Attached files

file filename
EX-32.1 - SECTION 906 CEO CERTIFICATION - SYCAMORE NETWORKS INCdex321.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - SYCAMORE NETWORKS INCdex311.htm
EX-32.2 - SECTION 906 CFO CERTIFICATION - SYCAMORE NETWORKS INCdex322.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - SYCAMORE NETWORKS INCdex312.htm
Table of Contents

 

 

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 JANUARY 29, 2011

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 000-27273

 

 

SYCAMORE NETWORKS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   04-3410558

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

220 Mill Road

Chelmsford, Massachusetts 01824

(Address of principal executive offices)

(Zip code)

(978) 250-2900

(Registrant’s telephone number, including area code)

 

 

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), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller Reporting Company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares outstanding of the registrant’s Common Stock as of February 22, 2011 was 28,537,965.

 

 

 


Table of Contents

Sycamore Networks, Inc.

 

Index

       Page No.  

Part I.

 

FINANCIAL INFORMATION

     3   

Item 1.

 

Financial Statements (unaudited)

     3   
 

Consolidated Balance Sheets as of January 29, 2011 and July 31, 2010

     3   
 

Consolidated Statements of Operations for the three months and six months ended January 29, 2011 and January 23, 2010

     4   
 

Consolidated Statements of Cash Flows for the six months ended January 29, 2011 and January 23, 2010

     5   
 

Notes to Consolidated Financial Statements

     6   

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     17   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     24   

Item 4.

 

Controls and Procedures

     25   

Part II.

 

OTHER INFORMATION

     26   

Item 1.

 

Legal Proceedings

     26   

Item 1A.

 

Risk Factors

     28   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     28   

Item 6.

 

Exhibits

     29   

Signature

     30   

 

2


Table of Contents

Part I. Financial Information

Item 1. Financial Statements

Sycamore Networks, Inc.

Consolidated Balance Sheets

(in thousands, except par value)

(unaudited)

 

     January 29,
2011
    July 31,
2010
 

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 215,029      $ 104,416   

Short-term investments

     217,855        450,722   

Accounts receivable, net of allowance for doubtful accounts of $72 at January 29, 2011 and July 31, 2010

     10,488        14,168   

Inventories

     11,288        11,175   

Prepaids and other current assets

     1,920        1,873   
                

Total current assets

     456,580        582,354   

Property and equipment, net

     5,876        6,569   

Long-term investments

     12,082        81,739   

Other assets

     369        358   
                

Total assets

   $ 474,907      $ 671,020   
                

Liabilities and Stockholders’ Equity

    

Current liabilities:

    

Accounts payable

   $ 2,077      $ 2,891   

Accrued compensation

     2,120        2,767   

Accrued warranty

     1,529        1,720   

Accrued expenses

     1,507        1,437   

Accrued restructuring costs

     578        498   

Deferred revenue

     10,187        10,930   

Other current liabilities

     1,092        1,142   
                

Total current liabilities

     19,090        21,385   

Other long term liabilities

     1,700        1,714   

Long term deferred revenue

     2,757        3,918   
                

Total liabilities

     23,547        27,017   
                

Commitments and contingencies (Note 11)

    

Stockholders’ equity:

    

Preferred stock, $.01 par value; 5,000 shares authorized; none issued or outstanding

     —          —     

Common stock, $.001 par value; 250,000 shares authorized; 28,538 and 28,431 shares issued and outstanding at January 29, 2011 and July 31, 2010, respectively

     29        28   

Additional paid-in capital

     1,577,611        1,759,520   

Accumulated deficit

     (1,126,204     (1,116,160

Accumulated other comprehensive income (loss)

     (76     615   
                

Total stockholders’ equity

     451,360        644,003   
                

Total liabilities and stockholders’ equity

   $ 474,907      $ 671,020   
                

The accompanying notes are an integral part of the consolidated financial statements.

 

3


Table of Contents

Sycamore Networks, Inc.

Consolidated Statements of Operations

(in thousands, except per share amounts)

(unaudited)

 

     Three Months Ended     Six Months Ended  
     January 29,
2011
    January 23,
2010
    January 29,
2011
    January 23,
2010
 

Revenue:

        

Product

   $ 5,593      $ 10,316      $ 11,317      $ 20,368   

Service

     6,564        5,858        12,549        11,430   
                                

Total revenue

     12,157        16,174        23,866        31,798   
                                

Cost of revenue:

        

Product

     3,090        4,617        7,763        10,026   

Service

     2,027        2,262        4,239        4,700   
                                

Total cost of revenue

     5,117        6,879        12,002        14,726   
                                

Gross profit

     7,040        9,295        11,864        17,072   
                                

Operating expenses:

        

Research and development

     6,239        7,761        13,550        16,433   

Sales and marketing

     2,643        2,759        5,243        5,344   

General and administrative

     2,030        2,444        4,156        4,752   

Restructuring and related asset impairment

     —          (88     —          6,216   
                                

Total operating expenses

     10,912        12,876        22,949        32,745   
                                

Loss from operations

     (3,872     (3,581     (11,085     (15,673

Interest and other income, net

     470        1,641        1,238        3,461   
                                

Loss before income taxes

     (3,402     (1,940     (9,847     (12,212

Income tax expense (benefit)

     103        (727     197        (607
                                

Net loss

   $ (3,505   $ (1,213   $ (10,044   $ (11,605
                                

Net loss per share:

        

Basic

   $ (0.12   $ (0.04   $ (0.35   $ (0.41

Diluted

   $ (0.12   $ (0.04   $ (0.35   $ (0.41

Weighted average shares outstanding:

        

Basic

     28,531        28,420        28,491        28,418   

Diluted

     28,531        28,420        28,491        28,418   

Cash distribution paid per common share

   $ 6.50      $ 10.00      $ 6.50      $ 10.00   

The accompanying notes are an integral part of the consolidated financial statements.

 

4


Table of Contents

Sycamore Networks, Inc.

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

     Six Months Ended  
     January 29,
2011
    January 23,
2010
 

Cash flows from operating activities:

    

Net loss

   $ (10,044   $ (11,605

Adjustments to reconcile net loss to net cash used in operating activities:

    

Depreciation and amortization

     2,036        3,733   

Share-based compensation

     922        1,676   

Asset impairment

     —          1,076   

Loss on disposal of equipment

     —          22   

Adjustments to provision for excess and obsolete inventory

     969        (96

Changes in operating assets and liabilities:

    

Accounts receivable

     3,680        (3,856

Inventories

     (1,186     2,391   

Prepaids and other current assets

     (58     (1,350

Deferred revenue

     (1,904     1,337   

Accounts payable

     (814     404   

Accrued expenses and other current liabilities

     (832     (1,238

Accrued restructuring costs

     80        (1,931
                

Net cash used in operating activities

     (7,151     (9,437
                

Cash flows from investing activities:

    

Purchases of property and equipment

     (1,239     (194

Purchases of investments

     (264,982     (247,112

Proceeds from maturities and sales of investments

     566,815        257,987   
                

Net cash provided by investing activities

     300,594        10,681   
                

Cash flows from financing activities:

    

Payment of cash distribution to common stockholders

     (185,446     (284,320

Proceeds from issuance of common stock

     2,616        233   
                

Net cash used in financing activities

     (182,830     (284,087
                

Net increase (decrease) in cash and cash equivalents

     110,613        (282,843

Cash and cash equivalents, beginning of period

     104,416        347,696   
                

Cash and cash equivalents, end of period

   $ 215,029      $ 64,853   
                

Cash paid for income taxes

   $ 64      $ 89   
                

The accompanying notes are an integral part of the consolidated financial statements.

 

5


Table of Contents

Sycamore Networks, Inc.

