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 OCTOBER 28, 2000
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 333-25853
SYCAMORE NETWORKS, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3410558
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
150 Apollo Drive
Chelmsford, MA 01824
(978) 250-2900
(Address Including Zip Code and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
NONE
(Former name, former address and former fiscal year,
if changed since last report)
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) Yes X No ___, and (2) has been
subject to such filing requirements for the past 90 days. Yes X No___ .
The number of shares outstanding of the Registrant's Common Stock as of November
30, 2000 was 272,635,510.
Sycamore Networks, Inc.
Index
Part I. Financial Information
Page No.
Item 1. Financial Statements
Consolidated Balance Sheets as of October 28, 2000 and July 31, 2000 3
Consolidated Statements of Operations for the three months
ended October 28, 2000 and October 30, 1999 4
Consolidated Statements of Cash Flows for the three months
ended October 28, 2000 and October 30, 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosure About Market Risk 21
Part II. Other Information
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 22
Signature 23
Exhibit Index 24
2
Part I. Financial Information
ITEM 1. FINANCIAL STATEMENTS
SYCAMORE NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
October 28, July 31,
2000 2000
---------- ----------
Assets
Current assets:
Cash and cash equivalents $ 375,994 $ 429,965
Marketable securities 741,279 710,398
Accounts receivable, net of allowance for doubtful accounts
of $401 and $0 at October 28, 2000 and July 31, 2000,
respectively. 40,231 43,407
Inventories 53,563 39,739
Prepaids and other current assets 14,997 25,869
---------- ----------
Total current assets 1,226,064 1,249,378
Property and equipment, net 71,053 42,840
Marketable securities 399,922 376,740
Other assets 27,429 19,438
---------- ----------
Total assets $1,724,468 $1,688,396
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 45,865 $ 49,030
Accrued compensation 2,945 7,177
Accrued expenses 16,300 7,529
Deferred revenue 49,904 29,708
Other current liabilities 5,352 8,866
---------- ----------
Total current liabilities 120,366 102,310
850 4,487
Long-term liabilities
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares - -
authorized; none issued or outstanding
Common stock, $.001 par value; 1,500,000,000 shares 273 272
authorized; 272,529,584 and 271,854,606 shares issued and
outstanding
Additional paid-in capital 1,723,737 1,652,463
Accumulated deficit (57,398) (31,194)
Notes receivable (100) (262)
Deferred compensation (67,461) (44,714)
Accumulated other comprehensive income 4,201 5,034
---------- ----------
Total stockholders' equity 1,603,252 1,581,599
---------- ----------
Total liabilities and stockholders' equity $1,724,468 $1,688,396
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
3
Sycamore Networks, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
-------------------
OCTOBER 28, OCTOBER 30,
2000 1999
-------- -------
Revenues ...................................................... $120,448 $19,510
Cost of revenues (exclusive of the non-cash stock
compensation expense of $1,643 and $261) ..................... 64,139 10,340
-------- -------
Gross profit ................................................. 56,309 9,170
Operating expenses:
Research and development (exclusive of the non-cash stock
compensation expense of $25,388 and $884) ................. 35,679 9,329
Sales and marketing (exclusive of the non-cash stock
compensation expense of $14,735 and $1,605) ............... 17,400 3,453
General and administrative (exclusive of the non-cash
stock compensation expense of $987 and $539) .............. 4,062 956
Amortization of stock compensation ......................... 42,753 3,289
Acquisition costs .......................................... 4,948 -
-------- -------
Total operating expenses .............................. 104,842 17,027
Loss from operations ......................................... (48,533) (7,857)
Interest and other income, net ............................... 22,329 484
-------- -------
Net loss ..................................................... $(26,204) $(7,373)
======== =======
Basic and diluted net loss per share .......................... $(0.11) $(0.15)
Weighted average shares used in computing basic and
diluted net loss per share ................................ 230,658 49,490
The accompanying notes are an integral part of the consolidated financial
statements.
4
SYCAMORE NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Three months ended
------------------
October 28, October 30,
2000 1999
--------- --------
Cash flows from operating activities:
Net loss $ (26,204) $ (7,373)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 5,716 700
Amortization of stock compensation 42,753 3,289
Tax benefit from employee stock plans 3,487 -
Changes in operating assets and liabilities:
Accounts receivable 3,176 (1,114)
Inventories (13,824) (960)
Prepaids and other current assets 10,872 2,038
Deferred revenue 20,196 (247)
Accounts payable (3,165) 4,747
Accrued expenses and other liabilities (833) 135
--------- --------
Net cash provided by operating activities 42,174 1,215
--------- --------
Cash flows from investing activities:
Purchases of property and equipment (33,929) (3,169)
Purchases of marketable securities (507,380) (8,082)
Maturities of marketable securities 452,484 4,906
Increase in other assets (7,991) (440)
--------- --------
Net cash used in investing activities (96,816) (6,785)
--------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock, net 2,289 285,037
Payments received for notes receivable 162 -
Payments on notes payable (1,780) (4,931)
--------- --------
Net cash provided by financing activities 671 280,106
--------- --------
Net increase (decrease) in cash and cash
equivalents (53,971) 274,536
Cash and cash equivalents, beginning of period 429,965 27,332
--------- --------
Cash and cash equivalents, end of period $ 375,994 $301,868
========= ========
Supplementary non-cash activity:
Issuance of common stock in exchange for
notes receivable - 100
The accompanying notes are an integral part of the consolidated financial
statements.
5
SYCAMORE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF THE BUSINESS
Sycamore Networks, Inc. (the "Company") develops and markets networking
products that enable service providers to quickly and cost-effectively provide
bandwidth and create new high-speed data services. To date, the Company has
principally marketed its products in the United States and Europe.
The Company is subject to risks common to technology-based companies
including, but not limited to, the development of new technology, development of
markets and distribution channels, dependence on key personnel, and the ability
to obtain additional capital as needed to meet its product plans. The Company's
ultimate success is dependent upon its ability to successfully develop and
market its products.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
All historical financial information has been restated to reflect the
acquisition of Sirocco Systems, Inc. in the first quarter of fiscal 2001, which
was accounted for as pooling of interests.
The accompanying financial data as of October 28, 2000 and for the three months
ended October 28, 2000 and October 30, 1999 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 generally
accepted accounting principles 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 for the fiscal year ended July 31, 2000.
In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present a fair statement of financial
position as of October 28, 2000, results of operations for the three months
ended October 28, 2000 and October 30, 1999 and cash flows for the three months
ended October 28, 2000 and October 30, 1999 have been made. The results of
operations for the three months ended October 28, 2000 are not necessarily
indicative of the operating results for the full fiscal year or any future
periods.
In September 1999, the FASB issued Emerging Issues Task Force Topic No. D-83
("EITF D-83"), "Accounting for Payroll Taxes Associated with Stock Option
Exercises." EITF D-83 requires that payroll taxes paid on the difference between
the exercise price and the fair value of acquired stock in association with an
employee's exercise of non-qualified stock options to be treated as operating
expenses. Payroll taxes on stock option exercises were $1.8 million in the first
quarter of fiscal 2001.
