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REDBACK NETWORKS INC (RBAK) Quarterly Report (SEC form 10-Q) Item 2. Management`s Discussion and Analysis of Financial Condition and Results of Operations All statements in this discussion that are not historical are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act, including statements regarding Redback`s "expectations", "beliefs", "hopes", "intentions", "strategies", "estimates", "projections" or the like. Such statements are based on management`s current expectations, and Redback cautions investors that there can be no assurance that actual results or business conditions will not differ materially from those projected or suggested in such forward-looking statements as a result of the risk factors we have identified as material risks discussed in this Form 10-Q and other documents we file with the Securities and Exchange Commission, including our most recent reports on Form 8-K and Form 10-K, and any amendments thereto. General Redback Networks Inc. is a leading provider of advanced networking systems that enable broadband service providers to rapidly deploy high-speed access to the Internet and corporate networks. Our product lines, which consist of the Subscriber Management System, SmartEdge(TM), and Service Management product families, combine networking hardware and software. Together, these product families are designed to enable our customers to create end-to-end regional and national networks that will support major broadband access technologies, as well as the new services that these high-speed connections support. Our Subscriber Management System, or SMS(TM), products connect and manage large numbers of subscribers across major high-speed access technologies. SMS products bridge the operational gap between the devices used to gather together high-speed Internet users (i.e., access concentrators) at one end of the network and the devices at the other end of the network used to connect to the Internet (i.e., routers). Our SmartEdge optical networking and multi-service products simplify the architecture of today`s regional voice and data networks, as well as improve their capacity and performance. The Service Management products allow service providers to publish, activate and manage Internet-related services and allow their customers to subscribe to these services on demand. The SMS and SmartEdge families of products are the only products we currently sell. We announced our Service Management products during the third quarter of 2000. We cannot be certain that the Service Management products, or any future products designed around this technology will be successfully developed or will achieve widespread market acceptance. We sell our products through a direct sales force, resellers and distribution partners. Through March 31, 2001, substantially all of our revenues have been derived from sales to providers of digital subscriber line services. Our products are used by many of the largest carriers and service providers worldwide. We anticipate that a small number of customers will continue to account for a majority of our revenues. Results of Operations Net Revenues Our net revenues increased 166% to $90.9 million for the three months ended March 31, 2001 from $34.2 million over the same three months in the prior year. The increase in net revenues in 2001 was primarily a result of increased unit sales of the existing SMS product family, which includes the SMS 10000, SMS 1800, and SMS 500, as well as sales for our SmartEdge 800. The increase in sales was attributable to increased worldwide marketplace acceptance of our products and resulting deployment of our products by our carrier and service provider customers, as well as higher average selling prices due to changes in product configurations. Cost of Revenues; Gross Margin Our cost of revenues increased 837% to $77.8 million for the three months ended March 31, 2001 from $8.3 million for the same period in the prior year as a result of increased sales of the SMS and SmartEdge product lines. In addition, as a result of certain product design changes initiated in the first quarter of 2001, we recorded charges for excess inventories and purchase commitments totaling approximately $24 million in the first quarter of 2001. Gross margin, expressed as a percentage of net revenue, decreased to 14% for the three months ended March 31, 2001 compared to 76% for the same period in the prior year. The excess inventory charge of $24 million impacted gross margin by 26%. The remaining decrease can be attributed to a shift in product mix from the higher margin, SMS products to the lower margin, SmartEdge product. In addition, margins were affected by lower selling prices on higher volume customer purchases and competition for market share in international markets. The Company`s gross margin will fluctuate in the future based on several factors, which include our ability to: 1) Control the mix of sales between our SMS and SmartEdge product families, 2) Introduce competitive product enhancements and upgrades, 3) Introduce new products, 4) Successfully integrate the Service Management products into our current SMS and SmartEdge product lines, 5) Control inventory costs, and 6) Maintain current price levels in an increasingly competitive environment. Operating Expenses Research and Development. Our research and development expenditures increased 145% to $29.7 million for the three months ended March 31, 2001 from $12.1 million for the same period in the prior year. This increased investment was primarily attributable to the development of the SmartEdge product family and an overall increase in development personnel focusing on new products and existing product enhancements in part due to the merger of Siara Systems in March 2000 and acquisition of Abatis Systems in September 2000. 