Notes To Consolidated Financial Statements

1. Description of Business

We develop and market Intelligent Bandwidth Management solutions for fixed line and mobile network operators worldwide and provide services associated with such products. Our current and prospective customers include domestic and international wireline and wireless network service providers, utility companies, large enterprises, multiple systems operators and government entities (collectively referred to as “service providers”). Our existing bandwidth management portfolio of optical switches, multiservice cross-connects and multiservice access platforms serve applications that extend across the network infrastructure, from multiservice access and regional backhaul to the optical core. We are also developing and marketing a mobile broadband optimization solution designed to help mobile operators reduce congestion in mobile access networks. We believe our products enable network operators to efficiently and cost-effectively provision and manage network capacity to support a wide range of converged services such as voice, video and data. As used in this report, “Sycamore,” “we,” “us,” or “our” refers collectively to Sycamore Networks, Inc. (the “Company”) and its subsidiaries.

2. Basis of Presentation

The accompanying financial data as of January 29, 2011 and for the three months and six months ended January 29, 2011 and January 23, 2010 has been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K as filed with the SEC for the fiscal year ended July 31, 2010.

In the opinion of management, the accompanying financial statements include all adjustments necessary to present a fair statement of financial position as of January 29, 2011 and results of operations and cash flows for the periods ended January 29, 2011 and January 23, 2010. The results of operations and cash flows for the periods ended January 29, 2011 are not necessarily indicative of the operating results and cash flows for the full fiscal year or any future periods.

On December 22, 2010, the Company made a cash distribution to its stockholders of $6.50 per share of its common stock, par value $0.001, amounting to $185.4 million in the aggregate. As a result of having an accumulated deficit, the cash distribution has been recorded as a reduction to additional paid in capital.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. Significant estimates and judgments relied upon in preparing these financial statements include those related to revenue recognition, allowance for doubtful accounts, warranty obligations, inventory allowance, litigation and other contingencies, and share-based compensation. Estimates, judgments, and assumptions are reviewed periodically by management and the effects of revisions are reflected in the consolidated financial statements in the period in which they are made.

 

6


Table of Contents

3. Share-Based Compensation

The following table presents share-based compensation expense included in the Company’s consolidated statements of operations (in thousands):

 

     Three Months Ended      Six Months Ended  
     January 29,
2011
     January 23,
2010
     January 29,
2011
     January 23,
2010
 

Cost of product revenue

   $ 73       $ 62       $ 106       $ 120   

Cost of service revenue

     28         68         75         135   

Research and development

     60         265         207         589   

Sales and marketing

     109         242         278         454   

General and administrative

     108         209         256         378   
                                   

Share-based compensation expense

   $ 378       $ 846       $ 922       $ 1,676   
                                   

Stock option activity under all of the Company’s stock plans since July 31, 2010 is summarized as follows:

 

     Number of
Shares
    Weighted
Average
Exercise
Price
     Weighted
Average
Contractual
Term
(Years)
 

Outstanding at July 31, 2010

     2,582,089      $ 25.62         4.12   
                   

Options granted

     22,196        22.21      

Options exercised

     (106,587     24.54      

Options canceled

     (95,118     128.35      
                   

Outstanding at January 29, 2011

     2,402,580      $ 21.57         3.82   
                         

Options vested and expected to vest

     2,382,790      $ 21.60         3.79   
                         

Options exercisable at end of period

     2,175,995      $ 21.88         3.45   
                         

Weighted average fair value of options granted for the six months ended January 29, 2011

   $ 9.84        
             

The intrinsic value of options exercised during the six months ended January 29, 2011 was $0.8 million.

In accordance with the provisions of the Company’s stock plans, an equitable adjustment was made to all outstanding option awards to give effect to the December 22, 2010 cash distribution to the Company’s common stockholders. No stock compensation charge was recorded in connection with the adjustment. The above stock option table has been adjusted to reflect the equitable adjustment.

As of January 29, 2011, there was $1.7 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Company’s stock plans. That cost is expected to be recognized over a weighted-average period of 2.2 years.

 

7


Table of Contents

4. Net Loss Per Share

Basic net loss per share is computed by dividing the net loss for the period by the weighted-average number of common shares outstanding during the period less unvested restricted stock. Common equivalent shares are not used in the calculation of net loss per share because the effect would be antidilutive.

The following table sets forth the computation of basic and diluted net loss per share

(in thousands, except per share data):

 

     Three Months Ended     Six Months Ended  
     January 29,
2011
    January 23,
2010
    January 29,
2011
    January 23,
2010
 

Numerator:

        

Net loss

   $ (3,505   $ (1,213   $ (10,044   $ (11,605
                                

Denominator:

        

Weighted-average shares of common stock outstanding

     28,531        28,432        28,491        28,432   

Weighted-average shares subject to repurchase

     —          (12     —          (14
                                

Shares used in per-share calculation – basic

     28,531        28,420        28,491        28,418   
                                

Weighted-average shares of common stock outstanding

     28,531        28,420        28,491        28,418   

Weighted common stock equivalents

     —          —          —          —     
                                

Shares used in per-share calculation – diluted

     28,531        28,420        28,491        28,418   
                                

Net loss per share:

        

Basic

   $ (0.12   $ (0.04   $ (0.35   $ (0.41
                                

Diluted

   $ (0.12   $ (0.04   $ (0.35   $ (0.41
                                

Employee stock options to purchase 2.4 million and 2.5 million shares have not been included in the computation of diluted net loss per share for the three month and six month periods ended January 29, 2011, respectively, because their effect would have been antidilutive. Employee stock options to purchase 2.9 million and 3.1 million shares have not been included in the computation of diluted net loss per share for the three and six month periods ended January 23, 2010, respectively, because their effect would have been antidilutive.

 

8


Table of Contents

5. Cash Equivalents and Investments

Cash equivalents are short-term, highly liquid investments with original maturity dates of three months or less at the date of acquisition. Cash equivalents are carried at cost plus accrued interest, which approximates fair market value. The Company’s short and long term investments, $217.9 million and $12.1 million, respectively, are classified as available-for-sale and are recorded at fair value with any unrealized gain or loss recorded as an element of stockholders’ equity. The fair value of short and long term investments is determined based on quoted market prices at the reporting date for those instruments. As of January 29, 2011 and July 31, 2010, aggregate cash and cash equivalents and short and long term investments consisted of (in thousands):

January 29, 2011:

 

     Amortized
Cost
     Gross
Unrealized

Gains
     Gross
Unrealized

Losses
    Fair
Market

Value
 

Cash and cash equivalents

   $ 215,029       $ —         $ —        $ 215,029   

Government securities

     229,702         255         (20     229,937   
                                  

Total

   $ 444,731       $ 255       $ (20   $ 444,966   
                                  

July 31, 2010:

 

     Amortized
Cost
     Gross
Unrealized

Gains
     Gross
Unrealized

Losses
    Fair
Market

Value
 

Cash and cash equivalents

   $ 104,416       $ —         $ —        $ 104,416   

Government securities

     531,560         903         (2     532,461   
                                  

Total

   $ 635,976       $ 903       $ (2   $ 636,877   
                                  

A cash distribution in the amount of $185.4 million and was paid to common stockholders on December 22, 2010, which reduced the Company’s available cash and cash equivalents.

6. Inventories

Inventories consisted of the following (in thousands):

 

     January 29,
2011
     July 31,
2010
 

Raw materials

   $ 4,806       $ 4,939   

Work in process

     990         833   

Finished goods

     5,492         5,403   
                 

Total

   $ 11,288       $ 11,175   
                 

7. Comprehensive Loss

The components of comprehensive loss consisted of the following (in thousands):

 

     Three Months Ended     Six Months Ended  
     January 29,
2011
    January 23,
2010
    January 29,
2011
    January 23,
2010
 

Net loss

   $ (3,505   $ (1,213   $ (10,044   $ (11,605

Unrealized loss on investments

     (318     (104     (691     (410
                                

Comprehensive loss

   $ (3,823   $ (1,317   $ (10,735   $ (12,015
                                

 

9


Table of Contents

8. Restructuring and Impairment Charges

During the first quarter of fiscal 2011, the Company made the decision to integrate and realign its operations group with other functional areas to enhance operational efficiency and realize the benefits of identified synergies within the respective groups. The realignment resulted in the elimination of four positions. The Company recorded a restructuring charge of $0.3 million which was charged to cost of product revenue. This charge relates to employee separation packages including severance pay, benefits continuation and outplacement costs.

