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 27, 2001
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 (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, 2001 was 273,680,683
1
Sycamore Networks, Inc.
Index
Part I. Financial Information
Page No.
Item 1. Financial Statements
Consolidated Balance Sheets as of October 27, 2001 and July 31, 2001 3
Consolidated Statements of Operations for the three months
ended October 27, 2001 and October 28, 2000 4
Consolidated Statements of Cash Flows for the three months
ended October 27, 2001 and October 28, 2000 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosure About Market Risk 28
Part II. Other Information
Item 1. Legal Proceedings 29
Item 6. Exhibits and Reports on Form 8-K 29
Signature 31
Exhibit Index 32
2
Part I. Financial Information
Item 1. Financial Statements
Sycamore Networks, Inc.
Consolidated Balance Sheets
(in thousands, except par value)
October 27, July 31,
2001 2001
---- ----
Assets
Current assets:
Cash and cash equivalents $ 291,909 $ 492,500
Short-term investments 436,605 332,471
Accounts receivable, net of allowance for doubtful accounts
of $4,948 and $4,773 at October 27, 2001 and July 31, 2001,
respectively 27,763 41,477
Inventories, net 33,523 66,939
Prepaids and other current assets 13,252 13,739
---------- ----------
Total current assets 803,052 947,126
---------- ----------
Property and equipment, net 72,245 106,625
Long-term investments 420,213 423,578
Other assets 20,246 73,992
---------- ----------
Total assets $1,315,756 $1,551,321
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 28,485 $ 62,513
Accrued expenses 22,601 25,199
Accrued restructuring costs 100,095 61,003
Deferred revenue 6,385 6,607
Other current liabilities 9,432 8,139
---------- ----------
Total current liabilities 166,998 163,461
Stockholders' equity:
Preferred stock, $.01 par value, 5,000 shares authorized; none
issued or outstanding -- --
Common stock, $.001 par value; 2,500,000 shares authorized;
273,681 shares issued and outstanding at October 27, 2001
and July 31, 2001, respectively 274 274
Additional paid-in capital 1,733,368 1,738,505
Accumulated deficit (549,364) (301,429)
Deferred compensation (42,188) (54,110)
Treasury stock, at cost, 1,467 and 680 shares held at
October 27, 2001 and July 31, 2001, respectively (143) (126)
Accumulated other comprehensive income 6,811 4,746
---------- ----------
Total stockholders' equity 1,148,758 1,387,860
---------- ----------
Total liabilities and stockholders' equity $1,315,756 $1,551,321
========== ==========
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 amounts)
Three Months Ended
------------------
October 27, October 28,
2001 2000
---- ----
Revenue............................................................. $ 21,243 $120,448
Cost of revenue (exclusive of non-cash stock compensation
expense of $517 and $1,643)........................................ 122,615 64,139
--------- --------
Gross profit (loss)................................................. (101,372) 56,309
Operating expenses:
Research and development (exclusive of non-cash stock
compensation expense of $2,725 and $25,388)..................... 36,515 35,679
Sales and marketing (exclusive of non-cash stock
compensation expense of $2,467 and $14,735)..................... 13,704 17,400
General and administrative (exclusive of non-cash stock
compensation expense of $575 and $987).......................... 3,190 4,062
Amortization of stock compensation............................... 6,284 42,753
Restructuring charges and related asset impairments.............. 77,306 --
Acquisition costs................................................ -- 4,948
--------- --------
Total operating expenses.................................... 136,999 104,842
Loss from operations............................................... (238,371) (48,533)
Losses on investments.............................................. (22,737) --
Interest and other income, net..................................... 13,173 22,329
--------- --------
Net loss........................................................... $(247,935) $(26,204)
========= ========
Basic and diluted net loss per share................................ $ (1.00) $ (0.11)
Weighted average shares used in computing basic and
diluted net loss per share...................................... 249,014 230,658
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 27, October 28,
2001 2000
---- ----
Cash flows from operating activities:
Net loss $(247,935) $ (26,204)
Adjustments to reconcile net loss to net
cash (used in) provided by operating activities:
Depreciation and amortization 12,349 5,716
Restructuring charges and related asset impairments 136,513 --
Amortization of stock compensation 6,284 42,753
Tax benefit from employee stock plans -- 3,487
Changes in operating assets and liabilities:
Accounts receivable 13,714 3,176
Inventories (19,643) (13,824)
Prepaids and other current assets 487 10,872
Deferred revenue (222) 20,196
Accounts payable (34,028) (3,165)
Accrued expenses and other liabilities (1,305) (833)
Accrued restructuring costs 39,092 --
--------- ---------
Net cash (used in) provided by operating activities (94,694) 42,174
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (5,924) (33,929)
Purchases of investments (372,833) (507,380)
Maturities of investments 274,128 452,484
Increase in other assets (1,580) (7,991)
--------- ---------
Net cash used in investing activities (106,209) (96,816)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock, net 364 2,289
Purchase of treasury stock (52) --
Payments received for notes receivable -- 162
Payments on notes payable -- (1,780)
--------- ---------
Net cash provided by financing activities 312 671
--------- ---------
Net decrease in cash and cash equivalents (200,591) (53,971)
Cash and cash equivalents, beginning of period 492,500 429,965
--------- ---------
Cash and cash equivalents, end of period $ 291,909 $ 375,994
========= =========
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") was incorporated in Delaware on February
17, 1998. The Company is a leading provider of intelligent optical networking
products that enable telecommunications service providers to quickly and cost-
effectively transform the capacity created by their fiber optic networks into
usable bandwidth for the deployment of new high-speed data services.
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
The accompanying financial data as of October 27, 2001 and for the three months
ended October 27, 2001 and October 28, 2000 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, 2001.
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 27, 2001, and results of operations and cash flows for
the three months ended October 27, 2001 and October 28, 2000 have been made.
The results of operations for the three months ended October 27, 2001 are not
necessarily indicative of the operating results for the full fiscal year or any
future periods.
3. 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. 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
warrants outstanding.
6
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 27, October 28,
2001 2000
---- ----
Numerator
Net loss $(247,935) $(26,204)
========= ========
Denominator
Historical:
Weighted-average shares of common stock outstanding 272,728 272,447
Weighted-average shares subject to repurchase (23,714) (41,789)
--------- --------
Shares used in per-share calculation - basic and diluted 249,014 230,658
========= ========
Net loss per share:
Basic and diluted $ (1.00) $ (0.11)
========= ========
Options to purchase 18,084,570 and 30,737,305 shares of common stock at
respective average exercise prices of $15.55 and $57.01 have not been included
in the computation of diluted net loss per share for the three months ended
October 27, 2001 and October 28, 2000, respectively, as their effect would have
been anti-dilutive. Warrants to purchase 150,000 shares of common stock at an
exercise price of $11.69 have not been included in the computation of diluted
net loss per share for the three months ended October 27, 2001, as their effect
would have been anti-dilutive.
