<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NUMBER 000-25853
REDBACK NETWORKS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0438443
(State of incorporation) (IRS Employer Identification No.)
1389 MOFFETT PARK DRIVE, SUNNYVALE, CA 94089 (Address
of principal executive offices, including ZIP code)
(408) 548-3500
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) Yes X No ___, and (2) has been
subject to such filing requirements for the past 90 days. Yes___ No X .
ALTHOUGH THE REGISTRANT HAS FILED ALL REPORTS REQUIRED TO BE FILED BY
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PERIOD
THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS, THE REGISTRANT DID NOT
BECOME SUBJECT TO SUCH FILING REQUIREMENTS UNTIL THE REGISTRATION OF CERTAIN
SHARES OF ITS COMMON STOCK PURSUANT TO A REGISTRATION STATEMENT ON FORM S-1 (THE
"REGISTRATION STATEMENT") WAS DECLARED EFFECTIVE BY THE SECURITIES AND EXCHANGE
COMMISSION ON MAY 17, 1999.
The number of shares outstanding of the Registrant's Common Stock as of
August 3, 1999 was 21,578,068.
================================================================================
<PAGE> 2
REDBACK NETWORKS INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements and Supplementary Data
Balance sheets as of June 30, 1999 and December 31, 1998 1
Statements of operations for the three and six months
ended June 30, 1999 and June 30, 1998 2
Statements of cash flows for the six months ended
June 30, 1999 and June 30, 1998 3
Notes to financial statements 4
Item 2. Management's discussion and analysis of financial
condition and results of operations 7
Item 3. Qualitative and quantitative disclosures about market risk 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURE 25
EXHIBIT INDEX 26
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REDBACK NETWORKS INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................. $ 57,404 $ 8,189
Short-term investments .................................... 5,640 --
Accounts receivable, less allowances of $528 and $340 ..... 9,062 2,342
Inventory ................................................. 2,706 821
Other current assets ...................................... 631 262
-------- --------
Total current assets ................................. 75,443 11,614
Property and equipment, net .................................... 4,380 2,822
Notes receivable from related party ............................ 114 111
Other assets ................................................... 315 135
-------- --------
$ 80,252 $ 14,682
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings, current ....................................... $ 247 $ 1,747
Capital lease obligations, current ........................ 754 560
Accounts payable .......................................... 6,432 2,060
Accrued liabilities ....................................... 4,673 2,005
Deferred revenue .......................................... 3,781 781
-------- --------
Total current liabilities ............................ 15,887 7,153
Borrowings, less current portion ............................... 21 144
Capital lease obligations, less current portion ................ 1,399 1,131
-------- --------
17,307 8,428
-------- --------
Stockholders' equity:
Convertible Preferred Stock: Series A, B, C and D; $0.0001
par value; 10,000 and 13,500 shares authorized; none and
10,457 issued and outstanding at June 30, 1999 and
December 31, 1998........................................ -- 18,884
Common Stock, par value $0.0001 per share; 80,000 shares
authorized; 21,509 and 7,825 shares issued and
outstanding at June 30, 1999 and December 31, 1998 ...... 90,551 6,741
Deferred stock compensation ............................... (5,488) (4,731)
Notes receivable from stockholder ......................... (151) (211)
Accumulated deficit ....................................... (21,967) (14,429)
-------- --------
Total stockholders' equity ........................... 62,945 6,254
-------- --------
$ 80,252 $ 14,682
======== ========
</TABLE>
See notes to financial statements.
