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 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NUMBER 333-25853
SYCAMORE NETWORKS, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3410558
(State of other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
10 Elizabeth 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___ No X .
ALTHOUGH THE REGISTRANT HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS, THE REGISTRANT DID NOT BECOME
SUBJECT TO SUCH FILING REQUIREMENTS UNTIL THE REGISTRATION OF CERTAIN SHARES OF
ITS COMMON STOCK PURSUANT TO A REGISTRATION STATEMENT ON FORM S-1 (THE
"REGISTRATION STATEMENT") WHICH WAS DECLARED EFFECTIVE BY THE SECURITIES AND
EXCHANGE COMMISSION ON OCTOBER 21, 1999.
The number of shares outstanding of the Registrant's Common Stock as of November
30, 1999 was 78,696,484.
1
Sycamore Networks, Inc.
Index
Part I. Financial Information
Page No.
Item 1. Financial Statements and Supplementary Data
Balance Sheets as of October 30, 1999 and July 31, 1999 3
Statements of Operations for the three months
ended October 30, 1999 and October 31, 1998 4
Statements of Cash Flows for the three months ended
October 30, 1999 and October 31, 1998 5
Notes to financial statements 6
Item 2. Management's discussion and analysis of financial
condition and results of operations 8
Item 3. Qualitative and quantitative disclosures about market risk 21
Part II Other Information
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Signature 24
Exhibit Index 25
2
Part I. Financial Information
Item 1.
Sycamore Networks, Inc.
(in thousands, except share data)
October 30, July 31,
1999 1999
---- ----
Assets
Current assets:
Cash and cash equivalents $ 280,634 $ 21,969
Marketable securities 10,196 7,020
Accounts receivable 12,524 11,410
Inventories 7,568 6,608
Prepaids and other current assets 3,015 5,153
---------- ---------
Total current assets 313,937 52,160
Property and equipment, net 7,117 5,288
Other assets 919 464
---------- ---------
Total assets $ 321,973 $ 57,912
========== =========
Liabilities, Redeemable Convertible Preferred Stock
and Stockholders' Equity (Deficit)
Current liabilities:
Current portion of notes payable $ -- $ 1,097
Accounts payable 10,546 5,750
Accrued compensation 813 1,403
Accrued warranty 987 453
Accrued expenses 2,042 1,298
Other current liabilities 961 1,709
---------- ---------
Total current liabilities 15,349 11,710
Notes payable -- 4,054
Commitments and contingencies
Redeemable convertible preferred stock -- 55,771
Stockholders' equity (deficit):
Preferred stock, $.01 par value, 5,000,000
shares authorized; none issued or outstanding -- --
Common stock, $.001 par value; 250,000,000
shares authorized; 78,696,484 and 23,273,112
shares issued and outstanding 79 23
Additional paid-in capital 385,584 30,826
Accumulated deficit (25,900) (20,183)
Notes receivable (460) (360)
Deferred compensation (52,679) (23,929)
---------- ---------
Total stockholders' equity (deficit) 306,624 (13,623)
---------- ---------
Total liabilities, redeemable convertible preferred
stock and stockholders' equity (deficit) $ 321,973 $ 57,912
========== =========
The accompanying notes are an integral part of the financial statements.
3
Sycamore Networks, Inc.
Statements of Operations
(in thousands, except per share data)
Three Months Ended
--------------------
October 30, October 31,
1999 1998
---- ----
Revenues $ 19,510 $ -
Cost of revenues 10,340 24
----------- ----------
Gross profit (loss) 9,170 (24)
Operating expenses:
Research and development 7,844 873
Sales and marketing 3,445 179
General and administrative 751 93
Amortization of stock compensation 3,289 75
----------- ----------
Total operating expenses 15,329 1,220
Loss from operations (6,159) (1,244)
Interest income, net 442 60
----------- ----------
Net loss $ (5,717) (1,184)
=========== ==========
Basic and diluted net loss per share $ (0.56) $ (0.39)
Weighted average shares used in computing
basic and diluted net loss per share 10,294 3,009
Pro forma basic and diluted net loss per share $ (0.11) $ (0.05)
Weighted average shares used in computing pro
forma basic and diluted net loss per share 53,420 21,750
The accompanying notes are an integral part of the financial statements.
4
Sycamore Networks, Inc.
Statements of Cash Flows
(in thousands)
Three months ended
------------------
October 30, October 31,
1999 1998
---- ----
Cash flows from operating activities:
Net loss $ (5,717) $ (1,184)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 650 75
Amortization of stock compensation 3,289 75
Changes in operating assets and liabilities:
Accounts receivable (1,114) -
Inventories (960) -
Prepaids and other current assets 2,138 (176)
Accounts payable 4,796 (6)
Accrued expenses and other current liabilities (60) (29)
------------ ---------
Net cash provided by (used in) operating activities 3,022 (1,245)
------------ ---------
Cash flows from investing activities:
Purchases of property and equipment (2,479) (417)
Purchases of marketable securities (8,082) -
Maturities of marketable securities 4,906 -
Increase in other assets (455) -
------------ ---------
Net cash used in investing activities (6,110) (417)
------------ ---------
Cash flows from financing activities:
Proceeds from issuance of redeemable convertible preferred stock, net - 2,525
Proceeds from issuance of common stock, net 266,904 147
Proceeds from notes payable - 673
Payments on notes payable (5,151) -
------------ ---------
Net cash provided by financing activities 261,753 3,345
------------ ---------
Net increase in cash and cash equivalents 258,665 1,683
Cash and cash equivalents, beginning of period $ 21,969 $ 1,197
------------ ---------
Cash and cash equivalents, end of period $ 280,634 $ 2,880
============ =========
Supplementary non-cash activity:
Issuance of common stock in exchange for notes receivable $ 100 $ -
The accompanying notes are an integral part of the financial statements.
5
Sycamore Networks, Inc.
