sales and marketing efforts accordingly. By
offering
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service providers the ability to support multiple broadband access technologies,
we believe our solution will gain acceptance across multiple broadband access
markets.
Expand Global Distribution and Strengthen Strategic Relationships. We
currently pursue a direct and indirect sales strategy to penetrate carrier,
cable operators and service provider organizations in North America, focusing
primarily on large Internet service providers, or ISPs, ILECs and CLECs. We also
target smaller service providers through resellers that participate in our
authorized PowerPartners program. A substantial majority of our revenues has
been generated through direct sales. We are expanding our presence globally by
increasing the scope and size of our sales force, including adding dedicated
sales resources in both Europe and Asia. To further support our global sales
objectives, we have established strategic distribution relationships with
leading communications and networking companies that have significant customer
relationships in place. These partners, including Nortel Networks and Nokia,
have enabled us to rapidly expand our global sales presence and to leverage
their established relationships with major carriers and service providers.
Leverage Leading Software Capabilities. We believe our Access Operating
System, or AOS, software differentiates our solution and gives us a competitive
advantage in the marketplace. We intend to continue to enhance our wholesale,
security, bandwidth management, subscriber accounting and billing, and network
management capabilities with our highly experienced team of software engineers.
We expect our current and future products will share a common software
foundation and offer a consistent operational model.
Enable New Consumer and Business Services. We believe our solution provides
a highly flexible platform for the creation and delivery of new value-added
services. We will continue to work directly with our customers to develop
features and functionality that further enhance the ability of service providers
to deliver profitable new broadband-based services. We believe this approach
will increase the value we offer in both new and existing installations, as well
as contribute to the continued business success of our customers. Examples of
these new services include tiered "gold" or "platinum" high-availability
services, virtual private networks, or VPNs, and bundled teleworker services.
Deliver Broad Product Family. Our flagship SMS 1000 is targeted at
carriers, cable operators and large service providers. We have expanded our
product offering with the SMS 500, which is targeted at service provider
facilities with fewer subscribers than those using the SMS 1000. Our strategy is
to continue to leverage our AOS software across multiple access technologies and
products. In so doing, we intend to address a range of functionality, density
and application requirements of carriers, cable operators and small and large
service providers.
CUSTOMERS
The following is a representative list of companies that have purchased our
products and services:
<TABLE>
<S> <C> <C>
SERVICE PROVIDERS: CARRIERS: RESELLERS:
Concentric Ameritech ECI Telecom
Earthlink AT&T Wireless Fujitsu
Flashcom Bell Atlantic GTI
Pacific Bell Internet, Bell Canada Lucent
a subsidiary of SBC Bell South Nokia
Southwestern Bell Information Systems, GTE Nortel Networks
a subsidiary of SBC Korea Telecom Sumitomo Electronics
UUNET, a subsidiary of MCI Worldcom SBC
Verio Sprint
@Work, a division of @Home Williams Communications
</TABLE>
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The following examples illustrate how organizations are using our products
to deploy broadband service offerings.
NETWORK SERVICE PROVIDER
One of the world's largest network service providers, or NSPs, announced
that it intended to roll out its DSL service by early 1999. The rollout, which
has the potential to be the largest DSL deployment offered by any service
provider to date, includes two different categories of DSL services: (1)
Symmetrical DSL, or SDSL, services designed to support business applications
such as Web hosting, e-commerce and bulk file transfer; and (2) Asymmetrical
DSL, or ADSL, services targeted at consumer applications such as Internet
surfing, home shopping and interactive games. In order to offer a broad
deployment on a rapid time schedule, the service provider required a solution
that would enable it to quickly and easily scale to large proportions.
The NSP chose us to anchor its DSL service offering, and plans to deploy
the SMS 1000 as an edge device that performs all of the aggregation, management
and conversion functions necessary to deliver router-ready IP data streams to
the backbone. The NSP will aggregate as many as 4,000 subscribers per SMS 1000
over high-speed links issuing from various central office sources. The NSP will
be able to handle the extra volume of traffic resulting from high-speed DSL
without adding any more router power to its backbone. Using the SMS 1000's
powerful multiple context functionality, the NSP will deliver wholesale DSL
services.
INTERNET SERVICE PROVIDER
One of the largest consumer ISPs, was interested in adding broadband access
to its portfolio of access services. The ISP was already a leader in traditional
dial-up access with hundreds of thousands of subscribers, and was looking to add
cable access and ADSL access over various transfer modes. Specifically, the ISP
received DSL capacity from strategic wholesale partners, and cable capacity
through an affiliated cable operator. The ISP was facing the issue of how to
cost-effectively aggregate subscriber traffic from these different access
technologies while maintaining its existing, and highly successful, operational
model.
By using our SMS 1000 in its large subscriber aggregation points, the ISP
was able to concentrate its different DSL and cable feeds using a single
vendor's device. Additionally, because the SMS 1000 was fully integrated with
the ISP's existing RADIUS billing and authentication systems, the ISP was able
to leverage and retain its many years of operating expertise and continue using
its existing operational model with new broadband service offerings.
INCUMBENT LOCAL EXCHANGE CARRIER AFFILIATE
An unregulated affiliate of an ILEC, had been operating trials of its DSL
Internet access service in a limited number of communities and households for
over a year and planned to announce a much broader service deployment and
breakthrough pricing levels. The ILEC affiliate needed a highly scalable and
production-proven solution to handle the massive demand it expected to receive
for its services. It was looking for a solution that would improve upon the
router-based architecture already in use in the service trials.
The ILEC affiliate selected our SMS 1000 as the subscriber management
platform to aggregate subscriber traffic in its service. Today, SMS 1000s are
being deployed in the ILEC affiliate's DSL-enabled subscriber aggregation points
to manage live traffic from thousands of subscribers, and the service deployment
has been scaling rapidly.
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SALES AND MARKETING
We sell our products through a direct sales force, resellers, and strategic
distribution partners.
Direct Sales. Our direct sales force is located in North America and is
focused on the largest service provider, cable operator and carrier
opportunities. As of March 31, 1999, our direct sales force consisted of 46
persons located in various cities throughout North America. In addition, we are
currently building sales organizations in Europe and Asia, both of which will be
focused on large international accounts.
Resellers. We sell our SMS solutions through resellers and network
integrators that participate in our authorized PowerPartners reseller program.
PowerPartners are responsible for system installation, preliminary technical
support and follow-on services to customers in their respective locations. Our
authorized PowerPartners program provides a wide range of sales and marketing
support materials, sales and technical training courses, a partners-only web
site, and various cooperative marketing opportunities.
Strategic Distribution Partners. In order to further support our global
sales objectives, we have established strategic relationships with leading
communications and networking companies that have significant customer
relationships already in place. These partners, including Nortel Networks and
Nokia, have enabled us to rapidly expand our global sales presence and to
leverage their established relationships with major carriers and service
providers.
Marketing. We have a variety of marketing programs and initiatives to
support the sale and distribution of our products. The audience for these
activities includes our sales organization, strategic partners and authorized
resellers, existing and prospective customers, and the trade press, analysts and
others who are influential in the industry. Marketing activities include
participation in technical conferences, preparation of sales tools, business
cases, competitive analyses and other marketing collateral, sales training,
publication of customer deployments, new product information and educational
articles in industry journals, maintenance of our World Wide Web site and direct
marketing to prospective customers. We also participate in leading industry
tradeshows, such as Networld + InterOp at Las Vegas, where we received an award
for Best of Show in May 1998 in the Wide Area Network, or WAN, and remote access
devices category.
PRODUCTS AND TECHNOLOGY
Our SMS enables broadband service providers to deliver high-speed Internet
access and services by bridging the operational gap between high-speed access
equipment in the telco central office or cable/wireless concentration point and
network service provider routers connecting to the Internet backbone. Whether
deployed at subscriber aggregation points by telecommunications carriers, by
cable operators or by service providers, the SMS accepts a large concentration
of high-speed data traffic from such devices as DSL access multiplexers, or
DSLAMs, cable modem termination systems, and wireless termination systems. The
SMS applies scalable user configuration and management to the data streams, and
then performs all of the translations necessary to convert the traffic to IP,
relieving the service provider backbone routers of frame translations that can
cause congestion on high-volume networks.
DESCRIPTION OF THE SMS PRODUCT FAMILY
We currently offer two SMS solutions, (1) the SMS 1000 and (2) the SMS 500.
SMS 1000. We began shipping the flagship SMS 1000 in December 1997. To
date, our customers for the SMS 1000 have included UUNET, a subsidiary of MCI
Worldcom, SBC, Southwestern Bell Information Services and Pacific Bell Internet,
subsidiaries of SBC, GTE, Ameritech, Bell Canada, Bell South, Concentric,
Earthlink, Flashcom, Korea Telecom, Verio and @Work, a division of @Home. Each
SMS 1000 today can support up to 4,000 simultaneous subscribers and is targeted
at major ISPs, ILECs, CLECs and cable operators. The chassis consists of six
modular interface slots, which can be
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populated with modules supporting DS-3 and OC-3 ATM, DS-3 Frame Relay, 10/100
megabit Ethernet and other transmission protocols.
SMS 500. Targeted initially for service provider facilities with fewer
subscribers than those using the SMS 1000, we released the SMS 500 for general
availability in March 1999. The SMS 500 is a smaller chassis with two modular
interface slots and supports up to 1,000 simultaneous subscribers. The SMS 500
supports ATM, Frame Relay and 10/100 megabit Ethernet, as well as T-1
connections.
ACCESS OPERATING SYSTEM SOFTWARE
Our Access Operating System software, or AOS, is an advanced operating
system developed to optimize the subscriber management and routing functions in
our SMS products. AOS operates on both the SMS 500 and SMS 1000, and was
developed specifically to support the aggregation of large numbers of subscriber
circuits. It supports a large variety of network protocols in use in the
industry today, and provides sophisticated traffic management features.
In addition, our AOS supports the routing and bridging of IP packets and is
capable of running dynamic routing protocols. It supports such security
standards as Challenge Handshake Authentication Protocol, or CHAP, and Password
Authentication Protocol, or PAP, and provides tools necessary to manage a large
network of subscribers. AOS supports the unique capability to dynamically bind
subscriber sessions to services. This capability enables dynamic service
selection to be deployed by carriers and service providers alike. The AOS also
supports the Layer 2 Tunneling Protocol, or L2TP, which is critical to the
deployment of virtual private networks by service providers. We are a co-author
of the PPP-over-Ethernet specification, a protocol that greatly simplifies
broadband access and service provider selection, and the functionality in our
AOS is a leading implementation of this protocol. Another distinguishing feature
of our AOS is its support for multiple contexts, which allows a service provider
to partition a single SMS unit into as many as twenty multiple virtual logical
devices.
Some of the key functions that our AOS supports include:
Traffic Management Features. Traffic management features, including
policing and rate limiting, support the creation of different service classes
and provide service providers with predictable traffic behavior for better
management of their networks.
Routing Protocol Support. AOS includes support for certain popular routing
protocols. In addition, we will continue to leverage and expand the routing
protocol support that our SMS product line offers.
Layer 2 Tunneling Protocol (L2TP). We support Layer 2 Tunneling Protocol,
or L2TP, the standard method of building a virtual private network, or VPN,
allowing fixed and mobile users, including telecommuters, to simulate a private
network using a shared infrastructure, such as the Internet. VPNs also allow
mobile users to make secure connections to their corporate intranets or
extranets over the public Internet.
Web-based Management. The Web-based management capabilities in our AOS
allow service providers to streamline operations and simplify troubleshooting
through a common, easy-to-use browser interface.
Bulk Statistics. The bulk statistics capabilities in our AOS allow service
providers access to information that enables them to provide efficient storage
and transfer of high volume accounting data.
RESEARCH AND DEVELOPMENT
We have assembled a team of highly experienced networking engineers with
experience at leading communications companies. Our engineering expertise
includes routers and routing protocols, access products, ATM/Frame Relay
switching, WAN interfaces and network management. As of March 31, 1999, we
employed 51 engineers, with plans to continue expanding all functional areas of
the engineering
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organization. During 1998 we spent $5.7 million on research and development. In
the first quarter of 1999, we spent $2.8 million on research and development.
Our research and development process is driven by market demand. Product
development begins with a comprehensive functional product specification based
on input from the product management and sales organizations. In addition, we
value feedback from customers and have incorporated a significant amount of
customer-requested functionality to date. We are also active in industry bodies
and standards committees and utilize information from these organizations in the
product development process.
We are focusing development efforts on, among other things, supporting
carrier services and additional industry standards, expanding the capacity of
existing products and extending network management capabilities. In addition, we
are committed to extending the functionality of our AOS software to enable
additional competitive advantage for our customers.
CUSTOMER SERVICE AND SUPPORT
Our customer service and support organization installs and maintains
products sold in North America by our direct sales force, as well as certain
products sold by our authorized resellers and partners. Generally, our strategic
distribution partners and authorized resellers provide installation and
first-level, or preliminary, support to their customers, while we provide backup
support.
Our Technical Assistance Center, or TAC, employs systems engineers who work
closely with our direct sales personnel, partners and resellers to assist end
users with post-sales support issues. We have retained field systems engineers
to provide pre-sales support and installation services for direct sales
customers.
MANUFACTURING
Our manufacturing operations consist primarily of prototype development,
materials planning and procurement, final assembly, testing and quality control.
We use several independent suppliers to provide certain printed circuit boards,
chassis and subassemblies. We subcontract substantially all of our manufacturing
to Electromax, located in San Jose, California. In addition, we use a
combination of standard parts and components obtained through Wyle Electronics,
located in Santa Clara, California. Several key components are purchased from
sole or limited sources of supply. See "Risk Factors -- We are dependent on a
single contract manufacturer and some of the key components in our products come
from single or limited sources of supply."
COMPETITION
The broadband access markets we are targeting, including DSL, cable and
wireless, are new and rapidly evolving and we expect these markets to become
highly competitive in the future. In addition, we expect that new competitors
will emerge as the market for broadband access itself evolves due to
technological innovation and regulatory changes. We encounter current or
potential competition from public and private companies providing routers
connecting to the Internet backbone, access concentrators and subscriber
aggregation systems.
Cisco, the leading provider of routers connecting to the Internet backbone,
offers products that compete directly with our SMS products, and also provides a
comprehensive range of broadband access systems. We expect companies that offer
access concentrators and routers to incorporate some subscriber management
functionality into their products. These companies include Nortel Networks which
recently agreed to acquire Shasta, a private company providing subscriber
management services, and Ascend, which has announced its pending acquisition by
Lucent. In addition, there are private companies that provide subscriber
management features in access concentrators or routing platforms.
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Some of our current and potential competitors, including Cisco, Alcatel,
Nortel Networks/Shasta and Lucent/Ascend are large public companies that have
longer operating histories and significantly greater financial, technical,
marketing and other resources than we do. As a result, these competitors are
able to devote greater resources to the development, promotion, sale and support
of their products. In addition, competitors with large market capitalizations or
cash reserves are much better positioned than we are to acquire other companies,
including our competitors, and thereby acquire new technologies or products that
may displace our product lines. Any of these acquisitions could give the
acquiring competitor a strategic advantage that would materially adversely
affect our business, results of operations and financial condition.
Many of our competitors have significantly more established customer
support and professional services organizations than we do. In addition, many of
our competitors have more extensive customer bases and broader customer
relationships than us, including relationships with many of our current and
potential customers. Moreover, these competitors often have broader product
offerings than we do. These companies can leverage their customer relationships
and broader product offerings and adopt aggressive pricing policies to gain
market share. As a result, we may not be able to maintain a competitive position
against current or future competitors. Our failure to maintain and enhance our
competitive position within the market could seriously harm our business,
results of operations and financial condition.
PATENTS AND PROPRIETARY RIGHTS
Our success and ability to compete are dependent on our ability to develop
and maintain the proprietary aspects of our technology. We rely on a combination
of patent, trademark, copyright and trade secret laws, employee and third-party
nondisclosure agreements and licensing arrangements to protect our intellectual
property. These legal protections afford only limited protection for our
technology. We have one patent application pending in the United States and we
have no foreign patents or patent applications. Our pending patent application
may not result in the issuance of any patents. If any patent is issued, it might
be invalidated or circumvented or otherwise fail to provide us any meaningful
protection. In addition, we cannot be certain that others will not independently
develop substantially equivalent intellectual property or otherwise gain access
to our trade secrets or intellectual property, or disclose our intellectual
property or trade secrets, or that we can meaningfully protect our intellectual
property. Our failure to protect our intellectual property effectively could
have a material adverse effect on our business, financial condition or results
of operations. We have licensed technology from third parties for incorporation
into our units, and we expect to continue to enter into such agreements for
future products. Our licenses may result in royalty payments to third parties,
the cross-license of technology by us or payment of other consideration. If our
arrangements are not concluded on commercially reasonable terms, our business,
financial condition or results of operations could be materially adversely
affected.
EMPLOYEES
At March 31, 1999, we had a total of 127 employees, all of whom were based
in the United States. Of the total, 51 were in research and development, 51 were
engaged in sales, marketing and business development, 7 were engaged in customer
support services operations, and 18 were in administration, finance and
operations. None of our employees are subject to a collective bargaining
agreement and we believe that our relations with our employees are good.
FACILITIES
As of March 31, 1999, our principal administrative, sales, marketing and
research and development facility occupied approximately 32,000 square feet in
Sunnyvale, California pursuant to a lease that expires in September 1999. We
believe that our existing facilities are adequate until this lease expires and
that suitable additional or alternative space will be available in the future on
commercially reasonable
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terms as needed. We have sales offices throughout the United States, including
regional sales offices in California, Colorado, Virginia and Washington.
LEGAL PROCEEDINGS
We are not aware of any pending legal proceedings against us that,
individually or in the aggregate, would have a material adverse effect on our
business, results of operations or financial condition. We may in the future be
party to litigation arising in the course of our business, including claims that
we allegedly infringe third-party trademarks and other intellectual property
rights. These claims, even if not meritorious, could result in the expenditure
of significant financial and managerial resources.
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MANAGEMENT
DIRECTORS AND OFFICERS
The following table sets forth certain information regarding our directors
and officers as of March 31, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Dennis L. Barsema(1)................. 45 President, Chief Executive Officer and Director
Geoffrey C. Darby(1)................. 52 Vice President of Finance, Chief Financial
Officer and Secretary
Randall J. Kruep(1).................. 38 Vice President of Worldwide Sales
William E. Miskovetz(1).............. 40 Vice President of Engineering
Larry D. Blair....................... 46 Vice President of Marketing
David D. Childers.................... 51 Director of Customer Support
Gilles G. Concordel.................. 38 Vice President of Business Development
Gaurav Garg.......................... 33 Vice President of Business Development and
Strategic Planning
Edward S. Harriman................... 44 Chief Technology Officer
Sean K. Laskey....................... 37 Vice President of Operations
Carrie J. Perzow..................... 42 Vice President of Human Resources
William M. Salkewicz................. 38 Director of Software Development
Daniel A. Simone..................... 39 Vice President of Product Management
James R. Flach(2).................... 52 Director
Pierre R. Lamond(3).................. 68 Director, Chairman of the Board
Daniel J. Warmenhoven(2)(3).......... 48 Director
</TABLE>
- -------------------------
(1) Executive officer
(2) Member of compensation committee
(3) Member of audit committee
Dennis L. Barsema has served as our President and Chief Executive Officer
and has been a director since joining us in November 1997. Prior to that time,
Mr. Barsema was the Senior Vice President and General Manager at Centigram, a
telecommunications company, from January 1996 to November 1997. From October
1993 to December 1995, he served as Vice President at SoftSwitch, a
telecommunications company. Prior to that time, he served as Vice President at
Primary Access and AT&T Paradyne. Mr. Barsema holds a BS in Business Management
from Northern Illinois University.
Geoffrey C. Darby has served as our Vice President of Finance, Chief
Financial Officer and Secretary since August 1998. From August 1994 to July
1998, he served as Vice President of Finance and Chief Financial Officer of
Visioneer, a digital imaging company. From February 1989 to August 1994, he
served as Vice President of Finance and Chief Financial Officer of Megatest, a
provider of testing equipment for the semiconductor industry. Prior to that
time, Mr. Darby was Assistant Treasurer of Compaq from February 1987 to December
1988. Mr. Darby holds a BS (Hons) from Southampton University in England and is
a Chartered Accountant in the United Kingdom.
Randall J. Kruep has served as our Vice President of Worldwide Sales since
January 1999. From September 1997 to January 1999, Mr. Kruep served as our Vice
President of Sales. Previously, Mr. Kruep was Senior Director of Telecom Sales
for Fore Systems, an ATM/switching company, from May 1996 to July 1997. Prior to
that time, he was a Regional Sales Manager at Cisco, a networking company, from
May 1992 to May 1996. From May 1982 to May 1992 he was Director of Sales at
Motorola in the Information Systems Group. Mr. Kruep holds a BA in Finance and
Communications from Southern Illinois University and an MBA from Fontbonne
College.
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<PAGE> 43
William E. Miskovetz has served as our Vice President of Engineering since
May 1998. Previously, he was Vice President of Engineering at FreeGate, a
networking company, from January 1997 to May 1998. From May 1991 to January
1997, he held various engineering and management positions at Cisco, a
networking company. Mr. Miskovetz holds a BS in Computer Science from the
University of Illinois.
Larry D. Blair has served as our Vice President of Marketing since January
1998. Previously, Mr. Blair was Vice President of Marketing at Ipsilon Networks,
a high-performance IP switch company. Prior to that time, Mr. Blair was a
co-founder and the Vice President of Marketing at Kalpana, an ethernet switch
company, from January 1990 to June 1995. Mr. Blair holds a BSEE from Rochester
Institute of Technology.
David D. Childers has served as our Director of Customer Support since July
1998. Previously, Mr. Childers was Senior Manager of Customer Support at Ascend,
a networking company, from April 1995 to July 1998. From May 1975 to April 1995,
Mr. Childers held various management positions at US West, a telecommunications
company. Mr. Childers holds an AA from Community College Denver.
Gilles G. Concordel is one of our co-founders and has served as Vice
President of Business Development since December 1996. From November 1994 to
December 1996, Mr. Concordel worked for Pacific Telesis, a telecommunications
company, as Director of Multimedia Technology. From March 1991 to October 1994,
he headed the multimedia business unit at Teknekron Communications Systems, a
communications systems company. Mr. Concordel holds a Masters degree in
Physics/Math from Ecole Polytechnique, a Masters degree in Telecommunications
from Ecole Nationale Superieure des Telecommunications and an MBA from HEC,
France/University of California at Los Angeles.
Gaurav Garg is one of our co-founders and has served as our Vice President
of Business Development and Strategic Planning since August 1996. Previously,
Mr. Garg was a principal engineer at Bay Networks, a networking company, from
July 1990 to July 1996. Mr. Garg holds BSEE, BSCS and MSEE degrees from
Washington University at St. Louis.
Edward S. Harriman is one of our co-founders and has served as our Chief
Technology Officer since March 1999 and has been with Redback Networks since
November 1996. Prior to joining Redback Networks, Mr. Harriman was a Consulting
Engineer at Bay Networks, a networking company, from February 1989 to November
1996. Previously, Mr. Harriman was Principal Engineer at Bolt Beranek Newman, an
Internet company, from February 1980 to February 1989. Mr. Harriman received his
BS in Electrical Engineering and Computer Science from the Massachusetts
Institute of Technology.
Sean K. Laskey has served as our Vice President of Operations since October
1997. Previously, Mr. Laskey was Director of Operations at Tut Systems, a
provider of advanced communications products from July 1996 to July 1997. From
September 1990 to June 1996, Mr. Laskey held various management positions at
Network Peripherals, a maker of networking equipment. Prior to that time, he was
a Manufacturing and Materials Manager at Sun Microsystems, a software and
computer systems company, from April 1987 to September 1990.
Carrie J. Perzow has served as our Vice President of Human Resources since
October 1998. From February 1995 to September 1998, she was the Vice President
of Human Resources for Centigram, a telecommunications company. Prior to that
time, she held various management positions at Sun Microsystems, a software and
computer systems company, from June 1992 to January 1995. Ms. Perzow previously
worked in various HR management positions at 3Com Corporation and Scientific
Micro Systems. Ms. Perzow holds a BA in Sociology from the University of
California at Santa Barbara.
William M. Salkewicz is one of our co-founders and has served as our
Director of Software Development since December 1996. Previously, Mr. Salkewicz
was a Principal Engineer at Bay Networks, a networking company, from February
1992 to November 1996. From June 1988 to February
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<PAGE> 44
1992, Mr. Salkewicz was a Principal Engineer at Digital Equipment Corporation, a
maker of computer peripherals. Mr. Salkewicz holds a BSEE and a BSCS from
Western New England College.
Daniel A. Simone has served as our Vice President of Product Management
since January 1997. Previously, Mr. Simone worked at Bay Networks, a networking
company, from June 1992 to January 1997 as Director of Product Management. Prior
to Bay Networks, Mr. Simone held various positions at Motorola, a maker of
communications equipment. Mr. Simone holds a BSEE from Marquette University, an
MSEE from Marquette University and an MBA from the University of Chicago.
James R. Flach has served as one of our directors since January 1997. From
January 1997 to November 1997, Mr. Flach served as our President and Chief
Executive Officer. Mr. Flach has been a partner of Accel Partners, a venture
capital firm, since September 1992. He currently serves as Chairman of Sentient
Networks, a multi-service access switch company, and is also a director of
Hybrid Networks, a broadband access equipment company. Additionally, Mr. Flach
serves on the board of a number of private companies. Mr. Flach holds a BS in
Physics from Rensselaer Polytechnic Institute and an MS in Applied Mathematics
from the Rochester Institute of Technology.
Pierre R. Lamond has served as our Chairman of the Board since November
1996. Mr. Lamond has been a partner with Sequoia Capital, a venture capital
firm, since 1981. He is currently the Chairman of CombiChem, a computational
drug discovery company, and Vitesse Semiconductor, a semiconductor company.
Additionally, Mr. Lamond serves on the board of a number of private companies.
Prior to joining Sequoia, Mr. Lamond was a founder and technical director of
National Semiconductor and the general manager of its Integrated Circuit
Division. Mr. Lamond holds an MS in Electrical Engineering from Northeastern
University and an MS in Physics from Toulouse University.