1
<PAGE> 4
REDBACK NETWORKS INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues ..................................... $ 11,087 $ 1,294 $ 17,604 $ 1,772
Cost of revenues ................................. 3,291 676 5,262 942
-------- -------- -------- --------
Gross profit ..................................... 7,796 618 12,342 830
-------- -------- -------- --------
Operating expenses:
Research and development .................... 4,133 1,062 7,238 1,925
Selling, general and administrative ......... 6,519 1,656 10,657 2,989
Amortization of deferred stock compensation . 1,139 53 2,217 76
-------- -------- -------- --------
Total operating expenses ................. 11,791 2,771 20,112 4,990
-------- -------- -------- --------
Loss from operations ............................. (3,995) (2,153) (7,770) (4,160)
Interest and other income ........................ 365 33 368 103
Interest and other expense ...................... (107) (53) (136) (97)
-------- -------- -------- --------
Net loss ......................................... $ (3,737) $ (2,173) $ (7,538) $ (4,154)
======== ======== ======== ========
Basic and diluted net loss per share ............. $ (0.33) $ (0.86) $ (0.98) $ (1.89)
======== ======== ======== ========
Shares used in computing net loss per share(C) ... 11,263 2,519 7,723 2,197
======== ======== ======== ========
Pro forma information:
Pro forma net loss(A) ........................ $ (2,598) $ (2,120) $ (5,321) $ (4,078)
======== ======== ======== ========
Pro forma net loss per share(A)(B) ........... $ (0.16) $ (0.18) $ (0.34) $ (0.35)
======== ======== ======== ========
Shares used in computing pro forma net
loss per share(B)(C) ................... 16,697 11,899 15,693 11,577
======== ======== ======== ========
</TABLE>
- ----------------
(A) Pro forma net loss excludes the effect of the amortization of deferred
stock compensation.
(B) Pro forma net loss per share assumes the conversion of the Company's
preferred stock which converted to common stock upon the closing of the
Company's initial public offering as if the conversion occurred as of
the beginning of the period or the date of issuance, if later.
(C) Share amounts do not reflect the effect of the 2 for 1 stock split
announced on July 22, 1999.
See notes to financial statements.
2
<PAGE> 5
REDBACK NETWORKS INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................. $ (7,538) $ (4,154)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ......................... 915 356
Amortization of deferred stock compensation ........... 2,217 53
Increase in allowance for doubtful accounts ........... 188 167
Other noncash charges ................................. 330 61
Changes in assets and liabilities:
Accounts receivable .............................. (6,908) (2,156)
Inventory ........................................ (1,885) (679)
Other current assets ............................. (369) (23)
Other assets ..................................... (183) (13)
Accounts payable ................................. 4,372 269
Accrued liabilities .............................. 2,668 579
Deferred revenue ................................. 3,000 565
-------- --------
Net cash used in operating activities ............ (3,193) (4,975)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ....................... (1,705) (419)
Purchase of short-term investments ....................... (5,640) --
Sale of short-term investments .......................... -- 3,139
-------- --------
Net cash provided by (used in) investing
activities ..................................... (7,345) 2,720
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible
preferred stock, net ................................... 491 8
Proceeds from issuance of common stock, net .............. 61,191 340
Principal payments on capital lease obligations .......... (306) (76)
Proceeds from bank borrowings ............................ 2,500 --
Repayments of bank borrowings ............................ (4,123) (123)
-------- --------
Net cash provided by financing activities ........ 59,753 149
Net increase (decrease) in cash and cash equivalents ....... 49,215 (2,106)
Cash and cash equivalents at beginning of period ........... 8,189 3,084
-------- --------
Cash and cash equivalents at end of period ................. $ 57,404 $ 978
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest ................................... $ 179 $ 52
======== ========
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITY:
Property and equipment acquired under capital leases ..... $ 768 $ 920
======== ========
Coversion of preferred to common stock upon completion of
initial public offering ................................ $(19,375) --
========
</TABLE>
See notes to financial statements.
3
<PAGE> 6
REDBACK NETWORKS INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
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 enables 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited financial statements have been prepared by the
Company and reflects all adjustments, consisting only of normal recurring
adjustments, which in the opinion of management are necessary to present fairly
the financial position, results of operations and cash flows for the interim
periods. The balance sheet at December 31, 1998 has been derived from audited
financial statements at that date. The financial statements have been prepared
in accordance with the regulations of the Securities and Exchange Commission,
but omit certain information and footnote disclosure necessary to present the
statements in accordance with generally accepted accounting principles. For
further information, refer to the Financial Statements and Notes thereto
included in the Company's Registration Statement on Form S-1, as amended, as
filed with the Securities and Exchange Commission on May 17, 1999 (the
"Registration Statement"). Results for the interim periods are not necessarily
indicative of results for the entire fiscal year.
