Redback Closes a Chapter

One-time broadband equipment leader files for bankruptcy, proposes leaving shareholders with only 5%

November 3, 2003

4 Min Read
Redback Closes a Chapter

Edge equipment vendor Redback Networks Inc. (Nasdaq: RBAK) is hoping to wipe out $467 million in debt by filing for Chapter 11 bankruptcy protection (see Redback Goes Chapter 11). If the court backs its reorganization plan, Redback says it can cut its operating expenses by one third.

As happens in most banktruptcies, Redback shareholders will lose most of their equity in the company when the plan is approved. If all of Redback's debt is exchanged for equity, as laid out in the company's restructuring plan, the debt holders will get about 95 percent of Redback's issued and outstanding common stock. The remaining 5 percent of the company's stock will stay with existing stockholders, who will get the right to increase their ownership to up to 15 percent if the company's value rises.

Also under the plan, Redback will execute a 73-for-1 reverse stock split, which will cut its share count to about 2.5 million shares and keep the value of each share higher, so the company's stock doesn't get delisted. After that, Redback plans to issue 47.5 million additional shares to creditors. The bankruptcy filing closes the chapter on yet another spectacular post-bubble implosion. Redback grabbed headlines for months following its IPO in 1999, which raised $57.5 million. While its business grew rapidly, its propensity to hype that growth sent its shares into the stratosphere, rising another 1,000 percent or so before the bubble popped.

Now, back to reality. To date, Redback has never been profitable. From its inception in 1996 until June 30, 2003, Redback brought in revenues totaling about $756.4 million and net losses, on paper, of about $5.4 billion, according to its bankruptcy documents. The company, as of June 30, had about $67.4 million in cash and investments, of which about $29.4 million was collateral for secured loans or letters of credit.In retrospect, Redback's downfall my have hinged on its attempted transition into the optical networking market and the fact that its high-profile acquisition in 2000 of Siara Systems for $4.3 billion never really panned out (see Redback Unveils Siara Product).

Though Redback has picked up a bit of ground by showing new revenue growth in a recent quarter, it still faces some distractions as some of its customers and employees deal with gremlins from the past (see SEC Digging Deeper at Redback). But one of its largest distractions -- its financial stability -- is close to being removed for good.

Redback CEO Kevin DeNuccio says the company's operations won't be affected by the company's bankruptcy filing; its customers have known about the process for several months (see Redback Trims Losses, CFO and Redback Investors Flee Restructuring). But, DeNuccio says Redback is raising some private equity -- up to $90 million -- to help fund operations after it exits bankruptcy. That new money will be added to the nearly $30 million in debt it sold recently (see Redback Gets $30M Credit). When Redback cleans up its balance sheet, DeNuccio says it will be rid of $45 million in annual operating expenses -- $24 million in annual interest expenses and $20 million in excess real estate (see Real Estate Nightmare). "That's almost as much as our entire employee payroll, which is [annually] over $50 million," he says.DeNuccio doesn't forsee any major layoffs during the bankruptcy but says that there's "always some tweaking to do." (See Headcount: Cabin Pressure.)Last year, it looked as though investor Nokia Corp. (NYSE: NOK) would be a larger part of Redback's future, but the company's share of Redback has since fallen below 5 percent and it has given up its seat on Redback's board (see Nokia Invests $36M in Redback). DeNuccio describes Nokia as a "significant strategic partner" and points out that the company accounted for more than 10 percent of Redback's revenues last quarter. However, DeNuccio says Redback is in talks with several companies that can either server as resellers or partners. It recently announced a relationship with ZTE Corp. in China (see Redback Teams With ZTE in China), for instance. And DeNuccio says Redback has "a growing revenue stream" with reseller Alcatel SA (NYSE: ALA; Paris: CGEP:PA). "Our role as a technology supplier to those major channels is much more attractive, so those discussions have been going very well."

Investors gave Redback a customary bankruptcy beating in trading Monday. Redback shares dropped $0.08 (18.18%) to $0.36 on news of the Chapter 11 filing.

— Phil Harvey, Senior Editor, Light Reading

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