3. NET LOSS PER SHARE AND PRO FORMA 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
the weighted-average number of shares of common stock that are subject to
repurchase. Diluted net loss per share is computed by dividing the net loss for
the period by the weighted- average number of common and common equivalent
shares outstanding during the period, if dilutive. Common equivalent shares are
composed of unvested shares of restricted common stock and the incremental
common shares issuable upon the exercise of stock options and unvested
restricted common shares.
Pro forma net loss per share is computed using the weighted-average number of
common shares outstanding, including the pro forma effects of the automatic
conversion of the Company's Series A, B, C and D redeemable convertible
preferred stock into shares of the Company's common stock effective upon the
closing of the Company's initial public offering as if such conversion occurred
at the date of original issuance.
6
All share and per share data presented reflects two three-for-one stock splits
effected in August 1999 and February 2000.
The following table sets forth the computation of basic and diluted net loss per
share, (in thousands, except per share data):
THREE MONTHS ENDED
--------------------------------------------
OCTOBER 28, October 30,
2000 1999
-------- --------
Numerator $(26,204) $ (7,373)
Net loss ======== ========
Denominator
HISTORICAL:
Weighted-average shares of common stock outstanding 272,447 104,245
Weighted-average shares subject to repurchase (41,789) (54,755)
-------- --------
Shares used in per-share calculation - basic and diluted 230,658 49,490
======== ========
Net loss per share:
Basic and diluted $ (0.11) $ (0.15)
======== ========
Denominator
PRO FORMA:
Weighted-average shares of common stock outstanding 230,658 49,490
Weighted-average number of shares assumed upon
conversion of redeemable convertible preferred stock - 129,379
-------- --------
Shares used in per-share calculation - pro forma basic and diluted 230,658 178,869
======== ========
Net loss per share:
Pro forma basic and diluted $ (0.11) $ (0.04)
======== ========
Options to purchase 5,363,868 and 248,955 shares of common stock at respective
average exercise prices of $114.69 and $9.50 have not been included in the
computation of diluted net loss per share for the three months ended October 28,
2000 and October 30, 1999, respectively, as their effect would have been anti-
dilutive.
4. INVENTORY
Inventory consisted of the following (in thousands):
October 28, July 31,
2000 2000
------- -------
Raw materials $18,559 $14,340
Work in process 8,242 3,685
Finished goods 26,762 21,714
------- -------
$53,563 $39,739
======= =======
5. COMPREHENSIVE LOSS
The Company reports comprehensive loss in accordance with Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (FAS 130). The
components of comprehensive loss are as follows (in thousands):
7
THREE MONTHS ENDED
OCTOBER 28, 2000 OCTOBER 30, 1999
------------------- -------------------
Net loss $(26,204) $(7,373)
Other comprehensive income:
Unrealized gain on investments 4,201 -
-------- -------
Comprehensive loss $(22,003) $(7,373)
======== =======
6. ACQUISITION
On September 7, 2000, the Company acquired Sirocco Systems, Inc. ("Sirocco") in
a transaction accounted for as a pooling of interests. An aggregate of
approximately 28.6 million shares of Sycamore common stock were either exchanged
for all outstanding shares of Sirocco or reserved for common stock issuable
under outstanding Sirocco stock options assumed by us in the transaction.
Acquisition costs for the first quarter of fiscal 2001 were $4.9 million.
Since the fiscal years of Sycamore and Sirocco differ, the historical periods
combined giving effect to the acquisition are as follows:
SYCAMORE Sirocco
- -------- -------
Fiscal year ended July 31, 1999 Fiscal year ended December 31, 1999
Fiscal year ended July 31, 2000 Fiscal year ended July 31, 2000
Three months ended October 28, 2000 Three months ended October 28, 2000
and October 30, 1999 and October 30, 1999
The three months ended October 30, 1999 include Sirocco's financial results
which are also recorded in the fiscal year ended December 31, 1999. Sirocco had
no revenue and a net loss for the three months ended October 30, 1999 of
$1,656,000. Sirocco's financial results for the five month period ended
December 31, 1999, which has been reflected as an adjustment to retained
earnings, include no revenue and a net loss of $3,659,000. There were no
intercompany transactions requiring elimination in any period presented.
7. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No.133, Accounting for Derivative Instruments and Hedging Activities (SFAS
No.133). This accounting standard, which is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000, requires that all derivatives be
recognized as either assets or liabilities at estimated fair value. In June
2000, the FASB issued Statement of Financial Accounting Standards No. 138,
Accounting for Certain Derivative Instruments and Certain Hedging Activities, an
amendment of SFAS No. 133. This accounting standard amended the accounting and
reporting standards of SFAS No. 133 for certain derivative instruments and
hedging activities. The adoption of SFAS No. 133, as amended, is not expected to
have a material effect on the Company's financial position or results of
operations.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" (SAB 101). SAB 101 summarizes certain areas
of the Staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. In June 2000, the SEC issued SAB
No. 101B which defers the implementation date of SAB 101 until no later than the
fourth fiscal quarter of fiscal years beginning after December 15, 1999, with
earlier adoption encouraged. The Company is required to and will adopt SAB 101
in the fourth quarter of fiscal 2001. The Company believes that its current
revenue recognition policy complies with SAB 101 and does not expect the
adoption to have a material impact on its financial position or results of
operations.
8
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 "Factors That May Affect Future
Results" contained in our Annual Report on Form 10-K and other reports we file
from time to time with the SEC and the risks and uncertainties discussed under
the captions "Risks Related To Our Business" and "Risks Related to the
Securities Market." 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.
OVERVIEW
We develop and market products that transport voice and data traffic over
wavelengths of light. Our products enable service providers to quickly and cost
effectively provide bandwidth and create new high-speed data services. From our
inception in February 1998 through May 1, 1999, our operating activities
consisted primarily of research and development, product design, development and
testing. During this period, we also staffed and trained our administrative,
marketing and sales personnel and began sales and marketing activities. We
began shipping our SN 6000 Intelligent Optical Transport product in May 1999,
our SN 8000 Intelligent Optical Node in August 1999, our Silvx Manager Network
Management System in November 1999 and our SN 16000 Intelligent Optical Switch
in June 2000.
On September 7, 2000, we acquired Sirocco Systems, Inc. ("Sirocco") in a
transaction accounted for as a pooling of interests. An aggregate of
approximately 28.6 million shares of Sycamore common stock were either exchanged
for all outstanding shares of Sirocco or reserved for common stock issuable
under outstanding Sirocco stock options assumed by us in the transaction. All
historical periods combined give effect to the acquisition.
RESULTS OF OPERATIONS
REVENUES
Revenues for the first quarter of fiscal 2001 increased 517% to $120.4 million
from $19.5 million for the first quarter of fiscal 2000. The increase in
revenues represents increased market acceptance of our products and the
broadening of our product offerings, including the SN8000 and SN16000. For the
first quarter of fiscal 2001, three customers individually represented more than
ten percent of our revenues compared to one customer in the first quarter of
fiscal 2000.