4. Stock Option Exchange Offer
In May 2001 the Company announced an offer to exchange outstanding employee
stock options having an exercise price of $7.25 or more per share in return for
restricted stock and new stock options to be granted by the Company (the
"Exchange Offer"). Pursuant to the Exchange Offer, in exchange for eligible
options, an option holder generally received a number of shares of restricted
stock equal to one-tenth (1/10) of the total number of shares subject to the
options tendered by the option holder and accepted for exchange, and commitment
for new options to be issued exercisable for a number of shares of common stock
equal to nine-tenths (9/10) of the total number of shares subject to the options
tendered by the option holder and accepted for exchange. In order to address
potential adverse tax consequences for employees of certain international
countries, these employees were allowed to forego the restricted stock grants
and receive all stock options.
A total of 17.6 million options were accepted for exchange under the Exchange
Offer and accordingly, were canceled in June 2001. A total of 1.7 million
shares of restricted stock were issued in June 2001 and the Company recorded
deferred compensation of $12.6 million related to these grants at that time.
Due to cancellations of restricted stock relating to employee terminations,
which were primarily due to the Company's fiscal 2002 restructuring program as
described in Note 7, the number of outstanding shares of restricted stock
related to the Exchange Offer has been reduced to 1.3 million shares as of
October 27, 2001. As a result, the total deferred compensation relating to the
Exchange Offer has been reduced to approximately $10.1 million. The deferred
compensation costs will be amortized ratably over the vesting periods of the
restricted stock, generally over a four year period, with 25% of the shares
vesting one year after the date of grant and the remaining 75% vesting quarterly
thereafter. Until the restricted stock vests, such shares are subject to
forfeiture in the event the employee leaves the Company.
7
Upon the completion of the Exchange Offer, options to purchase approximately
15.9 million shares were expected to be granted in the second quarter of fiscal
2002, no sooner than six months and one day from June 20, 2001. However, due to
the effect of employee terminations, which were primarily due to the Company's
fiscal 2002 restructuring program as described in Note 7, the number of options
which are now expected to be granted in the second quarter of fiscal 2002
related to the Exchange Offer is approximately 12.5 million shares. The new
options will generally vest over three years, with 8.34% of the options vesting
on the date of grant and the remaining 91.66% vesting quarterly thereafter
subject to forfeiture in the event the employee leaves the Company. The new
options will have an exercise price equal to the fair market value of the
Company's common stock on the date of the grant.
5. Inventories, net
Inventories, net consisted of the following (in thousands):
October 27, July 31,
2001 2001
---- ----
Raw materials $13,973 $25,299
Work in process 4,558 18,849
Finished goods 14,992 22,791
------- -------
$33,523 $66,939
======= =======
6. 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):
Three Months Ended
October 27, October 28,
2001 2000
----------- -----------
Net loss $(247,935) $(26,204)
Other comprehensive income:
Unrealized gain on investments 2,065 4,201
--------- --------
Comprehensive loss $(245,870) $(22,003)
========= ========
7. Restructuring Charges and Related Asset Impairments
Beginning in the third quarter of fiscal 2001, unfavorable economic conditions
and reduced capital spending by telecommunications service providers negatively
impacted the Company's operating results in a progressive and increasing manner.
As a result, the Company has enacted two separate business restructuring
programs, the first in the third quarter of fiscal 2001 (the "fiscal 2001
restructuring"), and the second in the first quarter of fiscal 2002 (the "fiscal
2002 restructuring"). Details regarding each of these restructuring actions are
as follows:
Fiscal 2001 Restructuring:
- -------------------------
As a result of the unfavorable conditions referred to above, the Company
implemented a restructuring program in the third quarter of fiscal 2001,
designed to reduce expenses in order to align resources with long-term growth
opportunities. The restructuring program included a workforce reduction,
consolidation of excess facilities, and the restructuring of certain business
functions to eliminate non-strategic products and overlapping feature sets. This
included the discontinuance of the SN 6000 Intelligent Optical Transport product
and the bi-directional capabilities of the SN 8000 Intelligent Optical Network
Node. As a result of the restructuring program, the Company recorded
restructuring charges and related asset impairments of $81.9 million classified
as operating expenses and an additional excess inventory charge of $84.0 million
relating to the discontinued product lines, which was classified as cost of
revenue.
8
The restructuring charges and related asset impairments recorded in the third
quarter of fiscal 2001, and the reserve activity since that time, are summarized
as follows (in thousands):
Accrual
Total Accrual Balance at
Restructuring Non-cash Fiscal 2001 Balance at Fiscal 2002 October 27,
Charge Charges Cash Payments July 31, 2001 Cash Payments 2001
------ ------- ------------- ------------- ------------- ----
Workforce reductions $ 4,174 $ 829 $ 2,823 $ 522 $ 344 $ 178
Facility consolidations and certain
other costs 24,437 1,214 1,132 22,091 1,220 20,871
Inventory and asset write-downs 137,285 84,972 13,923 38,390 24,661 13,729
-------- ------- ------- ------- ------- -------
Total $165,896 $87,015 $17,878 $61,003 $26,225 $34,778
======== ======= ======= ======= ======= =======
The remaining cash expenditures relating to workforce reductions will be
substantially paid by the second quarter of fiscal 2002. Facility consolidation
charges will be paid over the respective lease terms through fiscal 2007. The
Company expects to substantially complete the fiscal 2001 restructuring program
during the first half of fiscal 2002.
Fiscal 2002 Restructuring:
- --------------------------
As a result of a continued decline in overall economic conditions and further
reductions in capital spending by telecommunications service providers, the
Company implemented a second restructuring program in the first quarter of
fiscal 2002, designed to further reduce expenses to align resources with long-
term growth opportunities. The restructuring program included a workforce
reduction, consolidation of excess facilities, and charges related to excess
inventory and other asset impairments.
As a result of the restructuring program, the Company recorded restructuring
charges and related asset impairments of $77.3 million classified as operating
expenses and an excess inventory charge of $102.4 million classified as cost of
revenue. In addition, the Company recorded charges totaling $22.7 million
classified as a non-operating expense, relating to impairments of investments in
non-publicly traded companies that were determined to be other than temporary.