Notes To Financial Statements
1. Description of Business
Sycamore Networks, Inc. ("Sycamore", or the "Company") was incorporated in
Delaware on February 17, 1998. Sycamore develops and markets products that
transport voice and data traffic over wavelengths of light. Sycamore's products
enable service providers to quickly and cost effectively provide bandwidth and
create new high-speed data services. To date, Sycamore has principally marketed
its products in the United States. Through May 1, 1999, Sycamore was considered
to be in the development stage and was principally engaged in research and
development, raising capital and building its management team. Sycamore shipped
its first product in May 1999. Sycamore operates in one business segment.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited financial statements have been prepared by Sycamore
and reflect all adjustments, consisting only of normal recurring adjustments,
which in the opinion of management are necessary for a fair statement of the
results for the interim periods. The financial statements have been prepared in
accordance with the regulations of the Securities and Exchange Commission
("SEC"), but omit certain information and footnote disclosure necessary to
present the statements in accordance with generally accepted accounting
principles. Results for the interim periods are not necessarily indicative of
results for the entire fiscal year. These statements should be read in
conjunction with the financial statements and related footnotes included in
Sycamore's registration statement Form S-1 filed with the SEC on October 21,
1999 for the year ended July 31, 1999.
3. Net Loss Per Share and Pro Forma Loss Per Share
Basic net loss per share is computed by dividing the net loss for the period by
the weighted average number of common shares outstanding during the period.
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.
Pro forma net loss per share is computed using the weighted average number of
common shares outstanding, including the pro forma effects of the automatic
conversion of Sycamore's Series A, B, C and D redeemable convertible preferred
stock into shares of Sycamore's common stock, effective upon the closing of
Sycamore's initial public offering, as if such conversion had occurred at the
date of original issuance.
6
The following table sets forth the computation of basic and diluted net loss per
share:
(in thousands, except per share data) Three Months Three Months
Ended Ended
October 30, 1999 October 31, 1998
---------------- ----------------
Numerator:
Net loss $ (5,717) $(1,184)
Denominator:
Historical:
Weighted average common shares outstanding 28,545 10,032
Weighted average common shares outstanding
subject to repurchase (18,251) (7,023)
-------- -------
Denominator for basic and diluted calculation 10,294 3,009
======== =======
Basic and diluted net loss per share $ (.56) $ (.39)
======== =======
Pro Forma:
Historical weighted average common shares outstanding 10,294 3,009
Weighted average number of shares assumed
upon conversion of redeemable convertible
preferred stock 43,126 18,741
-------- -------
Shares used in computing pro forma basic and
diluted net loss per share 53,420 21,750
======== =======
Pro forma basic and diluted net loss per share $ (.11) $ (.05)
======== =======
Options to purchase 4,828,849 and 28,500 shares of common stock at respective
average exercise prices of $11.09 and $.02 per share, have not been included in
the computation of diluted net loss per share for the three months ended October
30, 1999 and October 31, 1998, respectively, as their effect would have been
anti-dilutive.
4. Inventory
Inventory consisted of the following (in thousands):
October 30, July 31,
1999 1999
---- ----
Raw materials $1,826 $2,164
Work in process 2,427 3,026
Finished goods 3,315 1,418
------ ------
$7,568 $6,608
====== ======
5. Other Comprehensive Income
Sycamore reports comprehensive income (loss) in accordance with Statement of
Financial Accounting Standard No. 130, "Reporting Comprehensive Income" (FAS
130). The comprehensive net loss for the three months ended October 30, 1999 and
October 31, 1999 does not differ from the reported net loss.
7
6. Initial Public Offering
On October 21, 1999, Sycamore completed its initial public offering ("IPO") in
which it sold 7,475,000 shares of Common Stock at a price to the public of
$38.00 per share. The net proceeds of the IPO, after deducting underwriting
discounts and other offering expenses, were approximately $263.0 million. Upon
the closing of the IPO, all redeemable convertible preferred Stock (Series A, B,
C and D) automatically converted to 47,283,225 shares of Common Stock.
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 on Form 10-Q constitute forward-
looking statements that involve risks and uncertainties. The Company's actual
results could differ materially from those stated or implied in forward-looking
statements due to a number of factors, including without limitation those
discussed under the caption "Factors That May Effect Future Results" included
herein and under the caption "Risk Factors" in the Company's Registration
Statement on Form S-1 (No. 333-84635) filed by the Company in connection with
its IPO which became effective October 21, 1999. Forward-looking statements
include statements regarding the future or the Company's expectations, beliefs,
intentions or strategies regarding the future and may be identified by the words
"anticipate," "believe," "could," "estimate" "expect," "intend," "may,"
"should," "will," and "would" and similar expressions. There may be events in
the future that could affect these matters.
Overview
Sycamore develops and markets products that transport voice and data traffic
over wavelengths of light. Sycamore's products enable service providers to
quickly and cost effectively provide bandwidth and create new high-speed data
services. From Sycamore's inception in February 1998 through May 1, 1999,
Sycamore's operating activities consisted primarily of research and development,
product design, development and testing. During this period, Sycamore also
staffed and trained its administrative, marketing and sales personnel and began
sales and marketing activities. In May 1999, Sycamore began shipping the SN
6000 product and recognized revenues of $11.3 million from shipments of the SN
6000 in the fourth quarter of 1999. Since inception, Sycamore has incurred
significant losses, and as of October 30, 1999, had an accumulated deficit of
$25.9 million. Sycamore has not achieved profitability on a quarterly or annual
basis.
Revenues are currently generated from two products: the SN 6000 and the SN 8000.
While Sycamore is developing and plans to introduce future products, there can
be no assurance that it will be successful in these efforts.
Results of Operations
Revenues
Revenues for the three months ended October 30, 1999 were $19.5 million (none
for the corresponding period in the prior year). Sycamore began shipping the SN
6000 in May 1999. The SN 8000 was first shipped in August 1999. For the three
months ended October 30, 1999, one customer accounted for all revenues.
Cost of Revenues
Cost of revenues were $10.3 million for the three months ended October 30, 1999
compared to $24,000 for the same period in fiscal 1999. Sycamore began shipping
the SN 6000 in May 1999 and the SN 8000 in August 1999. Cost of revenues
includes material costs, costs of manufacturing overhead, the cost of the
customer service organization and other period costs.