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, our research and development expenses are expected to increase in future periods. Selling, General and Administrative. Our selling, general and administrative expenditures increased 133% to $30.8 million for the three months ended March 31, 2001 from $13.3 million for the same period in the prior year. This increase was mainly due to the hiring of additional sales and administrative personnel in part due to merger of Siara Systems in March 2000 and acquisition of Abatis Systems in September 2000. These personnel were required to support our increased revenue. Additional marketing expenses were also incurred to promote our new and existing products. We anticipate that selling, general, and administrative expenses will continue to increase in future periods as the Company`s revenues grow. Restructuring Charges. For the quarter ended March 31, 2001, we incurred a $23.3 million restructuring charge to account for three excess facilities at the end of the quarter. We intend to terminate or sublease all or part of these three facilities. The estimated costs to exit these facilities will be approximately $23.3 million. This estimate is based on current comparable rates for leases in the respective markets. Should facilities operating lease rental rates continue to decrease in these markets or should it take longer than expected to find a suitable tenant to sublease these facilities, the actual loss could exceed this estimate. For the quarter ended March 31, 2001, no material charges were made against the reserve. Future cash outlays are anticipated to continue through June 2012 unless the company negotiates to exit the leases at an earlier date. In April 2001 we executed a plan to restructure our operations by effecting a reduction in the workforce by approximately 150 people, or 12% of our employee base. All functional areas of the Company were affected by the reduction. The affected employees are entitled to severance and other benefits pursuant to our benefits program. The Company expects to record a charge of approximately $4.0 million for these termination benefits in the second quarter of 2001. Amortization of Intangible Assets. Amortization of intangible assets increased 347% to $315.4 million for the three months ended March 31, 2001 from the $70.6 million for the same period in the prior year due to amortization of goodwill and other intangible assets related to the merger with Siara Systems in March 2000 and the acquisition of Abatis in September 2000. We are required under generally accepted accounting principles to review our intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. We have experienced a decline in our stock price and market capitalization during the first quarter of 2001. In addition, our industry has begun to experience slower growth rates. If such factors continue, we are required to perform an impairment review of our goodwill and other intangible assets, which approximate $3.8 billion at March 31, 2001. This review could result in a significant charge to earnings in the period any impairment is determined. In Process Research and Development (IPR&D). IPR&D was recorded in the first quarter of 2000 in the amount of $15.3 million in connection with the merger with Siara Systems. Amortization of Deferred Stock Compensation. Our amortization of deferred stock compensation expense increased to $17.9 million for the three months ended March 31, 2001 from $535,000 for the same period in the prior year. The increase in amortization of deferred stock compensation can be attributed to the assumption of stock option grants in connection with acquisition activity and stock option grants made below fair market value to certain key employees. Interest and Other Income. Interest and other income increased to $10.9 million for the three months ended March 31, 2001 from $1.0 million for the same period in the prior year due primarily to the interest earned on larger invested cash and investment balances. The increase in cash and investment balances can be primarily attributed to the issuance of $500 million of convertible subordinated notes in March 2000. Interest Expense. Interest expense increased to $7.4 million for the three months ended March 31, 2001 from $311,000 for the same period in the prior year due primarily to interest expense arising from our $500 million offering of convertible subordinated notes in March 2000. Provision for Income Taxes. No provisions for income taxes have been recorded, as the Company has incurred net losses since inception. Liquidity and Capital Resources Our principal source of liquidity as of March 31, 2001 consists of approximately $380 million in cash, cash equivalents and short-term investments. Since our inception, we have financed our operations through both private and public sales of debt and equity securities, bank borrowings and equipment lease financing. During the three months ended March 31, 2001, we used approximately $22 million from operating activities, as compared to the same period in the prior year where we used $10 million in operating activities. In the three months ended March 31, 2001, cash was used to fund increased inventory, partially offset by an increase in accounts payable and accrued liabilities. Our net accounts receivable balance decreased from $96 million at December 31, 2000 to $90 million at