COST OF REVENUES
Cost of revenues for the first quarter of fiscal 2001 increased 520% to $64.1
million from $10.3 million for the first quarter of fiscal 2000. Cost of
revenues as a percentage of revenue was 53% for the first quarter of fiscal 2001
and fiscal 2000. The increase in cost of revenues is primarily related to
increased revenues, as well as headcount increases in our manufacturing overhead
and customer service organizations and warranty and other period costs. The
Company expects cost of revenues to continue to increase as revenues increase.
Cost of revenues, and the resulting gross margins, may be highly variable and
dependent on many factors, some of which are outside the Company's control, such
as the demand for the Company's products and the mix of products sold.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the first quarter of fiscal 2001 increased
283% to $35.7 million from $9.3 million for the first quarter of fiscal 2000.
Research and development expenses as a percentage of revenue were 29.6% and
47.8% for the first quarter of fiscal 2001 and fiscal 2000, respectively. The
increase in expenses was primarily due to increased costs associated with a
significant increase in personnel and personnel-related expenses, increases in
non-recurring engineering costs and increases in prototype expenses for the
design and development of new products as well as enhancements to existing
products. Research and development is essential to our future success and we
expect the dollar amounts of research and development expenses will increase in
future periods to support the continued development of our intelligent optical
transport and optical switching products as well as new or complementary
technologies.
9
SALES AND MARKETING EXPENSES
Sales and marketing expenses for the first quarter of fiscal 2001 increased 404%
to $17.4 million from $3.5 million for the first quarter of fiscal 2000. Sales
and marketing expenses as a percentage of revenue were 14.4% and 17.7% for the
first quarter of fiscal 2001 and fiscal 2000, respectively. The increase in
expenses reflect the hiring of additional sales and marketing personnel, sales
based commissions, additional office space and marketing program costs,
including web development, trade shows and new product launch activities. We
intend to continue to expand our domestic and international sales force and
marketing efforts and as a result expect that the dollar amounts of sales and
marketing expenses will increase in future periods.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the first quarter of fiscal 2001
increased 325% to $4.1 million from $1 million for the first quarter of fiscal
2000. General and administrative expenses as a percentage of revenue were 3.4%
and 4.9% for the first quarter of fiscal 2001 and fiscal 2000, respectively.
The increase in expenses reflects the hiring of additional general and
administrative personnel and expenses necessary to support increased levels of
business activities. We expect that the dollar amounts of general and
administrative expenses will increase in future periods as a result of the
expansion of business activity and related expenses to support our operations.
AMORTIZATION OF STOCK COMPENSATION
Amortization of stock compensation expense for the first quarter of fiscal 2001
increased 1,200% to $42.8 million from $3.3 million for the first quarter of
fiscal 2000. Amortization of stock compensation expense primarily resulted from
the granting of stock options and restricted shares with exercise or sale prices
which were deemed to be below fair market value and with the granting of options
to non-employees and consultants. The increase is primarily due to the
accelerated vesting of certain restricted stock and stock options in connection
with our merger with Sirocco Systems, Inc. of approximately $36.3 million.
Amortization of stock compensation relating to these grants is expected to
impact our reported results of operations through the third quarter of fiscal
2005.
ACQUISITION COSTS
Acquisition costs for the first quarter of fiscal 2001 were $4.9 million related
to the acquisition of Sirocco Systems, Inc. These costs include legal and
accounting services and other professional fees associated with the transaction.
INTEREST INCOME AND OTHER INCOME, NET
Interest income and other income, net increased to $22.3 million for the first
quarter of fiscal 2001 compared to $0.5 million for the first quarter of fiscal
2000. Interest income and other income, net as a percentage of revenue was
18.5% and 2.5% for the first quarter of fiscal 2001 and fiscal 2000,
respectively. The increase in interest income and other income primarily
reflects the invested proceeds of our two public offerings within fiscal year
2000.
PROVISION FOR INCOME TAXES
We did not provide for taxes for the first quarter of fiscal 2001 due to the net
loss within the quarter, and for fiscal 2000 primarily due to the uncertainty
regarding the realization of our net operating loss carryforwards and tax
credits.
LIQUIDITY AND CAPITAL RESOURCES
Prior to our initial public offering, which we completed in October 1999, we
financed our operations primarily through private sales of our capital stock
totaling approximately $84 million and through borrowings on long-term debt
agreements for the purchase of capital equipment. In fiscal 2000, we completed
two public offerings, for which we sold 30.9 million shares of common stock and
generated net proceeds of $1.5 billion. We primarily invest excess funds in
investment grade short-term money market funds, commercial paper, government and
non-government debt securities. As of October 28, 2000, we had $1.5 billion in
cash, cash equivalents and marketable securities.
10
Net cash provided by operating activities for the three months ended October 28,
2000 was $42.2 million, compared to $1.2 million for the three months ended
October 30, 1999. The increase in net cash provided by operating activities is
primarily due to increased deferred revenue and adjustments for certain non-cash
charges for amortization of stock compensation and depreciation, partially
offset by increased net losses and inventory purchases.
Net cash used in investing activities was $96.8 million for the three months
ended October 28, 2000, compared to $6.8 million for the three months ended
October 30, 1999. The increase in net cash used in investing activities
reflects the net purchase of available-for-sale marketable securities and
increased purchases of property and equipment, primarily for computers and test
equipment for our development and manufacturing activities.
Cash provided by financing activities for the first quarter of fiscal 2001
primarily consisted of $2.3 million of proceeds from the sale of our common
stock and $1.8 million of payments on notes payable. Net cash provided by
financing activities for the first fiscal quarter of fiscal 2000 primarily
reflects the net proceeds and use of proceeds generated from our IPO in October
1999.
Increasingly, as a result of the financial demands of major network deployments,
service providers are looking to their suppliers for financing assistance. From
time to time we may provide or commit to extend credit or credit support to our
customers as we consider appropriate in the course of our business, considering
our limited resources. Currently we have customer financing commitments of
approximately $200 million, subject to draw down over two to three years and
completion of definitive documentation. Our financing of customers may include
extending credit to them, lease financing or guaranteeing their indebtedness to
third parties. Depending on market conditions, we may seek to factor these
arrangements to financial institutions and investors to free up our capital and
reduce the amount of our commitments for such arrangements. Our ability to
provide customer financing is limited and depends on a number of factors,
including our capital structure, the level of our available credit and our
ability to factor commitments. The extension of financing to our customers will
limit the capital that we have available for other uses.
Although we believe that our current cash will be sufficient to fund our
operations for at least the next 12 months, there can be no assurance that we
will not require additional financing within this time frame or that such
additional funding, if needed, will be available on terms acceptable to us or at
all.