8
Research and Development Expenses
Research and development expenses increased $6.9 million to $7.8 million for the
three months ended October 30, 1999 compared to $873,000 for the same period in
fiscal 1999. The increase in expenses was primarily due to increased costs
associated with a significant increase in personnel and personnel-related
expenses, an increase in non-recurring engineering costs and an increase in
prototype expenses for the design and development of new products as well as
enhancements to existing products. Research and development is essential to
Sycamore's future success and Sycamore expects that the dollar amounts of
research and development expenses to increase in future periods.
Sales and Marketing Expenses
Sales and marketing expenses increased $3.3 million to $3.4 million for the
three months ended October 30, 1999 compared to $179,000 for the same period in
fiscal 1999. The increase in expenses reflects the hiring of additional sales
and marketing personnel, sales based commissions and marketing program costs,
including web development, trade shows and product launch activities. Sycamore
intends to continue to expand its domestic and international sales force and
marketing efforts, and as a result, expects that the dollar amounts of sales and
marketing expenses will increase in future periods.
General and Administrative Expenses
General and administrative expenses increased $658,000 to $751,000 for the three
months ended October 30, 1999 compared to $93,000 for the same period in fiscal
1999. The increase in expenses reflects the hiring of additional general and
administrative personnel and expenses necessary to support increased levels of
business activities. Sycamore expects that the dollar amounts of general and
administrative expenses will increase in future periods as a result of expansion
of business activity and the reporting and other requirements of being a
publicly traded company.
Amortization of Stock Compensation
Amortization of stock compensation expense was $3.3 million and $75,000 for the
three months ended October 30, 1999 and October 31, 1998, respectively. Amounts
for the three months ended October 30, 1999 include $837,000 of compensation
expense associated with the grant of options to purchase common stock to non-
employees and consultants. For the three months ended October 30, 1999, Sycamore
granted 3,182,196 stock options at exercise prices, ranging from $4.00 to
$17.50, which were deemed to be below fair market value, and recorded additional
deferred compensation expense of approximately $31.2 million related to these
grants. Amortization of stock compensation relating to these grants is expected
to impact Sycamore's reported results of operations through the first quarter of
fiscal 2005.
Interest Income, Net
Interest income, net was $442,000 and $60,000 for the three months ended October
30, 1999 and October 31, 1998, respectively. The increase in interest income
reflects higher invested balances and interest earnings on the IPO proceeds,
offset by interest payments on the notes payable.
Net Operating Losses and Tax Credit Carryforwards
As of October 30, 1999, Sycamore had approximately $19.0 million of state and
federal net operating loss carryforwards for tax reporting purposes available to
offset future taxable income. Such net operating loss carryforwards begin to
expire in 2004 and 2019, respectively, to the extent that they are not utilized.
Sycamore has not recognized any benefit from the future use of loss
carryforwards for these periods, or for any other periods, since inception.
Management's evaluation of all the available evidence in assessing realizability
of the tax benefits of such loss carryforwards indicates that the underlying
assumptions of future profitable operations contain risks that do not provide
sufficient assurance to recognize the tax benefits currently. The net operating
loss carryforwards could be limited in future years if there is a significant
change in our ownership.
9
Liquidity and Capital Resources
Prior to its IPO, Sycamore financed its operations primarily through private
sales of its capital stock and through borrowings on long-term debt agreements
for the purchase of capital equipment. On October 22, 1999, Sycamore completed
its IPO in which it sold 7,475,000 shares of Common Stock at a price to the
public of $38.00 per share. The net proceeds of the IPO, after deducting
underwriting discounts and other offering expenses, were approximately $263.0
million
At October 30, 1999, cash, cash equivalents and marketable securities totaled
$290.8 million. Sycamore invests excess funds in short-term money market funds,
commercial paper and government and non-government debt securities.
Cash provided by operating activities was $3.0 million for the three months
ended October 30, 1999, compared to cash used in operating activities of $1.2
million for the three months ended October 31, 1998. The increase in cash
provided by operating activities is primarily due to increases in non-cash
charges for amortization of stock compensation and depreciation, accounts
payable offset by the increases in net losses, accounts receivables and
inventory purchases.
Cash used in investing activities was $6.1 million for the three months ended
October 30, 1999, compared to $417,000 for the three months ended October 31,
1998. The increase in net cash used in investing activities reflects increased
purchases of property and equipment, primarily for computers and test equipment
for our development and manufacturing activities, and increased net purchases of
marketable securities.
Cash provided by financing activities was $261.8 million for the three months
ended October 30, 1999 and $3.3 million for the three months ended October 31,
1998. The increase in cash provided by financing activities reflects the net
proceeds of $263.0 million from Sycamore's IPO and the issuance of common stock
from the exercise of stock options, offset by payments of debt obligations.
In December 1998, Sycamore issued an irrevocable stand-by letter of credit for
$92,000 for an office facility lease which is collateralized by an U.S. Treasury
Bill. The letter of credit is irrevocable and expires in January 2002. In July
1999, Sycamore issued a guaranteed stand-by letter of credit for $4,000,000 for
inventory purchases made by a third party manufacturer on behalf of Sycamore
which is collateralized by a U.S. Government security. The letter of credit was
irrevocable and expired in October 1999.
Sycamore believes that the net proceeds from the IPO, together with Sycamore's
current cash, cash equivalents and marketable securities will be sufficient to
meet anticipated cash needs for working capital and capital expenditures for at
least the next twelve months.
Year 2000 Readiness Disclosure
State of Readiness of Sycamore's Products.
Sycamore has designed its products for use in the year 2000 and beyond and
Sycamore believes its products are year 2000 complaint. However, Sycamore's
products are generally integrated into larger networks involving sophisticated
hardware and software products supplied by other vendors. Each of Sycamore's
customers' networks involves different combinations of third party products.
Sycamore cannot evaluate whether all of these third-party vendor products are
year 2000 compliant. Sycamore may face warranty and other claims based on year
2000 problems in other companies' products or based on issues arising from the
integration of multiple products within the customer's overall network. Although
no such claims have been made against Sycamore, Sycamore may in the future be
required to defend its products in legal proceedings which could be expensive
regardless of the merits of such claims. In addition, some customers may wait to
purchase Sycamore's products until after the year 2000, which may negatively
impact Sycamore's revenue.
10
State of Readiness of Sycamore's Internal Systems.
