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CoSine gains 195 percent in IPO, shuffles revenue

CoSine Communications Inc. (Nasdaq: COSN), maker of switches for delivering IP communication services, blasted up 44.75 to 67.75, or 195 percent Tuesday. The company had priced 10 million shares at $23 each, above its raised range for trading Tuesday. The company is a sure bet in a fast-growing field, but has come under SEC scrutiny for the way it reports revenue.

"This is a no-brainer," said Kenan Pollack of IPO Central. "Networking equipment has been popular," and the deal has a strong list of underwriters and a significant price tag.

On Sept. 5, the company raised the price range of its planned initial public offering to $15 to $17 per share from its previously expected estimate of $13 to $15 a share. On Sept. 22, the company upped its range again to $20-$22 a share.

According to Renaissance Capital, which chose CoSine as the IPO of the week, the company will save service providers from diminishing revenue amidst tightening competition. In response to the insatiable hunger for bandwidth, network service providers are quickly rolling out broadband access solutions at a pace sure to creates a crowded market, declining prices and thinner margins. CoSine's IP-based service delivery platform that enables carriers to provide extra services like firewalls and VPNs (virtual private networks) to subscribers by simply flipping a switch.

CoSine's platform has already been used by a number of carriers -- including Qwest Communications (NYSE: Q).

The fledgling company, which only began to recognize revenue in the first quarter of 2000, has already racked up large large losses to develop its technology. It recognized substantially all of our revenue during the first six months of 2000 from two customers, and said its IP service delivery platform is its only product line, and related software applications will constitute the majority of future revenue. As of June 30, CoSine had an accumulated deficit of $104.2 million.

For the six months ended June 30, the company had a net loss of $57 million and $11.32 million in revenue. At least, those were the numbers the company originally stated in its filings, before it became embroiled in discussions with the SEC which questioned its practice of offering cheap pre-IPO stock to customers who agree to sign big deals.

According to an article in Tuesday's Wall Street Journal, six out of eight of CoSine's customers hold stock or warrants to buy stock in the company. In the company's most recent SEC filing, it claims "revenue, net of non-cash charges related to equity issuances," to comply with the SEC, which totals $7.62 million.

CoSine isn't the only company to come under SEC scrutiny for the practice; Tellium Inc., a maker of fibre-optic gear, included a similar adendum in its filing for an IPO last Friday. ONI Systems (Nasdaq: ONIS), another telecom equipment maker, was in discussions with the regulatory body which delayed its June IPO by a week, but didn't result in an amended filing, according to the WSJ article.

Goldman Sachs, Chase H&Q, Robertson Stephens and J.P. Morgan, the underwriters handling the CoSine IPO, have been granted 1.5 million shares if the 10 million shares are oversubscribed, according to the SEC filing.

CoSine faces competition from companies in the network infrastructure market, including Cisco Systems (Nasdaq: CSCO) Lucent Technologies (NYSE: LU), Nortel Networks (NYSE: NT), Alcatel (NYSE: ALA).
• IPO Insider >

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