3. NET LOSS PER SHARE AND PRO FORMA NET LOSS PER SHARE
Basic and diluted net loss per share have been computed using the
weighted-average number of shares of common stock outstanding during the period,
less shares subject to repurchase. Pro forma basic and diluted net loss per
share has been computed using the weighted-average number of shares of common
stock outstanding during the period, less shares subject to repurchase, and also
gives effect to the conversion of the Company's preferred stock which converted
to common stock upon the closing of the Company's initial public offering as if
the conversion occurred as of the beginning of the period or the date of
issuance, if later.
4
<PAGE> 7
The following table presents the calculation of basic and diluted and pro
forma basic and diluted net loss per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
(in thousands, except (in thousands,
per share data) except per share data)
<S> <C> <C> <C> <C>
Net loss ............................................. $ (3,737) $ (2,173) $ (7,538) $ (4,154)
======== ======== ======== ========
Basic and diluted:
Weighted-average common shares outstanding ...... 14,491 7,908 11,099 7,562
Less weighted-average common shares subject
to repurchase ................................. (3,228) (5,389) (3,376) (5,365)
-------- -------- -------- --------
Weighted-average shares used in computing
basic and diluted net loss per common share 11,263 2,519 7,723 2,197
======== ======== ======== ========
Basic and diluted net loss per common share ..... $ (0.33) $ (0.86) $ (0.98) $ (1.89)
======== ======== ======== ========
Pro forma net loss ................................... $(2,598) $(2,120) $(5,321) $(4,078)
======== ======== ======== ========
Pro forma basic and diluted:
Shares used above ............................... 11,263 2,519 7,723 2,197
Pro forma adjustment to reflect
weighted-average effect of the assumed
conversion of convertible preferred stock ..... 5,434 9,380 7,970 9,380
-------- -------- -------- --------
Shares used in computing pro forma basic and
diluted net loss per share .................... 16,697 11,899 15,693 11,577
======== ======== ======== ========
Pro forma basic and diluted net loss per share $ (0.16) $ (0.18) $ (0.34) $ (0.35)
======== ======== ======== ========
</TABLE>
Options to purchase 650,625 and 3,686,286 shares of Common Stock at an
average exercise price of $0.29 and $6.79 per share and warrants to purchase
123,375 and 158,971 shares of Preferred Stock and Common Stock at an average
exercise price of $1.19 and $5.21 per share, have not been included in the
computation of diluted net loss per share for the three or six month periods
ended June 30, 1998 and 1999, respectively, as their effect would have been
anti-dilutive.
Pro forma net loss excludes the effect of the amortization of deferred
stock compensation from the net loss and was $53,000 and $1.1 million in the
three month periods ended June 30, 1998 and 1999, respectively and $76,000 and
$2.2 million for the six month periods ended June 30, 1998 and 1999,
respectively.
Pro forma net loss per share for the three and six month periods ended June
30, 1998 and 1999 was 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.
5
<PAGE> 8
4. BALANCE SHEET DETAIL (IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------ ------
<S> <C> <C>
Inventory
Raw materials $2,465 $ 563
Finished goods 241 258
------ ------
$2,706 $ 821
====== ======
</TABLE>
5. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income". SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components in the financial statements. To date,
the Company has not had any transactions that are required to be reported in
comprehensive income.
6. SUBSEQUENT EVENTS
2- for-1 Stock Split
In July 1999, the Company's Board of Directors approved a two-for-one split
of the Company's common stock that was applicable to shareholders of record on
August 5, 1999 and effective on August 20, 1999. All references to share and
per-share data for all periods presented have not been adjusted to reflect this
two-for one stock split.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion in this report on Form 10-Q contains forward-looking
statements that involve risks and uncertainties. The statements contained in
this Report that are not purely historical are forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, including
statements regarding our expectations, beliefs, intentions or strategies
regarding the future. All forward-looking statements included in this document
are based on information available to us on the date hereof, and we assume no
obligation to update any such forward-looking statements. Our actual results
could differ materially from those described in our forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed under the heading "Risk Factors" and the risks and
factors discussed in our Registration Statement on Form S-1 declared effective
on May 17, 1999 by the Securities and Exchange Commission (File No. 333-74479).