The following paragraphs provide detailed information relating to the
restructuring charges and related asset impairments which were recorded during
the first quarter of fiscal 2002.
Workforce reduction
The restructuring program resulted in the reduction of 239 regular employees
across all business functions and geographic regions. The workforce reductions
were substantially completed in the first quarter of fiscal 2002. The Company
recorded a workforce reduction charge of approximately $7.1 million relating
primarily to severance and fringe benefits. In addition the number of temporary
and contract workers employed by the Company was also reduced.
Consolidation of facilities and certain other costs
The Company recorded a charge of $17.2 million relating to the consolidation of
excess facilities and certain other costs. The total charge includes $11.2
million related to the write-down of certain land, as well as lease terminations
and non-cancelable lease costs. The Company also recorded other restructuring
costs of $6.0 million relating primarily to administrative expenses and
professional fees in connection with the restructuring activities.
Inventory and asset write-downs
The Company recorded a charge of $155.5 million relating to the write-down of
inventory to its net realizable value and the impairment of certain other
assets. The total charge includes $102.4 million of inventory write-downs and
purchase commitments for inventory which was recorded as part of cost of
revenue. This excess inventory charge was due to a severe decline in the demand
for the Company's products. The Company also recorded charges totaling $53.1
million for asset impairments, including the assets related to the Company's
vendor financing agreements and fixed assets that were abandoned by the Company.
Since revenue had been recognized under the vendor financing agreements on a
cash basis, the amount of the impairment loss was limited to the cost of the
systems shipped to the vendor financing customers.
9
Losses on Investments
The Company recorded charges totaling $22.7 million for impairments of
investments in non-publicly traded companies that were determined to be other
than temporary. The impairment charges were classified as a non-operating
expense.
The restructuring charges and related asset impairments recorded in the first
quarter of fiscal 2002 are summarized as follows (in thousands):
Accrual
Total Balance at
Restructuring Non-cash Cash October 27,
Charge Charges Payments 2001
------ ------- -------- ----
Workforce reduction $ 7,106 $ 173 $645 $ 6,288
Facility consolidations and certain other costs 17,181 8,522 -- 8,659
Inventory and asset write-downs 155,451 105,081 -- 50,370
Losses on investments 22,737 22,737 -- --
-------- -------- ---- -------
Total $202,475 $136,513 $645 $65,317
======== ======== ==== =======
The remaining cash expenditures relating to workforce reductions will be
substantially paid by the third quarter of fiscal 2002. Facility consolidation
charges will be paid over the respective lease terms through fiscal 2005. The
Company expects to substantially complete the fiscal 2002 restructuring program
by the first quarter of fiscal 2003.
8. Recent Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 141, Business Combinations, which
addresses the initial recognition and measurement of goodwill and other
intangible assets acquired in a business combination. SFAS No. 141 requires the
purchase method of accounting to be used for business combinations initiated
after June 30, 2001 and eliminates the pooling of interests method. The
adoption of this statement is not expected to have a material impact on the
Company's financial position or results of operations.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets, which addresses the recognition and measurement of goodwill and other
intangible assets subsequent to their acquisition. SFAS No. 142 also addresses
the initial recognition and measurement of intangible assets acquired outside of
a business combination whether acquired individually or with a group of other
assets. SFAS No. 142 provides that intangible assets with finite useful lives
be amortized and that intangible assets with indefinite lives and goodwill will
not be amortized, but will rather be tested at least annually for impairment.
Although SFAS No. 142 is not required to be adopted by the Company until fiscal
2003, its provisions must be applied to goodwill and other intangible assets
acquired after June 30, 2001. As of October 27, 2001, the Company does not have
any goodwill or other intangible assets relating to business combinations that
were accounted for under APB Opinion No. 16. Accordingly, the adoption of SFAS
No. 142 is not expected to have a material impact on the Company's financial
position or results of operations.
In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which addresses the financial accounting and
reporting for the disposal of long-lived assets. SFAS 144 is effective for
financial statements issued for fiscal years beginning after December 15, 2001
and interim periods within those fiscal years. Accordingly, the Company will be
required to adopt SFAS 144 in the first quarter of fiscal 2003. The Company is
currently evaluating the potential impact, if any, that the adoption of SFAS 144
will have on its financial position and results of operations.
10
9. Litigation
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 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. The complaints were filed on behalf of persons who
purchased the Company's common stock during specified periods, all beginning on
October 21 or October 22, 1999 and ending on various dates, the latest of which
is August 10, 2001. The complaints are similar and allege violations of the
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as
amended, primarily based on the assertion that the Company's lead underwriters,
the Company and the other named defendants made material false and misleading
statements in the Company's prospectus incorporated in its registration
statements on Form S-1 filed with 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. The
complaints allege claims against the Company, several of the Company's officers
and directors and the underwriters under Sections 11 and 15 of the Securities
Act. The complaints also allege claims solely against the underwriter
defendants under Section 12(a)(2) of the Securities Act and some of the
complaints allege claims against the Company and the individual defendants under
Section 10(b) of the Exchange Act. The complaints against the Company have been
consolidated into a single action. Because the action against the Company is
being coordinated with over two hundred other nearly identical actions filed
against other companies, it is not yet clear when or whether a consolidated
complaint will be filed against the Company. The Company is not required to
respond before a consolidated complaint is filed. The actions seek damages in an
unspecified amount. The Company believes that the claims against it are without
merit and intends to defend against the complaints vigorously. The Company is
not currently able to estimate the possibility of loss or range of loss, if any,
relating to these claims.
The Company is subject to legal proceedings, claims, and litigation arising in
the ordinary course of business. While the outcome of these matters is currently
not determinable, management does not expect that the ultimate costs to resolve
these matters will have a material adverse effect on the Company's results of
operations or financial position.
11
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
Operating 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 are a leading provider of intelligent optical networking products that enable
telecommunications service providers to quickly and cost-effectively transform
the capacity created by their fiber optic networks into usable bandwidth for the
deployment of new high-speed data services. Since our inception in February
1998, our revenue has increased from $11.3 million for the fiscal year ended
July 31, 1999 to $374.7 million for the fiscal year ended July 31, 2001.
However, our revenue declined significantly beginning in the third quarter of
fiscal 2001 due to unfavorable economic conditions caused by a rapid and
significant decrease in capital spending by telecommunications service
providers. As a result, emerging service providers, which had been the early
adopters of our technology, were no longer able to continue to fund aggressive
deployments of equipment within their networks due to their inability to access
the capital markets. This trend was compounded by decisions by incumbent
service providers to slow their capital expenditures significantly. Our revenue
has been and continues to be negatively impacted by these unfavorable economic
conditions.