March 31, 2001, with our "Days Sales Outstanding" (DSO`s) increasing from 75 days to 90 days. The increase in DSO`s reflects the increasing percentage of our business that is occurring later in the final month of the quarter as our customers are delaying purchasing decisions, and a general slow down in the time companies are taking to pay their suppliers. We believe that these are trends occurring in the telecommunications equipment industry, and are not specific to us. We also believe that DSO`s of 90 days are within the current norms for the telecommunications equipment industry. Investments in property and equipment increased to $28 million in the three months ended March 31, 2001 from $11 million in the same period in 2000. This increase consisted primarily of purchases relating to our new facilities, software and other related implementation costs associated with our new internal business applications system and purchases of machinery and equipment primarily related to our research and development organization. We expect our capital expenditures to remain a significant use of cash as we 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 believe that our existing cash and investment balances and anticipated cash flows from operations will be sufficient to meet our operating and capital requirements for the next twelve months and for the foreseeable future thereafter. However, additional capital may need to be raised if (i) revenues grow rapidly which would require increased cash investments in accounts receivable and inventories, (ii) revenues and cash flow from operations are less than what we predict, or (iii) unexpected events require us to do so. The availability of additional capital is dependent on a number of factors including current market conditions and our financial condition, so additional capital may not be available at all, or may only be available on terms unfavorable to us, when we need it. Any additional issuance of equity or equity-related securities will be dilutive to our stockholders Risk Factors An investment in Redback common stock, or Redback convertible notes, involves a high degree of risk. In addition to the other information contained in this Form 10-Q, you should carefully consider the following risk factors we have identified as material risks before making an investment. Any of the following risks could harm our business, financial condition or results of operations. In such case, the trading price could decline and you may lose all or part of your investment. This Form 10-Q also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of factors that are described below and elsewhere in this Form 10-Q. Our business is difficult to evaluate because we have a limited operating history We were founded in August 1996 and began shipping products in material quantities in the second quarter of 1998. You should consider the risks and difficulties frequently encountered by companies like us that are developing and selling products for new and rapidly evolving markets. 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. Our business strategy may be unsuccessful and we may not successfully address the risks we face. We have a history of losses and expect to incur future losses We incurred net losses of approximately $400.4 million for the three months ending March 31, 2001, and approximately $1.0 billion for the year ended December 31, 2000. As of March 31, 2001, we had an accumulated deficit of approximately $1.4 billion. We have incurred significant net losses in the past and expect to continue to incur significant net losses in the future. To date, we have funded our operations from both private and public sales of equity securities and notes, 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. Further, we cannot be certain that we can attain profitability on a quarterly or annual basis in the future. A decline in the demand for broadband access services would seriously harm our sales and operating results 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 sales and operating results would be materially adversely affected by reduced or delayed demand for our products if the use of broadband access services does not increase or if our customers` broadband access services are not well-received 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, the market for products that provide broadband access to the Internet and to corporate networks could still fail to develop, or develop at a slower pace than anticipated. Although sales to the broadband service provider market have grown historically, this market is characterized by large and often sporadic purchases. Sales activity in this industry depends upon the stage of completion of expanding network infrastructures, the availability of funding, and the extent that broadband service providers are affected by regulatory, business and economic conditions and climate. Additionally, we expect that a general downturn in the domestic or international economic growth, or the perception that such a downturn is imminent will negatively affect the growth of the broadband access market and sales to broadband service providers as customers of ours and potential customers reduce network spending and otherwise curtail expansion opportunities. Our quarterly operating results have and are expected to continue to fluctuate significantly, which could cause our stock price to be volatile or decline The concerns we discuss under "Risk Factors" are likely to cause quarterly fluctuations in revenues and operating results. Additionally, our quarterly operating results are likely to be affected by other factors. These factors include the timing of significant sales to large customers, our ability to control expenses and the timing differences between when we incur expenses and when we realize benefits, if any, from such expenditures. 