Revenues.
Net Revenues. Net revenues increased to $11.1 million in the three months
ended June 30, 1999 from $1.3 million in the same quarter in the prior year, a
year-over-year increase of 757%. Net revenues for the first half of 1999
increased to $17.6 million from $1.8 million for the first half of 1998, an
increase of 893%. The increase in net revenues in each of the comparative
periods was a result of increasing unit sales as well as higher average selling
prices due to customer-driven changes in product configurations.
Cost of Revenues; Gross Margin. Gross margin, expressed as a percentage of
net revenues, increased in the three months ended June 30, 1999 as compared to
the same period in the prior year from 48% to 70% and increased from 47% to 70%
for the six months ended June 30, 1998 compared to the six months ended June 30,
1999, respectively. These increases are primarily due to reduced costs of key
components, a decrease in the percentage of related overhead costs to revenue
resulting from shipments of our products in material quantities and changes in
product configuration. Continuing changes in product configuration will cause
our gross margins to vary in future periods.
Operating Expenses.
Research and Development. Research and development expenditures increased in
absolute dollars in the quarter ended June 30, 1999 to $4.1 million from $1.1
million in the year-ago quarter and to $7.2 million in the first half of 1999
from $1.9 million in the first half of 1998. These increases are primarily
attributable to increased
6
<PAGE> 9
personnel costs associated with research and development efforts for both 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 continue to increase in absolute dollars in future
periods.
Selling, General and Administrative. Selling, general and administrative
expenditures increased in absolute dollars in the quarter ended June 30, 1999 to
$6.5 million from $1.7 million in the year-ago quarter and to $10.7 million in
the first half of 1999 from $2.9 million in the first half of 1998. 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 in future periods as a result of increases in sales force
personnel, payments of commissions on higher revenues, additional marketing
activities and costs associated with supporting a growing organization.
Amortization of Deferred Stock Compensation. Amortization of deferred stock
compensation increased from $53,000 in the second quarter of 1998 to $1.1
million in second quarter of 1999 and increased from $76,000 in the first six
months of 1998 to $2.2 million in the first six months of 1999. These increases
are 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. Deferred stock compensation expense is amortized
over the vesting period of the options, generally four years. As a result, the
amortization of stock compensation will impact our reported results of
operations through early 2003.
Interest Income. Interest income increased in both the three month and six
month periods ending June 30, 1999 as compared to the same periods in 1998 due
primarily to the interest earned on the net proceeds received from our initial
public offering.
Interest and Other Expense. Interest and other expense has increased in both
the three month and six month periods ending June 30, 1999 as compared to the
same periods in 1998 due to additional interest due on increased borrowings and
increased capital lease obligations.
We have not recorded a provision for income taxes because we experienced net
losses from inception through 1998. As of June 30, 1999, we had net operating
loss carryforwards of approximately $15.5 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.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations through the private and
public sale of securities and, to a lesser extent, bank borrowings and equipment
lease financing. During the six months ended June 30, 1999, we used $3.2 million
for operating activities, a decrease of 36% from the same period in the prior
year when we used $5.0 million in operating activities. This decrease resulted
from the significant increases in the Company's liabilities, primarily deferred
revenue, accounts payable and accrued liabilities, which was partially off-set
by an increase in net losses, and an increase in inventory and accounts
receivable balances. 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 June 30, 1999 consisted of $57.4
million in cash and cash equivalents as well as $5.6 million in short-term
investments. As of June 30, 1999, we had $268,000 in outstanding bank
indebtedness, all of which was due under a term loan with one of the Company's
banking institutions
Purchases of property and equipment, including equipment purchased under
capital leases, increased from $1.3 million in the first six months of 1998 to
$2.5 million in the same six month period in 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.