RISKS RELATED TO OUR BUSINESS
WE ARE ENTIRELY DEPENDENT ON OUR LINE OF INTELLIGENT OPTICAL NETWORKING PRODUCTS
AND OUR FUTURE REVENUE DEPENDS ON THEIR COMMERCIAL SUCCESS
Our future growth depends on the commercial success of our line of intelligent
optical networking products. To date, our SN 3000 Optical Access Switch, SN
6000 Intelligent Optical Transport product, SN 8000 Intelligent Optical Network
Node, Silvx Manager Network Management System and SN 16000 Intelligent Optical
Switch are the only products that have been shipped to customers. We cannot
assure you that we will be successful in completing the development or
introduction of new products or enhancing our existing products. Failure of our
current or planned products to operate as expected could delay or prevent their
adoption. If our target customers do not adopt, purchase and successfully
deploy our current and planned products, our revenues will not grow
significantly.
WE EXPECT THAT SUBSTANTIALLY ALL OF OUR REVENUE WILL BE GENERATED FROM A LIMITED
NUMBER OF CUSTOMERS, AND OUR REVENUE WILL NOT GROW IF WE DO NOT SUCCESSFULLY
SELL PRODUCTS TO THESE CUSTOMERS
We currently have a limited number of customers, one of whom, Williams
Communications, accounts for a majority of our revenues to date. In the first
quarter of fiscal 2001, two other customers each accounted for over 10% of our
revenues. None of these customers is contractually committed to purchase any
minimum quantities of products from us. We expect that in the foreseeable
future a majority of our revenues will continue to depend on sales of our
intelligent optical networking products to a limited number of customers. The
rate at which our current and prospective customers purchase products from us
will depend, in part, on their success in selling communications services based
on these products to their own customers. Any failure of current or prospective
customers to purchase products from us for any reason, including any
determination not to install our products in their networks or a downturn in
their business, would seriously harm our financial condition or results of
operations.
11
OUR FAILURE TO INCREASE OUR REVENUE WOULD PREVENT US FROM ACHIEVING
PROFITABILITY
We cannot assure you that our revenues will grow or that we will generate
sufficient revenues to achieve profitability. We have large fixed expenses and
we expect to continue to incur significant and increasing sales and marketing,
product development, administrative and other expenses. Although our revenue has
grown in recent quarters, we cannot be certain that our revenue growth will
continue or increase in the future or that we will realize sufficient revenues
to be profitable on an annual or quarterly basis.
BECAUSE OUR PRODUCTS ARE COMPLEX AND ARE DEPLOYED IN COMPLEX ENVIRONMENTS, THEY
MAY HAVE ERRORS OR DEFECTS THAT WE FIND ONLY AFTER FULL DEPLOYMENT, WHICH COULD
SERIOUSLY HARM OUR BUSINESS
Our intelligent optical networking products are complex and are designed to be
deployed in large and complex networks. Because of the nature of the products,
they can only be fully tested when completely deployed in very large networks
with high amounts of traffic. Our customers may discover errors or defects in
the hardware or the software, or the product may not operate as expected after
it has been fully deployed. If we are unable to fix errors or other problems
that may be identified in full deployment, we could experience:
* loss of or delay in revenues and loss of market share;
* loss of customers;
* failure to attract new customers or achieve market acceptance;
* diversion of development resources;
* increased service and warranty costs;
* legal actions by our customers; and
* increased insurance costs.
THE LONG AND VARIABLE SALES CYCLES FOR OUR PRODUCTS MAY CAUSE REVENUES AND
OPERATING RESULTS TO VARY SIGNIFICANTLY FROM QUARTER TO QUARTER
A customer's decision to purchase our intelligent optical networking products
involves a significant commitment of its resources and a lengthy evaluation,
testing and product qualification process. As a result, our sales cycle is
likely to be lengthy. Throughout the sales cycle, we spend considerable time
and expense educating and providing information to prospective customers about
the use and features of our products. Even after making a decision to purchase,
we believe that our customers will deploy the products slowly and deliberately.
Timing of deployment can vary widely and depends on the skills of the customer,
the size of the network deployment, the complexity of the customer's network
environment and the degree of hardware and software configuration necessary.
Customers with complex networks usually expand their networks in large
increments on a periodic basis. Accordingly, we may receive purchase orders for
significant dollar amounts on an irregular and unpredictable basis. Because of
our limited operating history and the nature of our business, we cannot predict
these sales and deployment cycles. The long sales cycles, as well as our
expectation that customers will tend to sporadically place large orders with
short lead times, may cause our revenues and results of operations to vary
significantly and unexpectedly from quarter to quarter.
OUR LIMITED OPERATING HISTORY MAKES FORECASTING DIFFICULT
We were founded in February 1998. We shipped our SN 6000 Intelligent -Optical
Transport product in May 1999, our SN 8000 Intelligent Optical Node in August
1999, our SilvxManager Network Management System in November 1999, our SN 16000
Intelligent Optical Switch in June 2000 and our SN 3000 Optical Access Switch in
October 2000. We have limited meaningful historical financial data upon which
to base projected revenues and planned operating expenses and upon which
investors may evaluate us and our prospects. In addition, our operating
expenses are largely based on anticipated revenue trends, and a high percentage
of our expenses are and will continue to be fixed. You should consider the
risks and difficulties frequently encountered by companies like ours in a new
and rapidly evolving market. Our ability to sell products and the level of
success, if any, we achieve depend, among other things, on the level of demand
for intelligent optical networking products, which is a new and rapidly evolving
market. If we do not achieve our expected revenue, our operating results will
be below our expectations and the expectations of our investors and market
analysts, which could cause the price of our common stock to decline.
12
WE MAY NOT BE SUCCESSFUL IF OUR CUSTOMER BASE DOES NOT GROW
Our future success will depend on our attracting additional customers. The
growth of our customer base could be adversely affected by:
* customer unwillingness to implement our new optical networking architecture;
* any delays or difficulties that we may incur in completing the development
and introduction of our planned products or product enhancements;
* new product introductions by our competitors;
* any failure of our products to perform as expected; or
* any difficulty we may incur in meeting customers' delivery requirements.
WE RELY ON SINGLE SOURCES FOR SUPPLY OF CERTAIN COMPONENTS AND OUR BUSINESS MAY
BE SERIOUSLY HARMED IF OUR SUPPLY OF ANY OF THESE COMPONENTS AND OTHER
COMPONENTS IS DISRUPTED
We currently purchase several key components, including commercial digital
signal processors, RISC processors, field programmable gate arrays, SONET
transceivers and erbium doped fiber amplifiers, from single or limited sources.
We purchase each of these components on a purchase order basis and have no long-
term contracts for these components. Although we believe that there are
alternative sources for each of these components, in the event of a disruption
in supply, we may not be able to develop an alternate source in a timely manner
or at favorable prices. Such a failure could hurt our ability to deliver our
products to our customers and negatively affect our operating margins. In
addition, our reliance on our suppliers exposes us to potential supplier
production difficulties or quality variations. Any such disruption in supply
would seriously impact present and future sales and revenue. Further, the
optical component industry is expanding rapidly and manufacturers of optical
components face unpredictable and growing demand for components. There is in an
industry-wide shortage of some optical components which may result in increased
pricing of such components, extended waiting periods after the placement of
orders for such components and allocations by suppliers limiting the supply of
such components to a given customer in a specific time period. Because optical
components are integrated into our products, this shortage could negatively
impact our sales and operating results.