We continuously monitor our costs and therefore future restructuring and/or impairment charges may be necessary in response to future market or economic conditions.

As of January 29, 2011, future cash restructuring payments of $0.6 million consist primarily of costs related to rent and employee separation packages that will be paid over the next 15 months. A roll-forward of the restructuring accrual is summarized below (in thousands):

 

     Accrual
Balance at
July  31,

2010
     Additions      Payments      Accrual
Balance at
January 29,
2011
 

Workforce reduction

   $ —         $ 339       $ 123       $ 216   

Facility consolidations

     498         —           136         362   
                                   

Total

   $ 498       $ 339       $ 259       $ 578   
                                   

9. Income Taxes

As of January 29, 2011 and July 31, 2010, the Company had a liability of $1.6 million for taxes, interest and penalties for unrecognized tax benefits related to various foreign income tax matters. If recognized, the entire amount would impact the Company’s effective tax rate. During fiscal 2011 it is reasonably possible that we may recognize up to $0.2 million of previously unrecognized tax benefits related to various foreign tax positions.

As of January 29, 2011 and July 31, 2010, the Company had $0.4 million accrued for interest and penalties related to uncertain tax positions. The Company accounts for interest and penalties related to uncertain tax positions as part of its provision for federal, international, and state income taxes.

The Company is currently open to audit under the statute of limitations by the Internal Revenue Service, various foreign jurisdictions, and state jurisdictions for the fiscal years ended July 31, 2004 through July 31, 2010.

Income tax expense was $0.1 million and $0.2 million for the three and six months ended January 29, 2011, respectively, primarily related to income tax expense in certain states and profitable foreign jurisdictions.

As a result of having substantial accumulated net operating losses, the Company determined that it is more likely than not that our deferred tax assets may not be realized. Therefore, we maintain a full valuation allowance. If the Company generates sustained future taxable income against which these tax attributes may be applied, some or all of the net operating loss carryforwards may be utilized and the valuation allowance reversed. If the valuation allowance is reversed, portions would be recorded as an increase to paid-in capital and the remainder would be recorded as a reduction in income tax expense.

 

10


Table of Contents

10. Recent Accounting Pronouncements

In September 2009, the Emerging Issues Task Force issued new guidance pertaining to the accounting for revenue arrangements with multiple deliverables. The new guidance addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting, and how the arrangement consideration should be allocated among the separate units of accounting. The new guidance became effective for fiscal years beginning after June 15, 2010 and may be applied retrospectively or prospectively for new or materially modified arrangements. In addition, early adoption was permitted. The new guidance is applicable to the Company and became effective beginning August 1, 2010. The Company adopted the new guidance in the first quarter of fiscal 2011, on a prospective basis.

In September 2009, the Emerging Issues Task Force issued new guidance that changes the accounting model for revenue arrangements that include both tangible products and software elements that are “essential to the functionality” and removes these products from the scope of current software revenue guidance. The new guidance shall be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Earlier application was permitted as of the beginning of a company’s fiscal year provided the company has not previously issued financial statements for any period within that year. An entity shall not elect early application of this guidance unless it also elects early application of the new rule pertaining to accounting for revenue arrangements with multiple deliverables. The new guidance is applicable to the Company and became effective beginning August 1, 2010. The Company adopted the new guidance in the first quarter of fiscal 2011.

During the second quarter of fiscal 2011, the Company entered into a multiple element arrangement that included hardware and non-essential software deliverables. The hardware element was delivered during the second quarter and the non-essential software element was undelivered as of the end of the second quarter. The Company recognized $0.7 million in revenue and deferred $0.1 million related to this multiple element transaction. Under the prior revenue recognition guidance the Company would have deferred $0.8 million for this multiple element transaction. The new guidance does not change the units of accounting.

 

11


Table of Contents

11. Commitments and Contingencies

Litigation

IPO Allocation Case

Beginning on July 2, 2001, several purported class action complaints were filed in the United States District Court for the Southern District of New York against the Company and several of its officers and directors (the “Individual Defendants”) and the underwriters for the Company’s initial public offering on October 21, 1999. Some of the complaints also include the underwriters for the Company’s follow-on offering on March 14, 2000. An amended complaint, which is the operative complaint, was filed on April 19, 2002 on behalf of persons who purchased the Company’s common stock between October 21, 1999 and December 6, 2000. The amended complaint alleges claims against the Company, several of the Individual Defendants and the underwriters for violations under Sections 11 and 15 of the Securities Act of 1933, as amended (the “Securities Act”), primarily based on the assertion that the Company’s lead underwriters, the Company and several of the Individual Defendants made material false and misleading statements in the Company’s Registration Statements and Prospectuses filed with the Securities and Exchange Commission, or the SEC, in October 1999 and March 2000 because of the failure to disclose (a) the alleged solicitation and receipt of excessive and undisclosed commissions by the underwriters in connection with the allocation of shares of common stock to certain investors in the Company’s public offerings and (b) that certain of the underwriters allegedly had entered into agreements with investors whereby underwriters agreed to allocate the public offering shares in exchange for which the investors agreed to make additional purchases of stock in the aftermarket at pre-determined prices. It also alleges claims against the Company, the Individual Defendants and the underwriters under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), primarily based on the assertion that the Company’s lead underwriters, the Company and the Individual Defendants defrauded investors by participating in a fraudulent scheme and by making materially false and misleading statements and omissions of material fact during the period in question. The amended complaint seeks damages in an unspecified amount.

The action against the Company is being coordinated with approximately three hundred other nearly identical actions filed against other companies. Due to the large number of nearly identical actions, the court has ordered the parties to select up to twenty “test” cases. The Company’s case has been selected as one such test case. As a result, among other things, the Company will be subject to broader discovery obligations and expenses in the litigation than non-test case issuer defendants.

On October 9, 2002, the court dismissed the Individual Defendants from the case without prejudice. This dismissal disposed of the Section 15 and Section 20(a) claims without prejudice, because these claims were asserted only against the Individual Defendants. On October 13, 2004, the court denied the certification of a class in the action against the Company with respect to the Section 11 claims alleging that the defendants made material false and misleading statements in the Company’s Registration Statement and Prospectuses. The certification was denied because no class representative purchased shares between the date of the IPO and January 19, 2000 (the date unregistered shares entered the market), and thereafter suffered a loss on the sale of those shares. The court certified a class in the action against the Company with respect to the Section 10(b) claims alleging that the Company and the Individual Defendants defrauded investors by participating in a fraudulent scheme and by making materially false and misleading statements and omissions of material fact during the period in question. On December 5, 2006, the Second Circuit vacated the district court’s class certification decision. On April 6, 2007, the Second Circuit panel denied a petition for rehearing filed by the plaintiffs, but noted that the plaintiffs could ask the district court to certify a more narrow class than the one that was rejected.

On August 14, 2007, the plaintiffs filed a Second Amended Class Action complaint against the Company. The Company and the underwriters filed separate motions to dismiss the amended complaint on November 14, 2007. On March 26, 2008, the Court denied the motion to dismiss the Section 10(b) claims but dismissed certain Section 11 claims against the Company. On June 5, 2008, the Court dismissed the remaining Section 11 claims against the Company in response to a motion for partial reconsideration.