We currently anticipate that the cost of revenue and the resulting gross margin
will continue to be adversely affected by several factors, including reduced
demand for our products, effect of new product introductions including volumes
and manufacturing efficiencies, component limitations, the mix of products sold,
competitive pricing, and possible increases in inventory levels which could
increase our exposure to excess and obsolete inventory charges. While we have
taken actions to reduce our cost structure, we anticipate that we will continue
to incur operating losses unless our revenue increases significantly compared to
current levels. During the last half of fiscal 2001 and the first quarter of
fiscal 2002, we incurred substantial operating losses totaling $536.7 million,
which includes restructuring and other charges totaling $345.6 million. We
expect to incur operating losses until the overall economic environment and the
demand for our products improves. At this time, we have limited visibility into
future revenue and cannot predict, when or if, the economic environment and the
demand for our products will improve.
Results of Operations
Revenue
Revenue for the first quarter of fiscal 2002 decreased 82% to $21.2 million from
$120.4 million for the first quarter of fiscal 2001. The decrease in revenue
was due to the decline in the overall economic environment, in particular the
reductions in capital spending by our target customers. For the first quarter
of fiscal 2002, two customers represented more than ten percent of revenue on an
individual basis, compared to three customers for the same period in fiscal
2001. Sales to emerging carriers, which had represented a large percentage of
our revenue in the first quarter of fiscal 2001, were insignificant in the first
quarter of fiscal 2002, and we expect this trend to continue for the foreseeable
future. While we have redirected our marketing efforts towards incumbent
carriers, these customers typically have longer sales evaluation cycles than
emerging carriers, and many incumbent carriers have also announced significant
reductions in their capital expenditure budgets. Accordingly, there can be no
certainty as to the severity or duration of the current economic downturn and
its impact on our future revenue.
12
Cost of Revenue
Cost of revenue for the first quarter of fiscal 2002 increased 91% to $122.6
million from $64.1 million for the first quarter of fiscal 2001. Cost of
revenue for the first quarter of fiscal 2002 includes a charge of $102.4 million
relating to excess inventory attributable to the significant reduction in the
Company's demand forecasts. Excluding the effect of this charge, cost of
revenue decreased by 69% to $20.2 million for the first quarter of fiscal 2002,
and represented 95% of total revenue for the first quarter of fiscal 2002,
compared to 53% for the first quarter of fiscal 2001. Excluding the impact of
the excess inventory charge, the increase in cost of revenue as a percentage of
revenue reflects the overall decrease in revenue and lower utilization of
certain fixed manufacturing and customer support costs.
Research and Development Expenses
Research and development expenses for the first quarter of fiscal 2002 increased
2% to $36.5 million from $35.7 million for the first quarter of fiscal 2001.
The slight increase in expenses was primarily due to higher depreciation expense
due to increased investments in lab and testing equipment.
Sales and Marketing Expenses
Sales and marketing expenses for the first quarter of fiscal 2002 decreased 21%
to $13.7 million from $17.4 million for the first quarter of fiscal 2001. The
decrease in expenses was primarily due to reduced costs for personnel and
related expenses due to the Company's restructuring activities as well as
decreased program marketing costs.
General and Administrative Expenses
General and administrative expenses for the first quarter of fiscal 2002
decreased 21% to $3.2 million from $4.1 million for the first quarter of fiscal
2001. The decrease in expenses was primarily due to reduced costs for personnel
and related expenses due to the Company's restructuring activities.
Amortization of Stock Compensation
Amortization of stock compensation expense for the first quarter of fiscal 2002
decreased 85% to $6.3 million from $42.8 million for the first quarter of fiscal
2001. 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. The decrease in amortization
expense is primarily due to $36.3 million of amortization expense that was
recorded during the first quarter of fiscal 2001, due to the accelerated vesting
of certain restricted stock and stock options in connection with the acquisition
of Sirocco Systems, Inc. ("Sirocco"). Amortization of stock compensation
relating to these option grants and restricted shares is expected to impact our
reported results of operations through the fourth quarter of fiscal 2005.
Restructuring Charges and Related Asset Impairments
As a result of a continued decline in overall economic conditions and further
reductions in capital spending by telecommunications service providers, we
implemented a second restructuring program in the first quarter of fiscal 2002,
designed to further reduce expenses to align resources with long-term growth
opportunities. The restructuring program included a workforce reduction,
consolidation of excess facilities, and charges related to excess inventory and
other asset impairments.
As a result of the restructuring program, we recorded restructuring charges and
related asset impairments of $77.3 million classified as operating expenses and
an excess inventory charge of $102.4 million classified as cost of revenue. In
addition, we recorded charges totaling $22.7 million classified as a non-
operating expense, relating to impairments of investments in non-publicly traded
companies that were determined to be other than temporary. We expect pretax
savings of approximately $45 million in annual operating expenses in connection
with the restructuring program and certain cost reduction initiatives, as
compared to the levels immediately preceding the restructuring program.
The following paragraphs provide detailed information relating to the
restructuring charges and related asset impairments which were recorded during
the first quarter of fiscal 2002.
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Workforce reduction
The restructuring program resulted in the reduction of 239 regular employees
across all business functions and geographic regions. The workforce reductions
were substantially completed in the first quarter of fiscal 2002. We recorded a
workforce reduction charge of approximately $7.1 million relating primarily to
severance and fringe benefits. In addition the number of temporary and contract
workers employed by us was also reduced.
Consolidation of facilities and certain other costs
We recorded a charge of $17.2 million relating to the consolidation of excess
facilities and certain other costs. The total charge includes $11.2 million
related to the write-down of certain land, as well as lease terminations and
non-cancelable lease costs. We also recorded other restructuring costs of $6.0
million relating primarily to administrative expenses and professional fees in
connection with the restructuring activities.
Inventory and asset write-downs
We recorded a charge of $155.5 million relating to the write-down of inventory
to its net realizable value and the impairment of certain other assets. The
total charge includes $102.4 million of inventory write-downs and purchase
commitments for inventory which was recorded as part of cost of revenue. This
excess inventory charge was due to a severe decline in the demand for our
products. We also recorded charges totaling $53.1 million for asset
impairments, including the assets related to our vendor financing agreements and
fixed assets that were abandoned by us. Since revenue had been recognized under
the vendor financing agreements on a cash basis, the amount of the impairment
loss was limited to the cost of the systems shipped to the vendor financing
customers.