Sycamore's business may be affected by year 2000 issues related to non-complaint
internal systems developed by Sycamore or by third-party vendors. The failure of
Sycamore's internal systems to be year 2000 compliant could temporarily prevent
Sycamore from processing orders, issuing invoices and developing products and
could require Sycamore to devote significant resources to correct such problems.
Sycamore has substantially completed the year 2000 testing and conversion of its
material internal systems and is not currently aware of any year 2000 problem
relating to any of such systems. Sycamore's material third-party vendors have
stated that they are, or expect to be, year 2000 complaint in a timely manner.
Sycamore cannot independently verify the Year 2000 compliance of its third party
vendors. Sycamore's internal operations and business are also dependent upon the
computer-controlled systems of third parties such as Sycamore's manufacturers,
suppliers, customers and other service providers. Sycamore believes that absent
a systemic failure outside Sycamore's control, such as a prolonged loss of
electrical or telephone service, year 2000 problems of third parties such as
manufacturers, suppliers, customers and service providers will not have a
material impact on Sycamore's operations. However, due to the uncertainty as to
the year 2000 readiness of Sycamore's manufacturer's, suppliers, customers and
other service providers, Sycamore is unable to determine at this time whether
the consequences of year 2000 failures will have a material impact on Sycamore's
business, results of operations or financial condition.
Risks
If Sycamore's manufacturers, suppliers, vendors, partners, customers and service
providers fail to correct their year 2000 problems, these failures could result
in an interruption in, or a failure of, Sycamore's normal business activities or
operations. If a year 2000 problem occurs, it may be difficult to determine
which party's products have caused the problem. These failures could interrupt
Sycamore's operations and damage Sycamore's relationships with Sycamore's
customers. Due to the general uncertainty inherent in the year 2000 problem
resulting from the readiness of third-party manufacturers, suppliers and
vendors, Sycamore is unable to determine at this time whether year 2000 failures
could harm Sycamore's business, results of operations or financial condition.
Sycamore's customers' purchasing plans could be affected by year 2000 issues if
they need to expend significant resources to fix their existing internal systems
to become year 2000 compliant. This situation may reduce funds available to
purchase Sycamore's products.
In addition, in the event that a significant number of Sycamore's customers
experience year 2000-related problems, whether or not due to Sycamore's
products, demand for technical support and assistance may increase
substantially. In such case, Sycamore's cost for providing technical support may
rise and the quality of such technical support and Sycamore's ability to manage
incoming requests may be impaired.
To date, Sycamore has not incurred material expense associated with its efforts
to become year 2000 compliant and does not anticipate that any future costs in
connection with Sycamore's year 2000 remediation efforts will be material.
Sycamore has developed contingency plans to be implemented if its efforts to
identify and correct Year 2000 problems affecting our internal systems are not
effective. Sycamore's implementation of any contingency plan could have an
adverse effect on its business, results of operations or financial condition.
Factors That May Effect Future Results
Sycamore Expects That Substantially All Of its Revenues Will Be Generated From A
Limited Number Of Customers And Sycamore's Revenues Will Not Grow If It Does Not
Successfully Sell Products To These Customers
Sycamore currently has a limited number of customers, one of whom, Williams
Communications, is significant. Williams is not contractually committed to
purchase any minimum quantities of products from us. Sycamore expects that in
the foreseeable future substantially all of our revenues will continue to depend
on sales of intelligent optical networking products to Williams and a limited
number of potential new customers. The rate at which Sycamore's current and
prospective customers purchase products from us will depend, in part, on their
success in selling communications services based on these products to their own
customers. Any failure of current or prospective customers to purchase products
from Sycamore for any reason, including any determination not to install our
products in their networks or a downturn in their business, would seriously harm
Sycamore's financial condition or results of its operations.
11
Sycamore Has Been In Business For A Short Period Of Time And The Basis For
Evaluating Sycamore Is Limited
Sycamore was founded in February 1998 and shipped its first intelligent optical
networking product in May 1999. Sycamore has limited meaningful historical
financial data upon which to base projected revenues and planned operating
expenses and upon which investors may evaluate Sycamore and its prospects. In
addition, Sycamore's operating expenses are largely based on anticipated revenue
trends and a high percentage of Sycamore's expenses are and will continue to be
fixed. Investors should consider the risks and difficulties frequently
encountered by companies like Sycamore in a new and rapidly evolving market.
Sycamore's ability to sell products, and the level of success, if any, Sycamore
achieves, depends, among other things, on the level of demand for intelligent
optical networking products, which is a new and rapidly evolving market.
Any Failure Of Sycamore To Increase Revenues Would Prevent Sycamore From
Achieving And Maintaining Profitability
Sycamore has incurred significant losses since inception and expects to continue
to incur losses in the future. As of October 30, 1999, Sycamore had an
accumulated deficit of $25.9 million. Sycamore has not achieved profitability on
a quarterly or annual basis, and Sycamore anticipates that it will continue to
incur net losses. There can be no assurances that Sycamore's revenues will grow
or that Sycamore will generate sufficient revenues to achieve or sustain
profitability. Sycamore has large fixed expenses and expects to continue to
incur significant and increasing sales and marketing, product development,
administrative and other expenses. As a result, Sycamore will need to generate
significantly higher revenues to achieve and maintain profitability.
Sycamore Is Entirely Dependent On Its Line Of Intelligent Optical Networking
Products And Sycamore's Future Revenue Depends On Their Commercial Success
Sycamore's future growth depends on the commercial success of its line of
intelligent optical networking products. To date, Sycamore's SN 6000 Intelligent
Optical Transport product and SN 8000 Optical Add/Drop product are the only
products that have been shipped to customers. Sycamore intends to develop and
introduce new products and enhancements to existing products in the future.
There can be no assurances that Sycamore will be successful in completing the
development or introduction of these products. Failure of current or planned
products to operate as expected could delay or prevent their adoption. If
Sycamore's target customers do not adopt, purchase and successfully deploy
Sycamore's current and planned products, Sycamore's revenues will not grow
significantly.