The parties in the approximately 300 coordinated cases, including the Company’s case, reached a settlement. The insurers for the issuer defendants in the coordinated cases will make the settlement payment on behalf of the issuers, including the Company. On October 5, 2009, the Court granted final approval of the settlement. Two appeals by objectors to the settlement are proceeding before the Second Circuit Court of Appeals. The plaintiffs have moved to dismiss both appeals.

 

12


Table of Contents

Due to the inherent uncertainties of litigation, the Company cannot accurately predict the ultimate outcome of the matter. If the settlement does not survive appeal, the litigation continues, and the Company is found liable, the Company is unable to estimate or predict the potential damages that might be awarded, whether such damages would be greater than the Company’s insurance coverage, and whether such damages would have a material impact on our results of operations or financial condition in any future period.

Derivative Lawsuits

In October 2007, a purported Sycamore Networks, Inc. stockholder filed a complaint for violation of Section 16 of the Securities Exchange Act of 1934, which prohibits short-swing trading, against the Company’s Initial Public Offering underwriters. The complaint, Vanessa Simmonds v. Morgan Stanley, et al., in the District Court for the Western District of Washington (“District Court”) seeks recovery of short-swing profits. On April 28, 2008, the district court established a briefing schedule for motions to dismiss and ruled that all discovery be stayed pending resolution of the motions to dismiss. The District Court found the motions appropriate for oral argument which was held on January 6, 2009. On March 16, 2009, the District Court issued an order dismissing the case. On March 31, 2009, the plaintiff appealed. Briefing before the Ninth Circuit was complete as of November 17, 2009 and oral argument was heard on October 5, 2010. On December 2, 2010, the Ninth Circuit Court of Appeals affirmed the District Court’s decision to dismiss the moving issuers’ cases (including the Company’s) on the grounds that plaintiff’s demand letters were insufficient to put the issuers on notice of the claims asserted against them and further ordered that the dismissals be made with prejudice. The Ninth Circuit, however, reversed and remanded the District Court’s decision on the underwriter’s motion to dismiss as to the claims arising from the non-moving issuers’ IPOs, finding plaintiff’s claims were not time-barred under the applicable statute of limitations. In remanding, the Ninth Circuit advised the non-moving issuers and underwriters to file in the District Court the same challenges to plaintiff’s demand letters that moving issuers had filed.

On December 16, 2010, underwriters filed a petition for panel rehearing and petition for rehearing en banc. Appellant Vanessa Simmonds also filed a petition for rehearing en banc. On January 18, 2011, the Ninth Circuit denied the petition for rehearing and petitions for rehearing en banc. It further ordered that no further petitions for rehearing may be filed.

On January 24, 2011, the underwriters filed a motion to stay the issuance of the Ninth Circuit’s mandate in the cases involving the non-moving issuers. On January 25, 2011, the Ninth Circuit granted the underwriters’ motion and ordered that the mandate in the cases involving the non-moving issuers is stayed for ninety days pending the filing of a petition for writ of certiorari in the United States Supreme Court. On January 26, 2011, Appellant Vanessa Simmonds moved to join the underwriters’ motion and requested the Ninth Circuit stay the mandate in all cases. On January 26, 2011, the Ninth Circuit granted Appellant’s motion and ruled that the mandate in all cases (including the Company’s and other moving issuers) is stayed for ninety days pending Appellant’s filing of a petition for writ of certiorari in the United States Supreme Court.

The Company is named as a nominal defendant. No recovery is sought from the Company in this matter.

Other Matters

From time to time the Company is a party to litigation and other disputes which it considers routine and incidental to its business. Our management does not expect the results of any of these actions to have a material adverse effect on the Company’s business, results of operations or financial condition.

Guarantees

As of January 29, 2011, the Company’s guarantees requiring disclosure consist of its accrued warranty obligations, indemnifications for intellectual property infringement claims and indemnifications for officers and directors.

In the normal course of business, the Company may also agree to indemnify other parties, including customers, lessors and parties to other transactions with the Company with respect to certain matters. The Company has agreed to hold these other parties harmless against losses arising from a breach of representations or covenants, or other claims made against certain parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. It is not possible to determine the maximum potential amount under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and

 

13


Table of Contents

circumstances involved in each particular agreement. Historically, payments made by the Company under these agreements have not had a material impact on the Company’s operating results or financial position. Accordingly, the Company has not recorded a liability for these agreements at January 29, 2011 or July 31, 2010 as the Company believes the fair value is not material.

The Company has agreed to indemnify its officers and directors for certain events or occurrences arising as a result of the officer or director serving in such capacity. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is not limited; however, the Company has directors and officers insurance coverage that reduces its exposure and may enable the Company to recover a portion of any future amounts paid. The Company has not incurred any expense under these arrangements through the second quarter of fiscal year 2011 and did not incur any expense under these arrangements in fiscal year 2010. Due to the Company’s inability to estimate its liabilities in connection with these agreements, the Company has not recorded a liability for these agreements at January 29, 2011 or July 31, 2010. The Company maintains insurance policies whereby certain payments may be recoverable. The Company received $0.2 million in recoveries under such policies for fiscal year 2010.

Warranty Liability

The following table summarizes the activity related to product warranty liability (in thousands):

 

     Three Months Ended     Six Months Ended  
     January 29,
2011
    January 23,
2010
    January 29,
2011
    January 23,
2010
 

Beginning balance

   $ 1,680      $ 2,661      $ 1,720      $ 2,866   

Accruals /adjustments

     (65     (133     (8     (277

Settlements

     (86     (3     (183     (64
                                

Ending balance

   $ 1,529      $ 2,525      $ 1,529      $ 2,525   
                                

 

14


Table of Contents

12. Fair Value Measurements

The fair value measurement rules establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

 

Level 1

   Quoted prices in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset and liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2

   Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3

   Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Assets and liabilities of the Company measured at fair value on a recurring basis as of January 29, 2011, are summarized as follows (in thousands):

 

            Fair Value Measurements at Reporting Date Using  

Description

   January 29, 2011      Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant Unobservable
Inputs

(Level 3)
 

Assets

           

Cash equivalents

   $ 215,029       $ 215,029       $ —         $ —     
                       

Government obligations

     229,937         229,937         —           —     
                                   

Total assets

   $ 444,966       $ 444,966       $ —         $ —     
                                   

Cash Equivalents

Cash equivalents of $215.0 million consisting of money market funds and federal government and government agency obligations are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets.

Government Obligations

Available-for-sale securities of $229.9 million consisting of federal government and government agency obligations are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets.

 

15


Table of Contents

Assets and liabilities of the Company measured at fair value on a recurring basis as of July 31, 2010, are summarized as follows (in thousands):

 

            Fair Value Measurements at Reporting Date Using  

Description

   July 31, 2010      Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant  Unobservable
Inputs

(Level 3)
 

Assets

           

Cash Equivalents

   $ 104,416       $ 104,416       $ —         $ —     

Government obligations

     532,461         532,461         —           —     
                                   

Total Assets

   $ 636,877       $ 636,877       $ —         $ —     
                                   

Cash Equivalents

Cash equivalents of $104.4 million consisting of money market funds and federal government and government agency obligations are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets.

Government Obligations

Available-for-sale securities of $532.5 million consisting of federal government and government agency obligations are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets.

13. Subsequent Events

The Company evaluated its events and transactions subsequent to its January 29, 2011 balance sheet date and determined that there were no significant subsequent events to report.

 

16


Table of Contents

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Except for the historical information contained herein, we wish to caution you that certain matters discussed in this report constitute forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those stated or implied in forward-looking statements due to a number of factors, including, without limitation, those risks and uncertainties discussed under the heading “Risk Factors” contained in our Annual Report on Form 10-K for the fiscal year ended July 31, 2010. The information discussed in this report should be read in conjunction with our Annual Report on Form 10-K and other reports we file from time to time with the SEC. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future results or otherwise. Forward-looking statements include statements regarding our expectations, beliefs, intentions or strategies regarding the future and can be identified by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “should,” “will,” and “would” or similar words.