Losses on Investments
We recorded charges totaling $22.7 million for impairments of investments in
non-publicly traded companies that were determined to be other than temporary.
The impairment charges were classified as a non-operating expense.
The restructuring charges and related asset impairments recorded in the first
quarter of fiscal 2002 are summarized as follows (in thousands):
Accrual
Total Balance at
Restructuring Non-cash Cash October 27,
Charge Charges Payments 2001
------ ------- -------- ----
Workforce reduction $ 7,106 $ 173 $645 $ 6,288
Facility consolidations and certain other costs 17,181 8,522 -- 8,659
Inventory and asset write-downs 155,451 105,081 -- 50,370
Losses on investments 22,737 22,737 -- --
-------- -------- ---- -------
Total $202,475 $136,513 $645 $65,317
======== ======== ==== =======
The remaining cash expenditures relating to workforce reductions will be
substantially paid by the third quarter of fiscal 2002. Facility consolidation
charges will be paid over the respective lease terms through fiscal 2005. We
expect to substantially complete the fiscal 2002 restructuring program by the
first quarter of fiscal 2003.
Acquisition Costs
Acquisition costs for the first quarter of fiscal 2001 were $4.9 million related
to the acquisition of Sirocco. These costs included legal and accounting
services and other professional fees associated with the transaction.
Interest and Other Income, Net
Interest and other income, net decreased to $13.2 million for the first quarter
of fiscal 2002 compared to $22.3 million for the first quarter of fiscal 2001.
The decrease was primarily attributable to lower interest rates and a lower
average cash balance during the first quarter of fiscal 2002.
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Provision for Income Taxes
We did not provide for taxes for the first quarter of fiscal 2002 or the first
quarter of fiscal 2001 due to the net loss in each period.
Liquidity and Capital Resources
Total cash, cash equivalents and investments were $1.15 billion at October 27,
2001. Included in this amount were cash and cash equivalents of $291.9 million,
compared to $492.5 million at July 31, 2001. The decrease in cash and cash
equivalents of $200.6 million was attributable to cash used in operating
activities of $94.7 million and cash used in investing activities of $106.2
million, offset by cash provided by financing activities of $0.3 million.
Cash used in operating activities of $94.7 million consisted of the net loss for
the period of $247.9 million, adjusted for non-cash charges totaling $155.1
million and changes in working capital totaling $1.9 million. Non-cash charges
included depreciation and amortization, restructuring charges and related asset
impairments, and amortization of stock compensation. Cash used in investing
activities of $106.2 million consisted primarily of net purchases of investments
of $98.7 million and purchases of property and equipment of $5.9 million. Cash
provided by financing activities of $0.3 million consisted primarily of the
proceeds received from employee stock plan activity.
During the first quarter of fiscal 2002, each of our two major vendor financing
customers experienced a significant deterioration in their financial condition.
As a result, we determined that we were unlikely to realize any significant
proceeds from these vendor financing agreements, under which a total of $81.7
million had been drawn down. Accordingly, we recorded an impairment charge for
the assets related to these financing agreements. Since revenue had been
recognized under the financing agreements on a cash basis, the amount of the
impairment loss was limited to the cost of the systems shipped to the vendor
financing customers, which had been recorded in other long-term assets.
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 resources. 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.
Based on our current plans and business conditions, we believe that our existing
cash, cash equivalents and investments will be sufficient to satisfy our
anticipated cash requirements for at least the next twelve months.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
RISKS RELATED TO OUR BUSINESS
WE ARE EXPOSED TO GENERAL ECONOMIC CONDITIONS AND CONDITIONS SPECIFIC TO THE
TELECOMMUNICATIONS INDUSTRY
As a result of unfavorable economic conditions and a sudden and severe decline
in the purchasing patterns of our customers, our revenue began to decline in the
third and fourth quarters of fiscal 2001, and declined significantly in the
first quarter of fiscal 2002, each as compared to the respective periods in the
previous year. The economic downturn and reduced capital spending by
telecommunications service providers has also resulted in longer selling cycles
with extended trial periods for new equipment purchases. In addition, recent
terrorist acts appear to have added additional uncertainty to an already weak
overall economic environment. Further acts of war or terrorism may adversely
affect our business, operating results and financial condition. Our business and
results of operations have been, and will continue to be seriously harmed if
current economic conditions do not improve.
15
WE ARE ENTIRELY DEPENDENT ON OUR LINE OF INTELLIGENT OPTICAL NETWORKING PRODUCTS
AND OUR FUTURE REVENUE DEPENDS ON THEIR COMMERCIAL SUCCESS
Our future revenue depends on the commercial success of our line of
intelligent optical networking products. As of October 27, 2001, our SN 3000
Optical Access Switch, SN 8000 Intelligent Optical Network Node, SN 10000
Intelligent Optical Transport System, SN 16000 Intelligent Optical Switch and
Silvx Manager Network Management System are the only products that are currently
available for sale to customers. To be successful, we believe that we must
continually enhance the capabilities of our existing products, and successfully
develop and introduce new products. We cannot assure you that we will be
successful in completing the development, introduction or production
manufacturing 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 results of operations could be
adversely affected.
WE EXPECT THAT SUBSTANTIALLY ALL OF OUR REVENUE WILL BE GENERATED FROM A LIMITED
NUMBER OF CUSTOMERS, AND OUR REVENUE IS SUBSTANTIALLY DEPENDENT UPON SALES OF
PRODUCTS TO THESE CUSTOMERS
We currently have a limited number of customers, one of whom, Williams
Communications, accounted for 47%, 92%, and 100% of our revenue during fiscal
2001, 2000 and 1999, respectively. Another customer, 360networks, accounted for
11% of our revenue in fiscal 2001. As a result of unfavorable economic and
other conditions, several of our largest customers to date, including Williams
and 360networks, have slowed their capital expenditures and decreased their rate
of ordering products from us. In addition, in any given quarter, a relatively
small number of customers typically comprise a large percentage of total
revenue, though the composition of these customers varies from quarter to
quarter.
Historically, a large percentage of our sales have been made to emerging
carriers such as Williams and 360networks. Many of these emerging carriers have
recently begun to experience severe financial difficulties. As a result, we
believe that sales to emerging carriers are likely to be at reduced levels, and
to be successful, we will need to increase our sales to incumbent carriers,
which typically have longer sales evaluation cycles and with which we have
limited experience in selling our products. There can be no assurance that we
will be successful in increasing our sales to incumbent carriers.