Because Sycamore's Products Are Complex And Are Deployed In Complex
Environments, They May Have Errors Or Defects That Are Found Only After Full
Deployment, Which Could Seriously Harm Sycamore's Business
Sycamore's intelligent optical networking products are complex and are designed
to be deployed in large and complex networks. Because of the nature of the
products, they can only be fully tested when completely deployed in very large
networks with high amounts of traffic. Sycamore's customers may discover errors
or defects in the hardware or the software, or the product may not operate as
expected, after it has been fully deployed. If Sycamore is unable to fix errors
or other problems that may be identified in full deployment, Sycamore could
experience:
. loss of or delay in revenues and loss of market share;
. loss of customers;
. failure to attract new customers or achieve market acceptance;
. diversion of development resources;
. increased service and warranty costs;
. legal actions by our customers; and
. increased insurance costs.
12
The Long And Variable Sales Cycles For Sycamore's Products May Cause Revenues
And Operating Results To Vary Significantly From Quarter To Quarter
A customer's decision to purchase Sycamore's intelligent optical networking
products involves a significant commitment of its resources and a lengthy
evaluation, testing and product qualification process. As a result, Sycamore's
sales cycle is likely to be lengthy. Throughout the sales cycle, Sycamore spends
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, Sycamore believes that its customers will deploy the
products slowly and deliberately. Timing of deployment can vary widely and
depends on the skills of the customer, the size of the network deployment, the
complexity of the customer's network environment and the degree of hardware and
software configuration necessary. Customers with significant or complex networks
usually expand their networks in large increments on a periodic basis.
Accordingly, Sycamore may receive purchase orders for significant dollar amounts
on an irregular and unpredictable basis. Because of Sycamore's limited operating
history and the nature of its business, Sycamore cannot predict these sales and
deployment cycles. The long sales cycles, as well as Sycamore's expectation that
customers will tend to sporadically place large orders with short lead times,
may cause Sycamore's revenues and results of operations to vary significantly
and unexpectedly from quarter to quarter.
Sycamore May Not Be Successful If Its Customer Base Does Not Grow
Sycamore's future success will depend on attracting additional customers. The
growth of Sycamore's customer base could be adversely affected by:
. customer unwillingness to implement Sycamore's new optical networking
architecture;
. any delays or difficulties that Sycamore may incur in completing the
development and introduction of our planned products or products
enhancements;
. new product introductions by our competitors;
. any failure of Sycamore's products to perform as expected; or
. any difficulty Sycamore may incur in meeting customers' delivery
requirements.
The Intelligent Optical Networking Market Is New And Sycamore's Business Will
Suffer If It Does Not Develop As Expected
The market for intelligent optical networking products is new. There can be no
assurances that a viable market for our products will develop or be sustainable.
If this market does not develop, or develops more slowly than Sycamore expects,
Sycamore's business, results of operations and financial condition would be
seriously harmed.
If Sycamore Does Not Respond Rapidly To Technological Changes, Sycamore's
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. Sycamore may be unable to respond quickly
or effectively to these developments. Sycamore may experience design,
manufacturing, marketing and other difficulties that could delay or prevent
Sycamore's 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 Sycamore's existing or future products
obsolete. In developing Sycamore's products, Sycamore has made, and will
continue to make, assumptions about the standards that may be adopted by its
customers and competitors. If the standards adopted are different from those
which Sycamore have chosen to support, market acceptance of our products may be
significantly reduced or delayed and our business will be seriously harmed. In
addition, the introduction of products incorporating new technologies and the
emergence of new industry standards could render Sycamore's existing products
obsolete. In addition, in order to introduce products incorporating new
technologies and new industry standards, Sycamore must be able to gain access to
the latest technologies of its customers, its suppliers and other network
vendors. Any failure to gain access to the latest technologies could impair the
competitiveness of Sycamore's products.
13
Customer Requirements Are Likely To Evolve, And Sycamore Will Not Retain
Customers or Attract New Customers If Sycamore Does Not Anticipate And Meet
Specific Customer Requirements
Sycamore's current and prospective customers may require product features and
capabilities that its current products do not have. To achieve market acceptance
for Sycamore's products, Sycamore must effectively and timely anticipate and
adapt to customer requirements and offer products and services that meet
customer demands. Any failure of Sycamore to develop products or offer services
that satisfy customer requirements would seriously harm Sycamore's ability to
increase demand for its products. Sycamore intends 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. Sycamore may experience design, manufacturing,
marketing and other difficulties that could delay or prevent the development,
introduction or marketing of new products and enhancements. The introduction of
new or enhanced products also requires that Sycamore 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. Sycamore's inability to effectively manage this
transition would cause Sycamore to lose current and prospective customers.
Sycamore's Market Is Highly Competitive, And Sycamore's Failure To Compete
Successfully Would Limit Its Ability to Increase Market Share
Competition in the public network infrastructure market is intense. This market
has historically been dominated by large companies, such as Lucent Technologies,
Nortel Networks, Cisco Systems and Ciena Corporation, and. Sycamore may face
competition from other large telecommunications companies who may enter its
market. In addition, a number of private companies have announced plans for new
products to address the same network problems which our products address. Many
of Sycamore's current and potential competitors have significantly greater
selling and marketing, technical, manufacturing, financial, and other resources,
including vendor-sponsored financing programs. Moreover, Sycamore's competitors
may foresee the course of market developments more accurately and could in the
future develop new technologies that compete with Sycamore's products or even
render those products obsolete. Due to the rapidly evolving markets in which
Sycamore competes, additional competitors with significant market presence and
financial resources may enter those markets, thereby further intensifying
competition.
In order to compete effectively, Sycamore must deliver products that:
. provide extremely high network reliability;
. scale easily and efficiently with minimum disruption to the network;
. interoperate with existing network designs and equipment vendors;
. reduce the complexity of the network by decreasing the need for
overlapping equipment;
. provide effective network management; and
. provide a cost-effective solution for service providers.
In addition, Sycamore believes that a knowledge of the infrastructure
requirements applicable to service providers, experience in working with service
providers to develop new services for their customers, and an ability to provide
vendor-sponsored financing are important competitive factors in our market.
Sycamore has limited ability to provide vendor-sponsored financing and this may
influence the purchasing decision of prospective customers, who may decide to
purchase products from one of our competitors who are better equipped to provide
such financing. If Sycamore is unable to compete successfully against its
current and future competitors, Sycamore could experience price reductions,
order cancellations and reduced gross margins, any one of which could materially
and adversely affect Sycamore's business, results of operations and financial
condition.