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 the future, we may 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. Because we rely on patent, trademark, trade secret and copyright laws both to protect our proprietary technology and to protect us against claims from others, any expenses associated with any litigation, including litigation involving our intellectual property would also affect our quarterly operating results. Due to these and other factors discussed in this "Risk Factors" section, 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 and convertible notes 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 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. We believe our financial results and prospects will be impacted by the current economic downturn in the United States as customers and potential customers globally assess its effect on their business, which can result in a deferral or cancellation of purchasing decisions for products such as ours. 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 purchasing activity. 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. We believe that certain customers` sales decisions are not made until the final weeks, or days, of the calendar quarter which leads to greater uncertainty for us in predicting the timing and amount of our revenues. If sales forecasted from a specific customer for a particular quarter are not realized in that quarter or at all, our operating results could be materially adversely affected. Our sales would suffer if one or more of our key customers substantially reduced its orders for our products In each of the periods presented, we have had at least one customer that accounted for 10% or more of our total revenue in the quarter. In the first quarter of 2001, Qwest Communications International Inc., Williams Communications, Inc., and Verizon Communications, Inc. accounted for 28%, 15% and 14% of our total revenue, respectively. For the twelve months ended December 31, 2000, sales to Qwest Communications International Inc. and Genuity Inc. accounted for 15% and 10% of our total revenue, respectively. We anticipate that a small number of customers 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, encounter a shortage of capital or reevaluate their need for our products or purchase competing products, or if we fail to receive a large order in any period, our business, results of operations and financial condition would be materially adversely affected due to shortfall in revenues. Because we sell primarily to major corporate customers, our business also depends on general economic and business conditions that are likely to affect these customers. Our operating results suffer due to risks associated with mergers and acquisitions generally We expect to continue our acquisition and expansion strategy. Future acquisitions could materially adversely affect our operating results as a result of dilutive issuances of equity securities and the incurrence of additional debt. In addition, the purchase price for many of these acquired businesses likely will significantly exceed the current fair values of the tangible net assets of the acquired businesses. As a result, we would be required to record material goodwill and other intangible assets that would result in significant amortization charges in future periods. These charges, in addition to the financial impact of such acquisitions, could have a material adverse effect on our business, financial condition and results of operations. We cannot forecast the number, timing or size of future acquisitions, or the effect that any such acquisitions might have on our operating or financial results. Further, we must successfully combine the acquired businesses. We may not be able to integrate the technologies and operations quickly and smoothly. In the event that our integration does not go smoothly, serious harm to our business, financial condition and business prospects may result. Integrating acquired businesses entails significant diversion of management`s time and attention. The integration of technology, products and services may require the partial or wholesale conversion or redesign of some or all of our technologies, products and services or those of the acquired business. In addition, we may be required to spend additional time or money on integration that would otherwise have been spent on developing our business and services or other matters. In addition to our merger with Siara Systems, Inc. completed on March 8, 2000, we acquired Abatis Systems Corporation on September 28, 2000. We accounted for the Siara merger and the Abatis acquisition using the purchase method of accounting. The results of operations of Siara and Abatis are included in our consolidated financial statements for all periods after March 8, 2000 and September 28, 2000, respectively. The excess of cost over the fair value of the net tangible assets acquired from these transactions is recorded as goodwill, other intangible assets and deferred stock compensation, which will be amortized by charges to operations. These transactions resulted in aggregate goodwill and other intangible assets of approximately $5.1 billion, as well as deferred stock compensation of $63 million. Our annual amortization of goodwill and other intangible assets is estimated to be approximately $1.3 billion per year and our