7
<PAGE> 10
We believe that our existing cash balances and anticipated cash flows from
operations 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.
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 information technology and
non-information technology 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.
RISK FACTORS
In addition to the other information in this Report, the following risk
factors should be carefully considered in evaluating our business and us:
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 June 30, 1999, we have
experienced significant growth--
8
<PAGE> 11
from 39 employees to 187 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--We 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 $7.5 million for the six months
ended June 30, 1999. As of June 30, 1999, we had an accumulated deficit of
approximately $22.0 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 both private and public 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 expenses. 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:
o Fluctuations in demand for broadband access services;
o The timing and size of sales of our products and services;
o Announcements of new products and product enhancements by competitors;
o The entry of new competitors into our market, including by acquisition;
o Unexpected delays in introducing new or enhanced products, including
manufacturing delays;
o Our ability to control expenses;
o Our ability to ship products on a timely basis and at a reasonable cost;
and
o The mix of our products sold and the mix of distribution channels
through which our products are sold.
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,
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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.
These customers are often engaged in multiple simultaneous purchasing decisions,
some of which may pertain to more immediate needs and absorb the immediate
attention of the customer. If sales forecasted from a specific customer for a
particular quarter are not realized in that quarter or at all, 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 six quarters in the period ended June 30, 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. In the second quarter of 1999, Southwestern
Bell Information Systems and GTE and its affiliated entities accounted for 15%
of our total revenue, each. We anticipate that a small number of customers with
large orders will continue to account for a majority of our quarterly revenue.
However, we do not have any contracts or other agreements that guarantee
continued sales to these or any other customers. If our customers alter their
purchasing habits, or reevaluate their need for our products, or 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
The SMS 1000 and SMS 500 are the only products that we currently sell. We
intend to introduce new products and enhancements to existing products in the
future. Our inability to timely and successfully introduce new products and
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
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 some additional
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. To date, we have sold a limited number of our
SMS 500. 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,
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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 digital subscriber line 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 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 digital subscriber line,
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 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 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 acquired 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 our competitors, are committed to the product
offerings of these competitors. As a
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result, these potential customers may not consider purchasing our products. We
expect to face competition in the following areas:
o Product pricing;
o Breadth of product lines;
o Sales and distribution capability;
o Product features and enhancements, including product performance,
reliability, size, compatibility and scalability;
o Product ease of deployment;
o Conformance to industry standards; and
o Technical support and service.
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. We have relationships
with two other third-party manufacturers, one of which currently builds our
prototypes. Although both of these other third-party manufacturers are capable
of building our products, 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 or any other manufacturer 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 another of our third-party manufacturers begins production 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 500 and our SMS 1000 products 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 materials
and components, which could materially adversely affect our business, results of
operations and financial condition.
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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 182 in June 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 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:
o Retain existing personnel;
o Hire, train, manage and retain additional qualified personnel; and
o Effectively manage multiple relationships with our customers,
suppliers and other third parties.
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:
o Expenses associated with customizing products for foreign countries;
o Protectionist laws and business practices that favor local
competition;
o Dependence on local vendors;
o Multiple, conflicting and changing governmental laws and
regulations;
o Longer sales cycles;
o Longer accounts receivable cycles;
o Increased difficulties in collecting accounts receivable;
o Difficulties in managing operations across disparate geographic
areas;
o Difficulties associated with enforcing agreements through foreign
legal systems;
o Reduced or limited protection of our intellectual property rights in
some countries;
o Foreign currency exchange rate fluctuations; and
o 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 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
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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:
o Potential warranty or other claims by our customers;
o Errors in systems we use to run our business;
o Errors in systems used by our suppliers;
o Errors in systems used by our customers; and
o 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 and
non-information technology systems. We have conducted an initial audit of our
material internal information technology systems, including both our own
software products and third-party software and hardware technology. We have not
yet initiated an assessment of our non-information technology 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
information technology and non-information technology 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 information technology and
non-information technology 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 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 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
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material.
If our internal systems, our 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.