14
Sycamore Is Likely To Face Difficulties In Obtaining And Retaining Customers If
Sycamore Does Not Expand Its Sales Organization And Its Customer Service And
Support Operations
Sycamore's products and services require a sophisticated sales effort targeted
at a limited number of key individuals within its prospective customers'
organizations. This effort requires specialized sales personnel and consulting
engineers. Sycamore is in the process of building its direct sales force and
plans to hire additional qualified sales personnel and consulting engineers.
Competition for these individuals is intense, and Sycamore might not be able to
hire the kind and number of sales personnel and consulting engineers required to
be successful. In addition, Sycamore believes that its future success is
dependent upon Sycamore's ability to establish successful relationships with a
variety of distribution partners. If Sycamore is unable to expand its direct
sales operations, or establish and expand an indirect sales channel, Sycamore
may not be able to increase market awareness or sales of its products, which may
prevent Sycamore from achieving and maintaining profitability. Sycamore
currently has a small customer service and support organization and will need to
increase staff to support new customers. The support of Sycamore's products
requires highly trained customer service and support personnel. Hiring customer
service and support personnel is very competitive in Sycamore's industry because
there are a limited number of people available with the necessary technical
skills and understanding of Sycamore's market. Once Sycamore hires such
personnel, they may require extensive training in Sycamore's intelligent optical
networking products. If Sycamore is unable to expand its customer service and
support organization and train them rapidly, Sycamore may not be able to
increase sales of its products.
Sycamore Depends Upon Contract Manufacturers And Any Disruption In These
Relationships May Cause Sycamore To Fail To Meet The Demands Of Its Customers
And Damage Its Customer Relationships
Sycamore relies on a small number of contract manufacturers to manufacture its
products in accordance with Sycamore's specifications, and to fill orders on a
timely basis. Celestica, Inc. provides comprehensive manufacturing services,
including assembly, test, control and shipment to our customers, and procures
material on Sycamore's behalf. Sycamore may not be able to effectively manage
its relationship with Celestica, and Celestica may not meet Sycamore's future
requirements for timely delivery. Each of Sycamore's contract manufacturers also
builds products for other companies, and there can be no assurances that they
will always have sufficient quantities of inventory available to fill orders
placed by Sycamore's customers, or that they will allocate their internal
resources to fill these orders on a timely basis. Sycamore does not have long-
term supply contracts with these manufacturers. Sycamore does not have internal
manufacturing capabilities. Qualifying a new contract manufacturer and
commencing volume production is expensive and time consuming and could result in
a significant interruption in the supply of Sycamore's products. If Sycamore is
required or chooses to change contract manufacturers, this could result in a
loss of revenue and damage to customer relationships.
Sycamore Relies On Single Sources For Supply Of Certain Components And
Sycamore's Business May Be Seriously Harmed If Its Supply Of Any Of These and
Other Components Is Disrupted
Sycamore currently purchases 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. Sycamore purchases each of these components on a purchase order basis
and has no long-term contracts for these components. Although Sycamore believes
that there are alternative sources for each of these components, in the event of
a disruption in supply, Sycamore may not be able to develop an alternate source
in a timely manner or at favorable prices. Such a failure could hurt Sycamore's
ability to deliver its products to its customers and negatively affect
Sycamore's operating margins. In addition, Sycamore's reliance on its suppliers
exposes Sycamore to potential supplier production difficulties or quality
variations. Any such disruption in supply would seriously impact future sales
and revenue. Further, the optical component industry is expanding rapidly and
manufacturers of optical components may be unable to meet the unpredictable and
growing demand for components. Because optical components are integrated into
Sycamore's products, a shortage or decrease in supply would seriously impact
future sales and revenue.
15
The Unpredictability Of Sycamore's Quarterly Results May Adversely Affect The
Trading Price Of Sycamore's Common Stock
Sycamore's revenues and operating results will vary significantly from quarter
to quarter due to a number of factors, many of which are outside of Sycamore's
control and any of which may cause Sycamore's stock price to fluctuate. The
primary factors that may affect Sycamore include the following:
. fluctuation in demand for intelligent optical networking products;
. the timing and size of sales of Sycamore's products;
. the length and variability of the sales cycle for Sycamore's products;
. the timing of recognizing revenue and deferred revenue;
. new product introductions and enhancements by Sycamore's competitors and
ourselves;
. changes in Sycamore's pricing policies or the pricing policies of
Sycamore's competitors;
. Sycamore's ability to develop, introduce and ship new products and
product enhancements that meet customer requirements in a timely manner;
. Sycamore's ability to obtain sufficient supplies of sole or limited
source components;
. increases in the prices of the components Sycamore purchases;
. Sycamore's ability to attain and maintain production volumes and quality
levels for Sycamore's products;
. the timing and level of prototype expenses;
. costs related to acquisitions of technology or businesses; and
. general economic conditions as well as those specific to the
telecommunications, Internet and related industries.
Sycamore plans to increase significantly its operating expenses to fund greater
levels of research and development, expand its sales and marketing operations,
broaden its customer support capabilities and develop new distribution channels.
Sycamore also plans to expand its general and administrative capabilities to
address the increased reporting and other administrative demands which will
result from the increasing size of Sycamore's business. Sycamore's operating
expenses are largely based on anticipated organizational growth and revenue
trends and a high percentage of Sycamore's expenses are, and will continue to
be, fixed. As a result, a delay in generating or recognizing revenue for the
reasons set forth above, or for any other reason, could cause significant
variations in Sycamore's operating results from quarter to quarter and could
result in substantial operating losses. Due to the foregoing factors, Sycamore
believes that quarter-to-quarter comparisons of our operating results are not a
good indication of Sycamore's future performance. Readers should not rely on our
results or growth for one quarter as any indication of our future performance.
It is likely that in some future quarters, our operating results may be below
the expectations of public market analysts, investors and stockholders. In this
event, the price of our common stock could decrease.