None of our customers are contractually committed to purchase any minimum
quantities of products from us. We expect that in the foreseeable future a
majority of our revenue 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. Many incumbent carriers have recently
announced reductions in their capital expenditure budgets, reduced their revenue
forecasts, or announced restructurings. 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.
WE EXPECT GROSS MARGINS TO REMAIN AT REDUCED LEVELS IN THE NEAR TERM
Our gross margins declined significantly compared to historical levels
beginning in the third quarter of fiscal 2001. In the first quarter of fiscal
2002, our gross profit was 5% of revenue after excluding the effect of excess
inventory charges. We currently anticipate that gross margins may continue to
be adversely affected by several factors, including reduced demand for our
products, effect of new product introductions including volumes and
manufacturing efficiencies, component limitations, the mix of products sold,
competitive pricing, and possible increases in inventory levels which could
increase our exposure to excess and obsolete inventory charges, such as the
charge which occurred in the first quarter of fiscal 2002.
16
OUR FAILURE TO GENERATE SUFFICIENT REVENUE WOULD PREVENT US FROM ACHIEVING
PROFITABILITY
Beginning in the third quarter of fiscal 2001, our revenue declined
considerably and we incurred significant operating losses during the last half
of fiscal 2001 and the first quarter of fiscal 2002. As of October 27, 2001, we
had an accumulated deficit of $549.4 million. We cannot assure you that our
revenue will increase or that we will generate sufficient revenue to achieve or
sustain profitability. While we have implemented restructuring programs
designed to decrease the Company's business expenses, we will continue to have
large fixed expenses and we expect to continue to incur significant sales and
marketing, product development, customer support and service, administrative and
other expenses. As a result, we will need to generate significantly higher
revenue over the current levels in order to achieve and maintain profitability.
THE UNPREDICTABILITY OF OUR QUARTERLY RESULTS MAY ADVERSELY AFFECT THE TRADING
PRICE OF OUR COMMON STOCK
Our revenue and operating results have varied significantly from quarter to
quarter. For example, from the fourth quarter of fiscal 1999 through the second
quarter of fiscal 2001, our revenue increased each quarter sequentially compared
to the previous quarter. However, beginning in the third quarter of fiscal
2001, our revenue declined due to a sudden and severe decline in the purchasing
patterns of our customers, and as a result, we have incurred significant
operating losses since that time. We believe that our revenue and operating
results are likely to continue to 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, which we
believe is increasing in length;
* 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;
* our ability to develop, introduce and ship new products and product
enhancements that meet customer requirements in a timely manner;
* delays or cancellations by customers;
* 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;
* manufacturing lead times;
* the timing and level of prototype expenses;
* costs related to acquisitions of technology or businesses;
* general economic conditions as well as those specific to the
telecommunications, Internet and related industries.
17
While we have implemented restructuring and cost control programs, we plan to
continue to invest in our business, to continue to maintain a strong product
development and customer support infrastructure so as to be poised to move
quickly when economic conditions recover. Our operating expenses are largely
based on the requirements that we believe are necessary to support sales to
incumbent carriers, and a high percentage of our expenses are, and will continue
to be, fixed. As a result, we currently expect to continue to incur operating
losses unless revenue increases significantly above the current levels.
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 for one quarter as any indication of our
future performance. Occurrences of the foregoing factors are extremely
difficult to predict. In addition, our ability to forecast our future business
has been significantly impaired by the general economic downturn. As a result,
our future operating results may be below our expectations or those of public
market analysts and investors, and our net sales may continue to decline or
recover at a slower rate than anticipated by us or analysts and investors. In
either event, the price of our common stock could decrease.
OUR PRODUCTS ARE COMPLEX AND ARE DEPLOYED IN COMPLEX ENVIRONMENTS AND 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. 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. From time to time, there may be
interruptions or delays in the deployment of our products due to product
performance problems or post delivery obligations. If we are unable to fix
errors or other problems, or if our customers experience interruptions or delays
that cannot be promptly resolved, we could experience:
* loss of or delay in revenue 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;
* delays in collecting accounts receivable;
* legal actions by our customers; and
* increased insurance costs,
any of which could seriously harm our financial condition or results of
operations.
THE LONG AND VARIABLE SALES CYCLES FOR OUR PRODUCTS MAY CAUSE REVENUE 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
lengthy and recently has increased in length, as we have directed our sales
efforts towards incumbent carriers. 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 economic environment of our customers, the skills of our customers, the size
of the network deployment and the complexity of our customers' network
environment. 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
18
expectation that customers will tend to sporadically place large orders with
short lead times, may cause our revenue 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 and began shipping our first product in May
1999. As a result, there is limited meaningful historical financial data upon
which investors may evaluate us and our prospects. We also have limited
historical financial data upon which to base our projected revenue. Our
operating expenses are largely based on the requirements that we believe are
necessary to support sales to incumbent carriers, 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 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 continues to be a 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.
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 optical networking architecture;
* any delays or difficulties that we may incur in completing the development,
introduction and production manufacturing 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, installation or
performance 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 OR 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. In particular,
component yield limitations negatively impacted the production manufacturing for
the SN 16000 and our revenue from this product during fiscal 2001.
During the past year, the optical component industry has been downsizing
manufacturing capacity while consolidating product lines from earlier
acquisitions. This business environment could impact product deliveries and
result in the consolidation of product offerings. Because optical components are
integrated into our products, the business environment for optical component
manufacturers could negatively impact our revenue and results of operations.
19
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. The introduction
of products incorporating new technologies and the emergence of new industry
standards could render our existing products obsolete.
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, volume production 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 ensure 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 COULD
ADVERSELY AFFECT OUR MARKET POSITION
Competition in the public network infrastructure market is intense. This
market has historically been dominated by large companies, such as Nortel
Networks, Lucent Technologies, Alcatel and Ciena Corporation. In addition, a
number of smaller companies have either announced plans for new products or
introduced 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 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;
20
* 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 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. Furthermore, as we are increasingly directing our sales
efforts towards incumbent carriers which typically have longer sales evaluation
cycles, we believe that being able to demonstrate strong financial viability is
becoming an increasingly important consideration to our customers in making
their purchasing decisions.
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.
THE INDUSTRY IN WHICH WE COMPETE IS SUBJECT TO CONSOLIDATION
We believe that the industry in which we compete may enter into a
consolidation phase. Over the past year, the market valuations of the majority
of companies in our industry have declined significantly, and many companies
have experienced reduced revenue due to factors including decreased customer
demand in general, a smaller customer base due to the financial difficulties
impacting emerging carriers, financial exposures due to customer financing
commitments, and other factors. We expect that the weakened financial position
of many companies in our industry may cause acquisition activity to increase.