Daniel J. Warmenhoven has served as one of our directors since January
1998. Mr. Warmenhoven has been President, Chief Executive Officer and a Director
of Network Appliance, a network data storage devices company, since October
1994. Prior to that time, Mr. Warmenhoven served as Chairman, President and
Chief Executive Officer of Network Equipment Technologies. Prior to joining
Network Equipment Technologies, he spent five years with Hewlett-Packard serving
in a number of senior management positions. Before that time, he served thirteen
years with IBM. Mr. Warmenhoven holds a BSEE from Princeton University.
Our executive officers are appointed by our board of directors and serve
until their successors are elected or appointed. There are no family
relationships among any of our directors or executive officers.
BOARD COMMITTEES
The board of directors has a compensation committee and an audit committee.
Compensation Committee. The compensation committee of the board of
directors reviews and makes recommendations to the board regarding all forms of
compensation provided to our executive officers and directors, including stock
compensation and loans. In addition, the compensation committee reviews and
makes recommendations on bonus and stock compensation arrangements for all of
our employees. As part of the foregoing, the compensation committee also
administers our 1999 Stock Incentive Plan, 1999 Employee Stock Purchase Plan and
1999 Directors' Option Plan. The current members of the compensation committee
are Messrs. Flach and Warmenhoven.
Audit Committee. The audit committee of the board of directors reviews and
monitors our corporate financial reporting and our internal and external audits,
including, among other things, our internal audit and control functions, the
results and scope of the annual audit and other services provided by our
independent auditors and our compliance with legal matters that have a
significant impact on our financial reports. The audit committee also consults
with our management and our independent auditors prior to the presentation of
financial statements to stockholders and, as appropriate, initiates inquiries
into aspects of our financial affairs. In addition, the audit committee has the
responsibility to consider
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<PAGE> 45
and recommend the appointment of, and to review fee arrangements with, our
independent auditors. The current members of the audit committee are Messrs.
Lamond and Warmenhoven.
DIRECTOR COMPENSATION
Directors do not receive any cash fees for their service on the board or
any board committee, but they are entitled to reimbursement for all reasonable
out-of-pocket expenses incurred in connection with their attendance at board and
board committee meetings. Mr. Warmenhoven received options to purchase 75,000
shares of common stock when he joined the board of directors. Following this
offering, Messrs. Lamond and Flach will each receive an initial grant of options
to purchase 25,000 shares of common stock and all directors will receive
automatic annual option grants under our 1999 Directors' Option Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee of the board of directors currently consists of
Messrs. Flach and Warmenhoven. No interlocking relationship exists between any
member of our board of directors or our compensation committee and any member of
the board of directors or compensation committee of any other company, and no
such interlocking relationship has existed in the past.
INDEMNIFICATION
In March 1999, the board of directors authorized Redback Networks to enter
into indemnification agreements with each of our directors and executive
officers. The form of indemnification agreement provides that we will indemnify
our directors and executive officers to the fullest extent permitted by Delaware
law, our certificate of incorporation and our bylaws, against any and all of
their expenses incurred by reason of their status as a director or executive
officer.
Our certificate of incorporation and bylaws each contain certain provisions
relating to the limitation of liability and indemnification of our directors and
officers. Our certificate of incorporation provides that our directors will not
be personally liable to Redback Networks or our stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability
- for any breach of the director's duty of loyalty to Redback Networks or
our stockholders;
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- in respect of certain unlawful payments of dividends or unlawful stock
repurchases or redemptions as provided in Section 174 of the Delaware
General Corporation Law; or
- for any transaction from which the director derives any improper personal
benefit.
This provision in the certificate of incorporation does not eliminate the
directors' fiduciary duty, and in appropriate circumstances equitable remedies
such as injunctive or other forms of non-monetary relief will remain available
under Delaware General Corporation law.
Our certificate of incorporation also provides that if the Delaware General
Corporation Law is amended to authorize corporate action further eliminating or
limiting the personal liability of directors, then the liability of our
directors will be eliminated or limited to the fullest extent permitted by the
Delaware General Corporation Law. The foregoing provisions of our certificate of
incorporation are not intended to limit the liability of our directors or
officers for any violation of applicable federal securities laws.
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<PAGE> 46
In addition, as permitted by Section 145 of the Delaware General
Corporation Law, our bylaws provide that
- we are required to indemnify our directors and officers to the fullest
extent permitted by the Delaware General Corporation Law;
- we may, in our discretion, indemnify other current and former employees
of Redback Networks as provided by the Delaware General Corporation Law;
- to the fullest extent permitted by the Delaware General Corporation Law,
we are required to advance all expenses incurred bY our directors and
officers in connection with a legal proceeding (subject to certain
exceptions);
- the rights conferred in the bylaws are not exclusive; and
- any retroactive amendment of our bylaw provisions relating to
indemnification shall not affect any indemnification rights or
obligations relating to any pre-existing state of facts.
EXECUTIVE COMPENSATION
The following table sets forth information with respect to compensation for
the fiscal year ended December 31, 1998 paid by us for services rendered by our
Chief Executive Officer and our other executive officers whose total salary and
bonus for such fiscal year exceeded $100,000, collectively referred to below as
the Named Executive Officers:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
-------------------- UNDERLYING OTHER ANNUAL
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(#) COMPENSATION($)
--------------------------- --------- -------- ------------ ---------------
<S> <C> <C> <C> <C>
Dennis L. Barsema.......................... $180,000 $ 90,000 -- $ --
President, Chief Executive Officer
and Director
Geoffrey C. Darby(1)....................... 72,000 7,000 225,000 --
Vice President of Finance,
Chief Financial Officer and Secretary
Randall J. Kruep........................... 90,000 135,422(2) 75,000 53,000(3)
Vice President of Worldwide Sales
William E. Miskovetz(4).................... 93,750 15,000 317,500 --
Vice President of Engineering
</TABLE>
- -------------------------
(1) Represents the total amount of compensation Mr. Darby received in 1998 for
the portion of the year during which he was one of our executive officers.
Mr. Darby joined us in August 1998. See "Management -- Directors and
Officers."
(2) Represents commission income.
(3) Represents reimbursement for relocation expenses.
(4) Represents the total amount of compensation Mr. Miskovetz received in 1998
for the portion of the year during which he was one of our executive
officers. Mr. Miskovetz joined us in May 1998.
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<PAGE> 47
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth each grant of stock options during the year
ended December 31, 1998 to each of the Named Executive Officers. No stock
appreciation rights were granted to these individuals during that year.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
-------------------------------------------------------- ANNUAL RATES OF
NUMBER OF STOCK
SECURITIES % OF TOTAL PRICE APPRECIATION
UNDERLYING OPTIONS GRANTED EXERCISE FOR OPTION TERM(4)
OPTIONS TO EMPLOYEES IN PRICE EXPIRATION --------------------
NAME GRANTED(#)(1) 1998(2) ($/SH)(3) DATE 5%($) 10%($)
---- ------------- --------------- --------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Dennis L. Barsema(5)........ -- --% $ -- -- $ -- $ --
Geoffrey C. Darby........... 125,000 4.6 .80 8/3/08 62,889 159,374
100,000 3.7 .80 8/3/08 50,312 127,499
Randall J. Kruep(6)......... 30,000 1.1 .60 5/27/08 11,320 28,687
27,333 1.0 3.00 12/15/08 51,569 130,685
17,667 .7 3.00 12/15/08 33,332 84,470
William E. Miskovetz........ 247,500 9.1 .30 4/13/08 46,695 118,335
30,000 1.1 1.00 9/1/08 18,867 47,812
20,000 .7 3.00 12/15/08 37,734 95,625
20,000 .7 3.00 12/15/08 37,734 95,625
</TABLE>
- -------------------------
(1) Each of the options listed in the table is immediately exercisable. The
shares purchasable under the options may be repurchased by Redback Networks
at the original exercise price paid per share if the optionee ceases service
before vesting in such shares. The repurchase right lapses and the optionee
vests as to 25% of the option shares upon completion of 12 months of service
from the vesting start date and the balance in a series of equal monthly
installments over the next three years of service thereafter. The option
shares will vest upon an acquisition of Redback Networks by merger or asset
sale, unless our repurchase right with respect to the unvested option shares
is transferred to the acquiring entity. In addition, the repurchase right as
to Mr. Barsema's shares will lapse in full, and the vesting as to Mr.
Darby's shares will be accelerated in full if, upon a merger or asset sale,
they are not offered a position equal to or better than their existing
position. In the event of a merger or asset sale, the vesting on Mr. Kruep's
shares will be redetermined as if the shares vested over a three, rather
than four, year period.
(2) Based on a total of 2,709,100 options granted to our employees during the 12
months ended December 31, 1998.
(3) The exercise price was equal to the fair market value of our common stock as
valued by our board of directors on the date of grant. In determining this
fair market value, the board of directors took into account the purchase
price paid by investors for shares of our preferred stock (taking into
account the liquidation preferences and other rights, privileges and
preferences associated with such preferred stock) and an evaluation by the
board of directors of our revenues, operating history and prospects. The
exercise price may be paid in cash, in shares of our common stock valued at
fair market value on the exercise date or through a cashless exercise
procedure involving a same-day sale of the purchased shares. We may also
finance the option exercise by lending the optionee sufficient funds to pay
the exercise price for the purchased shares, together with any federal and
state income tax liability incurred by the optionee in connection with such
exercise.
(4) The potential realizable value is calculated based on the ten-year term of
the option at the time of grant. Stock price appreciation of 5% and 10% is
assumed pursuant to rules promulgated by the Securities and Exchange
Commission and does not represent our prediction of our stock price
performance. The potential realizable value at 5% and 10% appreciation is
calculated by assuming that the estimated fair market value on the date of
grant appreciates at the indicated rate for the
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<PAGE> 48
entire term of the option and that the option is exercised at the exercise
price and sold on the last day of its term at the appreciated price. See
footnote 3 for information on how the fair market value of our common stock
was estimated. The initial public offering price is higher than the
estimated fair market value on the date of grant, and the potential
realizable value of the option grants would be significantly higher than the
numbers shown in the table if future stock prices were projected to the end
of the option term by applying the same annual rates of stock price
appreciation to the initial public offering price.
(5) Does not include 1,053,480 shares of restricted stock granted to Mr. Barsema
in December 1997. See "Management -- Certain Transactions."
(6) Does not include 300,000 shares of restricted stock granted to Mr. Kruep in
August 1997. See "Management -- Certain Transactions."
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth for each of the Named Executive Officers the
number of options exercised during the fiscal year ended December 31, 1998 and
the number and value of securities underlying unexercised options that are held
by the Named Executive Officers as of December 31, 1998. No stock appreciation
rights were exercised by the Named Executive Officers in fiscal year 1998, and
no stock appreciation rights were outstanding at the end of that year.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
DECEMBER 31, DECEMBER 31,
SHARES 1998(#)(2) 1998($)(3)
ACQUIRED ON VALUE ----------------- -----------------
NAME EXERCISE(#) REALIZED($)(1) VESTED UNVESTED VESTED UNVESTED
---- ----------- -------------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Dennis L. Barsema.............. -- $ -- -- -- -- $ --
Geoffrey C. Darby.............. -- -- -- 225,000 -- 495,000
Randall J. Kruep............... 30,000 0 -- 45,000 -- --
William E. Miskovetz........... 97,500 0 -- 220,000 -- 465,000
</TABLE>
- -------------------------
(1) Equal to the fair market value of the purchased shares on the option
exercise date, less the exercise price paid for such shares.
(2) The options are immediately exercisable for all of the option shares, but
any shares purchased under those options will be subject to repurchase by
Redback Networks, at the original exercise price paid per share, if the
optionee ceases service with Redback Networks before vesting in such shares.
The heading "Vested" refers to shares that are no longer subject to
repurchase; the heading "Unvested" refers to shares subject to repurchase as
of December 31, 1998.
(3) Based on the fair market value of our common stock as determined by our
board of directors at the end of 1998 of $3.00 per share, less the exercise
price payable or paid for such shares. The fair market value of our common
stock at the end of 1998 was estimated by the board of directors on the
basis of the purchase price paid by investors for shares of our preferred
stock (taking into account the liquidation preferences and other rights,
privileges and preferences associated with the preferred stock) and an
evaluation by the board of our revenues, operating history and prospects.
The initial public offering price is higher than the estimated fair market
value at fiscal year-end, and the value of unexercised options would be
higher than the numbers shown in the table if the value were calculated by
subtracting the exercise price from the initial public offering price.
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<PAGE> 49
STOCK PLANS
1999 STOCK INCENTIVE PLAN
Share Reserve. Our board of directors adopted our 1999 Stock Incentive Plan
on March 3, 1999. We have reserved 2,500,000 shares of our common stock for
issuance under the 1999 Stock Incentive Plan. Any shares not yet issued under
our 1997 Stock Plan on the date of this offering will also be available under
the 1999 Stock Incentive Plan. On January 1 of each year, starting with the year
2000, the number of shares in the reserve will automatically increase by 5% of
the total number of shares of common stock that are outstanding at that time or
by 1,500,000 shares, whichever is less. In general, if options or shares awarded
under the 1999 Stock Incentive Plan or the 1997 Stock Plan are forfeited, then
those options or shares will again become available for awards under the 1999
Stock Incentive Plan. We have not yet granted any options under the 1999 Stock
Incentive Plan.
Administration. The compensation committee of our board of directors
administers the 1999 Stock Incentive Plan. The committee has the complete
discretion to make all decisions relating to the interpretation and operation of
our 1999 Stock Incentive Plan. The committee has the discretion to determine who
will receive an award, what type of award it will be, how many shares will be
covered by the award, what the vesting requirements will be (if any), and what
the other features and conditions of each award will be. The compensation
committee may also reprice outstanding options and modify outstanding awards in
other ways.
Eligibility. The following groups of individuals are eligible to
participate in the 1999 Stock Incentive Plan:
- Employees;
- Members of our board of directors who are not employees; and
- Consultants.
Types of Award. The 1999 Stock Incentive Plan provides for the following
types of award:
- Incentive stock options to purchase shares of our common stock;
- Nonstatutory stock options to purchase shares of our common stock; and
- Restricted shares of our common stock.
Options. An optionee who exercises an incentive stock option may qualify
for favorable tax treatment under Section 422 of the Internal Revenue Code of
1986. Nonstatutory stock options, however, do not qualify for such favorable tax
treatment. The exercise price for incentive stock options granted under the 1999
Stock Incentive Plan may not be less than 100% of the fair market value of our
common stock on the option grant date. In the case of nonstatutory stock
options, the minimum exercise price is 30% of the fair market value of our
common stock on the option grant date. Optionees may pay the exercise price by
using:
- Cash;
- Shares of common stock that the optionee already owns;
- A full-recourse promissory note, except that the par value of newly
issued shares must be paid in cash;
- An immediate sale of the option shares through a broker designated by us;
or
- A loan from a broker designated by us, secured by the option shares.
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<PAGE> 50
Options vest at the time or times determined by the compensation committee.
In most cases, our options vest over the four-year period following the date of
grant. Options generally expire 10 years after they are granted, except that
they generally expire earlier if the optionee's service terminates earlier. The
1999 Stock Incentive Plan provides that no participant may receive options
covering more than 1,000,000 shares in the same year, except that a newly hired
employee may receive options covering up to 2,000,000 shares in the first year
of employment.
Salary Reduction Option Program. The compensation committee may offer our
employees, non-employee directors and consultants the opportunity to convert a
portion of their salaries or fees into nonstatutory stock options. Individuals
who have been selected for this program, if they wish to participate, must file
an irrevocable election before the end of a calendar year. In the election, they
must specify how much they would like to contribute during the next year, within
the limits established by the committee. On the first business day in January of
the next year, we will grant them an option under the 1999 Stock Incentive Plan.
The exercise price of this option will be equal to one-third of the market price
of our stock on the date of grant. The number of shares covered by the option
will be equal to the amount of the salary or fee reduction that the participant
elected, divided by an amount equal to two-thirds of the market price of our
stock on the date of grant. As a result, the total discount under the option
(the market price of the option shares on the grant date less the aggregate
exercise price payable for those shares) will be equal to the dollar amount of
the reduction in the optionee's compensation for the calendar year in which the
grant is made. The option will generally become exercisable in 12 equal monthly
installments, as the optionee completes each calendar month of service in the
year of the grant. The option generally remains exercisable for 10 years from
the date of grant, even if the optionee's service terminates earlier. The other
terms applicable to grants under this program are substantially the same as the
terms described above for regular nonstatutory option grants.
Restricted Shares. Restricted shares may be awarded under the 1999 Stock
Incentive Plan in return for:
- Cash;
- A full-recourse promissory note, except that the par value of newly
issued shares must be paid in cash;
- Services already provided to us; and
- In the case of treasury shares only, services to be provided to us in the
future.
Restricted shares vest at the time or times determined by the compensation
committee.
Change in Control. If a change in control of Redback Networks occurs, an
option or restricted stock award under the 1999 Stock Incentive Plan will
generally become fully vested. However, if the surviving corporation assumes the
option or award or replaces it with a comparable award, then vesting accelerates
only to the extent determined by the compensation committee. A change in control
includes:
- A merger of Redback Networks after which our own stockholders own 50% or
less of the surviving corporation (or its parent company);
- A sale of all or substantially all of our assets;
- A proxy contest that results in the replacement of more than one-half of
our directors over a 24-month period; or
- An acquisition of 50% or more of our outstanding stock by any person or
group, other than a person related to Redback Networks (such as a holding
company owned by our stockholders).
Amendments or Termination. Our board may amend or terminate the 1999 Stock
Incentive Plan at any time. If our board amends the plan, it does not need to
ask for stockholder approval of the
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<PAGE> 51
amendment unless applicable law requires it. The 1999 Stock Incentive Plan will
continue in effect indefinitely, unless the board decides to terminate the plan
earlier.
1999 EMPLOYEE STOCK PURCHASE PLAN
Share Reserve and Administration. Our board of directors adopted our 1999
Employee Stock Purchase Plan on March 3, 1999. Our 1999 Employee Stock Purchase
Plan is intended to qualify under Section 423 of the Internal Revenue Code. We
have reserved 1,000,000 shares of our common stock for issuance under the plan.
On May 1 of each year, starting with the year 2000, the number of shares in the
reserve will automatically be restored to 1,000,000. In other words, the reserve
will be increased by the number of shares that have been issued under the 1999
Employee Stock Purchase Plan during the prior 12-month period. The plan will be
administered by the compensation committee of our board of directors.
Eligibility. All of our employees are eligible to participate if they are
employed by us for more than 20 hours per week and for more than five months per
year. Eligible employees may begin participating in the 1999 Employee Stock
Purchase Plan at the start of any offering period. Each offering period lasts 24
months. Overlapping offering periods start on May 1 and November 1 of each year.
However, the first offering period will start on the effective date of this
offering and end on April 30, 2001.
Amount of Contributions. Our 1999 Employee Stock Purchase Plan permits each
eligible employee to purchase common stock through payroll deductions. Each
employee's payroll deductions may not exceed 15% of the employee's cash
compensation. Purchases of our common stock will occur on April 30 and October
31 of each year. Each participant may purchase up to 1,000 shares on any
purchase date (2,000 shares per year). But the value of the shares purchased in
any calendar year (measured as of the beginning of the applicable offering
period) may not exceed $25,000.
Purchase Price. The price of each share of common stock purchased under our
1999 Employee Stock Purchase Plan will be 85% of the lower of:
- The fair market value per share of common stock on the date immediately
before the first day of the applicable offering period; or
- The fair market value per share of common stock on the purchase date.
In the case of the first offering period, the price per share under the
plan will be 85% of the lower of:
- The price per share to the public in this offering; or
- The fair market value per share of common stock on the purchase date.
Other Provisions. Employees may end their participation in the 1999
Employee Stock Purchase Plan at any time. Participation ends automatically upon
termination of employment with Redback Networks. If a change in control of
Redback Networks occurs, our 1999 Employee Stock Purchase Plan will end and
shares will be purchased with the payroll deductions accumulated to date by
participating employees, unless the plan is assumed by the surviving corporation
or its parent. Our board of directors may amend or terminate the 1999 Employee
Stock Purchase Plan at any time. Our Chief Executive Officer may also amend the
plan in certain respects. If our board increases the number of shares of common
stock reserved for issuance under the plan (except for the automatic increases
described above), it must seek the approval of our stockholders.
1999 DIRECTORS' OPTION PLAN
Share Reserve. Our board of directors adopted our 1999 Directors' Option
Plan on March 3, 1999. We have reserved 200,000 shares of our common stock for
issuance under the plan. On January 1 of each year, starting with the year 2000,
the number of shares in the reserve will automatically be restored to
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<PAGE> 52
200,000. In other words, the reserve will be increased by the number of shares
that have been optioned under the 1999 Directors' Option Plan during the prior
12-month period. In general, if options granted under the 1999 Directors' Option
Plan are forfeited, then those options will again become available for grants
under the plan. The Directors' Option Plan will be administered by the
compensation committee of our board of directors, although all grants under the
plan are automatic and non-discretionary.
Initial Grants. Only the non-employee members of our board of directors
will be eligible for option grants under the 1999 Directors' Option Plan. Each
non-employee director who did not previously receive options to buy our common
stock will receive an initial option to buy 25,000 shares on the date of this
offering. Each non-employee director who first joins our board after the
effective date of this offering will receive an initial option for 25,000
shares. That grant will occur when the director takes office. The initial
options vest in equal monthly installments over the four-year period following
the date of grant, except that all vesting for the first year occurs at the
close of that year.
Annual Grants. At the time of each of our annual stockholders' meetings,
beginning in 2000, each non-employee director who will continue to be a director
after that meeting will automatically be granted an annual option for 10,000
shares of our common stock. However, a new non-employee director who is
receiving the 25,000-share initial option will not receive the 10,000-share
annual option in the same calendar year. The annual options vest in equal
monthly installments over the one-year period following the date of grant.
Other Option Terms. The exercise price of each non-employee director's
option will be equal to the fair market value of our common stock on the option
grant date. A director may pay the exercise price by using cash, shares of
common stock that the director already owns, or an immediate sale of the option
shares through a broker designated by us. The non-employee directors' options
have a 10-year term, except that they expire one year after a director leaves
the board (if earlier). If a change in control of Redback Networks occurs, a
non-employee director's option granted under the 1999 Directors' Option Plan
will become fully vested (unless the accounting rules applicable to a pooling of
interests preclude acceleration). Vesting also accelerates in the event of the
optionee's death or disability.
Amendments or Termination. Our board may amend or terminate the 1999
Directors' Option Plan at any time. If our board amends the plan, it does not
need to ask for stockholder approval of the amendment unless applicable law
requires it. The 1999 Directors' Option Plan will continue in effect
indefinitely, unless the board decides to terminate the plan.
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CERTAIN TRANSACTIONS
SALES OF STOCK TO INSIDERS
Since August 30, 1996, we have issued and sold securities to the following
persons who are executive officers, directors or principal stockholders of
Redback Networks. These figures reflect activity through March 31, 1999.
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES D TOTAL SHARES TOTAL
PREFERRED PREFERRED PREFERRED PREFERRED COMMON AS AMOUNT
INVESTOR(1) STOCK(2) STOCK(3) STOCK(4) STOCK(5) STOCK CONVERTED(6) PAID
----------- --------- --------- --------- --------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Dennis L. Barsema(8)......... -- -- -- -- 1,053,480 1,053,480 $ 210,696
Geoffrey C. Darby(9)......... -- -- -- -- 100,000 100,000 80,000
Randall J. Kruep(10)......... -- -- -- -- 330,000 330,000 34,000
William E. Miskovetz(11)..... -- -- -- -- 97,500 97,500 29,250
James R. Flach(12)........... -- 2,500,001 392,171 409,508 150,000 3,451,680 6,515,171
Pierre R. Lamond(13)......... 1,500,000 2,555,004 622,453 419,130 -- 5,096,587 7,293,463
Daniel J. Warmenhoven(14).... -- -- -- -- 75,000 75,000 15,000
Funds affiliated with Sequoia
Capital(15)................ 1,500,000 2,455,002 612,703 419,130 -- 4,986,835 7,173,961
Funds Affiliated with Accel
Partners(16)............... -- 2,500,001 387,296 409,508 -- 3,296,805 3,597,421
Funds affiliated with
Mayfield Fund(17).......... -- -- 1,500,000 212,746 -- 1,712,746 4,674,311
<CAPTION>
VALUE OF
SHARES AT
INVESTOR(1) $13 PER SHARE(7)
----------- ----------------
<S> <C>
Dennis L. Barsema(8)......... $13,695,240
Geoffrey C. Darby(9)......... 1,300,000
Randall J. Kruep(10)......... 4,290,000
William E. Miskovetz(11)..... 1,267,500
James R. Flach(12)........... 44,871,840
Pierre R. Lamond(13)......... 66,255,631
Daniel J. Warmenhoven(14).... 975,000
Funds affiliated with Sequoia
Capital(15)................ 64,828,855
Funds Affiliated with Accel
Partners(16)............... 42,858,465
Funds affiliated with
Mayfield Fund(17).......... 22,265,698
</TABLE>
- -------------------------
(1) See "Principal Stockholders" for more detail on shares held by these
purchasers.
(2) The per share purchase price for our series A preferred stock was $.13.
(3) The per share purchase price for our series B preferred stock was $1.00.
(4) The per share purchase price for our series C preferred stock was $2.00.
(5) The per share purchase price for our series D preferred stock was $7.87.
(6) Reflects the conversion to common stock of each share of series A, series
B, series C and series D preferred stock that will be effective upon the
closing of our initial public offering.
(7) Reflects the value of the shares upon the commencement of the initial
public offering, assuming a price at the middle of the proposed
$12.00 - $14.00 filing range.
(8) Reflects the purchase on December 9, 1997 of our common stock. Mr Barsema
subsequently transferred 100,000 shares of common stock.
(9) Reflects the exercise on January 12, 1999 of options to purchase our common
stock.
(10) Reflects the purchase on September 8, 1997 of 300,000 shares of common
stock, and reflects an exercise on May 28, 1998 of options to purchase
30,000 shares of our common stock.
(11) Reflects the exercise on May 12, 1998 of options to purchase our common
stock.