If Sycamore's Products Do Not Interoperate With Customers' Networks,
Installations Will Be Delayed Or Cancelled And Could Result In Substantial
Product Returns, Which Could Seriously Harm Sycamore's Business
Many of Sycamore's customers will require that its products be designed to
interface with their existing networks, each of which may have different
specifications and utilize multiple protocol standards. Sycamore's customers'
networks contain multiple generations of products that have been added over time
as these networks have grown and evolved. Sycamore's products must interoperate
with all of the products within these networks as well as future products in
order to meet customers' requirements. The requirement that Sycamore 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 Sycamore's
products. If Sycamore finds errors in the existing software used in customers'
networks, Sycamore would have to modify its products to fix or overcome these
errors so that Sycamore's products will interoperate and scale with the existing
software and hardware. If Sycamore's products do not interoperate with those of
its customers' networks, installations could be delayed, orders for products
could be cancelled or products could be returned. This would also seriously harm
Sycamore's reputation, all of which could seriously harm Sycamore's business and
prospects.
16
Undetected Software Or Hardware Errors And Problems Arising From Use Of
Sycamore's Products In Conjunction With Other Vendors' Products Could Result In
Delays or Loss of Market Acceptance of Sycamore's Products
Networking products frequently contain undetected software or hardware errors
when first introduced or as new versions are released. Sycamore expects that
errors will be found from time to time in new or enhanced products after
Sycamore begins commercial shipments. In addition, service providers typically
use Sycamore's 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 Sycamore to incur significant warranty,
support and repair costs, divert the attention of Sycamore's engineering
personnel from 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 Sycamore's products and would likely have a
material adverse effect on Sycamore's 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 Sycamore's
customers or could damage market acceptance for Sycamore's products. Sycamore's
customers could also seek damages for losses from Sycamore. A product liability
claim brought against Sycamore, even if unsuccessful, would likely be time
consuming and costly.
Sycamore's Failure To Establish And Maintain Key Customer Relationships May
Result In Delays In Introducing New Products Or Cause Customers To Forego
Purchasing Its Products
Sycamore's future success will also depend upon Sycamore's 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 Sycamore's customers. Sycamore's failure to establish and maintain
these customer relationships may adversely affect Sycamore's ability to develop
new products and product enhancements. In addition, Sycamore may experience
delays in releasing new products and product enhancements in the future.
Material delays in introducing new products and enhancements or Sycamore's
inability to introduce competitive new products may cause customers to forego
purchases of Sycamore's products and purchase those of Sycamore's competitors,
which could seriously harm Sycamore's business.
Sycamore's Failure To Continually Improve Its Internal Controls And Systems, And
Hire Needed Personnel, Could Impair Future Growth
Sycamore has expanded its operations rapidly since inception. Sycamore continues
to increase the scope of its operations and have grown headcount substantially.
For example, at January 31, 1999, Sycamore had a total of 48 employees and at
October 30, 1999 had a total of 228 employees. In addition, Sycamore plans to
continue to hire a significant number of employees this fiscal year. Sycamore's
growth has placed, and anticipated growth will continue to place, a significant
strain on Sycamore's management systems and resources. Sycamore's ability to
successfully offer its products and implement its business plan in a rapidly
evolving market requires an effective planning and management process. Sycamore
expects that it will need to continue to improve financial, managerial and
manufacturing controls and reporting systems, and will need to continue to
expand, train and manage its work force worldwide. Sycamore may not be able to
implement adequate control systems in an efficient and timely manner.
Competition for highly skilled personnel is intense, especially in the New
England area. Any failure to attract, assimilate or retain qualified personnel
to fulfill our current or future needs could impair Sycamore's growth.
Sycamore Depends On Its Key Personnel To Manage Its Business Effectively In A
Rapidly Changing Market And If Sycamore Is Unable To Retain Its Key Employees,
Sycamore's Ability To Compete Could Be Harmed
Sycamore's future success depends upon the continued services of Sycamore's
executive officers and other key engineering, sales, marketing and support
personnel, who have critical industry experience and relationships that Sycamore
relies on to implement its business plan. None of Sycamore's officers or key
employees is bound by an employment agreement for any specific term. We do not
have "key person" life insurance policies covering any of our employees. The
loss of the services of any of Sycamore's key employees could delay the
development and introduction of, and negatively impact Sycamore's ability to
sell, Sycamore's products.
17
If Sycamore Becomes Subject To Unfair Hiring Claims Sycamore Could Incur
Substantial Defense Costs
Companies in our industry whose employees accept positions with competitors
frequently claim that their competitors have engaged in unfair hiring practices.
There can be no assurances that Sycamore will not receive claims of this kind or
other claims relating to Sycamore's employees in the future as it seeks to hire
qualified personnel or that those claims will not result in material litigation.
Sycamore could incur substantial costs in defending itself or its employees
against such claims, regardless of their merits. In addition, defending itself
from such claims could divert the attention of Sycamore's management away from
Sycamore's operations. One of Sycamore's non-officer sales employees has been
sued by a former employer which has alleged, among other things, that the
employee improperly disclosed confidential information of the former employer
regarding its business dealings with Sycamore's customer. Although Sycamore is
not a party to the lawsuit, Sycamore has chosen to assume the costs of defending
this lawsuit.
Sycamore's Ability To Compete Could Be Jeopardized If Sycamore Is Unable To
Protect Its Intellectual Property Rights From Third-Party Challenges
Sycamore relies on a combination of patent, copyright, trademark and trade
secret laws and restrictions on disclosure to protect our intellectual property
rights. Sycamore also enters into confidentiality or license agreements with our
employees, consultants and corporate partners, and controls access to and
distribution of our software, documentation and other proprietary information.
Despite Sycamore's efforts to protect its proprietary rights, unauthorized
parties may attempt to copy or otherwise obtain and use Sycamore's products or
technology. Monitoring unauthorized use of Sycamore's products is difficult and
Sycamore cannot be certain that the steps Sycamore has taken will prevent
unauthorized use of Sycamore's technology, particularly in foreign countries
where the laws may not protect proprietary rights as fully as in the United
States. If competitors are able to use Sycamore's technology, Sycamore's ability
to compete effectively could be harmed.
If Necessary Licenses Of Third-Party Technology Are Not Available To Sycamore Or
Are Very Expensive, Sycamore's Products Could Become Obsolete
From time to time Sycamore may be required to license technology from third
parties to develop new products or product enhancements. There can be no
assurances that third party licenses will be available to Sycamore 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 Sycamore to obtain substitute technology of lower quality or performance
standards or at greater cost, either of which could seriously harm the
competitiveness of Sycamore's products.