Available Information

We file annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K with the SEC. These reports, any amendments to these reports, proxy and information statements and certain other documents we file with the SEC are available through the SEC’s website at www.sec.gov or free of charge on our website as soon as reasonably practicable after we file the documents with the SEC. The public may also read and copy these reports and any other materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

Executive Summary

We develop and market Intelligent Bandwidth Management solutions for fixed line and mobile network operators worldwide and provide services associated with such products. Our current and prospective customers include domestic and international wireline and wireless network service providers, utility companies, large enterprises, multiple systems operators and government entities (collectively referred to as “service providers”). Our existing bandwidth management portfolio of optical switches, multiservice cross-connects and multiservice access platforms serve applications that extend across the network infrastructure, from multiservice access and regional backhaul to the optical core. We are also developing and marketing a mobile broadband optimization solution designed to help mobile operators reduce congestion in mobile access networks. We believe our products enable network operators to efficiently and cost-effectively provision and manage network capacity to support a wide range of converged services such as voice, video and data.

Revenue for the three months ended January 29, 2011, which was derived exclusively from our Intelligent Bandwidth Management products and services, decreased 25% to $12.2 million year over year. Net loss was $3.5 million for the three months ended January 29, 2011, compared to net loss of $1.2 million for the same period ended January 23, 2010.

The market for bandwidth management products continues to be challenged by high customer concentration, the project-oriented nature of purchasing patterns and customer migration to next-generation transmission technologies. In addition, the current economic climate continues to create uncertainty with regard to the level and timing of capital expenditures by service providers. With purchasing power concentrated in a small number of customers and with an excess of suppliers, competition remains intense. We believe that these factors will result in a limited number of new opportunities for revenue growth, and will continue to create quarterly revenue variability in this area of our business. Accordingly, our investments in these products will remain focused on customer support and sustaining engineering efforts, including targeted, incremental feature development tied to tangible revenue opportunities, and we will not be focusing on the development of next-generation transmission products. At the same time, we continue to invest in the area of mobile broadband optimization, which we believe represents an emerging market opportunity.

In July 2010, we announced the introduction of IQstream®, a mobile broadband optimization solution designed to help operators reduce congestion in mobile backhaul networks caused by rising demand for Internet video and other rich media subscriber content. IQstream is designed to lower the cost of delivering mobile data services by freeing

 

17


Table of Contents

up capacity in the cost-sensitive access network. In response to evolving customer requirements and market opportunities identified during the latter part of the first quarter of fiscal 2011, we made the decision to expand the scope of our first release of IQstream beyond our initial target set of features. We believe this expanded set of features will enhance the overall value of our solution and benefit the majority of our target customers. We anticipate attaining general availability of IQstream by the end of March 2011.

We are taking a systematic approach to our trial opportunities for IQstream. We continue to work with a focused set of customers that have specific backhaul implementations. This systematic approach provides us with the opportunity to more rigorously test our solution against specific interoperability, security and reliability requirements. The resultant trial process, while longer than originally envisioned, reflects the strategic nature of the location in which IQstream operates in the network, the complexities of the mobile backhaul environment, and the effects of the dynamic changes driving traffic growth. Given the early stage of IQstream and the extended trial process, we are not providing a date for expected first revenue for IQstream.

On December 22, 2010, the Company made a cash distribution to its stockholders of $6.50 per share of its common stock, par value $0.001, amounting to $185.4 million in the aggregate. As a result of having an accumulated deficit, the cash distribution has been recorded as a reduction to additional paid in capital.

In addition, we will continue to consider other strategic options that may serve to enhance stockholder value. These strategic options include, but are not limited to: acquisitions of, or mergers or other business combinations with, companies with complementary technologies or companies in other market segments; the sale or spin-off of certain assets; strategic alliances with, or investments in, other entities; the discontinuation or divestiture of certain products; and recapitalization alternatives, including stock buybacks, cash distributions or cash dividends.

Our cash, cash equivalents and investments totaled $445.0 million at January 29, 2011. We intend to fund our operations for the foreseeable future, including fixed commitments under operating leases and any required capital expenditures, utilizing these funds. We believe that existing cash, cash equivalents and investments will be sufficient to satisfy our operating requirements and enable us to pursue strategic alternatives.

Critical Accounting Policies and Estimates

Preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Management believes the most complex and sensitive judgments, because of their significance to the consolidated financial statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Management’s Discussion and Analysis in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2010 describes the significant accounting estimates and policies used in the preparation of the financial statements. Actual results in these areas could differ from management’s estimates. There have been no significant changes in the Company’s critical accounting policies during the first six months of fiscal 2011, other than the new revenue recognition guidance as discussed in the recent accounting pronouncement section.

Results of Operations

Revenue

The following table presents product and service revenue (in thousands, except percentages):

 

     Three Months Ended     Six Months Ended  
     January 29,
2011
     January 23,
2010
     Variance
in Dollars
    Variance
in Percent
    January 29,
2011
     January 23,
2010
     Variance
in Dollars
    Variance
in Percent
 

Revenue

                    

Product

   $ 5,593       $ 10,316       $ (4,723     (46 )%    $ 11,317       $ 20,368       $ (9,051     (44 )% 

Service

     6,564         5,858         706        12     12,549         11,430         1,119        10
                                                        

Total revenue

   $ 12,157       $ 16,174       $ (4,017     (25 )%    $ 23,866       $ 31,798       $ (7,932     (25 )% 
                                                        

Total revenue, which was derived exclusively from our Intelligent Bandwidth Management products and services, decreased for the three and six months ended January 29, 2011 compared to the same periods ended January 23,

 

18


Table of Contents

2010. Product revenue decreased for the three and six months ended January 29, 2011 compared to the same periods ended January 23, 2010, primarily due to a decrease in demand for our optical switching products. Service revenue consists primarily of fees for services relating to the maintenance of our products, installation services and training. Service revenue increased for the three and six months ended January 29, 2011 compared to the same periods ended January 23, 2010, primarily due to increased maintenance revenue.

For the three months ended January 29, 2011, two customers each accounted for more than 10% of our total revenue. International revenue represented 38% of our total revenue. We expect future revenue will continue to be highly concentrated in a relatively small number of customers. The timing of customer requirements during a fiscal year may cause shifts between quarterly periods in the level and type of revenue, the number of customers who account for more than 10% of our revenue, and in the mix of domestic versus international revenue. The loss or any substantial reduction or delay in orders by any one of these customers could materially adversely affect our business and, accordingly, our financial condition and results of operations.

Gross Profit

The following table presents gross profit for product and services (in thousands, except percentages):

 

     Three Months Ended     Six Months Ended  
     January 29,
2011
    January 23,
2010
    January 29,
2011
    January 23,
2010
 

Gross profit:

        

Product

   $ 2,503      $ 5,699      $ 3,554      $ 10,342   

Service

     4,537        3,596        8,310        6,730   
                                

Total

   $ 7,040      $ 9,295      $ 11,864      $ 17,072   
                                

Gross profit:

        

Product

     45     55     31     51

Service

     69     61     66     59
                                

Total

     58     58     50     54

Product gross profit

Cost of product revenue consists primarily of amounts paid to third-party contract manufacturers for purchased materials and services, other fixed manufacturing costs and provisions for warranty, scrap, rework, and provisions which may be taken for excess or slow moving inventory. Product gross profit decreased for the three and six months ended January 29, 2011 compared to the same periods ended January 23, 2010. The decrease for the three months ended January 29, 2011 was primarily due to lower revenue for our optical switching products. The decrease for the six months ended January 29, 2011 was primarily due to lower revenue for our optical switching products, a provision in our first quarter of fiscal 2011 of $0.9 million for certain inventory which, based on the company’s then current forecast, was deemed to be in excess of foreseeable demand, and a provision of $0.3 million for severance and benefits related to the restructuring of our operations organization. Product gross profit may fluctuate from period to period due to volume fluctuations, pricing pressures resulting from intense competition in our industry, and the enhanced negotiating leverage of larger customers. In addition, product gross profit may be affected by changes in the mix of products sold, channels of distribution, overhead absorption, sales discounts, increases in labor costs, excess inventory and obsolescence charges, increases in component pricing or other material costs, the introduction of new products, or the entry into new markets with different pricing and cost structures.