(12) These figures include shares owned individually by Mr. Flach, consisting of
4,875 shares of our series C preferred stock purchased on October 23, 1997,
and 150,000 shares of our common stock purchased pursuant to the exercise
of an option on February 18, 1997. These figures also include holdings by
entities related to Accel Partners which include: Accel Internet/Strategic
Technology Fund L.P., Accel Investors '96 L.P., Accel Keiretsu V L.P.,
Accel V L.P. and Ellmore C. Patterson Partners. Mr. Flach, a director of
Redback Networks, is a partner of Accel Partners.
(13) These figures include 50,001 shares of our series B preferred stock and
4,875 shares of our series C preferred stock held by the Pierre R. and
Christine E. Lamond Trust dated November 22, 1985 and 50,001 shares of our
series B preferred stock and 4,875 shares of our series C preferred stock
held by the David A. Lamond Trust dated November 16, 1992. These figures
also include holdings by entities related to Sequoia Capital which include:
Sequoia 1995 LLC, Sequoia 1997, Sequoia
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<PAGE> 54
Capital VIII, Sequoia Technology Partners VII and SQP 1997. Mr. Lamond, a
director and chairman of the board of Redback Networks, is a partner of
Sequoia Capital.
(14) Reflects the exercise on February 20, 1998 of options to purchase Redback
Networks common stock.
(15) Sequoia Capital includes the following entities managed by Sequoia Capital:
Sequoia 1995 LLC, Sequoia 1997, Sequoia Capital VIII, Sequoia Technology
Partners VII and SQP 1997. Pierre R. Lamond, a director and chairman of the
board of Redback Networks, is a partner of Sequoia Capital.
(16) Accel Partners includes the following entities managed by Accel Partners:
Accel Internet/ Strategic Technology Fund L.P., Accel Investors '96 L.P.,
Accel Keiretsu V L.P., Accel V L.P. and Ellmore C. Patterson Partners.
James R. Flach, a director of Redback Networks, is a partner of Accel
Partners.
(17) Mayfield Fund includes the following entities managed by Mayfield Fund:
Mayfield Associates Fund III and Mayfield VIII.
In addition, we have granted options to certain of our executive officers.
See "Management -- Option Grants."
SERIES A FINANCING
On September 24, 1996, we issued an aggregate of 1,687,500 shares of series
A preferred stock at a per share purchase price of $.13 to four investors,
including entities affiliated with Sequoia Capital.
SERIES B FINANCING
On January 14, 1997, we issued an aggregate of 5,134,498 shares of series B
preferred stock at a per share purchase price of $1.00 to 14 investors,
including entities affiliated with Sequoia Capital, Accel Partners and Pierre
Lamond.
SERIES C FINANCING
On October 23, 1997, we issued an aggregate of 2,557,999 shares of series C
preferred stock at a per share purchase price of $2.00 to 16 investors,
including James Flach and entities affiliated with Sequoia Capital, Accel
Partners, Mayfield Fund and Pierre Lamond.
SERIES D FINANCING
On July 2, 1998, we issued an aggregate of 1,076,624 shares of series D
preferred stock at a per share purchase price of $7.87 to 14 investors,
including entities affiliated with Sequoia Capital, Accel Partners and Mayfield
Fund. On January 21, 1999, we issued an aggregate of 63,532 shares of series D
preferred stock at a per share purchase price of $7.87 to TDF Management Pte
Ltd.
RELATIONSHIPS AMONG OFFICERS AND DIRECTORS WITH CERTAIN INVESTORS
Two of our directors are partners in entities that each own more than five
percent of our capital stock. Mr. Lamond is a partner in Sequoia Capital and Mr.
Flach is a partner in Accel Partners. No other officer or director of Redback
Networks has any material relationship with Sequoia Capital, Accel Partners or
Mayfield Fund.
LOANS TO CERTAIN EXECUTIVE OFFICERS
In April 1997, we loaned $105,000 to Live Wire Communications Inc. under a
promissory note. Darrell Scherbarth, who was then one of our officers, was
president and chief executive officer of Live
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<PAGE> 55
Wire Communications Inc. The note accrued interest at a rate of 5.9%. We forgave
the principal of $105,000 and recorded this amount as a compensation expense in
1997.
In December 1997, we loaned $104,696 to Dennis Barsema, our president,
chief executive officer and a director, under a promissory note. The note
accrues interest at a rate of 5.81% compounded annually and expires on December
3, 2000, on which date all unpaid interest and principal is due on demand. The
full amount of this note is currently outstanding, plus accrued interest. In
January 1998, we advanced $210,626 to Mr. Barsema for the purchase of Redback
Networks common stock pursuant to a subscription agreement dated December 1997.
The principal balance of this note, together with interest accrued and unpaid to
date, is due and payable in January 2002. Interest will accrue under the note on
any unpaid principal balance at the rate of 5.93% per annum, compounded
annually. The full amount of this note is currently outstanding, plus accrued
interest. This note is secured by a pledge of the purchased common stock.
OPTION GRANTS
In the past, we have granted options to our executive officers and
directors. We intend to grant additional options to our directors and officers
in the future. See "Management -- Option Grants in Last Fiscal Year" and
"Management -- Director Compensation."
INDEMNIFICATION AND LIMITATION OF DIRECTOR AND OFFICER LIABILITY
We have entered into an Indemnification Agreement with each of our
executive officers and directors. See "Management -- Indemnification."
-------------------------
We believe that the transactions set forth above were made on terms no less
favorable to us and at least as beneficial for us as could have been obtained
from unaffiliated third parties. All future transactions, including loans
between us and our officers, directors, principal stockholders and their
affiliates will be approved by a majority of the board of directors, and will
continue to be on terms no less favorable to us than could be obtained from
unaffiliated third parties.
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<PAGE> 56
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of Redback Networks
common stock as of March 31, 1999 and as adjusted to reflect the sale of the
common stock offered hereby for: (1) each person who is known by us to
beneficially own more than 5% of our common stock; (2) the chief executive
officer and each of our executive officers, (3) each of our directors; (4)
Gaurav Garg, one of our founders; and (5) all of our directors and executive
officers as a group. Except as otherwise indicated, we believe that the
beneficial owners of the common stock listed below, based on information
furnished by such owners, have sole voting and investment power with respect to
such shares. The percentage of beneficial ownership for the following table is
based on 18,534,119 shares of common stock outstanding as of March 31, 1999
assuming conversion of all outstanding shares of preferred stock into common
stock, and 21,034,119 shares of common stock outstanding after the completion of
this offering assuming no exercise of the underwriters' over-allotment option.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED
NUMBER OF SHARES -------------------------------
BENEFICIALLY BEFORE AFTER
NAME OF BENEFICIAL OWNER OWNED(1) OFFERING(1) OFFERING(1)(2)
------------------------ ---------------- -------------- --------------
<S> <C> <C> <C>
EXECUTIVE OFFICERS, DIRECTORS AND FOUNDER
Dennis J. Barsema............................. 953,480 5.1% 4.5%
Geoffrey C. Darby(3).......................... 225,000 1.2 1.1
Randall J. Kruep(4)........................... 375,000 2.0 1.8
William E. Miskovetz(5)....................... 317,500 1.7 1.5
Gaurav Garg................................... 872,550 4.7 4.1
James R. Flach(6)............................. 3,451,680 18.6 16.4
Pierre R. Lamond(7)........................... 5,096,587 27.5 24.2
Daniel J. Warmenhoven......................... 75,000 *
OTHER 5% STOCKHOLDERS
Entities affiliated with Sequoia Capital(8)... 4,986,835 26.9 23.7
3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
Entities affiliated with Accel Partners(9).... 3,296,805 17.8 15.7
428 University Avenue
Palo Alto, CA 94301
Entities affiliated with Mayfield Fund(10).... 1,712,746 9.2 8.1
2800 Sand Hill Road
Menlo Park, CA 94025
All executive officers and directors as a
group (7 persons)(11)....................... 10,494,247 55.1 48.7
</TABLE>
- -------------------------
* Represents beneficial ownership of less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Common stock subject to
options currently exercisable within 60 days of March 31, 1999 are deemed
outstanding for purposes of computing the percentage ownership of the
person holding such option but are not deemed outstanding for purposes of
computing the percentage ownership of any other person. Except where
indicated, and subject to community property laws where applicable, the
persons in the table above have sole voting and investment power with
respect to all common stock shown as beneficially owned by them. Unless
otherwise indicated, the address of each of the
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<PAGE> 57
individuals listed in the table is c/o Redback Networks Inc., 1389 Moffett
Park Drive, Sunnyvale, CA 94089.
(2) Assumes no exercise of the underwriters' over-allotment option.
(3) Includes options immediately exercisable for 225,000 shares.
(4) Includes options immediately exercisable for 45,000 shares.
(5) Includes options immediately exercisable for 220,000 shares.
(6) Includes 154,875 shares owned individually by Mr. Flach, 356,053 shares
held by Accel Internet/ Strategic Technology Fund L.P., 158,247 shares held
by Accel Investors '96 L.P., 52,746 shares held by Accel Keiretsu V L.P.,
2,657,230 shares held by Accel V L.P. and 72,529 shares held by Ellmore C.
Patterson Partners.
(7) Includes 54,876 shares owned by the Pierre R. and Christine E. Lamond Trust
dated November 22, 1985, 54,876 shares held in the David A. Lamond Trust
dated November 16, 1992, 137,031 shares held by Sequoia 1995 LLC, 4,441
shares held by Sequoia 1997, 4,614,266 shares held by Sequoia Capital VII
and 223,218 shares held by Sequoia Technology Partners VII.
(8) Includes 137,031 shares held by Sequoia 1995 LLC, 4,441 shares held by
Sequoia 1997, 4,614,266 shares held by Sequoia Capital VII, 223,218 shares
held by Sequoia Technology Partners VII and 7,879 shares held by SQP 1997.
(9) Includes 356,053 shares held by Accel Internet/Strategic Technology Fund
L.P., 158,247 shares held by Accel Investors '96 L.P., 52,746 shares held
by Accel Keiretsu V L.P., 2,657,230 shares held by Accel V L.P. and 72,529
shares held by Ellmore C. Patterson Partners.
(10) Includes 85,638 shares held by Mayfield Associates Fund III and 1,627,108
shares held by Mayfield VIII.
(11) Includes options immediately exercisable for 490,000 shares.
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<PAGE> 58
DESCRIPTION OF CAPITAL STOCK
GENERAL
On the closing of this offering, our authorized capital stock will consist
of 80,000,000 shares of common stock, $.0001 par value, and 10,000,000 shares of
preferred stock, $.0001 par value. The following summary of certain provisions
of the common stock and the preferred stock does not purport to be complete and
is subject to, and qualified in its entirety by, our certificate of
incorporation and bylaws and by the provisions of applicable law.
COMMON STOCK
As of March 31, 1999, there were 8,013,966 shares of common stock
outstanding that were held of record by approximately 120 stockholders. There
will be 21,034,119 shares of common stock outstanding (assuming no exercise of
the underwriters' over-allotment option and assuming no exercise after March 31,
1999, of outstanding options) after giving effect to the sale of the shares of
common stock to the public offered hereby and the conversion of our preferred
stock into common stock at a one-to-one ratio.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the board of directors out of funds legally available therefor. See
"Dividend Policy." In the event of the liquidation, dissolution or winding up of
Redback Networks, the holders of common stock are entitled to share ratably in
all assets remaining after payment of liabilities, subject to prior distribution
rights of preferred stock, if any, then outstanding. The common stock has no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are fully paid and nonassessable, and the
shares of common stock to be issued upon completion of this offering will be
fully paid and nonassessable.
PREFERRED STOCK
The board of directors has the authority to issue the preferred stock in
one or more series and to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any series or the designation
of such series, without further vote or action by the stockholders. The issuance
of preferred stock may have the effect of delaying, deferring or preventing a
change in control of Redback Networks without further action by the stockholders
and may adversely affect the voting and other rights of the holders of common
stock. The issuance of preferred stock with voting and conversion rights may
adversely affect the voting power of the holders of common stock, including the
loss of voting control to others. At present, we have no plans to issue any of
the preferred stock.
WARRANTS
Immediately following the closing of this offering, there will be four
warrants to purchase preferred stock convertible into common stock. There are
two warrants outstanding to purchase an aggregate of 99,375 shares of series B
preferred stock at $1.00 per share, one warrant outstanding to purchase 24,000
shares of series C preferred stock at $2.00 per share and one warrant
outstanding to purchase 6,096 shares of series D preferred stock at $7.87 per
share. Additionally, there is one warrant outstanding to purchase 4,500 shares
of common stock at the offering price per share. Each of the outstanding
warrants for the series B preferred stock expire on February 14, 2002 and July
31, 2003 respectively. The
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<PAGE> 59
outstanding warrant to purchase series C preferred stock expires on February 28,
2004. The outstanding warrant to purchase series D preferred stock expires on
August 21, 2004. The outstanding warrant to purchase common stock expires on
March 29, 2002.
ANTITAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS
AND DELAWARE LAW
CERTIFICATE OF INCORPORATION AND BYLAWS
The certificate of incorporation provides that, effective upon the closing
of this offering, all stockholder actions must be effected at a duly called
meeting and not by a consent in writing. The bylaws provide that our
stockholders may call a special meeting of stockholders only upon a request of
stockholders owning at least 50% of our capital stock. These provisions of the
certificate of incorporation and bylaws could discourage potential acquisition
proposals and could delay or prevent a change in control of Redback Networks.
These provisions are intended to enhance the likelihood of continuity and
stability in the composition of the board of directors and in the policies
formulated by the board of directors and to discourage certain types of
transactions that may involve an actual or threatened change of control of
Redback Networks. These provisions are designed to reduce the vulnerability of
Redback Networks to an unsolicited acquisition proposal. The provisions also are
intended to discourage certain tactics that may be used in proxy fights.
However, these provisions could have the effect of discouraging others from
making tender offers for our shares and, as a consequence, they also may inhibit
fluctuations in the market price of our shares that could result from actual or
rumored takeover attempts. These provisions also may have the effect of
preventing changes in our management. See "Risk Factors -- Antitakeover
provisions in our charter documents and Delaware law could prevent or delay a
change in control of our company."
DELAWARE TAKEOVER STATUTE
We are subject to Section 203 of the Delaware General Corporation Law,
which, subject to certain exceptions, prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that the interested stockholder became
an interested stockholder, unless:
- prior to becoming an interested stockholder, the board of directors of
the corporation approved either the business combination or the
transaction that resulted in the stockholder becoming an interested
stockholder;
- upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned (x) by persons who are
directors and also officers and (y) by employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or
- on or subsequent to becoming an interested stockholder, the business
combination is approved by the board of directors and authorized at an
annual or special meeting of stockholders, and not by written consent, by
the affirmative vote of at least 66 2/3% of the outstanding voting stock
that is not owned by the interested stockholder.
Section 203 defines business combination to include:
- any merger or consolidation involving the corporation and the interested
stockholder;
- any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
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<PAGE> 60
- subject to certain exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the corporation
to the interested stockholder;
- any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series of
the corporation beneficially owned by the interested stockholder; or
- the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
REGISTRATION RIGHTS
After this offering, the holders of 11,697,967 shares of common stock will
be entitled to certain rights with respect to the registration of these shares
under the Securities Act. Under the terms of our agreement with the holders of
these registrable securities, if we propose to register any of our securities
under the Securities Act, either for our own account or for the account of other
security holders exercising registration rights, these holders are entitled to
notice of that registration and are entitled to include shares of their
registrable common stock therein. Additionally, holders of 10,520,153 shares of
common stock are also entitled to certain demand registration rights pursuant to
which they may require us to file a registration statement under the Securities
Act at our expense with respect to their shares of common stock, and we are
required to use our best efforts to effect that registration. Further, the
holders of these demand rights may require us to file additional registration
statements on Form S-3. All of these registration rights are subject to certain
conditions and limitations, including the right of the underwriters of an
offering to limit the number of shares included in that registration and our
right not to effect a requested registration within six months following an
offering of our securities, including the offering made hereby.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for our common stock is U.S. Stock
Transfer Corporation.
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<PAGE> 61
SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of this offering, we will have 21,034,119 shares of
common stock outstanding, assuming the issuance of 2,500,000 shares of common
stock offered hereby and no exercise of options after March 31, 1999. Of these
shares, the 2,500,000 shares sold in the offering will be freely tradable
without restriction or further registration under the Securities Act, except
that any shares held by our affiliates, as that term is defined under the
Securities Act, may generally only be sold in compliance with the limitations of
Rule 144 described below.
SALES OF RESTRICTED SHARES
The remaining 18,534,119 shares of common stock are deemed restricted
shares under Rule 144. The number of shares of common stock available for sale
in the public market is limited by restrictions under the Securities Act and
lock-up agreements under which the holders of these shares have agreed, subject
to limited exceptions, not to sell or otherwise dispose of any of their shares
for a period of 180 days after the date of this prospectus without the prior
written consent of Morgan Stanley & Co. Incorporated. On the date of this
prospectus, no shares other than the 2,500,000 shares offered hereby will be
eligible for sale. Beginning 180 days after the date of this prospectus, or
earlier with the consent of Morgan Stanley & Co. Incorporated, 18,534,119
restricted shares will become available for sale in the public market subject to
certain limitations of Rule 144 of the Securities Act.
In general, under Rule 144 of the Securities Act as currently in effect,
beginning 90 days after this offering, a person (or persons whose shares are
aggregated) who has beneficially owned restricted shares for at least one year,
including a person who may be deemed an affiliate, is entitled to sell within
any three-month period a number of shares of common stock that does not exceed
the greater of 1% of the then-outstanding shares of our common stock
(approximately 210,341 shares after giving effect to this offering) and the
average weekly trading volume of our common stock on the Nasdaq National Market
during the four calendar weeks preceding that sale. Sales under Rule 144 of the
Securities Act are subject to certain restrictions relating to manner of sale,
notice and the availability of current public information about us. A person who
is not our affiliate at any time during the 90 days preceding a sale, and who
has beneficially owned shares for at least two years, would be entitled to sell
their shares immediately following this offering without regard to the volume
limitations, manner of sale provisions or notice or other requirements of Rule
144 of the Securities Act. However, the transfer agent may require an opinion of
counsel that a proposed sale of shares comes within the terms of Rule 144 of the
Securities Act prior to effecting a transfer of the subject shares.
Prior to this offering, there has been no public market for our common
stock and we do not know the effect, if any, that the sale or availability for
sale of shares of additional common stock will have on the market price of our
common stock. Nevertheless, sales of substantial amounts of these shares in the
public market, or the perception that these sales could occur, could adversely
affect the market price of the common stock and could impair our future ability
to raise capital through an offering of our equity securities.
OPTIONS
As of March 31, 1999, there were a total of 2,866,411 shares of common
stock subject to outstanding options under our 1997 Stock Option Plan, of which
95,076 were vested, and 40,000 shares of common stock subject to outstanding
options issued outside our 1997 Stock Option Plan, none of which were vested.
However, all of these shares are subject to lock-up agreements. Immediately
after the completion of the offering, Redback Networks intends to file
registration statements on Form S-8 under the Securities Act to register all of
the shares of common stock issued or reserved for future issuance under the 1997
Stock Option Plan and issued outside the 1997 Stock Option Plan. On the date 180
days after the effective date of the offering, a total of
shares of common stock subject to
59
<PAGE> 62
outstanding options will be vested. After the effective dates of the
registration statements on Form S-8, shares purchased upon exercise of options
granted pursuant to the 1997 Stock Plan and shares granted outside the 1997
Stock Plan generally would be available for resale in the public market.
Rule 701 under the Securities Act provides that shares of common stock
acquired on the exercise of outstanding options may be resold by persons other
than our affiliates, beginning 90 days after the date of this prospectus,
subject only to the manner of sale provisions of Rule 144, and by affiliates,
beginning 90 days after the date of this prospectus, subject to all provisions
of Rule 144 except its one-year minimum holding period. We intend to file one or
more registration statements on form S-8 under the Securities Act to register
all shares of common stock subject to outstanding stock options and common stock
issued or issuable pursuant to our 1997 Stock Plan. We expect to file the
registration statement covering shares offered pursuant to the 1997 Stock Plan
and the 1999 Stock Incentive Plan approximately 30 days after the closing of
this offering. Such registration statements are expected to become effective
upon filing. Shares covered by these registration statements will thereupon be
eligible for sale in the public markets, subject to the lock-up agreements, if
applicable.
LOCK-UP AGREEMENTS
The officers, directors and stockholders of Redback Networks have agreed,
subject to limited exceptions, not to sell or otherwise dispose of any of their
shares for a period of 180 days after the date of the offering. Morgan Stanley &
Co. Incorporated, however, may in its sole discretion, at any time without
notice, release all or any portion of the shares subject to lock-up agreements.
See "Underwriters."
60
<PAGE> 63
UNDERWRITERS
Under the terms and subject to conditions contained in the underwriting
agreement dated the date hereof, the underwriters named below, for whom Morgan
Stanley & Co. Incorporated, BancBoston Robertson Stephens Inc., and Dain
Rauscher Wessels, a division of Dain Rauscher Incorporated, are serving as
representatives, have severally agreed to purchase, and we have agreed to sell
to them, an aggregate of 2,500,000 shares of common stock. The number of shares
of common stock that each underwriter has agreed to purchase is set forth
opposite its name below:
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated...........................
BancBoston Robertson Stephens Inc. .........................
Dain Rauscher Wessels.......................................
---------
Total............................................. 2,500,000
=========
</TABLE>
The underwriters are offering the shares subject to their acceptance of the
shares from us and subject to prior sale. The underwriting agreement provides
that the obligations of the several underwriters to pay for and accept delivery
of the shares of common stock offered hereby are subject to the approval of
certain legal matters by their counsel and to certain other conditions. The
underwriters are obligated to take and pay for all of the shares of common stock
offered hereby, other than those covered by the over-allotment option described
below, if any of the shares are taken.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price set forth on the cover
page hereof and part to certain dealers at a price that represents a concession
not in excess of $ a share under the public offering price. Any
underwriters may allow, and such dealers may reallow, a concession not in excess
of $ a share to other underwriters or to certain other dealers. After
the initial offering of the shares of common stock, the offering price and other
selling terms may from time to time be varied by the representatives of the
underwriters.
Pursuant to the underwriting agreement, we have granted to the underwriters
an option, exercisable for 30 days from the date of this prospectus, to purchase
up to an aggregate of 375,000 additional shares of common stock at the public
offering price set forth on the cover page hereof, less underwriting discounts
and commissions. The underwriters may exercise such option solely for the
purpose of covering over-allotments, if any, made in connection with the
offering of the shares of common stock offered hereby. To the extent such option
is exercised, each underwriter will become obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares of common stock as the number set forth next to such underwriter's name
in the preceding table bears to the total number of shares of common stock set
forth next to the names of all underwriters in the preceding table.
At our request, the underwriters have reserved up to 10% of the shares of
common stock to be sold in the offering and offered hereby for sale, at the
initial public offering price, to certain persons designated by us. The number
of shares of common stock available for sale to the general public will be
reduced to the extent these persons purchase the reserved shares. Any reserved
shares which are not so purchased will be offered by the underwriters to the
general public on the same basis as the other shares offered hereby.
61
<PAGE> 64
We, our directors, officers and certain other of our stockholders have each
agreed that, without the prior written consent of Morgan Stanley & Co.
Incorporated on behalf of the underwriters, or otherwise during the period
ending 180 days after the date of this prospectus, we will not directly or
indirectly:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend, or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
- enter into any swap or similar agreement that transfers to another, in
whole or in part, the economic risk of ownership of the common stock;
whether any such transaction described above is to be settled by delivery of
common stock or such other securities, in cash or otherwise.
The restrictions described in the previous paragraph do not apply to:
- the sale of any shares to the underwriters;
- the issuance by Redback Networks of shares of common stock upon the
exercise of an option or a warrant or the conversion of a security
outstanding on the date of this prospectus of which the underwriters have
been advised in writing;
- transactions by any person other than Redback Networks relating to shares
of common stock or other securities acquired in open market transactions
after the completion of the offering of the shares;
- the granting of stock options pursuant to our existing employee benefit
plans, provided that such options do not become exercisable and such
options do not vest during such 180-day period; or
- certain gifts or transfers to trusts, provided that the transferees enter
into lock-up agreements similar to those described in the previous
paragraph.
The underwriters have informed us that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
common stock offered by them.
We have submitted an application to have our common stock approved for
quotation on the Nasdaq National Market under the symbol "RBAK."
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the common stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of the common stock, the underwriters may bid for, and purchase, shares of
common stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for distributing the
common stock in the offering if the syndicate repurchases previously distributed
shares of common stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the common stock above independent market
levels. The underwriters are not required to engage in these activities and may
end any of these activities at any time.
We and the underwriters have agreed to indemnify each other against certain
liabilities, including liabilities under the Securities Act.
62
<PAGE> 65
PRICING OF THE OFFERING
Prior to this offering, there has been no public market for the shares of
common stock. Consequently, the public offering price for the shares of common
stock will be determined by negotiations between Redback Networks and the
representatives of the underwriters. Among the factors to be considered in
determining the public offering price will be:
- our record of operations, current financial position and future
prospects;
- the experience of our management;
- our sales, earnings and certain other financial operating information in
recent periods; and
- the price-earnings ratios, price-sales ratios, market prices of
securities and certain financial and operating information of companies
engaged in activities similar to ours.
Our estimated public offering price range is subject to change as a result
of market conditions and other factors.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, Menlo Park,
California. As of the date of this prospectus, certain members and employees of
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, beneficially
owned an aggregate of 29,871 shares of our common stock. Certain legal matters
in connection with this offering will be passed upon for the underwriters by
Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California.
EXPERTS
Our financial statements as of December 31, 1997 and 1998 and for the
period from August 30, 1996 (inception) to December 31, 1996 and for each of the
two years in the period ended December 31, 1998, included in this prospectus
have been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
63
<PAGE> 66
ADDITIONAL INFORMATION
We filed with the Securities and Exchange Commission, or SEC, Washington,
D.C. 20549, a registration statement on Form S-1 under the Securities Act with
respect to the shares of common stock offered hereby. This prospectus does not
contain all the information set forth in the registration statement and the
exhibits and schedules filed therewith. For further information with respect to
Redback Networks and the common stock offered hereby, reference is made to the
registration statement and to the exhibits and schedules filed therewith.