amortization of deferred stock compensation will be as much as $40 million per year, which will have a significant negative impact on our operating results by increasing our losses, and could cause our stock price to decline. We are required under generally accepted accounting principles to review our intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. We have experienced a decline in our stock price and market capitalization during the first quarter of 2001. In addition, our industry has begun to experience slower growth rates. If such factors continue, we are required to perform an impairment review of our goodwill and other intangible assets, which approximate $3.8 billion at March 31, 2001. This review could result in a significant charge to earnings in the period any impairment is determined. We are at risk of securities class action litigation due to the volatility of our stock price In the past, securities class action litigation has often been brought against companies following periods of volatility in the market price of their securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert management`s attention and resources, which could seriously harm its business. Our gross margin may decline Our gross margin may decline in the future due to several factors. These factors include a shift in emphasis from sales of higher margin, lower volume products to sales of lower margin, higher volume products and our ability to control the mix of sales between these products. Additionally, our ability to maintain current price levels will be affected by competition for market share in international markets and lower selling prices on higher volume customer purchases. Gross margin will also likely fluctuate depending on our ability to introduce new products, competitive product enhancements and upgrades and our ability to control inventory costs. If we do not introduce new products with a higher margin, and are required to sell current products at a higher discount to remain competitive, our gross margin will decline. Our operating results will suffer if we fail to commercialize new product lines The SMS and SmartEdge families of products, along with their associated management software are the only products that we currently sell. We continue the development of our Service Management technology and intend to introduce new products utilizing it in the future. We cannot be certain that the SMS, SmartEdge or Service Management products or any future products will achieve widespread market acceptance. Our inability to timely and successfully introduce new products and enhancements, or the failure of these new products or enhancements to achieve market acceptance, could materially adversely affect our operating results, financial condition or business prospects. There are a limited number of potential customers for our products The products that we have developed or 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 and may decrease in the future. Our inability to develop and maintain relationships with these large customers could materially adversely affect our operating results and financial condition. If our products do not anticipate and meet specific customer requirements and demands, our sales and operating results would be adversely affected Many of our customers require product features and capabilities that our 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. There can be no assurance that we will be able to provide a product that will satisfy new customer demands, or that the standards we chose to develop will position our products to compete with others on the market. Our failure to develop products or offer services that satisfy customer requirements would materially adversely affect our sales, operating results, financial condition and business prospects because customers will not place orders with us. 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, to ensure that adequate supplies of new products can be delivered to meet anticipated customer demand, and to limit the creation of excess inventory that may impact our financial results. Our inability to effectively manage this transition would materially adversely affect our sales and the acceptance of our products in the marketplace. Our failure to meet the demands of current and future broadband access markets would impair our operating results and business prospects by reducing sales To date, we have derived substantially all of our revenues from sales of products used for broadband access in the digital subscriber line market or optical networking products for use in metropolitan optical networks. We intend to invest resources to increase our penetration of these markets and enter other markets, including the market for routed services. We may be unable to simultaneously or effectively address evolving demands in all of these markets, and customers in these markets may choose to implement competing technologies or products. In addition, if our competitors gain market acceptance in these markets first, it will be difficult, if not impossible, for us to gain subsequent market acceptance in these markets. If we are unable to achieve acceptance of our products in these markets, our ability to generate revenues will be limited, and our operating results, financial condition and business prospects would be materially adversely affected because customers will not place orders with us. Any failure to remain competitive in our industry would impair our operating results and business prospects by reducing our ability to attract customers We may be unable to compete successfully with