Service gross profit

Cost of service revenue consists primarily of costs of providing services under customer service contracts which include salaries and related expenses and other fixed costs. Service gross profit increased for the three and six months ended January 29, 2011 compared to the same periods ended January 23, 2010. The increase in service gross profit was primarily due to higher maintenance revenue and lower service cost. As most of our service cost of revenue is fixed, increases or decreases in revenue can have a significant impact on service gross profit. Service gross profit may also be affected in future periods by various factors including, but not limited to, the change in mix between technical support services and advanced services, competitive and economic pricing pressures, the enhanced negotiating leverage of certain larger customers, maintenance contract renewals, and the timing of renewals.

 

19


Table of Contents

Operating Expenses

The following table presents operating expenses (in thousands, except percentages):

 

     Three Months Ended     Six Months Ended  
     January 29,
2011
     January 23,
2010
    Variance
in Dollars
    Variance
in Percent
    January 29,
2011
     January 23,
2010
     Variance
in Dollars
    Variance
in Percent
 

Research and development

   $ 6,239       $ 7,761      $ (1,522     (20 )%    $ 13,550       $ 16,433       $ (2,883     (18 )% 

Sales and marketing

     2,643         2,759        (116     (4 )%      5,243         5,344         (101     (2 )% 

General and administrative

     2,030         2,444        (414     (17 )%      4,156         4,752         (596     (13 )% 

Restructuring and asset impairment

     —           (88     88        (100 )%      —           6,216         (6,216     (100 )% 
                                                       

Total operating expenses

   $ 10,912       $ 12,876      $ (1,964     (15 )%    $ 22,949       $ 32,745       $ (9,796     (30 )% 
                                                       

Research and Development Expenses

Research and development expenses consist primarily of salaries and related expenses and prototype costs relating to design, development, testing and enhancements of our products. Research and development expenses decreased for the three and six months ended January 29, 2011 compared to the same periods ended January 23, 2010. The decrease was primarily due to lower fixed and allocated expenses of $0.6 million and $1.5 million for the three and six months ended January 29, 2011 as a result of our cost containment initiatives. The decrease was also due to lower personnel expenses of $0.6 million and $1.3 million for the three and six months ended January 29, 2011 as a result of lower headcount and a change in estimate of certain compensation related obligations.

Sales and Marketing Expenses

Sales and marketing expenses consist primarily of salaries, commissions and related expenses, and other sales and marketing support expenses. Sales and marketing expenses decreased slightly for the three and six months ended January 29, 2011 compared to the same periods ended January 23, 2010 primarily due to lower personnel expenses on lower revenue. Within our existing spending levels, we continue to allocate sales and marketing resources to those geographic regions where we see the most attractive opportunities.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related expenses, professional fees and other general corporate expenses. General and administrative costs are net of insurance recoveries associated with the Company’s now concluded stock option investigation.

General and administrative expenses decreased for the three and six months ended January 29, 2011 compared to the same periods ended January 23, 2010. The decrease was primarily due to a decrease in discretionary spending of $0.4 million and $0.6 million for the three and six months ended January 29, 2011 compared to the same periods ended January 23, 2010.

 

20


Table of Contents

Restructuring and Impairment Charges

During the first quarter of fiscal 2011, the Company made the decision to integrate and realign its operations group with other functional areas to enhance operational efficiency and realize the benefits of identified synergies within the respective groups. The realignment resulted in the elimination of four positions. The Company recorded a restructuring charge of $0.3 million which was charged to cost of product revenue. This charge relates to employee separation packages including severance pay, benefits continuation and outplacement costs.

During the first quarter of fiscal 2010 the Company recorded a restructuring and related asset impairment charge of $6.4 million of which $6.3 million was charged to operating expense and $0.1 million to cost of product revenue. This charge relates to (i) employee separation packages including severance pay, benefits continuation and outplacement costs amounting to $3.4 million, of which $3.3 million was charged to operating expense and $0.1 million to cost of product revenue, (ii) a facility related termination agreement of $1.9 million, and (iii) a related asset impairment charge of $1.1 million. During the second quarter of fiscal 2010, the Company recorded an adjustment of $0.1 million for unused outplacement services.

We continuously monitor our costs and therefore future restructuring and/or impairment charges may be necessary in response to future market or economic conditions.

Interest and Other Income, Net

The following table presents interest and other income, net (in thousands, except percentages):

 

     Three Months Ended     Six Months Ended  
     January 29,
2011
     January 23,
2010
     Variance
in Dollars
    Variance
In Percent
    January 29,
2011
     January 23,
2010
     Variance
in Dollars
    Variance
In Percent
 

Interest and other income, net

   $ 470       $ 1,641       $ (1,171     (71 )%    $ 1,238       $ 3,461       $ (2,223     (64 )% 
                                                                    

Interest and other income net decreased for the three and six months ended January 29, 2011, compared to the same periods ended January 23, 2010. The decrease was primarily due to lower interest rates in fiscal 2011 when compared to fiscal 2010 and a lower average investment balance as a result of the cash distributions that were paid on December 15, 2009 and December 22, 2010.

Income Tax Expense/Benefit

Income tax expense was $0.1 million and $0.2 million for the three and six months ended January 29, 2011, respectively, primarily related to income tax expense in certain states and profitable foreign jurisdictions.

The income tax benefit was $0.7 million and $0.6 million for the three and six months ended January 23, 2010, respectively. The recognized tax benefit reflects the tax effect of the November 2009 enactment of the Home Ownership and Business Assistance Act of 2009. The new law provided for the utilization of 100% (previously 90%) of certain net operating loss carrybacks against alternative minimum taxable income and resulted in an aggregate refund of alternative minimum tax paid of $0.8 million for fiscal 2006 and fiscal 2007.

As a result of having substantial accumulated net operating losses, the Company determined that it is more likely than not that our deferred tax assets may not be realized. Therefore, we maintain a full valuation allowance. If the Company generates sustained future taxable income against which these tax attributes may be applied, some or all of the net operating loss carryforwards may be utilized and the valuation allowance reversed. If the valuation allowance is reversed, portions would be recorded as an increase to paid-in capital and the remainder would be recorded as a reduction in income tax expense.

 

21


Table of Contents

Liquidity and Capital Resources

Total cash, cash equivalents and short and long term investments were $445.0 million at January 29, 2011. Included in this amount were cash and cash equivalents of $215.0 million compared to $104.4 million at July 31, 2010. The increase in cash and cash equivalents was primarily attributable to the maturity of various short term investments.

Net cash provided by investing activities was $300.6 million for the six months ended January 29, 2011 and consisted primarily of net proceeds from the maturity of investments of $301.8 million partially offset by purchases of property and equipment of $1.2 million.

Net cash used in operating activities was $7.2 million for the six months ended January 29, 2011. Net loss for the six months ended January 29, 2011 was $10.0 million and included non-cash charges including share-based compensation of $0.9 million, and depreciation and amortization of $2.0 million. Accounts receivable decreased to $10.5 million at January 29, 2011 from $14.2 million at July 31, 2010. The decrease was primarily due to lower revenue in the six months ended January 29, 2011. Our accounts receivable and days sales outstanding are impacted primarily by the timing of shipments, collections performance and timing of support contract renewals. Deferred revenue decreased to $12.9 million at January 29, 2011 from $14.8 million at July 31, 2010 due to the timing of service contract renewals.