We believe that industry consolidation may result in stronger competitors that
are better able to compete as sole-source vendors for customers. This could
lead to more variability in operating results as we compete to be a single
vendor solution and could have a material adverse effect on our business,
operating results, and financial condition.
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 our 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. During the normal course of business, we may
provide forecasts of our demand to our contract manufacturers up to six months
prior to scheduled delivery of products to our customers. If we overestimate our
requirements, the contract manufacturers may assess cancellation penalties or we
may have excess inventory which could negatively impact our gross margins. If we
underestimate our requirements, the contract manufacturers may have inadequate
inventory, which could interrupt manufacturing of our products and result in
delays in shipment to our customers and revenue recognition. During the first
quarter of fiscal 2002, we recorded an excess inventory charge of $102.4 million
due to the sudden decline in our forecasted revenue. A portion of this charge
was related to inventory purchase commitments.
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. The contract manufacturing industry is highly
competitive, and in recent months, several major acquisitions within the
industry have been announced. Any proposed or announced acquisitions could
have an adverse effect on our working relationship with our contract
manufacturers. Qualifying a new contract manufacturer and commencing volume
production is expensive and time consuming and could result in a
21
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.
SALES TO EMERGING SERVICE PROVIDERS MAY INCREASE THE UNPREDICTABILITY OF OUR
RESULTS
As a result of current economic and market conditions, decreased funding is
available for large capital expenditures by service providers. This decrease in
available funding significantly affects spending by our customers that are
emerging service providers. In addition, the timing and volume of purchases by
emerging service providers can be unpredictable due to other factors, including
their need to build a customer base and capacity while working within their
budgetary constraints. As a result of economic and other conditions, emerging
service providers, which had been the early adopters of our technology, are no
longer able to continue to fund aggressive deployments. Our ability to
recognize revenue from emerging service providers will depend on the relative
financial strength of the particular customer. We may be required to write off
or decrease the value of our accounts receivable from a customer whose financial
condition materially deteriorates. For example, during the fourth quarter of
fiscal 2001, we recorded a specific provision for doubtful accounts of $4.4
million, due to the filing for bankruptcy protection by our customer,
360networks. Decreases in purchasing volume of emerging service providers or
changes in the financial condition of emerging service provider customers could
have a material adverse effect on our results of operations.
THE INTELLIGENT OPTICAL NETWORKING MARKET IS EVOLVING AND OUR BUSINESS WILL
SUFFER IF IT DOES NOT DEVELOP AS WE EXPECT
The market for intelligent optical networking products continues to evolve.
Over the past six to nine months, there has been a sharp decline in capital
spending by our current and prospective customers. 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 WE COULD HAVE SUBSTANTIAL PRODUCT RETURNS,
WHICH COULD SERIOUSLY HARM OUR BUSINESS
Many of our customers utilize multiple protocol standards, and each of our
customers may have different specification requirements to interface with their
existing networks. Our customers' networks contain multiple generations of
products that have been added over time as these networks have grown and
evolved. Specifically, incumbent carriers typically have less evolutionary
networks that contain more generations of products. Our products must
interoperate with all of the products within our customers' 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 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.
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
22
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.
The majority of our product sales to date have been to emerging carriers
rather than incumbent carriers. We believe that it is important for us to
increase our sales to incumbent carriers, including incumbent local exchange
carriers such as the Regional Bell Operating Companies ("RBOCs"). Incumbent
carriers typically have longer sales evaluation cycles than emerging carriers,
and we have limited experience in selling our products to incumbent carriers.
In addition, we will need to invest in product certification standards such as
the Operations System Integration and Modification of Network Elements
("OSMINE") standard, which will be necessary for us to increase our sales to the
RBOCs. While we have made a commitment to invest resources in obtaining such
certification standards, there can be no assurance that we will be able to
establish or maintain strong customer relationships or that such efforts will
enable us to increase our sales to incumbent carriers.
OUR FAILURE TO CONTINUALLY IMPROVE OUR INTERNAL CONTROLS AND SYSTEMS, AND
RETAIN NEEDED PERSONNEL COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS
Since inception, the scope of our operations has increased and we have grown
our headcount substantially. However, over the past three quarters our
headcount levels have been reduced significantly, due primarily to our
restructuring actions. At October 27, 2001, we had a total of 701 employees,
which represents a reduction of approximately 35% from headcount levels
immediately prior to the restructuring actions. Our initial growth, followed
by recent headcount reductions, has placed a significant strain on our
management systems and resources. Our ability to successfully offer our
products and services 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 effectively manage our
headcount levels worldwide. We may not be able to implement adequate control
systems in an efficient and timely manner. In spite of recent economic
conditions, competition for highly skilled personnel is intense, especially in
the New England area where we are headquartered. Any failure to attract,
assimilate or retain qualified personnel to fulfill our current or future needs
could adversely affect our results of operations.
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
We depend on 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. All of our key employees have been granted stock options
which are intended to represent an integral component of their compensation
package. These stock options may not provide the intended incentive to our
employees if our stock price declines or experiences significant volatility.
The loss of the services of any of our key employees, the inability to attract
and retain qualified personnel in the future, or delays in hiring qualified
personnel could delay the development and introduction of, and negatively impact
our ability to sell, our products.
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IF WE BECOME SUBJECT TO UNFAIR HIRING, WRONGFUL TERMINATION OR OTHER EMPLOYMENT
RELATED 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. During
the third quarter of fiscal 2001 and the first quarter of fiscal 2002, we
terminated approximately 371 employees in response to changing market
conditions, and as a result, may face claims relating to their compensation
and/or wrongful termination based on discrimination. 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.
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, THE COMPETITIVENESS OF OUR PRODUCTS COULD BE IMPAIRED
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 CLAIMS 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. Our industry in
particular is characterized by the existence of a large number of patents and
frequent claims and related litigation regarding patents and other intellectual
property rights. We may be a party to claims as a result of an allegation that
we infringe others' intellectual property. Such disputes could result in
significant expenses to Sycamore and divert the efforts of our technical and
management personnel.
Any parties asserting that our products infringe upon their proprietary rights
would force us to defend ourselves and possibly our customers, manufacturers or
suppliers against the alleged infringement. Regardless of their merit, these
claims could result in costly litigation and subject us to the risk of
significant liability for damages. These claims, again regardless of their
merit, would likely be time consuming and expensive to resolve, would divert
management time and attention and would put the Company at risk to:
* stop selling, incorporating or using our products that use the challenged
intellectual property;
24
* obtain from the owner of the intellectual property right a license to
sell or use the relevant technology, which license may not be available on
reasonable terms, or at all;
* redesign those products that use such technology; or
* accept a return of products that use such technologies.
