Redback Networks Inc.'s (Nasdaq: RBAK) restructuring plan aims to give its balance sheet a nip and a tuck, wiping out debts and dodging bankruptcy. The only problem is that remaining common shareholders could see most of their equity value nipped away as well.

The company announced this week it has entered into a lockup agreement with its debt holders that provides for a $467 million debt-for-equity swap, whereby Redback's debt holders will get an equity stake in the company in exchange for cancellation of the debt (see Redback Cuts Debt, Wins Reprieve).

If all of Redback's debt is exchanged, the debt holders will get about 95 percent of Redback's issued and outstanding common stock, the company says. The remaining 5 percent of the company's stock will stay with existing stockholders, who will get the right to increase their ownership through the issuance of two sets of seven-year warrants.

To keep its stock price from falling below listing standards while all this is happening, Redback will seek to execute a reverse split, where it reduces the number of outstanding shares and increases the value of each share .

Existing Redback shareholders will have their stake in the company diluted significantly, but it's hard to say how much, because Redback hasn't said how many shares of its stock will be outstanding after the deal goes through.

So far, Wall Street has been shooting first and asking questions later. The stock has lost half its value in the last two days. Today the stock tumbled six cents (12%) to $0.44.

Redback still has to get regulatory approval, as well as approval from all its existing shareholders by the end of September. If the plan hits a snag between now and then, the company will have to file for Chapter 11 bankruptcy protection, according to its SEC filings.

As the July 4 holiday weekend began, Redback sheepishly announced that its revenues for its second quarter would only be $22 million, far shy of the $30.7 million analysts were expecting, according to Thomson First Call (see Redback Sneaks Out Gloomy Forecast). The company lost 16 cents a share on revenues of about $40 million during the second quarter of 2002.

During a conference call Monday, Redback managers said the company should have about $69 million in cash at the end of the second quarter. They also acknowledged the company's revenue shortfall, blaming SARS and slow-moving customers in the U.S. for delayed orders [ed. note: no mention of El Niño?].

Redback will report its second-quarter results in detail on July 16.

— Phil Harvey, Senior Editor, Light Reading