current or future competitors. Currently, competition in our market is intense. The broadband access markets we are targeting are new and rapidly evolving and we expect these markets to be 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 various kinds of equipment that allows our customers to provide networking services to their customers. For instance, Cisco Systems, Inc., the leading provider of routers, also offers products that compete directly with our products, and provides a comprehensive range of other access systems. In addition, new "start-up" companies continue to announce their plans to develop "next generation" products that would compete directly with our products. We expect companies that offer access concentrators, which are devices used to gather together high-speed Internet users, and routers to incorporate some subscriber management functionality into their products. These companies include Cisco Systems, Inc., Nortel Networks Corp. and Lucent Technologies Inc. In addition, there are several other companies that provide subscriber management features in access concentrators or routing platforms. Many of our principal competitors in the optical networking market, including Alcatel Alsthom S.A., Cisco Systems, Inc., Fujitsu Ltd., Lucent Technologies Inc., Nortel Networks Corp., Siemens Aktiengesellschaft through its Unisphere division 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 the acquiring competitor a strategic advantage that may disrupt our marketing and sales efforts. 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 we have. 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 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 capabilities; 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. Interruptions affecting our contract manufacturers or suppliers could disrupt production, compromise our product quality and adversely affect our sales We currently use a limited number of third party manufacturers to assemble, test and ship our products. We may not be able to effectively manage our relationship with these manufacturers and such manufacturers may not meet our future requirements for timely delivery. Any interruption in the operations of our contract manufacturers would adversely affect our ability to meet our scheduled product deliveries to our customers. This could cause the loss of existing or potential customers and could materially adversely affect our sales and operating results. In addition, the products that these manufacturers build for us may be insufficient in quality or in quantity to meet our needs or the needs of our customers. These manufacturers 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 our contract manufacturers in the future to provide us with adequate supplies of high-quality products, or the loss 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 sales and operating results. We currently purchase several key components used in our products from single or limited sources of supply. These manufacturers include Altera Corp., Agere Systems, Inc., APW Electronic Solutions, Brooktree Corp., Foresight Imaging, LLC, Intel Corp., JDS Uniphase Corp., Level One Communications, Inc., Powerspec, Siemens Aktiengesellschaft and Ziatech Corp. In addition, we rely on Arrow Electronics Corp., for component distribution, and LSI Logic Corp. as our foundry for a number of our application specific integrated circuits, or ASICs, and IBM Microelectronics as a foundry for other ASICs. 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 sales and business prospects. In addition, locating and contracting with additional qualified suppliers is time-consuming and expensive. Interruptions in delivery of power could disrupt normal business operations and adversely affect our delivery schedules Our corporate headquarters, a portion of our research and development activities, other business operations and a certain number of our suppliers and manufacturers are located in California. California has recently experienced ongoing power shortages, which have resulted in "rolling blackouts." These blackouts could cause disruptions to our operations and the operations of our suppliers, manufacturers and customers. Any significant or extended power outages could disrupt our business operations. Unexpected power disruptions could result in loss of data and interruption of development efforts. Extended power outages would adversely affect our ability to meet scheduled product deliveries to our customers and could materially adversely affect our sales and operating results. Additionally, and as a result of the continuing shortage of power in California, our costs of power in California may rise significantly, which may increase our operating expenses and those of our customers. If we fail to match production with product demand, we may need to incur additional costs to meet such demand We currently use a rolling 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, or if any components become obsolete between order and delivery time, we may have excess or inadequate inventory of materials and components. Excess inventory could materially adversely affect our operating results due to increased storage or obsolescence costs. In order to meet our inventory needs, we may incur expedite fees charged by our suppliers, which could materially adversely affect our product margins. If we fail to attract or retain employees or properly manage our growth, we may not be able to timely develop, sell or support our products We have expanded our operations rapidly since our inception. The number of our employees increased from inception in August, 1996 to approximately 1,000 on April 30, 2001. Our future performance depends on our continuing ability to attract and retain highly qualified technical and managerial personnel. 