Statements contained in this prospectus as to the contents of any contract or
other document referred to are not necessarily complete, and each of these
statements is qualified in all respects by reference to the full text of such
contract or other document filed as an exhibit to the registration statement. A
copy of the registration statement and the exhibits and schedules filed
therewith may be inspected without charge at the public reference facilities
maintained by the SEC in Room 1024, 450 Fifth Street, N.W. Washington, D.C.
20549, and at the SEC's regional offices located at the Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven
World Trade Center, 13th Floor, New York, New York 10048, and copies of all or
any part of the registration statement may be obtained from such offices upon
payment of the fees prescribed by the SEC. The SEC maintains a World Wide Web
site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the SEC. The
address of the site is http://www.sec.gov.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Securities Exchange Act of 1934, and,
in accordance therewith, will file periodic reports, proxy statements and other
information with the SEC. These periodic reports, proxy statements and other
information will be available for inspection and copying at the regional
offices, public reference facilities and web site of the SEC referred to above.
64
<PAGE> 67
REDBACK NETWORKS INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Balance Sheet............................................... F-3
Statement of Operations..................................... F-4
Statement of Stockholders' Equity........................... F-5
Statement of Cash Flows..................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 68
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Redback Networks Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Redback Networks Inc. at December
31, 1997 and 1998, and the results of its operations and its cash flows for the
period from August 30, 1996 (inception) through December 31, 1996 and the years
ended December 31, 1997 and 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
March 5, 1999
F-2
<PAGE> 69
REDBACK NETWORKS INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
1997 1998 1999
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 3,084,000 $ 8,189,000 $ 5,264,000
Short-term investments.............................. 3,139,000 -- --
Accounts receivable, less allowances of $0, $340,000
and $645,000..................................... 48,000 2,342,000 5,733,000
Inventory........................................... 89,000 821,000 1,133,000
Other current assets................................ 211,000 262,000 328,000
----------- ------------ ------------
Total current assets........................ 6,571,000 11,614,000 12,458,000
Property and equipment, net........................... 1,066,000 2,822,000 3,665,000
Notes receivable from related party................... 105,000 111,000 113,000
Other assets.......................................... 107,000 135,000 335,000
----------- ------------ ------------
$ 7,849,000 $ 14,682,000 $ 16,571,000
=========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings, current................................. $ 247,000 $ 1,747,000 $ 2,747,000
Capital lease obligations, current.................. 149,000 560,000 658,000
Accounts payable.................................... 451,000 2,060,000 3,477,000
Accrued liabilities................................. 94,000 2,005,000 2,536,000
Deferred revenue.................................... -- 781,000 1,339,000
----------- ------------ ------------
Total current liabilities................... 941,000 7,153,000 10,757,000
Borrowings, less current portion...................... 391,000 144,000 82,000
Capital lease obligations, less current portion....... 436,000 1,131,000 1,288,000
----------- ------------ ------------
1,768,000 8,428,000 12,127,000
----------- ------------ ------------
Commitments (Note 6)
Stockholders' equity:
Convertible Preferred Stock: Series A, B, C and D;
$0.0001 par value; 13,500,000 shares authorized;
9,379,997, 10,456,621 and 10,520,153 (unaudited)
issued and outstanding at December 31, 1997 and
1998 and March 31, 1999.......................... 10,419,000 18,884,000 19,375,000
Common Stock: $0.0001 par value; 22,500,000 shares
authorized; 6,734,132, 7,825,302 and 8,013,966
(unaudited) shares issued and outstanding at
December 31, 1997 and 1998 and March 31, 1999.... 426,000 6,741,000 10,137,000
Deferred stock compensation......................... -- (4,731,000) (6,627,000)
Stock subscription receivable....................... (211,000) -- --
Notes receivable from stockholder................... -- (211,000) (211,000)
Accumulated deficit................................. (4,553,000) (14,429,000) (18,230,000)
----------- ------------ ------------
Total stockholders' equity.................. 6,081,000 6,254,000 4,444,000
----------- ------------ ------------
$ 7,849,000 $ 14,682,000 $ 16,571,000
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 70
REDBACK NETWORKS INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
AUGUST 30,
1996
(INCEPTION) THREE MONTHS ENDED
THROUGH YEAR ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, ------------------------- -------------------------
1996 1997 1998 1998 1999
------------ ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues............... $ -- $ 48,000 $ 9,206,000 $ 478,000 $ 6,517,000
Cost of revenues........... -- 29,000 3,603,000 266,000 1,971,000
--------- ----------- ----------- ----------- -----------
Gross profit............... -- 19,000 5,603,000 212,000 4,546,000
--------- ----------- ----------- ----------- -----------
Operating expenses:
Research and
development........... 124,000 3,249,000 5,727,000 863,000 2,829,000
Selling, general and
administrative........ 19,000 1,317,000 8,875,000 1,333,000 4,414,000
Amortization of deferred
stock compensation.... -- -- 880,000 23,000 1,078,000
--------- ----------- ----------- ----------- -----------
Total operating
expenses...... 143,000 4,566,000 15,482,000 2,219,000 8,321,000
--------- ----------- ----------- ----------- -----------
Loss from operations....... (143,000) (4,547,000) (9,879,000) (2,007,000) (3,775,000)
Interest and other
income................... 1,000 221,000 254,000 70,000 3,000
Interest expense........... -- (85,000) (251,000) (44,000) (29,000)
--------- ----------- ----------- ----------- -----------
Net loss................... $(142,000) $(4,411,000) $(9,876,000) $(1,981,000) $(3,801,000)
========= =========== =========== =========== ===========
Basic and diluted net loss
per share................ $ (.22) $ (4.10) $ (3.57) $ (1.06) $ (.91)
========= =========== =========== =========== ===========
Shares used in computing
net loss per share....... 658,000 1,076,000 2,769,000 1,874,000 4,182,000
========= =========== =========== =========== ===========
Pro-forma net loss per
share (unaudited):
Basic and diluted net
loss per share........ $ (.78) $ (.26)
=========== ===========
Shares used in computing
net loss per share.... 12,684,000 14,689,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 71
REDBACK NETWORKS INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE NOTES
PREFERRED STOCK COMMON STOCK DEFERRED STOCK RECEIVABLE
------------------------ ----------------------- STOCK SUBSCRIPTION FROM
SHARES AMOUNT SHARES AMOUNT COMPENSATION RECEIVABLE STOCKHOLDER
---------- ----------- --------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of Series A Convertible
Preferred Stock, net............. 1,687,500 $ 217,000 -- $ -- $ -- $ -- $ --
Issuance of Common Stock.......... -- -- 2,829,996 8,000 -- -- --
Net loss.......................... -- -- -- -- -- -- --
---------- ----------- --------- ----------- ----------- ----------- ---------
Balance at December 31, 1996...... 1,687,500 217,000 2,829,996 8,000 -- -- --
Issuance of Series B Convertible
Preferred Stock, net............. 5,134,498 5,119,000 -- -- -- -- --
Issuance of Series C Convertible
Preferred Stock, net............. 2,557,999 5,083,000 -- -- -- -- --
Exercise of stock options......... -- -- 106,875 6,000 -- -- --
Issuance of Common Stock.......... -- -- 4,199,730 385,000 -- (211,000) --
Issuance of Common Stock and
warrants for services............ -- -- 90,746 31,000 -- -- --
Repurchase of Common Stock........ -- -- (493,215) (4,000) -- -- --
Net loss.......................... -- -- -- -- -- -- --
---------- ----------- --------- ----------- ----------- ----------- ---------
Balance at December 31, 1997...... 9,379,997 10,419,000 6,734,132 426,000 -- (211,000) --
Issuance of Series D Convertible
Preferred Stock, net............. 1,076,624 8,465,000 -- -- -- -- --
Exercise of stock options......... -- -- 836,875 345,000 -- -- --
Issuance of Common Stock.......... -- -- 631,502 142,000 -- -- --
Issuance of Common Stock and
warrants for services............ -- -- 102,900 255,000 -- -- --
Repurchase of Common Stock........ -- -- (480,107) (38,000) -- -- --
Deferred stock compensation....... -- -- -- 5,611,000 (5,611,000) -- --
Amortization of deferred stock
compensation..................... -- -- -- -- 880,000 -- --
Issuance of notes receivable...... -- -- -- -- -- 211,000 (211,000)
Net loss.......................... -- -- -- -- -- -- --
---------- ----------- --------- ----------- ----------- ----------- ---------
Balance at December 31, 1998...... 10,456,621 18,884,000 7,825,302 6,741,000 (4,731,000) -- (211,000)
Issuance of Series D Convertible
Preferred Stock, net
(unaudited)...................... 63,532 491,000 -- -- -- -- --
Exercise of stock options
(unaudited)...................... 217,814 322,000 -- -- --
Repurchase of Common Stock
(unaudited)...................... -- -- (33,750) (7,000) -- -- --
Issuance of Common Stock and
warrants for services
(unaudited)...................... -- -- 4,600 107,000 -- --
Deferred stock compensation
(unaudited)...................... -- -- -- 2,974,000 (2,974,000) --
Amortization of deferred stock
compensation (unaudited)......... -- -- -- -- 1,078,000 -- --
Net loss (unaudited).............. -- -- -- -- -- -- --
---------- ----------- --------- ----------- ----------- ----------- ---------
Balance at March 31, 1999
(unaudited)...................... 10,520,153 $19,375,000 8,013,966 $10,137,000 $(6,627,000) $ -- $(211,000)
========== =========== ========= =========== =========== =========== =========
<CAPTION>
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
------------ -------------
<S> <C> <C>
Issuance of Series A Convertible
Preferred Stock, net............. $ -- $ 217,000
Issuance of Common Stock.......... -- 8,000
Net loss.......................... (142,000) (142,000)
------------ -----------
Balance at December 31, 1996...... (142,000) 83,000
Issuance of Series B Convertible
Preferred Stock, net............. -- 5,119,000
Issuance of Series C Convertible
Preferred Stock, net............. -- 5,083,000
Exercise of stock options......... -- 6,000
Issuance of Common Stock.......... -- 174,000
Issuance of Common Stock and
warrants for services............ -- 31,000
Repurchase of Common Stock........ -- (4,000)
Net loss.......................... (4,411,000) (4,411,000)
------------ -----------
Balance at December 31, 1997...... (4,553,000) 6,081,000
Issuance of Series D Convertible
Preferred Stock, net............. -- 8,465,000
Exercise of stock options......... -- 345,000
Issuance of Common Stock.......... -- 142,000
Issuance of Common Stock and
warrants for services............ -- 255,000
Repurchase of Common Stock........ -- (38,000)
Deferred stock compensation....... -- --
Amortization of deferred stock
compensation..................... -- 880,000
Issuance of notes receivable...... -- --
Net loss.......................... (9,876,000) (9,876,000)
------------ -----------
Balance at December 31, 1998...... (14,429,000) 6,254,000
Issuance of Series D Convertible
Preferred Stock, net
(unaudited)...................... -- 491,000
Exercise of stock options
(unaudited)...................... -- 322,000
Repurchase of Common Stock
(unaudited)...................... -- (7,000)
Issuance of Common Stock and
warrants for services
(unaudited)...................... -- 107,000
Deferred stock compensation
(unaudited)...................... -- --
Amortization of deferred stock
compensation (unaudited)......... -- 1,078,000
Net loss (unaudited).............. (3,801,000) (3,801,000)
------------ -----------
Balance at March 31, 1999
(unaudited)...................... $(18,230,000) $ 4,444,000
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 72
REDBACK NETWORKS INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
AUGUST 30, 1996
(INCEPTION) THREE MONTHS ENDED
THROUGH YEAR ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, ------------------------- -------------------------
1996 1997 1998 1998 1999
--------------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................. $(142,000) $(4,411,000) $(9,876,000) $(1,951,000) $(3,801,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization........ 2,000 281,000 922,000 142,000 418,000
Amortization of deferred stock
compensation...................... -- -- 880,000 -- 1,078,000
Write-off of fixed assets............ -- 200,000 -- -- --
Other noncash charges................ -- 136,000 255,000 23,000 107,000
Changes in assets and liabilities:
Accounts receivable............... -- (48,000) (2,294,000) (829,000) (3,391,000)
Inventory......................... -- (89,000) (732,000) (237,000) (312,000)
Other current assets.............. (26,000) (185,000) (51,000) (88,000) (66,000)
Other assets...................... (34,000) (73,000) (34,000) (73,000) (202,000)
Accounts payable.................. 31,000 420,000 1,609,000 197,000 1,417,000
Accrued liabilities............... 102,000 (8,000) 1,911,000 208,000 531,000
Deferred revenue.................. -- -- 781,000 287,000 558,000
--------- ----------- ----------- ----------- -----------
Net cash used by operating
activities...................... (67,000) (3,777,000) (6,629,000) (2,321,000) (3,663,000)
--------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment....... (39,000) (899,000) (1,234,000) (518,000) (886,000)
Purchase of short-term investments....... -- (3,139,000) -- -- --
Sale of short-term investments........... -- -- 3,139,000 3,139,000 --
Advances to related parties.............. -- (210,000) -- -- --
--------- ----------- ----------- ----------- -----------
Net cash (used) provided by
investing activities............ (39,000) (4,248,000) 1,905,000 2,621,000 (886,000)
--------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Convertible
Preferred Stock, net................... 217,000 10,202,000 8,465,000 8,000 491,000
Proceeds from issuance of Common Stock,
net.................................... 8,000 176,000 449,000 171,000 315,000
Principal payments on capital lease
obligations............................ -- (26,000) (338,000) (60,000) (120,000)
Proceeds from bank borrowings............ -- 700,000 1,500,000 -- 2,500,000
Repayments of bank borrowings............ -- (62,000) (247,000) (62,000) (1,562,000)
--------- ----------- ----------- ----------- -----------
Net cash provided by financing
activities...................... 225,000 10,990,000 9,829,000 57,000 1,624,000
--------- ----------- ----------- ----------- -----------
Net increase in cash and cash
equivalents.............................. 119,000 2,965,000 5,105,000 357,000 (2,925,000)
Cash and cash equivalents at beginning of
period................................... -- 119,000 3,084,000 3,084,000 8,189,000
--------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of
period................................... $ 119,000 $ 3,084,000 $ 8,189,000 $ 3,441,000 $ 5,264,000
========= =========== =========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest................... $ -- $ 60,000 $ 222,000 $ 44,000 $ 79,000
========= =========== =========== =========== ===========
SUPPLEMENTAL NON-CASH INVESTING AND
FINANCING ACTIVITY:
Property and equipment acquired under
capital leases......................... $ -- $ 611,000 $ 1,444,000 $ 173,000 $ 375,000
========= =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 73
REDBACK NETWORKS INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
THE COMPANY
Redback Networks Inc., (the "Company" or "Redback"), was incorporated in
Delaware on August 30, 1996. Redback is a leading provider of advanced
networking solutions that enable carriers, cable operators and service providers
to rapidly deploy high-speed broadband access to the Internet and corporate
networks. Redback's Subscriber Management System connects and manages large
numbers of subscribers using any of the major high-speed access technologies
including digital subscriber line, cable and wireless. The Company operates in
one business segment.
Through December 31, 1997, the Company was considered to be in the
development stage and was principally engaged in research and development,
raising capital and building its management team. During 1998, the Company
ceased to be in the development stage.
STOCK SPLITS
Share information for all periods has been retroactively adjusted to
reflect a 4-for-1 Common Stock split effected in January 1997 and a 3-for-2
Common Stock split effected in September 1998.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Product sales are recognized upon shipment provided that no significant
vendor obligations remain and collection is considered probable.
Services revenue consists primarily of post-contract customer support,
training, consulting and installation services. Post-contract customer support
revenues are recognized ratably over the support period, which is generally one
year. Revenues from training, consulting services and installation are
recognized as the services are performed. Service revenues to date have not been
significant.
WARRANTY AND SALES RETURNS ALLOWANCES
The Company provides a limited warranty for its products. A provision for
the estimated warranty cost and a provision for sales returns are recorded at
the time revenue is recognized based on the Company's historical experience.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents, and
investments with original maturity dates greater than three months but less than
12 months to be short-term investments. Cash equivalents at December 31, 1997
and 1998 consist of money-market funds and commercial paper totaling $2,930,000
and $7,735,000, respectively, the carrying amounts of which approximates fair
value. At December 31, 1997, the
F-7
<PAGE> 74
REDBACK NETWORKS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Company had short-term investments which consisted of $3,139,000 of commercial
paper which was held to maturity. The cost of this investment approximated fair
value at December 31, 1997.
CONCENTRATION OF CREDIT RISK, FOREIGN OPERATIONS AND SIGNIFICANT CUSTOMERS
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents,
short-term investments and accounts receivable. The Company places its temporary
cash investments in money market funds and commercial paper with high credit
quality financial institutions. The Company's accounts receivable are derived
from revenue earned from customers located in the U.S. and certain foreign
countries, including Canada, Korea, Finland and China. Sales to foreign
customers in 1998, which were denominated in U.S. dollars, accounted for 15% of
total revenues. Sales to any one foreign country did not exceed 10% of total
revenues in 1998. The Company performs ongoing credit evaluations of its
customers' financial condition and, generally, requires no collateral from its
customers. The Company maintains an allowance for doubtful accounts receivable
based upon the expected collectibility of accounts receivable. The Company has
generated all of its revenues to date from the sale of one product, the SMS
1000.
During the year ended December 31, 1998, two customers accounted for 18%
and 19% of the Company's revenue and at December 31, 1998, these two customers
each accounted for 9% of total gross receivables.
The Company is dependent on a single contract manufacturer and some of the
key components in the Company's product come from single or limited sources of
supply.
INVENTORY
Inventory, which consists principally of raw materials and finished goods,
is stated at the lower of cost or market, cost being determined under the
first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally two to five years, or the lease term of the respective assets.
LONG-LIVED ASSETS
The Company periodically evaluates the recoverability of its long-lived
assets based on expected undiscounted cash flows and recognizes impairment from
the carrying value of long-lived assets, if any, based on the fair value of such
assets.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB No. 25") and complies with the
disclosure provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation ("SFAS No. 123").
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force
("EITF") 96-18.
F-8
<PAGE> 75
REDBACK NETWORKS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INCOME TAXES
The Company accounts for income taxes under the liability method, which
requires, among other things, that deferred income taxes be provided for
temporary differences between the tax bases of the Company's assets and
liabilities and their financial statement reported amounts. In addition,
deferred tax assets are recorded for the future benefit of utilizing net
operating losses and research and development credit carryforwards. A valuation
allowance is provided against deferred tax assets unless it is more likely than
not that they will be realized.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations as incurred.
FAIR VALUE
The carrying value of the Company's financial instruments, including cash
and cash equivalents, short-term investments, accounts receivable, accounts
payable and accrued liabilities approximate their fair values due to their
relatively short maturities. The Company does not hold or issue financial
instruments for trading purposes.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Software development costs not qualifying for capitalization are included
in research and development and are expensed as incurred. After technological
feasibility is established, material software development costs are capitalized.
The capitalized cost is then amortized on a straight-line basis over the
estimated product life or on the ratio of current revenues to total projected
product revenues, if greater. The Company defines technological feasibility as
the establishment of a working model, which typically occurs upon completion of
the first beta version. To date, the period between achieving technological
feasibility, and the general availability of the related products has been short
and software development costs qualifying for capitalization have been
insignificant. Accordingly, the Company has not capitalized any software
development costs.
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity during a period
from non-owner sources. To date, the Company has not had any transactions that
are required to be reported in comprehensive income.
NET LOSS PER SHARE
The Company computes net loss per share in accordance with SFAS No. 128,
"Earnings per Share" and SEC Staff Accounting Bulletin No. 98 ("SAB 98"). Under
the provisions of SFAS No. 128 and SAB 98, basic net loss per share is computed
by dividing the net loss for the period by the weighted average number of common
shares outstanding during the period. Weighted average shares exclude shares
subject to repurchase ("restricted shares"). Diluted net loss per share is
computed by dividing the net loss for the period by the weighted average number
of common and common equivalent shares outstanding during the period, if
dilutive. Common equivalent shares, composed of unvested restricted
F-9
<PAGE> 76
REDBACK NETWORKS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
shares and incremental common shares issuable upon the exercise of stock options
and warrants and upon conversion of Series A, B, C, and D Convertible Preferred
Stock.
The following table sets forth the computation of basic and diluted net
loss per share for the periods indicated:
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
AUGUST 30,
1996
(INCEPTION) THREE MONTHS ENDED
THROUGH YEAR ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, -------------------------- --------------------------
1996 1997 1998 1998 1999
------------ ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator:
Net loss................. $ (142,000) $(4,411,000) $(9,876,000) $(1,981,000) $(3,801,000)
=========== =========== =========== =========== ===========
Denominator:
Weighted average common
shares outstanding..... 1,911,000 4,534,000 7,420,000 7,216,000 7,816,000
Weighted average unvested
common shares subject
to repurchase.......... (1,253,000) (3,458,000) (4,651,000) (5,342,000) (3,634,000)
----------- ----------- ----------- ----------- -----------
Denominator for basic and
diluted calculation.... 658,000 1,076,000 2,769,000 1,874,000 4,182,000
=========== =========== =========== =========== ===========
Basic and diluted net loss
per share................ $ (.22) $ (4.10) $ (3.57) $ (1.06) $ (.91)
=========== =========== =========== =========== ===========
</TABLE>
Options to purchase 232,500, 2,104,725 and 2,906,411 shares of Common Stock
at an average exercise price of $.16, $1.49 and $3.49 per share and warrants to
purchase 99,375, 129,421 and 133,971 shares of Preferred Stock and Common Stock
at an average exercise price of $1.00, $1.51 and $1.89 per share, have not been
included in the computation of diluted net loss per share for the years ended
December 31, 1997 and 1998 and the three months ended March 31, 1999,
respectively, as their effect would have been anti-dilutive.
PRO FORMA NET LOSS PER SHARE (UNAUDITED)
Pro forma net loss per share for the year ended December 31, 1998 and the
three months ended March 31, 1999 is computed using the weighted average number
of common shares outstanding, including the pro forma effects of the automatic
conversion of the Company's Series A, B, C and D Convertible Preferred Stock
into shares of the Company's common stock effective upon the closing of the
Company's initial public offering as if such conversion occurred on January 1,
1998, or at date of original issuance, if later. The resulting pro forma
adjustment includes an increase in the weighted average shares used to compute
basic net loss per share of 9,915,000 for the year ended December 31, 1998 and
10,507,000 for the three months ended March 31, 1999.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") No. 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." SOP No. 98-1
requires that entities capitalize certain costs related to
F-10
<PAGE> 77
REDBACK NETWORKS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
internal-use software once certain criteria have been met. The Company expects
that the adoption of SOP No. 98-1 will not have a material impact on its
financial position, results of operations or cash flows. The Company will be
required to implement SOP No. 98-1 for the year ending December 31, 1999.
In April 1998, the AICPA issued SOP No. 98-5, "Reporting on the Costs of
Start-Up Activities." SOP No. 98-5 requires that all start-up costs related to
new operations must be expensed as incurred. In addition, all start-up costs
that were capitalized in the past must be written off when SOP No. 98-5 is
adopted. The Company expects that the adoption of SOP No. 98-5 will not have a
material impact on its financial position, results of operations or cash flows.
The Company will be required to implement SOP No. 98-5 for the year ending
December 31, 1999.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 established methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. Because the Company
currently holds no derivative instruments and does not engage in hedging
activities, the Company expects that the adoption of SFAS No. 133 will not have
a material impact on its financial position, results of operations or cash
flows. The Company will be required to implement SFAS No. 133 for the year
ending December 31, 2000.
UNAUDITED INTERIM RESULTS
The accompanying balance sheet as of March 31, 1999, the statements of
operations and of cash flows for the three months ended March 31, 1999 and 1998
and the statement of stockholders' equity for the three months ended March 31,
1999 are unaudited.
In the opinion of management, these statements have been prepared on the
same basis as the audited financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for the fair
statement of the results of these periods. The data disclosed in notes to the
financial statements for these periods are unaudited.
F-11
<PAGE> 78
REDBACK NETWORKS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------- -----------
1997 1998 1999
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
INVENTORY
Raw materials......................... $ 89,000 $ 563,000 $ 828,000
Finished goods........................ -- 258,000 305,000
---------- ----------- -----------
$ 89,000 $ 821,000 $ 1,133,000
========== =========== ===========
PROPERTY AND EQUIPMENT, NET
Computer equipment.................... $1,180,000 $ 3,554,000 $ 4,683,000
Furniture and fixtures................ 148,000 358,000 416,000
Leasehold improvements................ 21,000 115,000 189,000
---------- ----------- -----------
1,349,000 4,027,000 5,288,000
Less: Accumulated depreciation and
amortization....................... (283,000) (1,205,000) (1,623,000)
---------- ----------- -----------
$1,066,000 $ 2,822,000 $ 3,665,000
========== =========== ===========
ACCRUED LIABILITIES
Accrued compensation.................. $ 94,000 $ 494,000 $ 590,000
Accrued professional fees............. -- 458,000 360,000
Accrued warranty...................... -- 338,000 482,000
Accrued sales tax..................... -- -- 311,000
Other................................. -- 715,000 793,000
---------- ----------- -----------
$ 94,000 $ 2,005,000 $ 2,536,000
========== =========== ===========
</TABLE>
Property and equipment includes $611,000 and $2,055,000 of computer
equipment, internal-use software and furniture and fixtures under capital leases
at December 31, 1997 and 1998, respectively. Accumulated amortization of assets
under capital leases totaled $80,000 and $552,000 at December 31, 1997 and 1998,
respectively.
NOTE 3 -- RELATED PARTY TRANSACTIONS:
In April 1997, the Company loaned $105,000 to an affiliate of an officer
under a promissory note. The note accrued interest at a rate of 5.9%. The
principal of $105,000 was forgiven by the Company and recorded as compensation
expense in 1997.