Net cash used in financing activities was $182.8 million. On December 22, 2010, the Company made a cash distribution to its stockholders of $6.50 per share of its common stock, par value $0.001, amounting to $185.4 million in the aggregate. As a result of having an accumulated deficit, the cash distribution has been recorded as a reduction to additional paid in capital. The impact of the cash distribution was partially offset by proceeds from the exercise of employee stock options of $2.6 million.

Our primary source of liquidity comes from our cash, cash equivalents and investments, which totaled $445.0 million at January 29, 2011. Our investments are classified as available-for-sale and consist of securities that are readily convertible to cash, including certificates of deposits and government securities. At January 29, 2011, $217.9 million of investments with maturities of less than one year were classified as short-term investments. Based on our current expectations, we anticipate that some portion of our existing cash, cash equivalents and investments may be consumed by operations. Our accounts receivable, while not considered the primary source of liquidity, represents a concentration of credit risk because the accounts receivable balance at any point in time typically consists of a relatively small number of customer account balances. At January 29, 2011, more than 50% of our accounts receivable balance was attributable to five of our customers. As of January 29, 2011, we have no outstanding debt or credit facilities and do not anticipate entering into any debt or credit agreements in the foreseeable future. Our fixed commitments for cash expenditures consist primarily of payments under operating leases and inventory purchase commitments. We do not currently have any material commitments for capital expenditures. We currently intend to fund our operations, including our fixed operating leases, purchase commitments and any required capital expenditures using our existing cash, cash equivalents and investments.

As of January 29, 2011, future cash restructuring payments of $0.6 million consist primarily of costs related to rent and employee separation packages that will be paid over the next 15 months.

We believe that our current cash, cash equivalents and investments will be sufficient to satisfy our anticipated cash requirements for at least the next twelve months. We will continue to consider appropriate action with respect to our cash position in light of present and anticipated business needs as well as providing a means by which our stockholders may realize value in connection with their investment.

 

22


Table of Contents

Commitments, Contractual Obligations and Off-Balance Sheet Arrangements

At January 29, 2011, our future obligations, which consist of contractual commitments for operating leases and inventory and other purchase commitments, were as follows (in thousands):

 

     Total      Less than
1 Year
     1-3 Years      3-5 Years      Thereafter      Other  

Operating leases

   $ 2,647       $ 2,055       $ 592       $ —         $ —         $ —     

Inventory and other purchase commitments

     4,659         4,659         —           —           —           —     
                                                     

Total

   $ 7,306       $ 6,714       $ 592       $ —         $ —         $ —     
                                                     

Payments made under operating leases will be treated as rent expense for the facilities currently being utilized, or as a reduction of the restructuring liability for payments relating to excess facilities. Payments made for inventory purchase commitments will initially be capitalized as inventory and will then be recorded as cost of revenue as the inventory is sold or otherwise disposed of.

Reserves for unrecognized tax benefits of $1.6 million have not been included in the above table because the periods of cash settlement with the respective tax authority cannot be reasonably estimated.

Recent Accounting Pronouncements

In September 2009, the Emerging Issues Task Force issued new guidance pertaining to the accounting for revenue arrangements with multiple deliverables. The new guidance addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting, and how the arrangement consideration should be allocated among the separate units of accounting. The new guidance became effective for fiscal years beginning after June 15, 2010 and may be applied retrospectively or prospectively for new or materially modified arrangements. In addition, early adoption was permitted. The new guidance is applicable to the Company and became effective beginning August 1, 2010. The Company adopted the new guidance in the first quarter of fiscal 2011, on a prospective basis.

In September 2009, the Emerging Issues Task Force issued new guidance that changes the accounting model for revenue arrangements that include both tangible products and software elements that are “essential to the functionality” and removes these products from the scope of current software revenue guidance. The new guidance shall be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Earlier application was permitted as of the beginning of a company’s fiscal year provided the company has not previously issued financial statements for any period within that year. An entity shall not elect early application of this guidance unless it also elects early application of the new rule pertaining to accounting for revenue arrangements with multiple deliverables. The new guidance is applicable to the Company and became effective beginning August 1, 2010. The Company adopted the new guidance in the first quarter of fiscal 2011.

During the second quarter of fiscal 2011, the Company entered into a multiple element arrangement that included hardware and non-essential software deliverables. The hardware element was delivered during the second quarter and the non-essential software element was undelivered as of the end of the second quarter. The Company recognized $0.7 million in revenue and deferred $0.1 million related to this multiple element transaction. Under the prior revenue recognition guidance the Company would have deferred $0.8 million for this multiple element transaction. The new guidance does not change the units of accounting.

 

23


Table of Contents

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Sensitivity

The primary objective of our current investment activities is to preserve investment principal while maximizing income without significantly increasing risk. We maintain a portfolio of cash equivalents and short-term and long-term investments in a variety of securities including money market funds and government debt securities. These available-for-sale investments are subject to interest rate risk and may decline in value if market interest rates increase. If market interest rates increased immediately and uniformly by 10 percent from levels at January 29, 2011, the fair value of the portfolio would decline by approximately $0.1 million. We have the ability to hold our fixed income investments until maturity, and therefore do not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on our investment portfolio.

Exchange Rate Sensitivity

While the majority of our operations are based in the United States, our business is global, with international revenue representing 39% of total revenue in fiscal 2010 and 35% of revenue in the first six months of fiscal 2011. To date, our revenue has been primarily denominated in US dollars. Additionally, we have a development center in Shanghai, China. Currency fluctuations to date have not had a significant impact on our financial results. We expect international sales to continue to represent a significant portion of our revenue and that we will continue to incur costs in our Shanghai development center. Should our exposure to foreign currency fluctuations become material, we are prepared to hedge against such fluctuations, although we have not engaged in hedging activities to date.

 

24


Table of Contents

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures. Our management (with the participation of our Chief Executive Officer and Chief Financial Officer) evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of January 29, 2011. Disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported on a timely basis and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures are effective and designed to ensure that the information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the requisite time periods.

Limitations on Effectiveness of Controls. Our management has concluded that our disclosure controls and procedures and internal controls provide reasonable assurance that the objectives of our control system are met. However, our management (including our Chief Executive Officer and Chief Financial Officer) does not expect that the disclosure controls and procedures or internal controls will prevent all error and/or fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, errors and instances of fraud, if any, within the company have been or will be detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple errors or mistakes. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurances that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.

Changes in Internal Control over Financial Reporting. There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the second fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

25


Table of Contents

Part II. Other Information

Item 1. Legal Proceedings

Litigation

IPO Allocation Case

Beginning on July 2, 2001, several purported class action complaints were filed in the United States District Court for the Southern District of New York against the Company and several of its officers and directors (the “Individual Defendants”) and the underwriters for the Company’s initial public offering on October 21, 1999. Some of the complaints also include the underwriters for the Company’s follow-on offering on March 14, 2000. An amended complaint, which is the operative complaint, was filed on April 19, 2002 on behalf of persons who purchased the Company’s common stock between October 21, 1999 and December 6, 2000. The amended complaint alleges claims against the Company, several of the Individual Defendants and the underwriters for violations under Sections 11 and 15 of the Securities Act of 1933, as amended (the “Securities Act”), primarily based on the assertion that the Company’s lead underwriters, the Company and several of the Individual Defendants made material false and misleading statements in the Company’s Registration Statements and Prospectuses filed with the Securities and Exchange Commission, or the SEC, in October 1999 and March 2000 because of the failure to disclose (a) the alleged solicitation and receipt of excessive and undisclosed commissions by the underwriters in connection with the allocation of shares of common stock to certain investors in the Company’s public offerings and (b) that certain of the underwriters allegedly had entered into agreements with investors whereby underwriters agreed to allocate the public offering shares in exchange for which the investors agreed to make additional purchases of stock in the aftermarket at pre-determined prices. It also alleges claims against the Company, the Individual Defendants and the underwriters under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), primarily based on the assertion that the Company’s lead underwriters, the Company and the Individual Defendants defrauded investors by participating in a fraudulent scheme and by making materially false and misleading statements and omissions of material fact during the period in question. The amended complaint seeks damages in an unspecified amount.