IF WE DO NOT RESPOND RAPIDLY TO TECHNOLOGICAL CHANGES, OUR PRODUCTS COULD BECOME
OBSOLETE
The market for intelligent optical networking products is likely to be
characterized by rapid technological change, frequent new product introductions
and changes in customer requirements. We may be unable to respond quickly or
effectively to these developments. We may experience design, manufacturing,
marketing and other difficulties that could delay or prevent our development,
introduction or marketing of new products and enhancements. The introduction of
new products by competitors, market acceptance of products based on new or
alternative technologies or the emergence of new industry standards could render
our existing or future products obsolete.
In developing our products, we have made, and will continue to make, assumptions
about the standards that may be adopted by our customers and competitors. If
the standards adopted are different from those which we have chosen to support,
market acceptance of our products may be significantly reduced or delayed and
our business will be seriously harmed. In addition, the introduction of
products incorporating new technologies and the emergence of new industry
standards could render our existing products obsolete.
13
In addition, in order to introduce products incorporating new technologies and
new industry standards, we must be able to gain access to the latest
technologies of our customers, our suppliers and other network vendors. Any
failure to gain access to the latest technologies could impair the
competitiveness of our products.
CUSTOMER REQUIREMENTS ARE LIKELY TO EVOLVE, AND WE WILL NOT RETAIN CUSTOMERS OR
ATTRACT NEW CUSTOMERS IF WE DO NOT ANTICIPATE AND MEET SPECIFIC CUSTOMER
REQUIREMENTS
Our current and prospective customers may require product features and
capabilities that our current products do not have. To achieve market
acceptance for our products, we must effectively and timely anticipate and adapt
to customer requirements and offer products and services that meet customer
demands. Our failure to develop products or offer services that satisfy
customer requirements would seriously harm our ability to increase demand for
our products.
We intend to continue to invest in product and technology development. The
development of new or enhanced products is a complex and uncertain process that
requires the accurate anticipation of technological and market trends. We may
experience design, manufacturing, marketing and other difficulties that could
delay or prevent the development, introduction or marketing of new products and
enhancements. The introduction of new or enhanced products also requires that
we manage the transition from older products in order to minimize disruption in
customer ordering patterns and ensures that adequate supplies of new products
can be delivered to meet anticipated customer demand. Our inability to
effectively manage this transition would cause us to lose current and
prospective customers.
OUR MARKET IS HIGHLY COMPETITIVE, AND OUR FAILURE TO COMPETE SUCCESSFULLY WOULD
LIMIT OUR ABILITY TO INCREASE OUR MARKET SHARE
Competition in the public network infrastructure market is intense. This market
has historically been dominated by large companies, such as Lucent Technologies,
Nortel Networks, Cisco Systems and Ciena Corporation. In addition, a number of
private companies have announced plans for new products to address the same
network problems which our products address. Many of our current and potential
competitors have significantly greater selling and marketing, technical,
manufacturing, financial and other resources, including vendor-sponsored
financing programs. Moreover, our competitors may foresee the course of market
developments more accurately and could in the future develop new technologies
that compete with our products or even render our products obsolete. Due to the
rapidly evolving markets in which we compete, additional competitors with
significant market presence and financial resources may enter those markets,
thereby further intensifying competition.
In order to compete effectively, we must deliver products that:
* provide extremely high network reliability;
* scale easily and efficiently with minimum disruption to the network;
* interoperate with existing network designs and equipment vendors;
* reduce the complexity of the network by decreasing the need for
overlapping equipment;
* provide effective network management; and
* provide a cost-effective solution for service providers.
In addition, we believe that a knowledge of the infrastructure requirements
applicable to service providers, experience in working with service providers to
develop new services for their customers and an ability to provide vendor-
sponsored financing, are important competitive factors in our market. We have a
limited ability to provide vendor-sponsored financing and this may influence the
purchasing decisions of prospective customers, who may decide to purchase
products from one of our competitors who are able to provide more extensive
financing programs.
If we are unable to compete successfully against our current and future
competitors, we could experience price reductions, order cancellations and
reduced gross margins, any one of which could materially and adversely affect
our business, results of operations and financial condition.
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WE ARE LIKELY TO FACE DIFFICULTIES IN OBTAINING AND RETAINING CUSTOMERS IF WE DO
NOT EXPAND OUR SALES ORGANIZATION AND OUR CUSTOMER SERVICE AND SUPPORT
OPERATIONS
Our products and services require a sophisticated sales effort targeted at a
limited number of key individuals within our prospective customers'
organizations. This effort requires specialized sales personnel and consulting
engineers. We are in the process of building our direct sales force and plan to
hire additional qualified sales personnel and consulting engineers. Competition
for these individuals is intense, and we might not be able to hire and train the
kind and number of sales personnel and consulting engineers required for us to
be successful. In addition, we believe that our future success is dependent
upon our ability to establish successful relationships with a variety of
distribution partners. If we are unable to expand our direct sales operations
or our indirect sales channel, we may not be able to increase market awareness
or sales of our products, which may prevent us from achieving and maintaining
profitability.
We are currently expanding our customer service and support organization and
will need to increase our staff to support new customers. The installation and
support of our products requires highly trained customer service and support
personnel. Hiring customer service and support personnel is very competitive in
our industry because there are a limited number of people available with the
necessary technical skills and understanding of our market. Once we hire them,
they may require extensive training in our intelligent optical networking
products. If we are unable to expand our customer service and support
organization and train our personnel rapidly, our continued growth may be
adversely affected and we may not be able to increase sales of our products.
WE DEPEND UPON CONTRACT MANUFACTURERS AND ANY DISRUPTION IN THESE RELATIONSHIPS
MAY CAUSE US TO FAIL TO MEET THE DEMANDS OF OUR CUSTOMERS AND DAMAGE OUR
CUSTOMER RELATIONSHIPS
We have limited internal manufacturing capabilities. We rely on a small number
of contract manufacturers to manufacture our products in accordance with our
specifications and to fill orders on a timely basis. We have supply contracts
with Celestica Corporation and Jabil Circuit Inc., which provide comprehensive
manufacturing services, including assembly, test, control and shipment to our
customers, and procure material on our behalf. We may not be able to effectively
manage our relationship with such contract manufacturers, and such contract
manufacturers may not meet our future requirements for timely delivery. Each of
our contract manufacturers also builds products for other companies, and we
cannot assure you that they will always have sufficient quantities of inventory
available to fill orders placed by our customers or that they will allocate
their internal resources to fill these orders on a timely basis. We also
purchase products from certain other manufacturers, primarily on a purchase
order basis. Qualifying a new contract manufacturer and commencing volume
production is expensive and time consuming and could result in a significant
interruption in the supply of our products. If we are required or choose to
change contract manufacturers, we may lose revenue and damage our customer
relationships.