In December 1997, the Company loaned $105,000 to an officer under a
promissory note. The note accrues interest at a rate of 5.81% compounded
annually and expires on December 3, 2000, on which date all unpaid interest and
principal is due on demand. The balance of the note and accrued interest was
$111,000 at December 31, 1998.
In January 1998, the Company advanced $211,000 under a full recourse
promissory note to one of its officers for the purchase of Common Stock of the
Company pursuant to a December 1997 stock subscription. The principal balance of
this note, together with interest accrued and unpaid to date, is due and payable
in January 2002. Interest accrues under the note on any unpaid principal balance
at the rate of 5.93% per annum, compounded annually.
F-12
<PAGE> 79
REDBACK NETWORKS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- INCOME TAXES:
No provisions for income taxes have been recorded as the Company has
incurred net losses since inception.
At December 31, 1998, the Company had approximately $11.6 million of
federal and state net operating loss carryforwards available to offset future
taxable income which expire in varying amounts beginning in 2011 and 2004,
respectively. Under the Tax Reform Act of 1986, the amounts of and benefits from
net operating loss carryforwards may be impaired or limited in certain
circumstances. Events which cause limitations in the amount of net operating
losses that the Company may utilize in any one year include, but are not limited
to, a cumulative ownership change of more than 50%, as defined, over a three
year period. Such a change may have occurred as a result of the preferred stock
issuances during 1997 and 1998.
As of December 31, 1998, the Company had gross deferred tax assets of
approximately $5.4 million, related primarily to net operating loss
carryforwards and certain reserves that are not currently deductible for tax
purposes. Management believes that, based on a number of factors, the available
objective evidence creates sufficient uncertainty regarding the realizability of
the deferred tax assets such that a full valuation allowance has been recorded.
NOTE 5 -- BORROWINGS:
The Company had $638,000, $391,000 and $329,000 (unaudited) outstanding
under a loan and security agreement with a bank at December 31, 1997 and 1998,
and March 31, 1999, respectively. The loan agreement provides for borrowings of
up to $750,000 which are secured by the Company's property and equipment. Under
the terms of the loan agreement, certain transactions, including payment of
dividends, are prohibited without the bank's consent. The loan bears interest at
the prime rate (7.75% at December 31, 1998) plus .5% per annum. The Company is
required to make monthly repayments on this loan through July 2000.
Principal payments under the loan are due as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
<S> <C>
1999........................................................ $247,000
2000........................................................ 144,000
--------
$391,000
========
</TABLE>
In August 1998, the Company's loan and security agreement with its bank was
amended to include a revolving line that provides for additional borrowings of
up to, the lessor of $2 million, or 80% of eligible accounts receivable. The
line bears interest at the prime rate plus .5% per annum. At December 31, 1998
and March 31, 1999, the Company had $1,500,000 and $2,500,000 (unaudited),
respectively, outstanding under this line. No additional amounts were available
under the line as of December 31, 1998. Borrowings under the agreement are
secured by certain of the Company's assets. The revolving line matures in July
1999 and contains certain financial covenants, mainly relating to liquidity and
profitability. See Note 12.
The Company was not in compliance with a covenant under this line at
December 31, 1998. The Company has obtained a waiver of this covenant as of
December 31, 1998.
F-13
<PAGE> 80
REDBACK NETWORKS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- COMMITMENTS:
The Company leases office space and equipment under noncancelable operating
and capital leases with various expiration dates through 2001. The terms of the
facility lease provide for rental payments on a graduated scale. The facility
lease expires in September 1999. The Company recognizes rent expense on a
straight-line basis over the lease period. Rental expense for 1996, 1997 and
1998 was $0, $144,000 and $441,000, respectively.
At December 31, 1998, the Company had an equipment lease line that provides
for a total purchases under the facility of $2,750,000.
Future minimum lease payments under noncancelable operating and capital
leases, including operating lease commitments entered into subsequent to
December 31, 1998, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
------------ ---------- ---------
<S> <C> <C>
1999..................................................... $ 767,000 $479,000
2000..................................................... 813,000 --
2001..................................................... 443,000 --
---------- --------
Total minimum lease payments................... 2,023,000 $479,000
========
Less: Amount representing interest....................... 332,000
----------
Present value of capital lease obligations............... 1,691,000
Less: Current portion.................................... 560,000
----------
Non-current portion of capital lease obligations....... $1,131,000
==========
</TABLE>
NOTE 7 -- CONVERTIBLE PREFERRED STOCK:
Convertible Preferred Stock at December 31, 1998 consists of the following:
<TABLE>
<CAPTION>
PROCEEDS
SHARES NET OF
------------------------ LIQUIDATION ISSUANCE
SERIES DESIGNATED OUTSTANDING AMOUNT COSTS
------ ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
A...................................... 1,687,500 1,687,500 $ 225,000 $ 217,000
B...................................... 5,233,875 5,134,498 5,135,000 5,119,000
C...................................... 2,582,001 2,557,999 5,116,000 5,083,000
D...................................... 1,350,000 1,076,624 8,477,000 8,465,000
---------- ---------- ----------- -----------
10,853,376 10,456,621 $18,953,000 $18,884,000
========== ========== =========== ===========
</TABLE>
The holders of the Convertible Preferred Stock have various rights and
preferences as follows:
VOTING
Each share of Series A, B, C and D has voting rights equal to an equivalent
number of shares of Common Stock into which it is convertible and votes together
as one class with the Common Stock.
As long as at least 375,000 shares of Convertible Preferred Stock remain
outstanding, the Company must obtain approval from a majority of the holders of
Convertible Preferred Stock in order to alter the articles of incorporation as
related to the rights, preferences or privileges of the Convertible Preferred
F-14
<PAGE> 81
REDBACK NETWORKS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Stock. As long as any shares of Convertible Preferred Stock remain outstanding,
the Company must obtain approval from a majority of the holders of Convertible
Preferred Stock in order to change the authorized number of shares of
Convertible Preferred Stock, change the authorized number of Directors,
authorize a dividend for any class or series other than Convertible Preferred
Stock, create a new class of stock or effect a merger, consolidation or sale of
assets where the existing stockholders retain less than 50% of the voting stock
of the surviving entity.
The holders of the existing Convertible Preferred Stock and Common Stock,
respectively, voting separately as a class, shall be entitled to elect two
directors at each annual meeting of the stockholders.
DIVIDENDS
Holders of Series A, B, C and D Convertible Preferred Stock are entitled to
receive noncumulative dividends at the per annum rate of $.013, $.10, $.20 and
$.787 per share, respectively, when and if declared by the Board of Directors.
No dividends on Convertible Preferred Stock or Common Stock have been declared
from inception through December 31, 1998.
LIQUIDATION
In the event of any liquidation, dissolution or winding up of the Company,
including a merger, acquisition or sale of assets where the beneficial owners of
the Company's Common Stock and Convertible Preferred Stock own less than 50% of
the resulting voting power of the surviving entity, the holders of Series A, B,
C and D Convertible Preferred Stock are entitled to receive an amount of $.13,
$1.00, $2.00 and $7.87 per share, respectively, plus any declared but unpaid
dividends prior to and in preference to any distribution to the holders of
Common Stock. The remaining assets, if any, shall be distributed among the
holders of Series C Preferred Stock, Series D Preferred Stock and Common Stock
pro rata in proportion to the number of shares of Common Stock held by each
(assuming conversion of all such Series C and Series D Preferred Stock) until,
with respect to the holders of Series C Preferred Stock, such holders shall have
received an aggregate of $4.00 per share, and with respect to the holders of
Series D Preferred Stock, such holders shall have received an aggregate of
$11.81 per share; thereafter, the holders of Common Stock shall receive all of
the remaining assets of the Company pro rata based on the number of shares of
Common Stock held by each. Should the Company's legally available assets be
insufficient to satisfy the liquidation preferences, the funds will be
distributed ratably to the Series A, B, C and D Convertible Preferred Stock
holders.
CONVERSION
Each share of Series A, B, C and D Convertible Preferred Stock is
convertible, at the option of the holder, according to a conversion ratio which
is subject to adjustment for dilution. Each share of Series A, B, C and D
Convertible Preferred Stock automatically converts into the number of shares of
Common Stock into which such shares are convertible, at the then effective
conversion ratio, upon: (1) the closing of a public offering of Common Stock at
a per share price of at least $.66, $2.50, $5.00 and $10.00 per share,
respectively, with gross proceeds of at least $7,500,000, (2) a merger, sale of
substantially all of the assets or other transactions which result in a change
in control or (3) the consent of the holders of the majority of Convertible
Preferred Stock.
At December 31, 1998, the Company has reserved 1,687,500, 5,233,875,
2,582,001 and 1,350,000 shares of Common Stock for the conversion of Series A,
B, C and D Convertible Preferred Stock, respectively.
F-15
<PAGE> 82
REDBACK NETWORKS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
WARRANTS FOR CONVERTIBLE PREFERRED STOCK
In connection with certain borrowings, the Company issued warrants to
purchase 99,375, 24,000 and 6,096 shares of Series B, C and D Convertible
Preferred Stock for $1.00, $2.00 and $7.87 per share, respectively, in 1997 and
1998. Such warrants expire through 2004. Using the Black-Scholes pricing model,
the Company estimated that the fair value of the warrants was $98,000 at the
dates of grant. The Company recognized $25,000 and $28,000 of interest expense
associated with these warrants during 1997 and 1998, respectively.
NOTE 8 -- COMMON STOCK:
A portion of the shares of Common Stock outstanding is subject to the
Company's right to repurchase the shares at the original purchase or option
exercise price in the event that the service of the purchaser or optionee
terminates for any reason. The Company's repurchase right generally lapses as
the purchaser or optionee performs services over a four-year period. The right
generally lapses with respect to one-quarter of the shares after 12 months of
service and with respect to 1/48 of the shares after each additional month of
service thereafter. In certain cases, the right of repurchase lapses on an
accelerated basis in the event that the Company is subject to a change in
control. The shares generally are not transferable and are held in escrow while
they remain subject to the Company's right of repurchase. All grants to
non-employee service providers and other non-employees were fully vested at the
date of issuance. At December 31, 1997 and 1998, there were 4,985,588 and
4,241,400 shares subject to repurchase.
The Company issued 90,746 and 102,900 shares of Common Stock to consultants
and other service providers of the Company in 1997 and 1998, respectively. The
fair value of the Common Stock issued was determined to be $6,000 and $227,000
in 1997 and 1998, respectively, based on the fair value of the services received
or Common Stock issued, whichever was more reliably measurable, and has been
recognized in general and administrative expenses.
The Company issued 2,829,996, 2,072,230 and 29,252 restricted shares of
Common Stock outside the 1997 Stock Option Plan in 1996, 1997 and 1998,
respectively. The weighted average fair value of the restricted shares issued
was $0, $.05 and $.50, in 1996, 1997 and 1998, respectively.
NOTE 9 -- STOCK OPTIONS:
In April 1997, the Company adopted the 1997 Stock Plan (the "Plan"). The
Plan provides for the granting of stock options and common stock to employees
and consultants of the Company. Options granted under the Plan may be either
incentive stock options or nonqualified stock options. Incentive stock options
("ISO") may be granted only to Company employees (including officers and
directors who are also employees). Nonqualified stock options ("NSO") may be
granted to Company employees and consultants. The Company has reserved 7,071,096
shares of Common Stock for issuance under the Plan.
Options under the Plan may be granted for periods of up to ten years and at
prices no less than 85% of the estimated fair value of the shares on the date of
grant as determined by the Board of Directors, provided, however, that (i) the
exercise price of an ISO and NSO shall not be less than 100% and 85% of the
estimated fair value of the shares on the date of grant, respectively, and (ii)
the exercise price of an ISO and NSO granted to a 10% shareholder shall not be
less than 110% of the estimated fair value of the shares on the date of grant,
respectively. Options are generally exercisable immediately, subject to
repurchase options held by the Company. The repurchase options lapse over a
maximum period of five
F-16
<PAGE> 83
REDBACK NETWORKS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
years at such times and under such conditions as determined by the Board of
Directors. To date, options and restricted stock granted generally vest over
four years.
The following table presents activity under the Plan:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------
WEIGHTED
SHARES AVERAGE
AVAILABLE NUMBER EXERCISE
FOR GRANT OUTSTANDING PRICE
---------- ----------- --------
<S> <C> <C> <C>
Authorized............................................. 3,900,000 -- $ --
Options granted........................................ (331,500) 331,500 .13
Common Stock granted................................... (2,218,246) -- --
Options exercised...................................... -- (99,000) .06
Common Stock repurchased............................... 7,500 -- --
---------- ---------
Balance at December 31, 1997............................. 1,357,754 232,500 .16
Authorized............................................. 3,171,096 -- --
Options granted........................................ (2,669,100) 2,669,100 1.25
Common Stock granted................................... (705,150) -- --
Options exercised...................................... -- (836,875) .41
Common Stock repurchased............................... 118,500 -- --
---------- ---------
Balance at December 31, 1998............................. 1,273,100 2,064,725 1.47
Authorized (unaudited)................................. 600,000 -- --
Options granted (unaudited)............................ (1,019,500) 1,019,500 7.16
Common Stock granted (unaudited)....................... (4,600) -- --
Options exercised (unaudited).......................... -- (217,814) 1.48
Common Stock repurchased (unaudited)................... 33,750 -- --
---------- ---------
Balance at March 31, 1999 (unaudited).................... 882,750 2,866,411 3.49
========== =========
</TABLE>
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE AT
OPTIONS OUTSTANDING AT DECEMBER 31, 1998 DECEMBER 31, 1998
----------------------------------------- -----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING LIFE PRICE OUTSTANDING PRICE
- ---------- ------------ ------------ --------- ----------- --------
<S> <C> <C> <C> <C> <C>
$.05 - 1.00 1,111,725 9.36 years $ .56 1,011,725 $ .54
2.00 449,000 9.79 years 2.00 409,000 2.00
3.00 504,000 9.94 years 3.00 469,416 3.00
--------- ---------
2,064,725 9.60 years 1.47 1,890,141 1.46
========= =========
</TABLE>
A total of 124,156 options with an average exercise price of $.18 per share
are vested at December 31, 1998.
In 1997, the Company issued, to an employee, options to purchase 7,875
shares of Common Stock at an exercise price of $0.20 per share outside the Plan.
These options were exercised in 1997. In 1998, the Company issued, to two
employees, options to purchase 40,000 shares of Common Stock at an
F-17
<PAGE> 84
REDBACK NETWORKS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
exercise price of $3.00 per share outside the Plan. These options were
outstanding at December 31, 1998 and March 31, 1999.
FAIR VALUE DISCLOSURES
Had compensation cost for the Company's stock-based compensation plan been
determined based on the fair value at the grant dates for the awards under a
method prescribed by SFAS No. 123, the Company's net loss would not have been
materially different.
The Company calculated the minimum fair value of each option grant on the
date of grant using the Black-Scholes pricing model with the following
assumptions:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------
1997 1998
----- -----
<S> <C> <C>
Expected life (years)....................................... 5 5
Risk free interest rate..................................... 6.03% 5.12%
Expected volatility......................................... -- --
Dividend yield.............................................. -- --
</TABLE>
The weighted average fair values of options granted during 1997 and 1998
were as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE WEIGHTED AVERAGE
YEAR ENDED DECEMBER 31, 1997 EXERCISE PRICE FAIR VALUE
---------------------------- ----------------- -----------------
<S> <C> <C>
Exercise price equal to market value.................... $ .13 $ .03
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
----------------------------
<S> <C> <C>
Exercise price equal to market value.................... .60 .13
Exercise price less than market value................... 1.31 2.46
</TABLE>
The weighted average fair value of restricted shares of Common Stock
granted under the Plan in 1997 and 1998 was $.13 and $.77, respectively.
NOTE 10 -- DEFERRED STOCK COMPENSATION:
In the year ended December 31, 1998, the Company recorded deferred stock
compensation expense of approximately $5,611,000 related to the issuance of
stock options and restricted shares at prices subsequently determined to be
below fair market value. These charges are being amortized over a period of four
years from the date of option or restricted shares issuance. Amortization of
$880,000 has been recognized as stock compensation expense in the year ended
December 31, 1998.
NOTE 11 -- EMPLOYEE BENEFIT PLANS:
The Company sponsors a 401(k) defined contribution plan covering all
employees. Contributions made by the Company are determined annually by the
Board of Directors. There have been no Company contributions to the plan since
inception.
F-18
<PAGE> 85
REDBACK NETWORKS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 -- SUBSEQUENT EVENTS:
LOAN AGREEMENT
In January 1999, the Company repaid the $1.5 million in borrowings under
the loan and security agreement with a bank which was outstanding as of December
31, 1998. In January 1999, the Company's loan and security agreement with the
bank was amended to increase the revolving line from $2.0 million to $5.0
million.
PREFERRED STOCK
In January 1999, the Company sold 63,532 shares of Series D Preferred Stock
for $500,000.
AMENDMENT TO CERTIFICATE OF INCORPORATION
In March 1999, the Board of Directors approved, subject to stockholder
approval, an amendment to the Company's certificate of incorporation to provide
for an increase in the authorized capital stock to 24,500,000 shares of common
stock.
In March 1999, the Company also approved an amendment to the Company's
certificate of incorporation to provide for an increase in the authorized
capital stock to 80,000,000 shares of Common Stock and 10,000,000 shares of
undesignated Preferred Stock upon the completion of the Company's proposed
initial public offering. Upon completion of the initial public offering, all
previously issued and outstanding Preferred Stock will be converted into shares
of Common Stock and warrants to purchase shares of Preferred Stock will be
converted into warrants to purchase shares of Common Stock.
STOCK PLANS
During the period from January 1, 1999 to February 28, 1999, the Company
granted options to purchase 838,100 shares of Common Stock at exercise prices of
$4.75 to $8.75 per share. The Company recorded deferred stock compensation
expense of approximately $3.0 million related to the issuance of these options.
In March 1999, the Board of Directors approved an increase in the common
shares available for issuance under the 1997 Stock Plan of 600,000 shares.
In March 1999, the Board of Directors approved the adoption of the 1999
Stock Incentive Plan ("1999 Plan") and reserved 2,500,000 shares of common
shares for issuance under this Plan. Shares not yet issued under the 1997 Stock
Plan will also be available under the 1999 Plan. The 1999 Plan allows the grant
of ISO, NSO and restricted stock to employees, non-employee board members and
consultants.
In March 1999, the Board of Directors approved the adoption of the 1999
Employee Stock Purchase Plan and reserved 1,000,000 shares of Common Stock for
issuance under this Plan.
In March 1999, the Board of Directors approved the adoption of the 1999
Directors' Option Plan and reserved 200,000 shares of Common Stock for issuance
under this Plan.
NOTE 13 -- SUBSEQUENT EVENTS (UNAUDITED):
In April 1999, the Company repaid the $2.5 million in borrowings under the
loan and security agreement with a bank which was outstanding as of March 31,
1999.
In April 1999, the Company secured a commitment from a bank for a $2.0
million asset based borrowing facility.
F-19
<PAGE> 86
[GRAPHIC -- INSIDE BACK COVER]
Across the top of the page reads "Redback Networks. High-speed access for
the masses."
The page has two graphics on the right side and one graphic on the bottom
left side.
The first graphic on the right is a picture of the SMS 1000. Below that is
a picture of the SMS 500. The caption for the graphics read:
- "The SMS bridges the gap between high-speed subscribers and the
Internet, supports all major high-speed access technologies, and
accelerates the deployment of new services."
Next to these graphics is the following text:
- "Proven in production networks worldwide by leading carriers and
service providers. Supports all major broadband technologies.
Supports multiple transmission speeds and protocols. Ease of
delivering connectivity cuts time to market. Multiple service
creation opportunities."
Text runs down the left side of the page and down to the bottom right which
reads:
- "Redback Networks delivers solutions that allow carriers, cable
operators and service providers to quickly and cost-effectively
bring high-speed Internet access services to market."
"Powerful solutions for managing high-speed subscribers
Redback Networks' Subscriber Management Systems(TM), (SMS) are powerful,
advanced networking devices that bridge the operational gap between high-speed
access networks that serve businesses and homes and routers used by service
providers. The SMS accepts the high-speed data traffic of thousands of
individual subscribers and translates it to simple Internet protocol data
streams, relieving routers of processing and management tasks. By relieving
routers of subscriber management functions, the SMS enhances router performance
and helps reduce the need for additional router investments.
Rapid, scalable deployment of Internet access
The SMS allows providers to offer high-speed Internet access using DSL,
cable and wireless technologies alone or in combination. Because the SMS
leverages existing access, accounting and management control systems, it speeds
the deployment of these technologies and gives providers a competitive
advantage. For example, the SMS employs the same industry standard RADIUS
database technology used with traditional dial network subscribers, thus
reducing staff training and operational costs.
Service creation enables new revenues for service providers
In addition to streamlining basic high-speed access, the SMS allows
providers to create and market new service offerings that leverage high-speed
connectivity.
With the SMS's service selection capabilities, service providers can add
value to their high-speed access offerings by "re-profiling" and "re-selling"
lines to subscribers multiple times. Possible services include "business by
day/family by night" billing as well as different qualities of service. In
addition, wholesale providers of network transport can use the SMS to cost
effectively provide access bandwidth to service provider customers."
The graphic on the bottom-left side of the page depicts three distinct
Internet access modes, DSL, cable and wireless, each connected to the SMS 1000
product, which is connected to both the Internet and a corporate network. The
following caption is below these graphics:
- "Redback Networks' Subscriber Management Systems are used by leading
carriers and service providers to deploy high-speed services and
manage subscribers."
In the bottom right corner is our logo. Below the logo reads "Access.
Power. Innovation."
<PAGE> 87
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of Common Stock being registered. All amounts are estimates except
the SEC registration fee and the NASD filing fees.
<TABLE>
<S> <C>
SEC Registration fee........................................ $ 10,391
NASD fee.................................................... 4,238
Nasdaq National Market listing fee.......................... 90,000
Printing and engraving expenses............................. 150,000
Legal fees and expenses..................................... 400,000
Accounting fees and expenses................................ 250,000
Blue sky fees and expenses.................................. 10,000
Transfer agent fees......................................... 10,000
Miscellaneous fees and expenses............................. 75,371
----------
Total............................................. $1,000,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's Board of Directors to grant indemnification to
directors and officers, including reimbursement for expenses incurred, in terms
sufficiently broad to permit such indemnification under certain circumstances
for liabilities arising under the Securities Act of 1933, as amended (the
"Securities Act"). Article VII, Section 6, of the Registrant's Bylaws provides
for mandatory indemnification of its directors and permissible indemnification
of officers and employees to the maximum extent permitted by the Delaware
General Corporation Law. The Registrant's Certificate of Incorporation provides
that, pursuant to Delaware law, its directors shall not be liable for monetary
damages for breach of the directors' fiduciary duty as directors to the Company
and its stockholders. This provision in the Certificate of Incorporation does
not eliminate the directors' fiduciary duty, and in appropriate circumstances
equitable remedies such as injunctive or other forms of non-monetary relief will
remain available under Delaware law. In addition, each director will continue to
be subject to liability for breach of the director's duty of loyalty to the
Company for acts or omissions not in good faith or involving intentional
misconduct, for knowing violations of law, for actions leading to improper
personal benefit to the director, and for payment of dividends or approval of
stock repurchases or redemptions that are unlawful under Delaware law. The
provision also does not affect a director's responsibilities under any other
law, such as the federal securities laws or state or federal environmental laws.
The Registrant has entered into Indemnification Agreements with its officers and
directors, a form of which is attached as Exhibit 10.1 hereto and incorporated
herein by reference. The Indemnification Agreements provide the Registrant's
officers and directors with further indemnification to the maximum extent
permitted by the Delaware General Corporation Law. Reference is made to Section
7 of the Underwriting Agreement contained in Exhibit 1.1 hereto, indemnifying
officers and directors of the Registrant against certain liabilities.
II-1
<PAGE> 88
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since the Company's inception on August 30, 1996, the Company has issued
and sold the following securities (which numbers reflect the four for one stock
split effected January 13, 1997 and the three for two stock split effected
September 11, 1998):
1. From inception through March 31, 1999, the Company granted options
to purchase 4,020,100 shares of common stock and granted 2,927,996 shares
of restricted common stock at exercise prices ranging from $.053 to $10.80
per share to employees, consultants, directors and other service providers
pursuant to its 1997 Stock Plan. Additionally, the Company granted options
to purchase 47,875 shares of common stock and granted 4,931,478 shares of
restricted common stock at exercise prices ranging from $.001667 to $3.00
per share to employees, consultants, directors and other service providers
outside of the 1997 Stock Plan. The consultants and service providers
consist of individuals who provided recruiting, financial and marketing
services to the Company and in return received grants in respect of 198,246
shares of common stock. All of these shares were issued and outstanding at
March 31, 1999.
2. From inception through March 31, 1999, the Company issued an
aggregate of 1,161,564 shares of its common stock to employees,
consultants, directors and other service providers for aggregate
consideration of approximately $406,000 pursuant to exercises of options
granted both under its 1997 Stock Plan and outside of that 1997 Stock Plan.
3. In September 1996, the Company issued and sold an aggregate of
1,687,500 shares of its Series A Preferred Stock for an aggregate purchase
price of approximately $225,000, or $.13 per share to four investors,
including entities affiliated with Sequoia Capital.
4. In January 1997, the Company issued and sold 5,134,498 shares of
its Series B Preferred Stock for an aggregate purchase price of
approximately $5,135,000, or $1.00 per share to 14 investors, including
entities affiliated with Sequoia Capital, Accel Partners and Pierre Lamond.
5. In February and July 1997, the Company issued warrants to purchase
52,500 and 46,875 shares respectively, of its Series B Preferred Stock at
an exercise price of $1.00 per share to Silicon Valley Bank and Lighthouse
Capital Partners, respectively.
6. In October 1997, the Company issued and sold 2,557,999 shares of
its Series C Preferred Stock for an aggregate purchase price of
approximately $5,116,000, or $2.00 per share to 16 investors, including
James Flach and entities affiliated with Sequoia Capital, Accel Partners,
Mayfield Fund and Pierre Lamond.
7. In March 1998, the Company issued a warrant to purchase 24,000
shares of its Series C Preferred Stock at an exercise price of $2.00 per
share to Lighthouse Capital Partners.