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 REVENUE ABROAD
International sales represented 35% of total revenue in fiscal 2001, and more
than 50% of total revenue in the first quarter of fiscal 2002, and 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 services 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;
* necessity to work with third parties in certain countries to perform
installation and obtain customer acceptance, and the resulting potential
impact on revenue recognition;
* 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 OR STRATEGIC INVESTMENTS 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.
We completed the acquisition of Sirocco Systems, Inc. in September 2000, and may
consider making other acquisitions from time to time. In the event of an
acquisition, we could:
* issue stock that would dilute our current stockholders' percentage
ownership;
* incur debt;
* assume liabilities;
25
* record goodwill and non-amortizable intangible assets that will be subject
to impairment testing and potential periodic impairment charges;
* incur amortization expenses related to certain intangible assets;
* incur large and immediate write-offs; or
* become subject to litigation;
Our ability to achieve the benefits of any acquisition, 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.
As of October 27, 2001, we have made strategic investments in privately held
companies totaling approximately $26.0 million, and we may decide to make
additional investments in the future. During the first quarter of fiscal 2002,
we recorded impairment losses of $22.7 million relating to these investments.
These types of investments are inherently risky as the market for the
technologies or products they have under development are typically in the early
stages and may never materialize. We could lose our entire investment in
certain or all of these companies.
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, including emerging service providers, 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 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.
During the first quarter of fiscal 2002, we experienced losses relating to our
two current vendor financing customers, as each of them experienced a
significant deterioration in their financial condition. As a result, we
determined that we were unlikely to realize any significant proceeds from these
vendor financing agreements, under which a total of $81.7 million had been drawn
down, and accordingly, recorded an impairment charge for the assets related to
these transactions. Since revenue had been recognized under the financing
agreements on a cash basis, the amount of the impairment loss was limited to the
cost of the systems shipped to the vendor financing customers, which had been
recorded in other long-term assets.
26
RISKS RELATED TO THE SECURITIES MARKET
OUR STOCK PRICE MAY CONTINUE TO BE VOLATILE
Historically, the market for technology stocks has been extremely volatile.
Our common stock has experienced, and may continue to experience, substantial
price volatility. 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;
* variations between our actual results and the published expectations of
analysts;
* changes in financial estimates by securities analysts;
* sales of our common stock or other securities in the future;
* 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.
Beginning on July 2, 2001, several purported securities class action
complaints were filed against the Company, several of its officers and directors
and the Company's lead underwriters in connection with the Company's initial
public offering and secondary offering. The Company believes that the claims
against it are without merit and intends to defend against the complaints
vigorously. However, defending the Company and its officers against these
complaints may result in substantial costs and a diversion of management's
attention and resources. See Part II, Item 1 - Legal Proceedings for
additional details regarding these cases.
THERE MAY BE SALES OF A SUBSTANTIAL AMOUNT OF OUR COMMON STOCK THAT COULD CAUSE
OUR STOCK PRICE TO FALL, OR INCREASE THE VOLATILITY OF OUR STOCK PRICE
As of October 27, 2001 options to purchase a total of 18.1 million shares of
our common stock were outstanding. In addition, we plan to issue options to
purchase approximately 12.5 million shares during the second quarter of fiscal
2002, in accordance with the terms of an option exchange program in which most
of our employees were eligible to participate. While these options are subject
to vesting schedules, a number of the shares underlying these options are freely
tradable. Sales of a substantial number of shares of our common stock could
cause our stock price to fall or increase the volatility of our stock price. In
addition, sales of shares by our stockholders could impair our ability to raise
capital through the sale of additional stock.
27
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 27, 2001, the executive officers, directors and entities
affiliated with them, in the aggregate, beneficially owned approximately 42.2%
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 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 increase immediately and uniformly by 10 percent from levels at
October 27, 2001, the fair value of the portfolio would decline by approximately
$2.1 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 the majority of our sales to
date have been made in US dollars. However, our business has become increasingly
global, with international revenue representing 35% of total revenue in fiscal
2001, and we expect this trend to continue. As a result, we expect that sales
in non-dollar currencies and our exposure to foreign currency exchange rate
fluctuations are likely to increase. Fluctuations in foreign currencies may
have an impact on our financial results. We are prepared to hedge against
fluctuations in foreign currencies if the exposure is material, although we have
not engaged in hedging activities to date.
28
Part II. Other Information
Item 1. Legal Proceedings
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 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. The complaints were filed on behalf of persons who
purchased the Company's common stock during specified periods, all beginning on
October 21 or October 22, 1999 and ending on various dates, the latest of which
is August 10, 2001. The complaints are similar and allege violations of the
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as
amended, primarily based on the assertion that the Company's lead underwriters,
the Company and the other named defendants made material false and misleading
statements in the Company's prospectus incorporated in its registration
statements on Form S-1 filed with 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. The
complaints allege claims against the Company, several of the Company's officers
and directors and the underwriters under Sections 11 and 15 of the Securities
Act. The complaints also allege claims solely against the underwriter
defendants under Section 12(a)(2) of the Securities Act and some of the
complaints allege claims against the Company and the individual defendants under
Section 10(b) of the Exchange Act. The complaints against the Company have been
consolidated into a single action. Because the action against the Company is
being coordinated with over two hundred other nearly identical actions filed
against other companies, it is not yet clear when or whether a consolidated
complaint will be filed against the Company. The Company is not required to
respond before a consolidated complaint is filed. The actions seek damages in an
unspecified amount. The Company believes that the claims against it are without
merit and intends to defend against the complaints vigorously. The Company is
not currently able to estimate the possibility of loss or range of loss, if any,
relating to these claims.
The Company is subject to legal proceedings, claims, and litigation arising in
the ordinary course of business. While the outcome of these matters is currently
not determinable, management does not expect that the ultimate costs to resolve
these matters will have a material adverse effect on the Company's results of
operations or financial position.
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 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 Amended and Restated By-Laws of the Company (2)
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)
29
(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 File 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
Commission on March 13, 2001.
(b) Reports on Form 8-K : The Company filed a Current Report on Form 8-K on
October 19, 2001 relating to a press release issued by the Company providing
revised guidance as to its revenue and earnings for the first fiscal quarter
ending October 27, 2001.
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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 7, 2001
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EXHIBIT INDEX
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 Amended and Restated By-Laws of the Company (2)
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)
(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 File 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
Commission on March 13, 2001
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