THE UNPREDICTABILITY OF OUR QUARTERLY RESULTS MAY ADVERSELY AFFECT THE TRADING
PRICE OF OUR COMMON STOCK
Our revenues and operating results will vary significantly from quarter to
quarter due to a number of factors, many of which are outside of our control and
any of which may cause our stock price to fluctuate. The primary factors that
may affect us include the following:
* fluctuation in demand for intelligent optical networking products;
* the timing and size of sales of our products;
* the length and variability of the sales cycle for our products;
* the timing of recognizing revenue and deferred revenue;
* new product introductions and enhancements by our competitors and ourselves;
* changes in our pricing policies or the pricing policies of our competitors;
15
* our ability to develop, introduce and ship new products and product
enhancements that meet customer requirements in a timely manner;
* our ability to obtain sufficient supplies of sole or limited source
components;
* increases in the prices of the components we purchase;
* our ability to attain and maintain production volumes and quality levels for
our products;
* the timing and level of prototype expenses;
* costs related to acquisitions of technology or businesses;
* employer payroll taxes to be paid on an employee's gain on stock options
exercised (such payroll taxes are recorded as operating expenses and could be
material based upon the number of optionees who exercise their options and
the price of our common stock); and
* general economic conditions as well as those specific to the
telecommunications, Internet and related industries.
We plan to increase significantly our operating expenses to fund greater levels
of research and development, expand our sales and marketing operations, broaden
our customer support capabilities and develop new distribution channels. We also
plan to expand our general and administrative capabilities to address the
increased reporting and other administrative demands which will result from the
increasing size of our business. Our operating expenses are largely based on
anticipated organizational growth and revenue trends and a high percentage of
our expenses are, and will continue to be, fixed. As a result, a delay in
generating or recognizing revenue for the reasons set forth above, or for any
other reason, could cause significant variations in our operating results from
quarter to quarter and could result in substantial operating losses.
Due to the foregoing factors, we believe that quarter-to-quarter comparisons of
our operating results are not a good indication of our future performance. You
should not rely on our results or growth for one quarter as any indication of
our future performance. It is likely that in some future quarters, our
operating results may be below the expectations of public market analysts and
investors or that our net sales may grow at a slower quarter over quarter
percentage rate. In this event, the price of our common stock could decrease.
THE INTELLIGENT OPTICAL NETWORKING MARKET IS NEW AND OUR BUSINESS WILL SUFFER IF
IT DOES NOT DEVELOP AS WE EXPECT
The market for intelligent optical networking products is new. We cannot assure
you that a viable market for our products will develop or be sustainable. If
this market does not develop, develops more slowly than we expect or is not
sustained, our business, results of operations and financial condition would be
seriously harmed.
IF OUR PRODUCTS DO NOT INTEROPERATE WITH OUR CUSTOMERS' NETWORKS, INSTALLATIONS
WILL BE DELAYED OR CANCELLED AND COULD RESULT IN SUBSTANTIAL PRODUCT RETURNS,
WHICH COULD SERIOUSLY HARM OUR BUSINESS
Many of our customers will require that our products be specifically designed to
interface with their existing networks, each of which may have different
specifications and utilize multiple protocol standards. Our customers' networks
contain multiple generations of products that have been added over time as these
networks have grown and evolved. Our products must interoperate with all of the
products within these networks as well as future products in order to meet our
customers' requirements. The requirement that we modify product design in order
to achieve a sale may result in a longer sales cycle, increased research and
development expense and reduced margins on our products. If we find errors in
the existing software used in our customers' networks, we will have to modify
our products to fix or overcome these errors so that our products will
interoperate and scale with the existing software and hardware. If our products
do not interoperate with those of our customers' networks, installations could
be delayed, orders for our products could be cancelled or our products could be
returned. This would also seriously harm our reputation, all of which could
seriously harm our business and prospects.
16
UNDETECTED SOFTWARE OR HARDWARE ERRORS AND PROBLEMS ARISING FROM USE OF OUR
PRODUCTS IN CONJUNCTION WITH OTHER VENDORS' PRODUCTS COULD RESULT IN DELAYS OR
LOSS OF MARKET ACCEPTANCE OF OUR PRODUCTS
Networking products frequently contain undetected software or hardware errors
when first introduced or as new versions are released. We expect that errors
will be found from time to time in new or enhanced products after we begin
commercial shipments. In addition, service providers typically use our products
in conjunction with products from other vendors. As a result, when problems
occur, it may be difficult to identify the source of the problem. These
problems may cause us to incur significant warranty, support and repair costs,
divert the attention of our engineering personnel from our product development
efforts and cause significant customer relations problems. The occurrence of
these problems could result in the delay or loss of market acceptance of our
products and would likely have a material adverse effect on our business,
results of operations and financial condition. Defects, integration issues or
other performance problems in our products could result in financial or other
damages to our customers or could damage market acceptance for our products.
Our customers could also seek damages for losses from us. A product liability
claim brought against us, even if unsuccessful, would likely be time consuming
and costly.
OUR FAILURE TO ESTABLISH AND MAINTAIN KEY CUSTOMER RELATIONSHIPS MAY RESULT IN
DELAYS IN INTRODUCING NEW PRODUCTS OR CAUSE CUSTOMERS TO FOREGO PURCHASING OUR
PRODUCTS
Our future success will also depend upon our ability to develop and manage key
customer relationships in order to introduce a variety of new products and
product enhancements that address the increasingly sophisticated needs of our
customers. Our failure to establish and maintain these customer relationships
may adversely affect our ability to develop new products and product
enhancements. In addition, we may experience delays in releasing new products
and product enhancements in the future. Material delays in introducing new
products and enhancements or our inability to introduce competitive new products
may cause customers to forego purchases of our products and purchase those of
our competitors, which could seriously harm our business.
OUR FAILURE TO CONTINUALLY IMPROVE OUR INTERNAL CONTROLS AND SYSTEMS, AND HIRE
NEEDED PERSONNEL COULD IMPAIR OUR FUTURE GROWTH
We have expanded our operations rapidly since our inception. We continue to
increase the scope of our operations and have grown our headcount substantially
both domestically and internationally. For example, at October 30, 1999, we had
a total of 228 employees and at October 28, 2000, we had a total of 904
employees. In addition, we plan to continue to hire a significant number of
employees this fiscal year. Our growth has placed, and our anticipated growth
will continue to place, a significant strain on our management systems and
resources. Our ability to successfully offer our products and implement our
business plan in a rapidly evolving market requires an effective planning and
management process. We expect that we will need to continue to improve our
financial, managerial and manufacturing controls and reporting systems, and will
need to continue to expand, train and manage our work force worldwide. We may
not be able to implement adequate control systems in an efficient and timely
manner. Competition for highly skilled personnel is intense, especially in the
New England area. Any failure to attract, assimilate or retain qualified
personnel to fulfill our current or future needs could impair our growth.