8. In July 1998, the Company issued and sold 1,076,624 shares of its
Series D Preferred Stock for an aggregate purchase price of approximately
$8,477,000, or $7.87 to 14 investors, including entities affiliated with
Sequoia Capital, Accel Partners and Mayfield Fund.
9. In October 1998, the Company issued a warrant to purchase 6,096
shares of its Series D Preferred Stock at an exercise price of $7.87 per
share to Silicon Valley Bank.
10. In January 1999, the Company issued and sold 63,532 shares of its
Series D Preferred Stock for an aggregate purchase price of approximately
$499,997, or $7.87 per share to TDF Management Pte Ltd.
II-2
<PAGE> 89
11. In March, 1999, the company issued a warrant to purchase 4,500
shares of its common stock at the initial public offering price to
Concentric Networks.
The sale of the above securities was deemed to be exempt from registration
under the Securities Act in reliance upon Section 4(2) of the Securities Act or
Regulation D promulgated thereunder, or Rule 701 promulgated under Section 3(b)
of the Securities Act as transactions by an issuer not involving any public
offering or transactions pursuant to compensation benefit plans and contracts
relating to compensation as provided under Rule 701. The recipients of
securities in each such transaction represented their intentions to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof, and appropriate legends were affixed to the share
certificates issued in such transactions. All recipients had adequate access,
through their relationships with the Registrant, to information about the
Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement
3.1+ Certificate of Incorporation of the Registrant, as amended
to date
3.2 Form of Restated Certificate of Incorporation of the
Registrant, to be filed upon the closing of the offering
made pursuant to this Registration Statement
3.3+ Bylaws of the Registrant
3.4 Form of Amended and Restated Bylaws of the Registrant, to be
effective upon the closing of the offering made pursuant to
this Registration Statement
4.1+ Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4
5.1* Opinion of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP
10.1+ Form of Indemnification Agreement
10.2+ 1999 Stock Incentive Plan
10.3+ 1999 Employee Stock Purchase Plan
10.4+ 1999 Directors' Option Plan
10.5+ Sublease between Registrant and Infoseek Corporation, dated
January 12, 1998 (without exhibits)
10.6+ First Amendment to Sublease between Registrant and Infoseek
Corporation, dated January 15, 1999
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants
23.2* Consent of Counsel. Reference is made to Exhibit 5.1
24.1+ Power of Attorney. Reference is made to page II-5
27.1+ Financial Data Schedule
</TABLE>
- ------------------------
* to be filed by amendment.
+ previously filed.
(b) FINANCIAL STATEMENT SCHEDULES
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
II-3
<PAGE> 90
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Delaware General Corporation Law, the Certificate of
Incorporation or the Bylaws of the Registrant, the Underwriting Agreement, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act, and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered hereunder, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 91
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Sunnyvale, State of California, on this 21st day of April, 1999.
REDBACK NETWORKS INC.
By: /s/ DENNIS L. BARSEMA
------------------------------------
Dennis L. Barsema
President and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE
FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ DENNIS L. BARSEMA President, Chief Executive Officer April 21, 1999
- ------------------------------------------------ (Principal Executive Officer) and
Dennis L. Barsema Director
/s/ GEOFFREY C. DARBY Chief Financial Officer (Principal April 21, 1999
- ------------------------------------------------ Financial and Accounting Officer)
Geoffrey C. Darby and Secretary
/s/ DENNIS L. BARSEMA* Director April 21, 1999
- ------------------------------------------------
James R. Flach
/s/ DENNIS L. BARSEMA* Director April 21, 1999
- ------------------------------------------------
Pierre R. Lamond
/s/ DENNIS L. BARSEMA* Director April 21, 1999
- ------------------------------------------------
Daniel J. Warmenhoven
Dennis L. Barsema, Attorney-in-Fact
*By: /s/ DENNIS L. BARSEMA
------------------------------------------
</TABLE>
II-5
<PAGE> 92
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S> <C>
1.1 Form of Underwriting Agreement
3.1+ Certificate of Incorporation of the Registrant, as amended
to date
3.2 Form of Restated Certificate of Incorporation of the
Registrant, to be filed upon the closing of the offering
made pursuant to this Registration Statement
3.3+ Bylaws of the Registrant
3.4 Form of Amended and Restated Bylaws of the Registrant, to be
effective upon the closing of the offering made pursuant to
this Registration Statement
4.1+ Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4
5.1* Opinion of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP
10.1+ Form of Indemnification Agreement
10.2+ 1999 Stock Incentive Plan
10.3+ 1999 Employee Stock Purchase Plan
10.4+ 1999 Directors' Option Plan
10.5+ Sublease between Registrant and Infoseek Corporation, dated
January 12, 1998 (without exhibits)
10.6+ First Amendment to Sublease between Registrant and Infoseek
Corporation, dated January 15, 1999
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants
23.2* Consent of Counsel. Reference is made to Exhibit 5.1
24.1+ Power of Attorney. Reference is made to page II-5
27.1+ Financial Data Schedule
</TABLE>
- ------------------------
* to be filed by amendment.
+ previously filed.
<PAGE> 1
EXHIBIT 1.1
2,500,000 SHARES
REDBACK NETWORKS INC.
COMMON STOCK, PAR VALUE $0.0001 PER SHARE
UNDERWRITING AGREEMENT
__________, 1999
<PAGE> 2
_____________, 1999
Morgan Stanley & Co. Incorporated
BancBoston Robertson Stephens Inc.
Dain Rauscher Wessels
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Dear Sirs and Mesdames:
RedBack Networks Inc., a Delaware corporation (the "COMPANY"),
proposes to issue and sell to the several Underwriters named in Schedule I
hereto (the "UNDERWRITERS") 2,500,000 shares of its common stock, $0.0001 par
value per share (the "FIRM SHARES"). The Company also proposes to issue and sell
to the several Underwriters not more than an additional 375,000 shares of its
common stock, $0.0001 par value per share (the "ADDITIONAL SHARES"), if and to
the extent that you, as Managers of the offering, shall have determined to
exercise, on behalf of the Underwriters, the right to purchase such shares of
common stock granted to the Underwriters in Section 2 hereof. The Firm Shares
and the Additional Shares are hereinafter collectively referred to as the
"SHARES." The shares of common stock, $0.0001 par value per share, of the
Company to be outstanding after giving effect to the sales contemplated hereby
are hereinafter referred to as the "COMMON STOCK."
The Company has filed with the Securities and Exchange Commission
(the "COMMISSION") a registration statement, including a prospectus, relating to
the Shares. The registration statement as amended at the time it becomes
effective, including the information (if any) deemed to be part of the
registration statement at the time of effectiveness pursuant to Rule 430A under
the Securities Act of 1933, as amended (the "SECURITIES ACT"), is hereinafter
referred to as the "REGISTRATION STATEMENT;" the prospectus in the form first
used to confirm sales of Shares is hereinafter referred to as the "PROSPECTUS."
If the Company has filed an abbreviated registration statement to register
additional shares of Common Stock pursuant to Rule 462(b) under the Securities
Act (the "RULE 462 REGISTRATION STATEMENT"), then any reference herein to the
term "REGISTRATION STATEMENT" shall be deemed to include such Rule 462
Registration Statement.
As part of the offering contemplated by this Agreement, Morgan
Stanley & Co. Incorporated ("MORGAN STANLEY") has agreed to reserve out of the
Shares set forth
<PAGE> 3
opposite its name on Schedule II to this Agreement, _________ shares, for sale
to the Company's employees, officers and directors and other parties associated
with the Company (collectively, "PARTICIPANTS"), as set forth in the Prospectus
under the heading "Underwriting" (the "DIRECTED SHARE PROGRAM"). The Shares to
be sold by Morgan Stanley pursuant to the Directed Share Program (the "DIRECTED
SHARES") will be sold by Morgan Stanley pursuant to this Agreement at the public
offering price. Any Directed Shares not orally confirmed for purchase by any
Participants by the end of the first business day after the date on which this
Agreement is executed will be offered to the public by Morgan Stanley as set
forth in the Prospectus.
1. Representations and Warranties. The Company represents and
warrants to and agrees with each of the Underwriters that:
(a) The Registration Statement has become effective; no stop order
suspending the effectiveness of the Registration Statement is in effect,
and no proceedings for such purpose are pending before or threatened by
the Commission.
(b) (i) The Registration Statement, when it became effective, did
not contain and, as amended or supplemented, if applicable, will not
contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) the Registration Statement and the
Prospectus comply and, as amended or supplemented, if applicable, will
comply in all material respects with the Securities Act and the applicable
rules and regulations of the Commission thereunder and (iii) the
Prospectus does not contain and, as amended or supplemented, if
applicable, will not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading,
except that the representations and warranties set forth in this paragraph
do not apply to statements or omissions in the Registration Statement or
the Prospectus based upon information relating to any Underwriter
furnished to the Company in writing by such Underwriter through you
expressly for use therein.
(c) The Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the State of Delaware, has
the corporate power and authority to own its property and to conduct its
business as described in the Prospectus and is duly qualified to transact
business and is in good standing in each jurisdiction in which the conduct
of its business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so qualified or
be in good standing would not have a material adverse effect on the
Company.
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(d) This Agreement has been duly authorized, executed and delivered
by the Company.
(e) The Company has no subsidiaries other than a single subsidiary
which operates in Taiwan and which does not have any assets or liabilities
material to the Company.
(f) On the Closing Date (as defined below), the authorized capital
stock of the Company will conform as to legal matters to the description
thereof contained in the Prospectus.
(g) The shares of Common Stock outstanding prior to the issuance of
the Shares to be sold by the Company have been duly authorized and are
validly issued, fully paid and non-assessable.
(h) The Shares to be sold by the Company have been duly authorized
and, when issued and delivered in accordance with the terms of this
Agreement, will be validly issued, fully paid and non-assessable, and the
issuance of such Shares will not be subject to any preemptive or similar
rights.
(i) The execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement will
not contravene any provision of applicable law or the certificate of
incorporation or bylaws of the Company or any agreement or other
instrument binding upon the Company that is material to the Company, or
any judgment, order or decree of any governmental body, governmental
agency or court having jurisdiction over the Company, and no consent,
approval, authorization or order of, or qualification with, any
governmental body or governmental agency is required for the performance
by the Company of its obligations under this Agreement, except such as may
be required by the securities or Blue Sky laws of the various states in
connection with the offer and sale of the Shares.
(j) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company, from that set forth in the Prospectus
(exclusive of any amendments or supplements thereto subsequent to the date
of this Agreement).
(k) There are no legal or governmental proceedings pending or, to
the Company's knowledge, threatened to which the Company is a party or to
which any of the properties of the Company is subject that are required to
be described in the Registration Statement or the Prospectus and are not
so described or any statutes, regulations, contracts or other documents
that are required to be
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described in the Registration Statement or the Prospectus or to be filed
as exhibits to the Registration Statement that are not described or filed
as required.
(l) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or
filed pursuant to Rule 424 under the Securities Act, complied when so
filed in all material respects with the Securities Act and the applicable
rules and regulations of the Commission thereunder.
(m) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, (1) the Company
has not incurred any material liability or obligation, direct or
contingent, nor entered into any material transaction, in each case, not
in the ordinary course of business; (2) other than repurchases of stock
pursuant to the Company's 1997 Stock Plan, the Company has not purchased
any of its outstanding capital stock, nor declared, paid or otherwise made
any dividend or distribution of any kind on its capital stock other than
ordinary and customary dividends; and (3) there has not been any material
change in the capital stock, short-term debt or long-term debt of the
Company, except as described in the Prospectus.
(n) The Company has good and marketable title in fee simple to all
real property and good and marketable title to all personal property owned
by it which is material to the business of the Company, in each case free
and clear of all liens, encumbrances and defects except such as are
described in the Prospectus or such as do not materially affect the value
of such property and do not interfere with the use made and proposed to be
made of such property by the Company; and any real property and buildings
held under lease by the Company are held by it under valid, subsisting and
enforceable leases with such exceptions as are not material and do not
interfere with the use made and proposed to be made of such property and
buildings by the Company, in each case except as described in the
Prospectus.
(o) The Company owns or possesses adequate licenses or other rights
to use, or can acquire on reasonable terms, all material patents, patent
rights, inventions, copyrights, know-how (including trade secrets and
other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures), trademarks, service marks and trade
names currently employed by the Company in connection with the business
now operated by the Company, and, except as described in the Prospectus,
the Company has not received any notice of infringement of or conflict
with asserted rights of others with respect to any of the foregoing which,
singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would have a material adverse affect on the Company.
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<PAGE> 6
(p) No material labor dispute with the employees of the Company,
except as described in the Prospectus, or, to the knowledge of the
Company, is imminent; and the Company is not aware of any existing,
threatened or imminent labor disturbance by the employees of any of its
principal suppliers, manufacturers or contractors that could have a
material adverse effect on the Company.
(q) The Company is insured by insurers of recognized financial
responsibility against such losses and risks and in such amounts as are
customary in the businesses in which the Company is engaged; neither the
Company nor any of its subsidiaries has been refused any insurance
coverage sought or applied for; and neither the Company nor any of its
subsidiaries has any reason to believe that it will not be able to renew
its existing insurance coverage as and when such coverage expires or to
obtain similar coverage from similar insurers as may be necessary to
continue its business at a cost that would not have a material adverse
effect on the Company and its subsidiaries, taken as a whole, except as
described in the Prospectus.
(r) The Company possesses all certificates, authorizations and
permits issued by the appropriate federal, state or foreign regulatory
authorities necessary to conduct its business, except to the extent that
the failure to obtain such certificates, authorizations, and permits would
not have a material adverse effect on the Company, and the Company has not
received any notice of proceedings relating to the revocation or
modification of any such certificate, authorization or permit which,
singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would have a material adverse effect on the Company,
except as described in the Prospectus.
(s) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurance that (1) transactions are
executed in accordance with management's general or specific
authorizations; (2) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability; (3) access to
assets is permitted only in accordance with management's general or
specific authorization; and (4) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(t) PricewaterhouseCoopers LLP are independent public accountants
with respect to the Company as required by the Securities Act.
(u) The consolidated financial statements included in the
Registration Statement and the Prospectus (and any amendment or supplement
thereto), together with related schedules and notes, present fairly the
financial position,
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<PAGE> 7
results of operations and changes in financial position of the Company on
the basis stated therein at the respective dates or for the respective
periods to which they apply; such statements and related schedules and
notes have been prepared in accordance with generally accepted accounting
principles consistently applied throughout the periods involved, except as
disclosed therein; the supporting schedules, if any, included in the
Registration Statement present fairly in accordance with generally
accepted accounting principles the information required to be stated
therein; and the other financial and statistical information and data set
forth in the Registration Statement and the Prospectus (and any amendment
or supplement thereto) are, in all material respects, accurately presented
and prepared on a basis consistent with such financial statements and the
books and records of the Company.
(v) The Company is not and, after giving effect to the offering and
sale of the Shares and the application of the proceeds thereof as
described in the Prospectus, will not be an "investment company" as such
term is defined in the Investment Company Act of 1940, as amended.
(w) The Company (i) is in compliance with any and all applicable
foreign, federal, state and local laws and regulations relating to the
protection of human health and safety, the environment or hazardous or
toxic substances or wastes, pollutants or contaminants ("ENVIRONMENTAL
LAWS"), (ii) has received all permits, licenses or other approvals
required of it under applicable Environmental Laws to conduct its business
and (iii) is in compliance with all terms and conditions of any such
permit, license or approval, except where such noncompliance with
Environmental Laws, failure to receive required permits, licenses or other
approvals or failure to comply with the terms and conditions of such
permits, licenses or approvals would not, singly or in the aggregate, have
a material adverse effect on the Company.
(x) There are no costs or liabilities associated with Environmental
Laws (including, without limitation, any capital or operating expenditures
required for clean-up, closure of properties or compliance with
Environmental Laws or any permit, license or approval, any related
constraints on operating activities and any potential liabilities to third
parties) which would, singly or in the aggregate, have a material adverse
effect on the Company.
(y) There are no contracts, agreements or understandings between the
Company and any person granting such person the right to require the
Company to file a registration statement under the Securities Act with
respect to any securities of the Company or to require the Company to
include such securities with the Shares registered pursuant to the
Registration Statement, except such as have been validly waived or as have
otherwise been described in the Prospectus.
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<PAGE> 8
(z) The Company has reviewed its operations to evaluate the extent
to which the business or operations of the Company will be affected by the
Year 2000 Problem. The Company has received assurances from the third
parties with which the Company has a material relationship regarding the
exposure of the operations of such parties to the Year 2000 Problem. As a
result of the Company's internal review and its review of such third party
assurances, the Company does not believe that the Year 2000 Problem will
have a material adverse effect on the Company. The "Year 2000 Problem" as
used herein means any significant risk that the computer hardware or
software used in the receipt, transmission, storage, retrieval,
retransmission or other utilization of data or in the operation of
mechanical or electrical systems of any kind will not, in the case of
dates or time periods occurring after December 31, 1999, function at least
as effectively as in the case of dates or time periods occurring prior to
January 1, 2000.
(aa) The Company has complied with all provisions of Section
517.075, Florida Statutes relating to doing business with the Government
of Cuba or with any person or affiliate located in Cuba.
(bb) The Nasdaq Stock Market, Inc. has approved the Common Stock for
listing on the Nasdaq National Market, upon official notice of issuance.
(cc) Except for the Shares, ____________ outstanding shares of
Common Stock (assuming the conversion and exchange of all securities
convertible into or exercisable or exchangeable for Common Stock) are
subject to lock-up agreements (collectively, the "LOCK-UP AGREEMENTS")
that restrict the holders thereof from selling, making any short sale of,
granting any option for the purchase of, or otherwise transferring or
disposing of, any of such shares of Common Stock, or any such securities
convertible into or exercisable or exchangeable for Common Stock, for a
period of 180 days after the date of the Prospectus without the prior
written consent of Morgan Stanley & Co. Incorporated.
(dd) The Company (i) has notified each holder of a currently
outstanding option issued under the 1997 Stock Plan (the "OPTION PLAN")
and each person who has acquired shares of Common Stock pursuant to the
exercise of any option granted under the Option Plan that none of such
options or shares may be sold or otherwise transferred or disposed of for
a period of 180 days after the date of the Prospectus and (ii) has imposed
a stop-transfer instruction with the Company's transfer agent in order to
enforce the foregoing lock-up provision imposed pursuant to the Option
Plan.
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<PAGE> 9
(ee) The Company (i) has notified each shareholder who is party to
the Amended and Restated Investor Rights Agreement dated July 2, 1998, as
amended (the "REGISTRATION RIGHTS AGREEMENT"), that none of the shares of
the Company's capital stock held by such shareholder may be sold or
otherwise transferred or disposed of for a period of 180 days after the
date of the Prospectus and (ii) has imposed a stop-transfer instruction
with the Company's transfer agent in order to enforce the foregoing
lock-up provision imposed pursuant to the Registration Rights Agreement.
(ff) The Registration Statement, the Prospectus and any preliminary
prospectus comply in all material respects, and any amendments or
supplements thereto will comply in all material respects, with any
applicable laws or regulations of any jurisdiction in which the Prospectus
or any preliminary prospectus, as amended or supplemented, if applicable,
is distributed in connection with the Directed Share Program, and (ii) no
authorization, approval, license, consent, order, registration or
qualification of or with any governmental body or agency, other than such
as have been obtained, is necessary under the securities laws and
regulations of any jurisdiction in which the Directed Shares are offered.
(gg) The Company has not offered, or caused the Underwriters to
offer, Shares to any person pursuant to the Directed Share Program with
the specific intent to unlawfully influence (i) a customer or supplier of
the Company to alter the customer's or supplier's level or type of
business with the Company or (ii) a trade journalist or publication to
write or publish favorable information about the Company or its products.
2. Agreements to Sell and Purchase. The Company hereby agrees to
sell to the several Underwriters, and each Underwriter, upon the basis of the
representations and warranties herein contained, but subject to the conditions
hereinafter stated, agrees, severally and not jointly, to purchase from the
Company the respective numbers of Firm Shares set forth in Schedule I hereto
opposite its name at $______ a share (the "PURCHASE PRICE").
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to sell
to the Underwriters the Additional Shares, and the Underwriters shall have a
one-time right to purchase, severally and not jointly, up to 375,000 Additional
Shares at the Purchase Price. If you, on behalf of the Underwriters, elect to
exercise such option, you shall so notify the Company in writing not later than
30 days after the date of this Agreement, which notice shall specify the number
of Additional Shares to be purchased by the Underwriters and the date on which
such shares are to be purchased. Such date may be the same as the Closing Date
(as defined below) but not earlier than the Closing Date nor later than ten
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<PAGE> 10
business days after the date of such notice. Additional Shares may be purchased
as provided in Section 4 hereof solely for the purpose of covering
over-allotments made in connection with the offering of the Firm Shares. If any
Additional Shares are to be purchased, each Underwriter agrees, severally and
not jointly, to purchase the number of Additional Shares (subject to such
adjustments to eliminate fractional shares as you may determine) that bears the
same proportion to the total number of Additional Shares to be purchased as the
number of Firm Shares set forth in Schedule I hereto opposite the name of such
Underwriter bears to the total number of Firm Shares.
The Company hereby agrees that, without the prior written consent of
Morgan Stanley on behalf of the Underwriters, it will not, during the period
ending 180 days after the date of the Prospectus, (i) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase, lend, or
otherwise transfer or dispose of, directly or indirectly, any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock or (ii) enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of
the Common Stock, whether any such transaction described in clause (i) or (ii)
above is to be settled by delivery of Common Stock or such other securities, in
cash or otherwise. The foregoing sentence shall not apply to (A) the Shares to
be sold hereunder, (B) the issuance by the Company of shares of Common Stock
upon the exercise of an option or warrant or the conversion of a security
outstanding on the date hereof, (C) the grant of options to purchase Common
Stock pursuant to the Company's 1997 Stock Plan, 1999 Stock Incentive Plan or
1999 Directors Option Plan, and the shares of Common Stock issuable upon
exercise thereof and (D) the issuance by the Company of shares of Common Stock
pursuant to the Company's 1999 Employee Stock Purchase Plan and (E) warrants
issued pursuant to lender or equipment lease lines.
3. Terms of Public Offering. The Company is advised by you that the
Underwriters propose to make a public offering of their respective portions of
the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable. The Company is further
advised by you that the Shares are to be offered to the public initially at
$_____________ a share (the "PUBLIC OFFERING PRICE") and to certain dealers
selected by you at a price that represents a concession not in excess of $______
a share under the Public Offering Price, and that any Underwriter may allow, and
such dealers may reallow, a concession, not in excess of $_____ a share, to any
Underwriter or to certain other dealers.
4. Payment and Delivery. Payment for the Firm Shares shall be made
to the Company in Federal or other funds immediately available in New York City,
against delivery of such Firm Shares for the respective accounts of the several
Underwriters at 10:00 a.m., New York City time, on _________, 1999, or at such
other time on the same or such other date, not later than _________, 1999, as
shall be
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<PAGE> 11
designated in writing by you. The time and date of such payment are hereinafter
referred to as the "CLOSING DATE."
Payment for any Additional Shares shall be made to the Company in
Federal or other funds immediately available in New York City against delivery
of such Additional Shares for the respective accounts of the several
Underwriters at 10:00 a.m., New York City time, on the date specified in the
notice described in Section 2 or at such other time on the same or on such other
date, in any event not later than _______, 1999, as shall be designated in
writing by you. The time and date of such payment are hereinafter referred to as
the "OPTION CLOSING DATE."
Certificates for the Firm Shares and Additional Shares shall be in
definitive form and registered in such names and in such denominations as you
shall request in writing not later than one full business day prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you on
the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes payable
in connection with the transfer of the Shares to the Underwriters duly paid,
against payment of the Purchase Price therefor.
5. Conditions to the Underwriters' Obligations. The obligations of
the Company to sell the Shares to the Underwriters and the several obligations
of the Underwriters to purchase and pay for the Shares on the Closing Date are
subject to the condition that the Registration Statement shall have become
effective not later than 5:00 p.m. (New York City time) on the date hereof.
The several obligations of the Underwriters are subject to the
following further conditions:
(a) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date:
(i) there shall not have occurred any downgrading, nor shall
any notice have been given of any intended or potential downgrading
or of any review for a possible change that does not indicate the
direction of the possible change, in the rating accorded any of the
Company's securities by any "nationally recognized statistical
rating organization," as such term is defined for purposes of Rule
436(g)(2) under the Securities Act; and
(ii) there shall not have occurred any change, or any
development involving a prospective change, in the condition,
financial or otherwise, or in the earnings, business or operations
of the Company and its subsidiaries, taken as a whole, from that set
forth in the Prospectus
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<PAGE> 12
(exclusive of any amendments or supplements thereto subsequent to
the date of this Agreement) that, in your judgment, is material and
adverse and that makes it, in your judgment, impracticable to market
the Shares on the terms and in the manner contemplated in the
Prospectus.
(b) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by an executive officer of
the Company, to the effect set forth in Section 5(a)(i) above and to the
effect that the representations and warranties of the Company contained in
this Agreement are true and correct in all material respects as of the
Closing Date and that the Company has complied in all material respects
with all of the agreements and satisfied all of the conditions on its part
to be performed or satisfied hereunder on or before the Closing Date.
Solely for the purposes of the application of this Section 5(b), all such
representations and warranties and all such agreements and conditions that
are qualified as to materiality (including without limitation by the word
"material" in the phrases "material adverse change" or "material adverse
effect") shall be deemed to be not so qualified.
The officer signing and delivering such certificate may rely upon
the best of his or her knowledge as to proceedings threatened.