Although we attempt to protect our intellectual property rights, we may be
unable 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:
o Cease selling, incorporating or using products or services that
incorporate the challenged intellectual property;
o 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
o 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, 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 June 30, 1999, we had approximately $63.0 million in cash, cash
equivalents and short-term investments. We believe that these amounts, combined
with the 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
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as anticipated or if our customers' broadband access services are not received
well by the marketplace. Critical issues concerning use of broadband access
services are unresolved and will likely affect use of broadband access services.
These issues include:
o Security;
o Reliability;
o Bandwidth;
o Congestion;
o Cost;
o Ease of access; and
o 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.
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 or future 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 broadband access
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
An active public market for our common stock may not be sustained. The
market for technology stocks has been extremely volatile. The following factors
could cause the market price of our common stock to fluctuate significantly:
o Our loss of a major customer;
o Our addition or the departure of key personnel;
o Variations in our quarterly operating results;
o Announcements by us or our competitors of significant contracts, new
products or product enhancements, acquisitions, distribution
partnerships, joint ventures or capital commitments;
o Changes in financial estimates by securities analysts;
o Our sales of common stock or other securities in the future;
o Changes in market valuations of broadband access technology
companies;
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o Changes in market valuations of networking and telecommunications
companies; and
o 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 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
Our executive officers, directors and principal stockholders and their
affiliates beneficially own approximately 48% of our outstanding common
stock. 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.
SUBSTANTIAL SALES OF OUR COMMON STOCK COULD ADVERSELY AFFECT OUR STOCK PRICE
Sales of a substantial number of shares of our common stock 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. As of June 30, 1999, we had
21,509,119 shares of common stock outstanding. 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 our initial
public offering 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.
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 may have
the effect of delaying or preventing a change of control or changes in
management of our company. These provisions include:
o The stipulation that a special meeting of stockholders may only be
called by stockholders owning at least 50% of our outstanding shares;
o The ability of our board of directors to issue preferred stock without
stockholder approval; and
o 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.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
As of June 30, 1999 the Company's investment portfolio includes $5.6 million
of short-term corporate bonds and commercial paper which are subject to no
interest rate risk when held to maturity but may increase or decrease in value
if interest rates change prior to maturity. The Company maintains sufficient
cash and cash equivalent
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<PAGE> 20
balances to typically hold its investments to maturity. An immediate 10% change
in interest rates would be immaterial to the Company's financial condition or
results of operations.
18
<PAGE> 21
PART II. OTHER INFORMATION
REDBACK NETWORKS INC.
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the quarter ended June 30, 1999, the Company submitted one
matter to its stockholders by written consent in lieu of a stockholders'
meeting: On May 10, 1999, the Company's stockholders approved an amendment to
the Company's 1997 Stock Plan, which increased the number of shares reserved for
issuance under the plan by 100,000. Holders of a majority of the outstanding
shares of the Company voted to approve the action.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by Redback Networks during the quarter
ended June 30, 1999.
19
<PAGE> 22
REDBACK NETWORKS INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REDBACK NETWORKS INC.
Date: August 10, 1999 By: /s/ Geoffrey C. Darby
Geoffrey C. Darby
Vice President, Finance, Chief
Financial Officer and
Secretary (Duly Authorized Officer
and Principal Financial and
Accounting Officer)
20
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
21
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 57,404
<SECURITIES> 5,640
<RECEIVABLES> 9,590
<ALLOWANCES> 528
<INVENTORY> 2,706
<CURRENT-ASSETS> 75,443
<PP&E> 6,500
<DEPRECIATION> 2,120
<TOTAL-ASSETS> 80,252
<CURRENT-LIABILITIES> 15,887
<BONDS> 0
0
0
<COMMON> 90,551
<OTHER-SE> (27,606)
<TOTAL-LIABILITY-AND-EQUITY> 80,252
<SALES> 17,604
<TOTAL-REVENUES> 17,604
<CGS> 5,262
<TOTAL-COSTS> 5,262
<OTHER-EXPENSES> 20,112
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 232
<INCOME-PRETAX> (7,538)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,538)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,538)
<EPS-BASIC> (0.98)
<EPS-DILUTED> (0.98)
</TABLE>