WE DEPEND ON OUR KEY PERSONNEL TO MANAGE OUR BUSINESS EFFECTIVELY IN A RAPIDLY
CHANGING MARKET, AND IF WE ARE UNABLE TO RETAIN OUR KEY EMPLOYEES, OUR ABILITY
TO COMPETE COULD BE HARMED
Our future success depends upon the continued services of our executive officers
and other key engineering, sales, marketing and support personnel, who have
critical industry experience and relationships that we rely on to implement our
business plan. None of our officers or key employees is bound by an employment
agreement for any specific term. We do not have "key person" life insurance
policies covering any of our employees. The loss of the services of any of our
key employees could delay the development and introduction of, and negatively
impact our ability to sell, our products.
IF WE BECOME SUBJECT TO UNFAIR HIRING CLAIMS, WE COULD INCUR SUBSTANTIAL COSTS
IN DEFENDING OURSELVES
Companies in our industry, whose employees accept positions with competitors,
frequently claim that their competitors have engaged in unfair hiring practices.
We cannot assure you that we will not receive claims of this kind or other
claims relating to our employees in the future as we seek to hire qualified
personnel or that those claims will not result in material litigation. We could
incur substantial costs in defending ourselves or our employees against such
claims, regardless of their merits. In addition, defending ourselves or our
employees from such claims could divert the attention of our management away
from our operations.
17
OUR ABILITY TO COMPETE COULD BE JEOPARDIZED IF WE ARE UNABLE TO PROTECT OUR
INTELLECTUAL PROPERTY RIGHTS FROM THIRD-PARTY CHALLENGES
We rely on a combination of patent, copyright, trademark and trade secret laws
and restrictions on disclosure to protect our intellectual property rights. We
also enter into confidentiality or license agreements with our employees,
consultants and corporate partners and control access to and distribution of our
software, documentation and other proprietary information. Despite our efforts
to protect our proprietary rights, unauthorized parties may attempt to copy or
otherwise obtain and use our products or technology. Monitoring unauthorized
use of our products is difficult and we cannot be certain that the steps we have
taken will prevent unauthorized use of our technology, particularly in foreign
countries where the laws may not protect our proprietary rights as fully as in
the United States. If competitors are able to use our technology, our ability to
compete effectively could be harmed.
IF NECESSARY LICENSES OF THIRD-PARTY TECHNOLOGY ARE NOT AVAILABLE TO US OR ARE
VERY EXPENSIVE, OUR PRODUCTS COULD BECOME OBSOLETE
From time to time we may be required to license technology from third parties to
develop new products or product enhancements. We cannot assure you that third-
party licenses will be available to us on commercially reasonable terms, if at
all. The inability to obtain any third-party license required to develop new
products and product enhancements could require us to obtain substitute
technology of lower quality or performance standards or at greater cost, either
of which could seriously harm the competitiveness of our products.
WE COULD BECOME SUBJECT TO LITIGATION REGARDING INTELLECTUAL PROPERTY RIGHTS,
WHICH COULD SERIOUSLY HARM OUR BUSINESS AND REQUIRE US TO INCUR SIGNIFICANT
COSTS
In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. Although we have not
been involved in any intellectual property litigation, we may be a party to
litigation in the future to protect our intellectual property or as a result of
an allegation that we infringe others' intellectual property. Any parties
asserting that our products infringe upon their proprietary rights would force
us to defend ourselves and possibly our customers or manufacturers against the
alleged infringement. These claims and any resulting lawsuit, if successful,
could subject us to significant liability for damages and invalidation of our
proprietary rights. These lawsuits, regardless of their success, would likely
be time-consuming and expensive to resolve and would divert management time and
attention. Any potential intellectual property litigation also could force us
to do one or more of the following:
* stop selling, incorporating or using our products that use the challenged
intellectual property;
* obtain from the owner of the infringed intellectual property right a license
to sell or use the relevant technology, which license may not be available on
reasonable terms, or at all; or
* redesign those products that use such technology.
If we are forced to take any of the foregoing actions, our business may be
seriously harmed.
WE MAY FACE RISKS ASSOCIATED WITH OUR INTERNATIONAL EXPANSION THAT COULD IMPAIR
OUR ABILITY TO GROW OUR REVENUES ABROAD
We intend to continue to expand our sales into international markets. This
expansion will require significant management attention and financial resources
to develop successfully direct and indirect international sales and support
channels and to support customers in international markets. We may not be able
to develop international market demand for our products.
We have limited experience in marketing, distributing and supporting our
products internationally and to do so, we expect that we will need to develop
versions of our products that comply with local standards. In addition,
international operations are subject to other inherent risks, including:
* greater difficulty in accounts receivable collection and longer collection
periods;
* difficulties and costs of staffing and managing foreign operations;
18
* the impact of recessions in economies outside the United States;
* unexpected changes in regulatory requirements;
* certification requirements;
* currency fluctuations;
* reduced protection for intellectual property rights in some countries;
* potentially adverse tax consequences; and
* political and economic instability.
ANY ACQUISITIONS WE MAKE COULD DISRUPT OUR BUSINESS AND SERIOUSLY HARM OUR
FINANCIAL CONDITION
As part of our ongoing business development strategy, we consider acquisitions
and strategic investments in complementary companies, products or technologies.
On September 7, 2000, we completed our acquisition of Sirocco Systems, Inc. We
may also evaluate other potential transactions and transaction prospects. In
the event of an acquisition, we could:
* issue stock that would dilute our current stockholders' percentage ownership;
* incur debt;
* assume liabilities;
* incur amortization expenses related to goodwill and other intangible assets;
or
* incur large and immediate write-offs.
Our ability to achieve the benefits of any acquisition, including our
acquisition and integration of Sirocco, will also involve numerous risks,
including:
* problems combining the purchased operations, technologies or products;
* unanticipated costs;
* diversion of management's attention from our core business;
* adverse effects on existing business relationships with suppliers and
customers;
* risks associated with entering markets in which we have no or limited prior
experience; and
* problems with integrating employees and potential loss of key employees.
We cannot assure you that we will be able to successfully integrate any
businesses, products, technologies or personnel that we might acquire in the
future and any failure to do so could disrupt our business and seriously harm
our financial condition.
ANY EXTENSION OF CREDIT TO OUR CUSTOMERS MAY SUBJECT US TO CREDIT RISKS AND
LIMIT THE CAPITAL THAT WE HAVE AVAILABLE FOR OTHER USES
We are experiencing increased demands for customer financing and we expect these
demands to continue. We believe it is a competitive factor in obtaining
business. From time to time we may provide or commit to extend credit or credit
support to our customers as we consider appropriate in the course of our
business. Such financing activities subject us to the credit risk of customers
whom we finance. In addition, our ability to recognize revenue from financed
19
sales will depend upon the relative financial condition of the specific
customer, among other factors. Although we have programs in place to monitor
the risk associated with vendor financing, we cannot assure you that such
programs will be effective in reducing our risk of an impaired ability to pay on
the part of a customer whom we have financed. We could experience losses due to
customers failing to meet their financial obligations which could harm our
business and materially adversely affect our operating results and financial
condition.