(c) The Underwriters shall have received on the Closing Date an
opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP,
outside counsel to the Company, dated the Closing Date, to the effect
that:
(i) the Company has been duly incorporated, is validly
existing as a corporation in good standing under the laws of the
State of Delaware, has the corporate power and authority to own its
property and to conduct its business as described in the Prospectus
and is duly qualified to transact business and is in good standing
as a foreign corporation in ___________;
(ii) the authorized capital stock of the Company conforms as
to legal matters to the description thereof contained in the
Prospectus;
(iii) the shares of Common Stock outstanding prior to the
issuance of the Shares have been duly authorized and are validly
issued, non-assessable and, to such counsel's knowledge, fully paid;
(iv) the Shares have been duly authorized and, when issued and
delivered in accordance with the terms of this Agreement, will be
validly issued, fully paid and non-assessable, and to such counsel's
knowledge, the issuance of such Shares will not be subject to any
preemptive or similar rights;
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<PAGE> 13
(v) this Agreement has been duly authorized, executed and
delivered by the Company;
(vi) the execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement
will not contravene any provision of applicable Delaware corporate,
federal, or California law or the certificate of incorporation or
bylaws of the Company or, to the best of such counsel's knowledge,
any agreement or other instrument binding upon the Company that is
material to the Company, or, to the best of such counsel's
knowledge, any judgment, order or decree of any governmental body,
agency or court having jurisdiction over the Company, and no
consent, approval, authorization or order of, or qualification with,
any governmental body or governmental agency is required for the
performance by the Company of its obligations under this Agreement,
except such as may be required by the securities or Blue Sky laws of
the various states in connection with the offer and sale of the
Shares (as to which counsel need not opine);
(vii) the statements (A) in the Prospectus under the captions
"Management--Stock Plans," "Management--Indemnification," "Certain
Transactions," "Description of Capital Stock," and, to the extent of
the description of this Agreement, "Underwriters" and (B) in the
Registration Statement in Items 14 and 15, in each case insofar as
such statements constitute summaries of the legal matters, documents
or proceedings referred to therein, fairly present the information
called for with respect to such legal matters, documents and
proceedings and fairly summarize the matters referred to therein;
(viii) such counsel does not know of any legal or governmental
proceedings pending or threatened to which the Company is a party or
to which any of the properties of the Company is subject that are
required to be described in the Registration Statement or the
Prospectus and are not so described or of any statutes, regulations
or to such counsel's knowledge, contracts or other documents that
are required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement
that are not described or filed as required;
(ix) the Company is not and, after giving effect to the
offering and sale of the Shares and the application of the proceeds
thereof as described in the Prospectus, will not be an "investment
company" as such term is defined in the Investment Company Act of
1940, as amended;
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<PAGE> 14
(x) such counsel (A) is of the opinion that the Registration
Statement and Prospectus (except for financial statements and
schedules included therein and financial and statistical data
derived therefrom, as to which such counsel need not express any
opinion) comply as to form in all material respects with the
Securities Act and the applicable rules and regulations of the
Commission thereunder, (B) has no reason to believe that (except for
financial statements and schedules included therein and financial
and statistical data derived therefrom, as to which such counsel
need not express any belief) the Registration Statement and the
prospectus included therein at the time the Registration Statement
became effective contained any untrue statement of a material fact
or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading and (C) has
no reason to believe that (except for financial statements and
schedules included therein and financial and statistical data
derived therefrom, as to which such counsel need not express any
belief) the Prospectus contains any untrue statement of a material
fact or omits to state a material fact necessary in order to make
the statements therein, in the light of the circumstances under
which they were made, not misleading.
(d) The Underwriters shall have received on the Closing Date an
opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation,
counsel for the Underwriters, dated the Closing Date, covering the matters
referred to in Sections 5(c)(vi), 5(c)(vii), 5(c)(ix) (but only as to the
statements in the Prospectus under "Description of Capital Stock" and
"Underwriters") and 5(c)(xiii) above.
With respect to Section 5(c)(xiii) above, Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP and Wilson Sonsini Goodrich & Rosati,
Professional Corporation, may state that their opinion and belief are
based upon their participation in the preparation of the Registration
Statement and Prospectus and any amendments or supplements thereto and
review and discussion of the contents thereof, but are without independent
check or verification, except as specified.
The opinion of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP described in Section 5(c) above shall be rendered to the
Underwriters at the request of the Company and shall so state therein.
(e) The Underwriters shall have received, on each of the date hereof
and the Closing Date, a letter dated the date hereof or the Closing Date,
as the case may be, in form and substance satisfactory to the
Underwriters, from PricewaterhouseCoopers LLP, independent public
accountants, containing statements and information of the type ordinarily
included in accountants'
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<PAGE> 15
"comfort letters" to underwriters with respect to the financial statements
and certain financial information contained in the Registration Statement
and the Prospectus; provided that the letter delivered on the Closing Date
shall use a "cut-off date" not earlier than the date hereof.
(f) The "lock-up" agreements, each substantially in the form of
Exhibit A hereto, between you and the securityholders, officers and
directors of the Company relating to sales and certain other dispositions
of shares of Common Stock or certain other securities, delivered to you on
or before the date hereof, shall be in full force and effect on the
Closing Date.
(g) The Nasdaq National Market shall have approved the Common Stock
for listing, subject only to official notice of issuance.
The several obligations of the Underwriters to purchase Additional
Shares hereunder are subject to the delivery to you on the Option Closing Date
of such documents as you may reasonably request with respect to the good
standing of the Company, the due authorization and issuance of the Additional
Shares and other matters related to the issuance of the Additional Shares.
6. Covenants of the Company. In further consideration of the agreements of
the Underwriters herein contained, the Company covenants with each Underwriter
as follows:
(a) To furnish to you, without charge, five (5) signed copies of the
Registration Statement (including exhibits thereto) and for delivery to
each other Underwriter a conformed copy of the Registration Statement
(without exhibits thereto) and to furnish to you in New York City, without
charge, prior to 10:00 a.m. New York City time on the business day next
succeeding the date of this Agreement and during the period mentioned in
Section 6(c) below, as many copies of the Prospectus and any supplements
and amendments thereto or to the Registration Statement as you may
reasonably request.
(b) Before amending or supplementing the Registration Statement or
the Prospectus, to furnish to you a copy of each such proposed amendment
or supplement and not to file any such proposed amendment or supplement to
which you reasonably object, and to file with the Commission within the
applicable period specified in Rule 424(b) under the Securities Act any
prospectus required to be filed pursuant to such Rule.
(c) If, during such period after the first date of the public
offering of the Shares as in the opinion of counsel for the Underwriters
the Prospectus is required by law to be delivered in connection with sales
by an Underwriter or dealer, any
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<PAGE> 16
event shall occur or condition exist as a result of which it is necessary
to amend or supplement the Prospectus in order to make the statements
therein, in the light of the circumstances when the Prospectus is
delivered to a purchaser, not misleading, or if, in the opinion of counsel
for the Underwriters, it is necessary to amend or supplement the
Prospectus to comply with applicable law, forthwith to prepare, file with
the Commission and furnish, at its own expense, to the Underwriters and to
the dealers (whose names and addresses you will furnish to the Company) to
which Shares may have been sold by you on behalf of the Underwriters and
to any other dealers upon request, either amendments or supplements to the
Prospectus so that the statements in the Prospectus as so amended or
supplemented will not, in the light of the circumstances when the
Prospectus is delivered to a purchaser, be misleading or so that the
Prospectus, as amended or supplemented, will comply with law.
(d) To endeavor to qualify the Shares for offer and sale under the
securities or Blue Sky laws of such jurisdictions as you shall reasonably
request.
(e) To make generally available to the Company's security holders
and to you as soon as practicable an earning statement covering the
twelve-month period ending June 30, 2000 that satisfies the provisions of
Section 11(a) of the Securities Act and the rules and regulations of the
Commission thereunder.
(f) Whether or not the transactions contemplated in this Agreement
are consummated or this Agreement is terminated, to pay or cause to be
paid all expenses incident to the performance of its obligations under
this Agreement, including: (i) the fees, disbursements and expenses of the
Company's counsel and the Company's accountants in connection with the
registration and delivery of the Shares under the Securities Act and all
other fees or expenses in connection with the preparation and filing of
the Registration Statement, any preliminary prospectus, the Prospectus and
amendments and supplements to any of the foregoing, including all printing
costs associated therewith, and the mailing and delivering of copies
thereof to the Underwriters and dealers, in the quantities hereinabove
specified, (ii) all costs and expenses related to the transfer and
delivery of the Shares to the Underwriters, including any transfer or
other taxes payable thereon, (iii) the cost of printing or producing any
Blue Sky or Legal Investment memorandum in connection with the offer and
sale of the Shares under state securities laws and all expenses in
connection with the qualification of the Shares for offer and sale under
state securities laws as provided in Section 6(d) hereof, including filing
fees and the reasonable fees and disbursements of counsel for the
Underwriters in connection with such qualification and in connection with
the Blue Sky or Legal Investment memorandum, (iv) all filing fees and the
reasonable fees and disbursements of counsel to the Underwriters incurred
in connection with the review and qualification of the offering of the
Shares by the
-15-
<PAGE> 17
National Association of Securities Dealers, Inc. (the "NASD"), (v) all
fees and expenses in connection with the preparation and filing of the
registration statement on Form 8-A relating to the Common Stock and all
costs and expenses incident to listing the Shares on the Nasdaq National
Market, (vi) the cost of printing certificates representing the Shares,
(vii) the costs and charges of any transfer agent, registrar or
depositary, (viii) the costs and expenses of the Company relating to
investor presentations on any "road show" undertaken in connection with
the marketing of the offering of the Shares, including, without
limitation, expenses associated with the production of road show slides
and graphics, fees and expenses of any consultants engaged in connection
with the road show presentations with the prior approval of the Company,
travel and lodging expenses of the representatives and officers of the
Company and any such consultants, and[, if approved by the Company,] the
cost of any aircraft chartered in connection with the road show, (ix) all
fees and disbursements of counsel incurred by the Underwriters in
connection with the Directed Share Program and stamp duties, similar taxes
or duties or other taxes, if any, incurred by the Underwriters in
connection with the Directed Share Program, and (x) all other costs and
expenses incident to the performance of the obligations of the Company
hereunder for which provision is not otherwise made in this Section. It is
understood, however, that except as provided in this Section, Section 7
entitled "Indemnity and Contribution," and the last paragraph of Section 9
below, the Underwriters will pay all of their costs and expenses,
including fees and disbursements of their counsel, stock transfer taxes
payable on resale of any of the Shares by them and any advertising
expenses connected with any offers they may make.
(g) That in connection with the Directed Share Program, the Company
will ensure that the Directed Shares will be restricted to the extent
required by the NASD or the NASD rules from sale, transfer, assignment,
pledge or hypothecation for a period of three months following the date of
the effectiveness of the Registration Statement. Morgan Stanley will
notify the Company as to which Participants will need to be so restricted.
The Company will direct the transfer agent to place stop transfer
restrictions upon such securities for such period of time.
Furthermore, the Company covenants with Morgan Stanley that the
Company will comply with all applicable securities and other applicable laws,
rules and regulations in each foreign jurisdiction in which the Directed Shares
are offered in connection with the Directed Share Program.
7. Indemnity and Contribution.
-16-
<PAGE> 18
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within
the meaning of either Section 15 of the Securities Act or Section 20 of
the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), from
and against any and all losses, claims, damages and liabilities
(including, without limitation, any legal or other expenses reasonably
incurred in connection with defending or investigating any such action or
claim) caused by any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement or any amendment
thereof, any preliminary prospectus or the Prospectus (as amended or
supplemented if the Company shall have furnished any amendments or
supplements thereto), or caused by any omission or alleged omission to
state therein a material fact required to be stated therein or necessary
to make the statements therein not misleading, except insofar as such
losses, claims, damages or liabilities are caused by any such untrue
statement or omission or alleged untrue statement or omission based upon
information relating to any Underwriter furnished to the Company in
writing by such Underwriter through you expressly for use therein[;
provided, however, that the foregoing indemnity agreement with respect to
any preliminary prospectus shall not inure to the benefit of any
Underwriter, or any person controlling such Underwriter, from whom the
person asserting any such losses, claims, damages, or liabilities
purchased Shares, if a copy of the Prospectus (as then amended or
supplemented if the Company shall have furnished any amendments or
supplements thereto) was not sent or given by or on behalf of such
Underwriter to such person, if required by law so to have been delivered,
at or prior to the written confirmation of the sale of the Shares to such
person, and if the Prospectus (as so amended or supplemented) would have
cured the defect giving rise to such loss, claim, damage or liability].
(b) The Company agrees to indemnify and hold harmless Morgan Stanley
and each person, if any, who controls Morgan Stanley within the meaning of
either Section 15 of the Securities Act or Section 20 of the Exchange Act
("MORGAN STANLEY ENTITIES"), from and against any and all losses, claims,
damages and liabilities (including, without limitation, any legal or other
expenses reasonably incurred in connection with defending or investigating
any such action or claim) (i) caused by any untrue statement or alleged
untrue statement of a material fact contained in the prospectus wrapper
material prepared by or with the consent of the Company for distribution
in foreign jurisdictions in connection with the Directed Share Program
attached to the Prospectus or any preliminary prospectus, or caused by any
omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statement therein, when
considered in conjunction with the Prospectus or any applicable
preliminary prospectus, not misleading; (ii) caused by the failure of any
Participant to pay for and accept delivery of the shares which,
immediately following the effectiveness of the Registration Statement,
were subject to a
-17-
<PAGE> 19
properly confirmed agreement to purchase; or (iii) related to, arising out
of, or in connection with the Directed Share Program, provided that, the
Company shall not be responsible under this subparagraph (iii) for any
losses, claim, damages or liabilities (or expenses relating thereto) that
are finally judicially determined to have resulted from the bad faith or
gross negligence of Morgan Stanley Entities.
(c) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors, its officers who sign the
Registration Statement and each person, if any, who controls the Company
within the meaning of either Section 15 of the Securities Act or Section
20 of the Exchange Act from and against any and all losses, claims,
damages and liabilities (including, without limitation, any legal or other
expenses reasonably incurred in connection with defending or investigating
any such action or claim) caused by any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement or
any amendment thereof, any preliminary prospectus or the Prospectus (as
amended or supplemented if the Company shall have furnished any amendments
or supplements thereto), or caused by any omission or alleged omission to
state therein a material fact required to be stated therein or necessary
to make the statements therein not misleading, but only with reference to
information relating to such Underwriter furnished to the Company in
writing by such Underwriter through you expressly for use in the
Registration Statement, any preliminary prospectus, the Prospectus or any
amendments or supplements thereto.
(d) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of
which indemnity may be sought pursuant to Section 7(a), 7(b) or 7(c), such
person (the "INDEMNIFIED PARTY") shall promptly notify the person against
whom such indemnity may be sought (the "INDEMNIFYING PARTY") in writing
and the indemnifying party, upon request of the indemnified party, shall
retain counsel reasonably satisfactory to the indemnified party to
represent the indemnified party and any others the indemnifying party may
designate in such proceeding and shall pay the fees and disbursements of
such counsel related to such proceeding. In any such proceeding, any
indemnified party shall have the right to retain its own counsel, but the
fees and expenses of such counsel shall be at the expense of such
indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (ii)
the named parties to any such proceeding (including any impleaded parties)
include both the indemnifying party and the indemnified party and
representation of both parties by the same counsel would be inappropriate
due to actual or potential differing interests between them. It is
understood that the indemnifying party shall not, in respect of the legal
expenses of any indemnified party in connection with any proceeding or
related proceedings in the same jurisdiction, be liable for the fees
-18-
<PAGE> 20
and expenses of more than one separate firm (in addition to any local
counsel) for all such indemnified parties and that all such fees and
expenses shall be reimbursed as they are incurred. Such firm shall be
designated in writing by Morgan Stanley, in the case of parties
indemnified pursuant to Section 7(a), and by the Company, in the case of
parties indemnified pursuant to Section 7(c). The indemnifying party shall
not be liable for any settlement of any proceeding effected without its
written consent, but if settled with such consent or if there be a final
judgment for the plaintiff, the indemnifying party agrees to indemnify the
indemnified party from and against any loss or liability by reason of such
settlement or judgment. Notwithstanding the foregoing sentence, if at any
time an indemnified party shall have requested an indemnifying party to
reimburse the indemnified party for fees and expenses of counsel as
contemplated by the second and third sentences of this paragraph, the
indemnifying party agrees that it shall be liable for any settlement of
any proceeding effected without its written consent if (i) such settlement
is entered into more than 30 days after receipt by such indemnifying party
of the aforesaid request and (ii) such indemnifying party shall not have
reimbursed the indemnified party in accordance with such request prior to
the date of such settlement. No indemnifying party shall, without the
prior written consent of the indemnified party, effect any settlement of
any pending or threatened proceeding in respect of which any indemnified
party is or could have been a party and indemnity could have been sought
hereunder by such indemnified party, unless such settlement includes an
unconditional release of such indemnified party from all liability on
claims that are the subject matter of such proceeding. Notwithstanding
anything contained herein to the contrary, if indemnity may be sought
pursuant to Section 7(b) hereof in respect of such action or proceeding,
then in addition to such separate firm for the indemnified parties, the
indemnifying party shall be liable for the reasonable fees and expenses of
not more than one separate firm (in addition to any local counsel) for
Morgan Stanley for the defense of any losses, claims, damages and
liabilities arising out of the Directed Share Program, and all persons, if
any, who control Morgan Stanley within the meaning of either Section 15 of
the Act or Section 20 of the Exchange Act.
(e) To the extent the indemnification provided for in Section 7(a),
7(b) or 7(c) is unavailable to an indemnified party or insufficient in
respect of any losses, claims, damages or liabilities referred to therein,
then each indemnifying party under such paragraph, in lieu of indemnifying
such indemnified party thereunder, shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, claims,
damages or liabilities (i) in such proportion as is appropriate to reflect
the relative benefits received by the indemnifying party or parties on the
one hand and the indemnified party or parties on the other hand from the
offering of the Shares or (ii) if the allocation provided by clause
7(e)(i) above is not permitted by applicable law, in such proportion as is
appropriate to
-19-
<PAGE> 21
reflect not only the relative benefits referred to in clause 7(e)(i) above
but also the relative fault of the indemnifying party or parties on the
one hand and of the indemnified party or parties on the other hand in
connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities, as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one
hand and the Underwriters on the other hand in connection with the
offering of the Shares shall be deemed to be in the same respective
proportions as the net proceeds from the offering of the Shares (before
deducting expenses) received by the Company and the total underwriting
discounts and commissions received by the Underwriters, in each case as
set forth in the table on the cover of the Prospectus, bear to the
aggregate Public Offering Price of the Shares. The relative fault of the
Company on the one hand and the Underwriters on the other hand shall be
determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Company or by the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent
such statement or omission. The Underwriters' respective obligations to
contribute pursuant to this Section 7 are several in proportion to the
respective number of Shares they have purchased hereunder, and not joint.
(f) The Company and the Underwriters agree that it would not be just
or equitable if contribution pursuant to this Section 7 were determined by
pro rata allocation (even if the Underwriters were treated as one entity
for such purpose) or by any other method of allocation that does not take
account of the equitable considerations referred to in Section 7(e). The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages and liabilities referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or
claim. Notwithstanding the provisions of this Section 7, no Underwriter
shall be required to contribute any amount in excess of the amount by
which the total price at which the Shares underwritten by it and
distributed to the public were offered to the public exceeds the amount of
any damages that such Underwriter has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The remedies provided for in this Section 7 are not
exclusive and shall not limit any rights or remedies which may otherwise
be available to any indemnified party at law or in equity.
-20-
<PAGE> 22
(g) The indemnity and contribution provisions contained in this
Section 7 and the representations, warranties and other statements of the
Company contained in this Agreement shall remain operative and in full
force and effect regardless of (i) any termination of this Agreement, (ii)
any investigation made by or on behalf of any Underwriter or any person
controlling any Underwriter or by or on behalf of the Company, its
officers or directors or any person controlling the Company and (iii)
acceptance of and payment for any of the Shares.
8. Termination. This Agreement shall be subject to termination by
notice given by you to the Company, if (a) after the execution and delivery of
this Agreement and prior to the Closing Date (i) trading generally shall have
been suspended or materially limited on or by, as the case may be, any of the
New York Stock Exchange, the American Stock Exchange, the National Association
of Securities Dealers, Inc., the Chicago Board of Options Exchange, the Chicago
Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any
securities of the Company shall have been suspended on any exchange or in any
over-the-counter market, (iii) a general moratorium on commercial banking
activities in New York shall have been declared by either Federal or New York
State authorities or (iv) there shall have occurred any outbreak or escalation
of hostilities or any change in financial markets or any calamity or crisis
that, in your judgment, is material and adverse and (b) in the case of any of
the events specified in clauses 8(a)(i) through 8(a)(iv), such event, singly or
together with any other such event, makes it, in your judgment, impracticable to
market the Shares on the terms and in the manner contemplated in the Prospectus.
9. Effectiveness; Defaulting Underwriters. This Agreement
shall become effective upon the execution and delivery hereof by the parties
hereto.
If, on the Closing Date or the Option Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase Shares
that it has or they have agreed to purchase hereunder on such date, and the
aggregate number of Shares which such defaulting Underwriter or Underwriters
agreed but failed or refused to purchase is not more than one-tenth of the
aggregate number of the Shares to be purchased on such date, the other
Underwriters shall be obligated severally in the proportions that the number of
Firm Shares set forth opposite their respective names in Schedule I bears to the
aggregate number of Firm Shares set forth opposite the names of all such
non-defaulting Underwriters, or in such other proportions as you may specify, to
purchase the Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase on such date; provided that in no event shall the
number of Shares that any Underwriter has agreed to purchase pursuant to this
Agreement be increased pursuant to this Section 9 by an amount in excess of
one-ninth of such number of
-21-
<PAGE> 23
Shares without the written consent of such Underwriter. If, on the Closing Date,
any Underwriter or Underwriters shall fail or refuse to purchase Firm Shares and
the aggregate number of Firm Shares with respect to which such default occurs is
more than one-tenth of the aggregate number of Firm Shares to be purchased, and
arrangements satisfactory to you and the Company for the purchase of such Firm
Shares are not made within 36 hours after such default, this Agreement shall
terminate without liability on the part of any non-defaulting Underwriter or the
Company. In any such case either you or the Company shall have the right to
postpone the Closing Date, but in no event for longer than seven days, in order
that the required changes, if any, in the Registration Statement and in the
Prospectus or in any other documents or arrangements may be effected. If, on the
Option Closing Date, any Underwriter or Underwriters shall fail or refuse to
purchase Additional Shares and the aggregate number of Additional Shares with
respect to which such default occurs is more than one-tenth of the aggregate
number of Additional Shares to be purchased, the non-defaulting Underwriters
shall have the option (i) to terminate their obligation hereunder to purchase
Additional Shares or (ii) to purchase not less than the number of Additional
Shares that such non-defaulting Underwriters would have been obligated to
purchase in the absence of such default. Any action taken under this paragraph
shall not relieve any defaulting Underwriter from liability in respect of any
default of such Underwriter under this Agreement.
If this Agreement shall be terminated by the Underwriters, or any of
them, because of any failure or refusal on the part of the Company to comply
with the terms or to fulfill any of the conditions of this Agreement, or if for
any reason the Company shall be unable to perform its obligations under this
Agreement, the Company will reimburse the Underwriters or such Underwriters as
have so terminated this Agreement with respect to themselves, severally, for all
out-of-pocket expenses (including the fees and disbursements of their counsel)
reasonably incurred by such Underwriters in connection with this Agreement or
the offering contemplated hereunder.
10. Counterparts. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
11. Applicable Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York.
-22-
<PAGE> 24
12. Headings. The headings of the sections of this Agreement have
been inserted for convenience of reference only and shall not be deemed a part
of this Agreement.
Very truly yours,
REDBACK NETWORKS INC.
By:
-------------------------------------
Dennis L. Barsema
President and Chief Executive Officer
Accepted as of the date hereof
Morgan Stanley & Co. Incorporated
BancBoston Robertson Stephens Inc.
Dain Rauscher Wessels
Acting severally on behalf of
themselves and the several
Underwriters named in
Schedule I hereto.
By: Morgan Stanley & Co. Incorporated
By:
---------------------------------
Name:
Title:
-1-
<PAGE> 25
SCHEDULE I
<TABLE>
<CAPTION>
NUMBER OF
SHARES TO BE
UNDERWRITER PURCHASED
- ---------------------------------------- -------------
<S> <C>
Morgan Stanley & Co. Incorporated
BancBoston Robertson Stephens Inc.
Dain Rauscher Wessels
-------------
=============
Total......
</TABLE>
-2-
<PAGE> 1
EXHIBIT 3.2
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF REDBACK NETWORKS INC.,
A DELAWARE CORPORATION
The undersigned, Dennis L. Barsema and Geoffrey C. Darby, hereby
certify that:
ONE: They are the duly elected and acting President and Secretary,
respectively, of said corporation.
TWO: The name of the corporation is Redback Networks Inc. and that the
corporation was originally incorporated on August 30, 1996 pursuant to the
General Corporation Law of the State of Delaware.
THREE: Pursuant to Section 242 and Section 245 of the General
Corporation Law of the State of Delaware, Redback Networks Inc. has adopted this
Amended and Restated Certificate of Incorporation, restating, integrating and
further amending its Amended and Restated Certificate of Incorporation dated on
or about September 11, 1998, as amended on March 24, 1999, which Amended and
Restated Certificate of Incorporation has been duly proposed by the directors
and adopted by the stockholders of this corporation (by written consent pursuant
to Section 228 of said General Corporate Law) in accordance with the provisions
of said Section 242 and Section 245.
FOUR: The Amended and Restated Certificate of Incorporation of said
corporation shall be amended and restated to read in full as follows:
ARTICLE I
The name of this corporation is Redback Networks Inc.
ARTICLE II
The address of the registered office of this corporation in the State
of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, 19801, County of New Castle. The name of its registered agent at
such address is The Corporation Trust Company.
ARTICLE III
The nature of the business or purposes to be conducted or promoted is
to engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of Delaware.
ARTICLE IV
This corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total number
of shares that this corporation is authorized to issue is ninety million
(90,000,000) shares. Eighty million
<PAGE> 2
(80,000,000) shares shall be Common Stock, par value $.0001 per share, and ten
million (10,000,000) shares shall be Preferred Stock, par value $.0001 per
share.