The action against the Company is being coordinated with approximately three hundred other nearly identical actions filed against other companies. Due to the large number of nearly identical actions, the court has ordered the parties to select up to twenty “test” cases. The Company’s case has been selected as one such test case. As a result, among other things, the Company will be subject to broader discovery obligations and expenses in the litigation than non-test case issuer defendants.

On October 9, 2002, the court dismissed the Individual Defendants from the case without prejudice. This dismissal disposed of the Section 15 and Section 20(a) claims without prejudice, because these claims were asserted only against the Individual Defendants. On October 13, 2004, the court denied the certification of a class in the action against the Company with respect to the Section 11 claims alleging that the defendants made material false and misleading statements in the Company’s Registration Statement and Prospectuses. The certification was denied because no class representative purchased shares between the date of the IPO and January 19, 2000 (the date unregistered shares entered the market), and thereafter suffered a loss on the sale of those shares. The court certified a class in the action against the Company with respect to the Section 10(b) claims alleging that the Company and the Individual Defendants defrauded investors by participating in a fraudulent scheme and by making materially false and misleading statements and omissions of material fact during the period in question. On December 5, 2006, the Second Circuit vacated the district court’s class certification decision. On April 6, 2007, the Second Circuit panel denied a petition for rehearing filed by the plaintiffs, but noted that the plaintiffs could ask the district court to certify a more narrow class than the one that was rejected.

On August 14, 2007, the plaintiffs filed a Second Amended Class Action complaint against the Company. The Company and the underwriters filed separate motions to dismiss the amended complaint on November 14, 2007. On March 26, 2008, the Court denied the motion to dismiss the Section 10(b) claims but dismissed certain Section 11 claims against the Company. On June 5, 2008, the Court dismissed the remaining Section 11 claims against the Company in response to a motion for partial reconsideration.

The parties in the approximately 300 coordinated cases, including the Company’s case, reached a settlement. The insurers for the issuer defendants in the coordinated cases will make the settlement payment on behalf of the issuers, including the Company. On October 5, 2009, the Court granted final approval of the settlement. Two appeals by objectors to the settlement are proceeding before the Second Circuit Court of Appeals. The plaintiffs have moved to dismiss both appeals.

 

26


Table of Contents

Due to the inherent uncertainties of litigation, the Company cannot accurately predict the ultimate outcome of the matter. If the settlement does not survive appeal, the litigation continues, and the Company is found liable, the Company is unable to estimate or predict the potential damages that might be awarded, whether such damages would be greater than the Company’s insurance coverage, and whether such damages would have a material impact on our results of operations or financial condition in any future period.

Derivative Lawsuits

In October 2007, a purported Sycamore Networks, Inc. stockholder filed a complaint for violation of Section 16 of the Securities Exchange Act of 1934, which prohibits short-swing trading, against the Company’s Initial Public Offering underwriters. The complaint, Vanessa Simmonds v. Morgan Stanley, et al., in the District Court for the Western District of Washington (“District Court”) seeks recovery of short-swing profits. On April 28, 2008, the district court established a briefing schedule for motions to dismiss and ruled that all discovery be stayed pending resolution of the motions to dismiss. The District Court found the motions appropriate for oral argument which was held on January 6, 2009. On March 16, 2009, the District Court issued an order dismissing the case. On March 31, 2009, the plaintiff appealed. Briefing before the Ninth Circuit was complete as of November 17, 2009 and oral argument was heard on October 5, 2010. On December 2, 2010, the Ninth Circuit Court of Appeals affirmed the District Court’s decision to dismiss the moving issuers’ cases (including the Company’s) on the grounds that plaintiff’s demand letters were insufficient to put the issuers on notice of the claims asserted against them and further ordered that the dismissals be made with prejudice. The Ninth Circuit, however, reversed and remanded the District Court’s decision on the underwriter’s motion to dismiss as to the claims arising from the non-moving issuers’ IPOs, finding plaintiff’s claims were not time-barred under the applicable statute of limitations. In remanding, the Ninth Circuit advised the non-moving issuers and underwriters to file in the District Court the same challenges to plaintiff’s demand letters that moving issuers had filed.

On December 16, 2010, underwriters filed a petition for panel rehearing and petition for rehearing en banc. Appellant Vanessa Simmonds also filed a petition for rehearing en banc. On January 18, 2011, the Ninth Circuit denied the petition for rehearing and petitions for rehearing en banc. It further ordered that no further petitions for rehearing may be filed.

On January 24, 2011, the underwriters filed a motion to stay the issuance of the Ninth Circuit’s mandate in the cases involving the non-moving issuers. On January 25, 2011, the Ninth Circuit granted the underwriters’ motion and ordered that the mandate in the cases involving the non-moving issuers is stayed for ninety days pending the filing of a petition for writ of certiorari in the United States Supreme Court. On January 26, 2011, Appellant Vanessa Simmonds moved to join the underwriters’ motion and requested the Ninth Circuit stay the mandate in all cases. On January 26, 2011, the Ninth Circuit granted Appellant’s motion and ruled that the mandate in all cases (including the Company’s and other moving issuers) is stayed for ninety days pending Appellant’s filing of a petition for writ of certiorari in the United States Supreme Court.

The Company is named as a nominal defendant. No recovery is sought from the Company in this matter.

Other Matters

From time to time the Company is a party to litigation and other disputes which it considers routine and incidental to its business. Our management does not expect the results of any of these actions to have a material adverse effect on the Company’s business, results of operations or financial condition.

 

27


Table of Contents

Item 1A. Risk Factors

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended July 31, 2010, as filed with the SEC on September 24, 2010. There have been no material changes to our risk factors from those previously disclosed in our Form 10-K. Additional risks and uncertainties, including risks and uncertainties not presently known to us, or that we currently deem immaterial, could also have an adverse effect on our business, financial condition and/or results of operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The Company has not publicly announced any programs to repurchase shares of Common Stock.

 

28


Table of Contents

Item 6. Exhibits

Exhibits:

(a) List of Exhibits

 

Number

  

Exhibit Description

  3.1    Amended and Restated Certificate of Incorporation of the Company (2)
  3.2    Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Company (2)
  3.3    Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Company (3)
  3.4    Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Company (5)
  3.5    Amended and Restated By-Laws of the Company (4)
  4.1    Specimen common stock certificate (1)
  4.2    See Exhibits 3.1, 3.2, 3.3 and 3.4, for provisions of the Certificate of Incorporation and By-Laws of the Registrant defining the rights of holders of common stock of the Company (2)(3)(4)
31.1    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

(1) Incorporated by reference to Sycamore Networks, Inc.’s Registration Statement on Form S-1 (Registration Statement No. 333-84635).
(2) Incorporated by reference to Sycamore Networks, Inc.’s Registration Statement on Form S-1 (Registration Statement No. 333-30630).
(3) Incorporated by reference to Sycamore Networks, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended January 27, 2001 filed with the Securities and Exchange Commission on March 13, 2001.
(4) Incorporated by reference to Sycamore Networks, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended October 27, 2007 filed with the Securities and Exchange Commission on November 28, 2007.
(5) Incorporated by reference to Sycamore Networks, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 21, 2009.

 

29


Table of Contents

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.

 

Sycamore Networks, Inc.

/s/ Paul F. Brauneis

Paul F. Brauneis
Chief Financial Officer,
Vice President, Finance and Administration, Treasurer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
Dated: February 24, 2011

 

30