RISKS RELATED TO THE SECURITIES MARKET
Our Stock Price May Be Volatile
An active public market for our common stock may not be sustained. The market
for technology stocks has been extremely volatile. The following factors could
cause the market price of our common stock to fluctuate significantly:
* our loss of a major customer;
* significant changes or slowdowns in the funding and spending patterns of our
current and prospective customers;
* the addition or departure of key personnel;
* variations in our quarterly operating results;
* announcements by us or our competitors of significant contracts, new products
or product enhancements;
* failure by us to meet product milestones;
* acquisitions, distribution partnerships, joint ventures or capital
commitments;
* changes in financial estimates by securities analysts;
* sales of our common stock or other securities in the future;
* changes in market valuations of broadband access technology companies;
* changes in market valuations of networking and telecommunications companies;
and
* fluctuations in stock market prices and volumes.
In addition, the stock market in general, and the Nasdaq National Market and
technology companies in particular, have experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating
performance of such companies. These broad market and industry factors may
materially adversely affect the market price of our common stock, regardless of
our actual operating performance. In the past, following periods of volatility
in the market price of a company's securities, securities class-action
litigation has often been instituted against such companies. Such litigation,
if instituted, could result in substantial costs and a diversion
of management's attention and resources.
THERE MAY BE SALES OF A SUBSTANTIAL AMOUNT OF OUR COMMON STOCK THAT COULD CAUSE
OUR STOCK PRICE TO FALL
As of October 28, 2000, options to purchase a total of 30,787,305 shares of our
common stock were outstanding, which amount includes options to purchase shares
of our common stock issued in connection with our acquisition of Sirocco
Systems, Inc. These options are subject to vesting schedules. A number of the
shares underlying these options are freely tradable. In addition, certain of our
current stockholders hold a substantial number of shares which are subject to
restrictions limiting their ability to sell such shares. These stockholders may
be able to sell such shares in the public market in the near future. Sales of a
substantial number of shares of our common stock could cause our stock price to
fall. In addition, sales of shares by our stockholders could impair our ability
to raise capital through the sale of additional stock.
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INSIDERS OWN A SUBSTANTIAL NUMBER OF SYCAMORE SHARES AND COULD LIMIT YOUR
ABILITY TO INFLUENCE THE OUTCOME OF KEY TRANSACTIONS, INCLUDING CHANGES OF
CONTROL
As of October 28, 2000, the executive officers, directors and entities
affiliated with them, in the aggregate, beneficially owned approximately 48.1%
of our outstanding common stock. These stockholders, if acting together, would
be able to influence significantly matters requiring approval by our
stockholders, including the election of directors and the approval of mergers or
other business combination transactions.
PROVISIONS OF OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY HAVE ANTI-TAKEOVER
EFFECTS THAT COULD PREVENT A CHANGE OF CONTROL
Provisions of our amended and restated certificate of incorporation, by-laws,
and Delaware law could make it more difficult for a third party to acquire us,
even if doing so would be beneficial to our stockholders.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The following discussion about our market risk disclosures involves forward-
looking statements. Actual results could differ materially from those projected
in the forward-looking statements. We are exposed to market risk related to
changes in interest rates and foreign currency exchange rates. We do not use
derivative financial instruments for speculative or trading purposes.
INTEREST RATE SENSITIVITY
We maintain a portfolio of cash equivalents and short-term and long-term
investments in a variety of securities including; commercial paper, certificates
of deposit, money market funds and government and non-government debt
securities. These available-for-sale securities are subject to interest rate
risk and may fall in value if market interest rates increase. If market interest
rates were to increase immediately and uniformly by 10 percent from levels at
October 28, 2000, the fair value of the portfolio would decline by approximately
$5.1 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 securities portfolio.
EXCHANGE RATE SENSITIVITY
We operate primarily in the United States, and all sales to date have been made
in US dollars. Accordingly, there has not been any material exposure to foreign
currency rate fluctuations. Our business is becoming increasingly global. As a
result, in the future we may make sales in non-dollar currencies and have
exposure to foreign currency rate fluctuations.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of business, we become involved in various lawsuits and
claims. In addition, we have in certain instances agreed to assume the costs of
defending lawsuits brought against our current or prospective employees by their
former employers. While the outcome of these matters is not currently
determinable, we believe, after consultation with legal counsel, that the
outcome will not have a material adverse effect on the results of our operations
or our financial position.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
(a) List of Exhibits
Number Exhibit Description
------ --------------------
**3.1 Amended and Restated Certificate of Incorporation
**3.2 Certificate of Amendment to the Amended and Restated Certificate of Incorporation
**3.3 Amended and Restated By-Laws
* 4.1 Specimen common stock certificate
**4.2 See Exhibits 3.1, 3.2 and 3.3, for provisions of the Certificate of Incorporation
and By-Laws of the Registrant defining the rights of holders of common stock
10.1 Purchase and Sale Agreement dated as of October 13, 2000 between Vesper Park, LLC
and Sycamore Networks, Inc.
***99.2 Escrow Agreement dated as of September 7, 2000 by and among Sycamore Networks, Inc.,
the Stockholder Representative named therein and the Escrow Agent named therein
27.1 Financial Data Schedule (Filed Electronically)
* Incorporated by reference to Sycamore Networks Inc.'s Registration
Statement on Form S-1 (Registration Statement No. 333-84635).
** Incorporated by reference to Sycamore Networks Inc.'s Registration
Statement on Form S-1 (Registration Statement File No. 333-30630).
*** Incorporated by reference to Sycamore Networks Inc.'s Registration
Statement on Form S-4 (Registration Statement No. 333-40146)
(b) Reports on Form 8-K : The Company filed a Current Report on Form 8-K on
September 11, 2000 relating to the completion of its acquisition of Sirocco
Systems, Inc. pursuant to an Agreement and Plan of Merger dated as of June 5,
2000 by and among the Company, Sirocco Systems, Inc. and Tropical Acquisition
Corporation.
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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/ Frances M. Jewels
- ---------------------
Frances M. Jewels
Chief Financial Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
Dated: December 11, 2000
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EXHIBIT INDEX
Number Exhibit Description
- ------ -------------------
**3.1 Amended and Restated Certificate of Incorporation
**3.2 Certificate of Amendment to the Amended and Restated Certificate of Incorporation
**3.3 Amended and Restated By-Laws
* 4.1 Specimen common stock certificate
**4.2 See Exhibits 3.1, 3.2 and 3.3, for provisions of the Certificate of Incorporation
and By-Laws of the Registrant defining the rights of holders of common stock
10.1 Purchase and Sale Agreement dated as of October 13, 2000 between Vesper Park, LLC
and Sycamore Networks, Inc.
***99.2 Escrow Agreement dated as of September 7, 2000 by and among Sycamore Networks, Inc.,
the Stockholder Representative named therein and the Escrow Agent named therein
27.1 Financial Data Schedule (Filed Electronically)
* Incorporated by reference to Sycamore Networks Inc.'s Registration
Statement on Form S-1 (Registration Statement No. 333-84635).
** Incorporated by reference to Sycamore Networks Inc.'s Registration
Statement on Form S-1 (Registration Statement File No. 333-30630).
*** Incorporated by reference to Sycamore Networks Inc.'s Registration
Statement on Form S-4 (Registration Statement No. 333-40146)
24