The Preferred Stock may be issued from time to time in one or more
series, without further stockholder approval. The Board of Directors is hereby
authorized, in the resolution or resolutions adopted by the Board of Directors
providing for the issuance of any wholly unissued series of Preferred Stock,
within the limitations and restrictions stated in this Amended and Restated
Certificate of Incorporation (the "Restated Certificate"), to fix or alter the
dividend rights, dividend rate, conversion rights, voting rights, rights and
terms of redemption (including sinking fund provisions), the redemption price or
prices, and the liquidation preferences of any wholly unissued series of
Preferred Stock, and the number of shares constituting any such series and the
designation thereof, or any of them, and to increase or decrease the number of
shares of any series subsequent to the issue of shares of that series, but not
below the number of shares of such series then outstanding. In case the number
of shares of any series shall be so decreased, the shares constituting such
decrease shall resume the status that they had prior to the adoption of the
resolution originally fixing the number of shares of such series.
ARTICLE V
Except as otherwise provided in this Restated Certificate, in
furtherance and not in limitation of the powers conferred by statute, the Board
of Directors is expressly authorized to make, repeal, alter, amend and rescind
any or all of the Bylaws of this corporation.
ARTICLE VI
The number of directors of this corporation shall be fixed from time to
time by a bylaw or amendment thereof duly adopted by the Board of Directors or
by the stockholders.
ARTICLE VII
Elections of directors need not be by written ballot unless the Bylaws
of this corporation shall so provide.
ARTICLE VIII
Except as otherwise provided in this Restated Certificate, any action
required or permitted to be taken by the stockholders of the Corporation must be
effected at an annual or special meeting of the stockholders of the Corporation,
and no action required to be taken or that may be taken at any annual or special
meeting of the stockholders of the Corporation may be taken by written consent.
ARTICLE IX
A director of this corporation shall, to the full extent permitted by
the Delaware General Corporation Law as it now exists or as it may hereafter be
amended, not be liable to this
2
<PAGE> 3
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director. Neither any amendment nor repeal of this Article IX, nor the
adoption of any provision of this Restated Certificate of Incorporation
inconsistent with this Article IX, shall eliminate or reduce the effect of this
Article IX in respect of any matter occurring, or any cause of action, suit or
claim that, but for this Article IX, would accrue or arise, prior to such
amendment, repeal or adoption of an inconsistent provision.
ARTICLE X
This corporation reserves the right to amend, alter, change or
repeal any provision contained in this Restated Certificate, in the manner now
or hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.
ARTICLE XI
To the fullest extent permitted by applicable law, the
Corporation is authorized to provide indemnification of (and advancement of
expenses to) agents of the Corporation (and any other persons to which General
Corporation Law permits the Corporation to provide indemnification) through
bylaw provisions, agreements with such agents or other persons, vote of
stockholders or disinterested directors or otherwise, in excess of the
indemnification and advancement otherwise permitted by Section 145 of the
General Corporation Law, subject only to limits created by applicable General
Corporation Law (statutory or non-statutory), with respect to actions for breach
of duty to the Corporation, its stockholders, and others.
Any amendment, repeal or modification of the foregoing provisions
of this Article XI shall not adversely affect any right or protection of a
director, officer, agent, or other person existing at the time of, or increase
the liability of any director of the Corporation with respect to, any acts or
omissions of such director, officer or agent occurring prior to such amendment,
repeal or modification.
* * *
FIVE: That thereafter said amendment and restatement was duly
adopted in accordance with the provisions of Section 242 and Section 245 of the
General Corporation Law by obtaining the vote of the holders of the majority of
the outstanding stock of the corporation in favor of said amendment and
restatement in the manner set forth in Section 228 of the General Corporation
Law.
3
<PAGE> 4
IN WITNESS WHEREOF, the undersigned have executed this
certificate on _________, 1999.
---------------------------------------------
Dennis L. Barsema, President
---------------------------------------------
Geoffrey C. Darby, Secretary
<PAGE> 1
EXHIBIT 3.4
AMENDED AND RESTATED BYLAWS
OF
REDBACK NETWORKS INC.
ARTICLE I
OFFICES
Section 1. The registered office shall be in the City of
Wilmington, County of New Castle, State of Delaware.
Section 2. The corporation may also have offices at such other
places both within and without the State of Delaware as the Board of Directors
may from time to time determine or the business of the corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. All meetings of the stockholders for the election of
directors shall be held in the City of Sunnyvale, California, at such place as
may be fixed from time to time by the Board of Directors, or at such other place
either within or without the State of Delaware as shall be designated from time
to time by the Board of Directors and stated in the notice of the meeting.
Meetings of stockholders for any other purpose may be held at such time and
place, within or without the State of Delaware, as shall be stated in the notice
of the meeting or in a duly executed waiver of notice thereof.
Section 2. Annual meetings of stockholders, commencing with
fiscal year 2000, shall be held at such date and time as shall be designated
from time to time by the Board of Directors and stated in the notice of the
meeting, at which they shall elect by a plurality vote a board of directors, and
transact such other business as may properly be brought before the
<PAGE> 2
meeting.
Section 3. Written notice of the annual meeting stating the
place, date and hour of the meeting shall be given to each stockholder entitled
to vote at such meeting not fewer than ten (10) nor more than sixty (60) days
before the date of the meeting.
Section 4. The officer who has charge of the stock ledger of the
corporation shall prepare and make, at least ten days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
Section 5. Special meetings of the stockholders, for any purpose
or purposes, unless otherwise prescribed by statute or by the certificate of
incorporation, may be called by the president and shall be called by the
president or secretary at the request in writing of a majority of the Board of
Directors, or at the request in writing of stockholders owning at least fifty
percent (50%) in amount of the entire capital stock of the corporation issued
and outstanding and entitled to vote. Such request shall state the purpose or
purposes of the proposed meeting.
Section 6. Written notice of a special meeting stating the place,
date and hour of the meeting and the purpose or purposes for which the meeting
is called, shall be given not fewer than ten (10) nor more than sixty (60) days
before the date of the meeting, to each stockholder
<PAGE> 3
entitled to vote at such meeting.
Section 7. Business transacted at any special meeting of
stockholders shall be limited to the purposes stated in the notice.
Section 8. The holders of fifty percent (50%) of the stock issued
and outstanding and entitled to vote thereat, present in person or represented
by proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by statute or by the
certificate of incorporation. If, however, such quorum shall not be present or
represented at any meeting of the stockholders, the stockholders entitled to
vote thereat, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented any business may be
transacted which might have been transacted at the meeting as originally
notified. If the adjournment is for more than thirty days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.
Section 9. When a quorum is present at any meeting, the vote of
the holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of the statutes or of
the certificate of incorporation, a different vote is required, in which case
such express provision shall govern and control the decision of such question.
Section 10. Unless otherwise provided in the certificate of
incorporation each stockholder shall at every meeting of the stockholders be
entitled to one vote in person or by proxy for each share of the capital stock
having voting power held by such stockholder, but no
<PAGE> 4
proxy shall be voted on after three years from its date, unless the proxy
provides for a longer period.
ARTICLE III
DIRECTORS
Section 1. The number of directors which shall constitute the
whole board shall be determined by resolution of the Board of Directors or by
the stockholders at the annual meeting of the stockholders, except as provided
in Section 2 of this Article, and each director elected shall hold office until
his successor is elected and qualified. Directors need not be stockholders.
Section 2. Vacancies and new created directorships resulting from
any increase in the authorized number of directors may be filled by a majority
of the directors then in office, though less than a quorum, or by a sole
remaining director, and the directors so chosen shall hold office until the next
annual election and until their successors are duly elected and shall qualify,
unless sooner displaced. If there are no directors in office, then an election
of directors may be held in the manner provided by statute. If, at the time of
filling any vacancy or any newly created directorship, the directors then in
office shall constitute less than a majority of the whole board (as constituted
immediately prior to any such increase), the Court of Chancery may, upon
application of any stockholder or stockholders holding at least ten percent of
the total number of the shares at the time outstanding having the right to vote
for such directors, summarily order an election to be held to fill any such
vacancies or newly created directorships, or to replace the directors chosen by
the directors then in office.
Section 3. The business of the corporation shall be managed by or
under the direction of its board of directors which may exercise all such powers
of the corporation and do
<PAGE> 5
all such lawful acts and things as are not by statute or by the certificate of
incorporation or by these bylaws directed or required to be exercised or done by
the stockholders.
MEETINGS OF THE BOARD OF DIRECTORS
Section 4. The Board of Directors of the corporation may hold
meetings, both regular and special, either within or without the State of
Delaware.
Section 5. The first meeting of each newly elected Board of
Directors shall be held at such time and place as shall be fixed by the vote of
the stockholders at the annual meeting and no notice of such meeting shall be
necessary to the newly elected directors in order legally to constitute the
meeting, provided a quorum shall be present. In the event of the failure of the
stockholders to fix the time or place of such first meeting of the newly elected
Board of Directors, or in the event such meeting is not held at the time and
place so fixed by the stockholders, the meeting may be held at such time and
place as shall be specified in a notice given as hereinafter provided for
special meetings of the Board of Directors, or as shall be specified in a
written waiver signed by all of the directors.
Section 6. Regular meetings of the Board of Directors may be held
without notice at such time and at such place as shall from time to time be
determined by the board.
Section 7. Special meetings of the board may be called by the
president on two (2) days' notice to each director by mail or twenty-four (24)
notice to each director either personally, by telegram, or by facsimile; special
meetings shall be called by the president or secretary in like manner and on
like notice on the written request of two directors unless the board consists of
only one director, in which case special meetings shall be called by the
president or secretary in like manner and on like notice on the written request
of the sole director.
Section 8. At all meetings of the board a majority of the
directors shall constitute
<PAGE> 6
a quorum for the transaction of business and the act of a majority of the
directors present at any meeting at which there is a quorum shall be the act of
the Board of Directors, except as may be otherwise specifically provided by
statute or by the certificate of incorporation. If a quorum shall not be present
at any meeting of the Board of Directors, the directors present thereat may
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present.
Section 9. Unless otherwise restricted by the certificate of
incorporation of these bylaws, any action required or permitted to be taken at
any meeting of the Board of Directors or of any committee thereof may be taken
without a meeting, if all members of the board or committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the board or committee.
Section 10. Unless otherwise restricted by the certificate of
incorporation or these bylaws, members of the Board of Directors, or any
committee designated by the Board of Directors, may participate in a meeting of
the Board of Directors, or any committee, by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
COMMITTEES OF DIRECTORS
Section 11. The Board of Directors may, by resolution passed by a
majority of the whole board, designate one or more committees, each committee to
consist of one or more of the directors of the corporation. The board may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting
<PAGE> 7
of the committee.
In the absence or disqualification of a member of a committee,
the member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any such absent or disqualified member.
Any such committee, to the extent provided in the resolution of
the Board of Directors, shall have and may exercise all the powers and authority
of the Board of Directors in the management of the business and affairs of the
corporation, and may authorize the seal of the corporation to be affixed to all
papers which may require it; but no such committee shall have the power or
authority in reference to amending the certificate of incorporation, adopting an
agreement of merger or consolidation, recommending to the stockholders the sale,
lease or exchange of all or substantially all of the corporation's property and
assets, recommending to the stockholders a dissolution of the corporation or a
revocation of a dissolution, or amending the bylaws of the corporation; and,
unless the resolution or the certificate of incorporation expressly so provide,
no such committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock. Such committee or committees shall have such
name or names as may be determined from time to time by resolution adopted by
the Board of Directors.
Section 12. Each committee shall keep regular minutes of its
meetings and report the same to the Board of Directors when required.
COMPENSATION OF DIRECTORS
Section 13. Unless otherwise restricted by the certificate of
incorporation or these bylaws, the Board of Directors shall have the authority
to fix the compensation of directors. The directors may be paid their expenses,
if any, of attendance at each meeting of the Board of
<PAGE> 8
Directors and may be paid a fixed sum for attendance at each meeting of the
Board of Directors or a stated salary as director. No such payment shall
preclude any director from serving the corporation in any other capacity and
receiving compensation therefor. Members of special or standing committees may
be allowed like compensation for attending committee meetings.
REMOVAL OF DIRECTORS
Section 14. Unless otherwise restricted by the certificate of
incorporation or bylaw, any director or the entire Board of Directors may be
removed, with or without cause, by the holders of a majority of shares entitled
to vote at an election of directors.
ARTICLE IV
NOTICES
Section 1. Whenever, under the provisions of the statutes or of
the certificate of incorporation or of these bylaws, notice is required to be
given to any director or stockholder, it shall not be construed to mean personal
notice, but such notice may be given in writing, by mail, addressed to such
director or stockholder, at his address as it appears on the records of the
corporation, with postage thereon prepaid, and such notice shall be deemed to be
given at the time when the same shall be deposited in the United States mail.
Notice to directors may also be given by telegram.
<PAGE> 9
Section 2. Whenever any notice is required to be given under the
provisions of the statutes or of the certificate of incorporation or of these
bylaws, a waiver thereof in writing, signed by the person or persons entitled to
said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
ARTICLE V
OFFICERS
Section 1. The officers of the corporation shall be chosen by the
Board of Directors and shall be a president, treasurer and a secretary. The
Board of Directors may elect from among its members a Chairman of the Board and
a Vice Chairman of the Board. The Board of Directors may also choose one or more
vice-presidents, assistant secretaries and assistant treasurers. Any number of
offices may be held by the same person, unless the certificate of incorporation
or these bylaws otherwise provide.
Section 2. The Board of Directors at its first meeting after each
annual meeting of stockholders shall choose a president, a treasurer, and a
secretary and may choose vice presidents.
Section 3. The Board of Directors may appoint such other officers
and agents as it shall deem necessary who shall hold their offices for such
terms and shall exercise such powers and perform such duties as shall be
determined from time to time by the board.
Section 4. The salaries of all officers and agents of the
corporation shall be fixed by the Board of Directors.
Section 5. The officers of the corporation shall hold office
until their successors are chosen and qualify. Any officer elected or appointed
by the Board of Directors may be removed at any time by the affirmative vote of
a majority of the Board of Directors. Any
<PAGE> 10
vacancy occurring in any office of the corporation shall be filled by the Board
of Directors.
THE CHAIRMAN OF THE BOARD
Section 6. The Chairman of the Board, if any, shall preside at
all meetings of the Board of Directors and of the stockholders at which he shall
be present. He shall have and may exercise such powers as are, from time to
time, assigned to him by the Board and as may be provided by law.
Section 7. In the absence of the Chairman of the Board, the Vice
Chairman of the Board, if any, shall preside at all meetings of the Board of
Directors and of the stockholders at which he shall be present. He shall have
and may exercise such powers as are, from time to time, assigned to him by the
Board and as may be provided by law.
THE PRESIDENT AND VICE-PRESIDENTS
Section 8. The president shall be the chief executive officer
of the corporation; and in the absence of the Chairman and Vice Chairman of the
Board he shall preside at all meetings of the stockholders and the Board of
Directors; he shall have general and active management of the business of the
corporation and shall see that all orders and resolutions of the Board of
Directors are carried into effect.
Section 9. He shall execute bonds, mortgages and other contracts
requiring a seal, under the seal of the corporation, except where required or
permitted by law to be otherwise signed and executed and except where the
signing and execution thereof shall be expressly delegated by the Board of
Directors to some other officer or agent of the corporation.
Section 10. In the absence of the president or in the event of
his inability or refusal to act, the vice-president, if any, (or in the event
there be more than one vice-president, the vice-presidents in the order
designated by the directors, or in the absence of any designation,
<PAGE> 11
then in the order of their election) shall perform the duties of the president,
and when so acting, shall have all the powers of and be subject to all the
restrictions upon the president. The vice-presidents shall perform such other
duties and have such other powers as the Board of Directors may from time to
time prescribe.
THE SECRETARY AND ASSISTANT SECRETARY
Section 11. The secretary shall attend all meetings of the Board
of Directors and all meetings of the stockholders and record all the proceedings
of the meetings of the corporation and of the Board of Directors in a book to be
kept for that purpose and shall perform like duties for the standing committees
when required. He shall give, or cause to be given, notice of all meetings of
the stockholders and special meetings of the Board of Directors, and shall
perform such other duties as may be prescribed by the Board of Directors or
president, under whose supervision he shall be. He shall have custody of the
corporate seal of the corporation and he, or an assistant secretary, shall have
authority to affix the same to any instrument requiring it and when so affixed,
it may be attested by his signature or by the signature of such assistant
secretary. The Board of Directors may give general authority to any other
officer to affix the seal of the corporation and to attest the affixing by his
signature.
Section 12. The assistant secretary, or if there be more than
one, the assistant secretaries in the order determined by the Board of Directors
(or if there be no such determination, then in the order of their election)
shall, in the absence of the secretary or in the event of his inability or
refusal to act, perform the duties and exercise the powers of the secretary and
shall perform such other duties and have such other powers as the board of
directors may from time to time prescribe.
THE TREASURER AND ASSISTANT TREASURERS
<PAGE> 12
Section 13. The treasurer shall have the custody of the corporate
funds and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the corporation in
such depositories as may be designated by the Board of Directors.
Section 14. He shall disburse the funds of the corporation as may
be ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the president and the Board of Directors, at
its regular meetings, or when the Board of Directors so requires, an account of
all his transactions as treasurer and of the financial condition of the
corporation.
Section 15. If required by the Board of Directors, he shall give
the corporation a bond (which shall be renewed every six years) in such sum and
with such surety or sureties as shall be satisfactory to the Board of Directors
for the faithful performance of the duties of his office and for the restoration
to the corporation, in case of his death, resignation, retirement or removal
from office, of all books, papers, vouchers, money and other property of
whatever kind in his possession or under his control belonging to the
corporation.
Section 16. The assistant treasurer, or if there shall be more
than one, the assistant treasurers in the order determined by the Board of
Directors (or if there be no such determination, then in the order of their
election) shall, in the absence of the treasurer or in the event of his
inability or refusal to act, perform the duties and exercise the powers of the
treasurer and shall perform such other duties and have such other powers as the
Board of Directors may from time to time prescribe.
<PAGE> 13
ARTICLE VI
CERTIFICATE OF STOCK
Section 1. Every holder of stock in the corporation shall be
entitled to have a certificate, signed by, or in the name of the corporation by,
the chairman or vice-chairman of the Board of Directors, or the president or a
vice-president and the treasurer or an assistant treasurer, or the secretary or
an assistant secretary of the corporation, certifying the number of shares owned
by him in the corporation.
Certificates may be issued for partly paid shares and in such
case upon the face or back of the certificates issued to represent any such
partly paid shares, the total amount of the consideration to be paid therefor,
and the amount paid thereon shall be specified.
If the corporation shall be authorized to issue more than one
class of stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualification, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate which the corporation shall
issue to represent such class or series of stock, provided that, except as
otherwise provided in section 202 of the General Corporation Law of Delaware, in
lieu of the foregoing requirements, there may be set forth on the face or back
of the certificate which the corporation shall issue to represent such class or
series of stock, a statement that the corporation will furnish without charge to
each stockholder who so requests the powers, designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights.
Section 2. Any of or all the signatures on the certificate may
be facsimile. In case
<PAGE> 14
any officer, transfer agent or registrar who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to be such
officer, transfer agent or registrar before such certificate is issued, it may
be issued by the corporation with the same effect as if he were such officer,
transfer agent or registrar at the date of issue.
LOST CERTIFICATES
Section 3. The Board of Directors may direct a new certificate or
certificates to be issued in place of any certificate or certificates
theretofore issued by the corporation alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, stolen or destroyed. When authorizing such
issue of a new certificate or certificates, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate or certificates, or his
legal representative, to advertise the same in such manner as it shall require
and/or to give the corporation a bond in such sum as it may direct as indemnity
against any claim that may be made against the corporation with respect to the
certificate alleged to have been lost, stolen or destroyed.
TRANSFER OF STOCK
Section 4. Upon surrender to the corporation or the transfer
agent of the corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignation or authority to
transfer, it shall be the duty of the corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books.
FIXING RECORD DATE
Section 5. In order that the corporation may determine the
stockholders entitled to
<PAGE> 15
notice of or to vote at any meeting of stockholder or any adjournment thereof,
or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the Board of Directors may fix, in advance, a record date, which shall
not be more than sixty nor less than ten days before the date of such meeting,
nor more than sixty days prior to any other action. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
REGISTERED STOCKHOLDERS
Section 6. The corporation shall be entitled to recognize the
exclusive right of a person registered on its books as the owner of shares to
receive dividends, and to vote as such owner, and to hold liable for calls and
assessments a person registered on its books as the owner of shares and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE VII
GENERAL PROVISIONS
DIVIDENDS
Section 1. Dividends upon the capital stock of the corporation,
subject to the provisions of the certificate of incorporation, if any, may be
declared by the Board of Directors at any regular or special meeting, pursuant
to law. Dividends may be paid in cash, in property, or in shares of the capital
stock, subject to the provisions of the certificate of incorporation.
<PAGE> 16
Section 2. Before payment of any dividend, there may be set aside
out of any funds of the corporation available for dividends such sum or sums as
the directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or for such other
purposes as the directors shall think conducive to the interest of the
corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
CHECKS
Section 3. All checks or demands for money and notes of the
corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
FISCAL YEAR
Section 4. The fiscal year of the corporation shall be fixed by
resolution of the Board of Directors.
SEAL
Section 5. The Board of Directors may adopt a corporate seal
having inscribed thereon the name of the corporation, the year of its
organization and the words "Corporate Seal, Delaware". The seal may be used by
causing it or a facsimile thereof to be impressed or affixed or reproduced or
otherwise.
INDEMNIFICATION
Section 6. The corporation shall, to the fullest extent
authorized under the laws of the State of Delaware, as those laws may be amended
and supplemented from time to time, indemnify any officer or director made, or
threatened to be made, a party to an action or proceeding, whether criminal,
civil, administrative or investigative, by reason of being an officer
<PAGE> 17
or director of the corporation or a predecessor corporation or, at the
corporation's request, an officer or director of another corporation, provided,
however, that the corporation shall indemnify any such agent in connection with
a proceeding initiated by such agent only if such proceeding was authorized by
the Board of Directors of the corporation. The indemnification provided for in
this Section 6 shall: (i) not be deemed exclusive of any other rights to which
those indemnified may be entitled under any bylaw, agreement or vote of
stockholders or disinterested directors or otherwise, both as to action in their
official capacities and as to action in another capacity while holding such
office, (ii) continue as to a person who has ceased to be an officer or
director, and (iii) inure to the benefit of the heirs, executors and
administrators of such a person. The corporation's obligation to provide
indemnification under this Section 6 shall be offset to the extent of any other
source of indemnification or any otherwise applicable insurance coverage under a
policy maintained by the corporation or any other person.
Expenses incurred by an officer or director of the corporation in
defending a civil or criminal action, suit or proceeding by reason of the fact
that he is or was an officer or director of the corporation (or was serving at
the corporation's request as an officer or director of another corporation)
shall be paid by the corporation in advance of the final disposition of such
action, suit or proceeding upon receipt of an undertaking by or on behalf of
such officer or director to repay such amount if it shall ultimately be
determined that he is not entitled to be indemnified by the corporation as
authorized by relevant sections of the General Corporation Law of Delaware.
Notwithstanding the foregoing, the corporation shall not be required to advance
such expenses to an agent who is a party to an action, suit or proceeding
brought by the corporation and approved by a majority of the Board of Directors
of the corporation which alleges willful misappropriation of corporate assets by
such agent, disclosure of confidential information in violation of such
<PAGE> 18
agent's fiduciary or contractual obligations to the corporation or any other
willful and deliberate breach in bad faith of such agent's duty to the
corporation or its stockholders.
The foregoing provisions of this Section 6 shall be deemed to be
a contract between the corporation and each officer and director who serves in
such capacity at any time while this bylaw is in effect, and any repeal or
modification thereof shall not affect any rights or obligations then existing
with respect to any state of facts then or theretofore existing or any action,
suit or proceeding theretofore or thereafter brought based in whole or in part
upon any such state of facts.
The Board of Directors in its discretion shall have power on
behalf of the corporation to indemnify any person, other than a director, made a
party to any action, suit or proceeding by reason of the fact that he, his
testator or intestate, is or was an employee of the corporation.
To assure indemnification under this Section 6 of all directors,
officers and employees who are determined by the corporation or otherwise to be
or to have been "fiduciaries" of any employee benefit plan of the corporation
which may exist from time to time, Section 145 of the General Corporation Law of
Delaware shall, for the purposes of this Section 6, be interpreted as follows:
an "other enterprise" shall be deemed to include such an employee benefit plan,
including without limitation, any plan of the corporation which is governed by
the Act of Congress entitled "Employee Retirement Income Security Act of 1974,"
as amended from time to time; the corporation shall be deemed to have requested
a person to serve an employee benefit plan where the performance by such person
of his duties to the corporation also imposes duties on, or otherwise involves
services by, such person to the plan or participants or beneficiaries of the
plan; excise taxes assessed on a person with respect to an employee benefit
<PAGE> 19
plan pursuant to such Act of Congress shall be deemed "fines."
ARTICLE VIII
AMENDMENTS
Section 1. These bylaws may be altered, amended or repealed or
new bylaws may be adopted by the stockholders or by the Board of Directors, when
such power is conferred upon the Board of Directors by the certificate of
incorporation at any regular meeting of the stockholders or of the Board of
Directors or at any special meeting of the stockholders or of the Board of
Directors if notice of such alteration, amendment, repeal or adoption of new
bylaws be contained in the notice of such special meeting. If the power to
adopt, amend or repeal bylaws is conferred upon the Board of Directors by the
certificate or incorporation it shall not divest or limit the power of the
stockholders to adopt, amend or repeal bylaws.
<PAGE> 20
CERTIFICATE OF SECRETARY OF
REDBACK NETWORKS INC.
The undersigned, Geoff Darby, hereby certifies that he is the
duly elected and acting Secretary of Redback Networks Inc., a Delaware
corporation (the "Corporation"), and that the Bylaws attached hereto constitute
the Bylaws of said Corporation as duly adopted at the Meeting of the Board of
Directors on March 3, 1999.
IN WITNESS WHEREOF, the undersigned has hereunto subscribed his
name this ____ day of _________ 1999.
---------------------------------------
Geoff Darby, Secretary
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated March 5, 1999 relating to
the financial statements of Redback Networks Inc., which appears in such
Prospectus. We also consent to the reference to us under the heading "Experts"
in such Prospectus.
/s/ PricewaterhouseCoopers LLP
San Jose, California
April 21, 1999