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. The loss of the services of key personnel or the inability to continue to attract, assimilate or retain qualified personnel could delay product development cycles or otherwise materially harm our business, financial condition and operating results. If we become subject to employment related claims, we could incur substantial costs in defending against these claims Companies in our industry whose employees accept positions with competitors frequently claim that their competitors have engaged in unfair hiring practices. We have received in the past, and may receive in the future, claims of this kind as we seek to hire qualified personnel and those claims may result in material litigation. We could incur substantial costs in defending ourselves or our employees against such claims, regardless of their merits. In addition, defending ourselves from such claims could divert the attention of our management away from our operations. Our business may suffer slower or less growth due to further 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 established by other regulatory bodies, may slow or end the growth of the broadband access services industry. Regulation of our customers may materially harm our business 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 harm our business, results of operations and financial condition. Our expansion to international markets will involve new risks For the three months ended March 31, 2001 we derived 25% of our revenues from sales to customers outside the United States. For the years ended December 31, 1998, 1999 and 2000, we derived approximately 15%, 7%, and 29%, respectively, of our revenues from sales to customers outside the United States. Our ability to achieve future success will depend in part on the expansion of our international sales and operations. Our international presence exposes us to typical foreign market risks not faced by wholly-domestic companies, including, among others, foreign currency fluctuations, language and cultural barriers, unexpected regulatory requirements and protectionist laws, and political, legal and economic instability in foreign markets. Specifically, we have identified the following risks: o expenses associated with customizing products for foreign countries; o dependence on local vendors; o longer sales cycles; o longer accounts receivable cycles; o difficulties in managing operations across disparate geographic areas; and o reduced or limited protection of our intellectual property rights in some countries. 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 revenues and operating results. Undetected software or hardware errors could have a material adverse effect on our operating results Networking products frequently contain undetected software or hardware errors when first introduced or as new versions are released. We have experienced 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. 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 seek damages for losses from us, which, if they were successful, could have a material adverse effect on our operating results. A product liability claim brought against us, even if unsuccessful, would likely be time-consuming and costly. If we have insufficient proprietary technology rights or if we fail to protect those we have, our business would be materially impaired We rely on a combination of patent, copyright, trademark and trade secret laws, employee and third-party nondisclosure agreements and licensing agreements to protect our intellectual property rights. These legal protections afford only limited protection for our technology. We have filed 30 U.S. patent applications and two Canadian patent applications. There can be no assurance that these applications will be approved, that any issued patents will protect our intellectual property or that third parties will not challenge any issued patents. Furthermore, other parties may independently develop similar or competing technology, design around any patents that may be issued to us, otherwise gain access to our trade secrets or intellectual property, or disclose our intellectual property or trade secrets. 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. Many patents have been issued in the United States and throughout the world relating to many aspects of networking technology. 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 would be materially harmed due to lost or delayed sales or additional development or licensing expenses. 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 could be materially adversely affected. If we fail to obtain additional capital at the times, in the amounts and upon the terms required, our business could suffer The industry is evolving quickly and new products are always required in order to maintain and grow our market share and to meet our customers` technology needs in providing cheaper, faster, more reliable and sophisticated services to their subscribers. The research, development and marketing of such new products and the expansion of our operations and reseller channels will require a significant commitment of resources. Furthermore, 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. While we believe that our existing capital resources are adequate to meet our current needs, we may require additional capital in the future. We cannot precisely determine the timing and amount of such capital requirements and will depend on several factors, including our acquisitions and sales of our products and products under development. Such additional capital may not be available to us at all, or, if available, may be available only on unfavorable terms. We have insufficient cash flow to meet our debt service obligations We have substantial amounts of outstanding indebtedness, primarily due to our convertible notes. We also may obtain additional long-term debt and working capital lines of credit. As a result of this indebtedness, our principal and interest payment obligations will increase substantially. Currently, our earnings are insufficient to cover our anticipated debt service obligations. There is the possibility that we may be unable to generate cash sufficient to pay the principal of, interest on and other amounts due in respect of our indebtedness when due. Our substantial leverage could have significant negative consequences, including: o increasing our vulnerability to general adverse economic and industry conditions; o limiting our ability to obtain additional financing; o increasing our cost to obtain additional financing; o requiring the dedication of a substantial portion of our cash from operations to service our indebtedness, thereby reducing the amount of our cash available for other purposes, including capital expenditures; o limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; and o placing us at a possible competitive disadvantage vis-a-vis less leveraged competitors and competitors that have better access to capital resources. We may be unable to repurchase our convertible notes which could seriously harm our financial condition On April 1, 2007, the entire outstanding principal in the aggregate amount of $500 million of our outstanding 5% convertible subordinated notes issued in April 2000 will become due and payable. In addition, if a change in control occurs, each holder of the convertible notes may require us to repurchase all or a portion of that holder`s convertible notes as provided in the indenture for the convertible notes. At maturity or if a change in control occurs, we may not have sufficient funds or may be unable to arrange for additional financing to pay the principal amount or repurchase price due. Under the terms of the indenture for the convertible notes, we may elect, if we meet certain conditions, to pay the repurchase price with shares of common stock. Our borrowing arrangements or agreements relating to senior debt to which we become a party may contain restrictions on, or prohibitions against, our repurchases of the convertible notes. If the maturity date or change in control occurs at a time when our other arrangements prohibit us from repurchasing the convertible notes, we could try to obtain the consent of the lenders under those arrangements to purchase the convertible notes, or we could attempt to refinance these borrowings that contain the restrictions. If we do not obtain the necessary consents or refinance these borrowings, we will be unable to repurchase the convertible notes. In that case, our failure to repurchase any tendered convertible notes or convertible notes due upon maturity would constitute an event of default under the indenture for the convertible notes. Any such default, in turn, may cause a default under the terms of our senior debt. As a result, in those circumstances, we could not repurchase any of the convertible notes until we pay the senior debt in full, further limiting our ability to obtain additional financing. Provisions of our charter documents may have anti-takeover effects that could prevent a change in our control We are subject to the provisions of Section 203 of the Delaware General Corporation Law prohibiting, under some circumstances, publicly-held Delaware corporations from engaging in business combinations with some stockholders for a specified period of time without the approval of the holders of substantially all of its outstanding voting stock. Such provisions could delay or impede the removal of incumbent directors and could make more difficult a merger, tender offer or proxy contest involving us, even if such events could be beneficial, in the short term, to the interests of the stockholders. In addition, such provisions could limit the price that some investors might be willing to pay in the future for shares of our common stock. Our certificate of incorporation and bylaws contain provisions relating to the limitations of liability and indemnification of our directors and officers and providing that our stockholders can take action only at a duly called annual or special meeting of stockholders. These provisions also may have the effect of deterring hostile takeovers or delaying changes in control or management of us. -------------------------------------------------------------------------------- Recent filings: May 15, 2000 (Qtrly Rpt) | Nov 13, 2000 (Qtrly Rpt) | Nov 14, 2000 (form8-K) | Jan 18, 2001 (form8-K) | Jan 29, 2001 (form8-K) | Apr 02, 2001 (form8-K) | Apr 13, 2001 (form8-K) | May 15, 2001 (Qtrly Rpt) More filings for RBAK available from EDGAR Online | Get a Free Trial to EDGAR Online Premium EDGAR Online: Research People in this company | Full text Search -------------------------------------------------------------------------------- |
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| aus der Diskussion: | Redback Networks mit deutlicher Umsatzsteigerung |
| Autor (Datum des Eintrages): | Jeanneau (16.05.01 18:21:06) |
| Beitrag: | 32 von 40 (ID:3531852) |
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