Sycamore Could Become Subject To Litigation Regarding Intellectual Property
Rights, Which Could Seriously Harm Sycamore's Business And Require Sycamore To
Incur Significant Costs
In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. Although Sycamore has
not been involved in any intellectual property litigation, Sycamore may be a
party to litigation in the future to protect Sycamore's intellectual property or
as a result of an allegation that Sycamore infringes others' intellectual
property. Any parties asserting that Sycamore's products infringe upon their
proprietary rights would force Sycamore to defend itself and possibly Sycamore's
customers or manufacturers against the alleged infringement. These claims and
any resulting lawsuit, if successful, could subject Sycamore to significant
liability for damages and invalidation of Sycamore's proprietary rights. These
lawsuits, regardless of their success, would likely be time-consuming and
expensive to resolve and would divert management time and attention. Any
potential intellectual property litigation also could force Sycamore to do one
or more of the following:
. stop selling, incorporating or using Sycamore's products that use the
challenged intellectual property;
. obtain from the owner of the infringed intellectual property right a
license to sell or use the relevant technology, which license may not be
available on reasonable terms, or at all; or
. redesign those products that use such technology.
If Sycamore is forced to take any of the foregoing actions, Sycamore's business
may be seriously harmed.
18
Sycamore May Face Risks Associated With Its International Expansion That Could
Impair Sycamore's Ability To Grow Revenues Abroad
Sycamore intends to expand into international markets. This expansion will
require significant management attention and financial resources to develop
successfully direct and indirect international sales and support channels.
Sycamore may not be able to develop international market demand for its
products. Sycamore has limited experience in marketing and distributing its
products internationally and to do so, Sycamore expects that it will need to
develop versions of Sycamore's 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;
. 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.
Sycamore Faces A Number Of Unknown Risks Associated With Year 2000 Problems That
Could Result In Claims Against Sycamore Or Impair The Use Of Sycamore's Products
By Customers
The year 2000 computer issue creates a variety of risks for Sycamore. The year
2000 computer problem refers to the potential for system and processing failures
of date-related data as a result of computer-controlled systems using two digits
rather than four to define the applicable year. For example, computer programs
that have time-sensitive software may recognize a date represented as "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities. The risks involve:
. potential warranty or other claims by Sycamore's customers;
. errors in systems Sycamore uses to run its business;
. errors in systems used by Sycamore's suppliers;
. errors in systems used by Sycamore's customers; and
. potential reduced spending by other companies on intelligent optical
network products as a result of significant spending on year 2000
remediation.
Sycamore has designed its products for use in the year 2000 and beyond and
believes they are year 2000 compliant. However, Sycamore's products are
generally integrated into larger networks involving sophisticated hardware and
software products supplied by other vendors. Each of Sycamore's customers'
networks involves different combinations of third party products. Sycamore
cannot evaluate whether all of their products are year 2000 compliant. Sycamore
may face claims based on year 2000 problems in other companies' products or
based on issues arising from the integration of multiple products within the
overall network. Although no year 2000 claims have been made against Sycamore,
Sycamore may in the future be required to defend its products in legal
proceedings which could be expensive regardless of the merits of these claims.
If Sycamore's suppliers, vendors, major distributors, partners, customers and
service providers fail to correct their year 2000 problems, these failures could
result in an interruption in, or a failure of, Sycamore's normal business
activities or operations. If a year 2000 problem occurs, it may be difficult to
determine which party's products have caused the problem. These failures could
interrupt Sycamore's operations and damage Sycamore's relationships with
customers. Due to the general uncertainty inherent in the year 2000 problem
resulting from the readiness of third-party suppliers and vendors, Sycamore is
unable to determine at this time whether third party year 2000 failures could
harm Sycamore's business and our financial results. Sycamore's current and
prospective customers' purchasing plans could be affected by year 2000 issues if
they need to expend significant resources to fix their existing systems to
become year 2000 compliant. This situation may reduce funds available to
purchase Sycamore's products. In addition, customers may wait to purchase
Sycamore's products until after the year 2000, which may reduce our revenue.
19
Any Acquisitions Sycamore Makes Could Disrupt Its Business And Seriously Harm
Sycamore's Financial Condition
Sycamore intends to consider investments in complementary companies, products or
technologies. While we have no current agreements to do so, we may buy
businesses, products or technologies in the future. In the event of any future
purchases, Sycamore could:
. issue stock that would dilute Sycamore's current stockholders' percentage
ownership;
. incur debt;
. assume liabilities;
. incur amortization expenses related to goodwill and other intangible
assets; or
. incur large and immediate write-offs.
Sycamore's operation of any acquired business will also involve numerous risks,
including:
. problems combining the purchased operations, technologies or products;
. unanticipated costs;
. diversion of management's attention from Sycamore's core business;
adverse effects on existing business relationships with suppliers and
customers;
. risks associated with entering markets in which Sycamore has no or
limited prior experience; and
. potential loss of key employees, particularly those of the purchased
organizations.
There can be no assurances that Sycamore will be able to successfully integrate
any businesses, products, technologies or personnel that it might acquire in the
future and any failure to do so could disrupt Sycamore's business and seriously
harm Sycamore's financial condition.
Sycamore's Stock Price May Be Volatile
An active public market for Sycamore's common stock may not be sustained. The
market for technology stocks has been extremely volatile. The following factors
could cause the market price of Sycamore's common stock to fluctuate
significantly:
. Sycamore's loss of a major customer;
. the addition or departure of key personnel;
. variations in Sycamore's quarterly operating results;
. announcements by Sycamore or its competitors of significant contracts,
new products or product enhancements,
. acquisitions, distribution partnerships, joint ventures or capital
commitments;
. changes in financial estimates by securities analysts;
. Sycamore's sales of common stock or other securities in the future;
. changes in market valuations of broadband access technology companies;
. changes in market valuations of networking and telecommunications
companies; and
. fluctuations in stock market prices and volumes.
In addition, the stock market in general, and the Nasdaq National Market and
technology companies in particular, have experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating
performance of such companies. The trading prices of many technology companies'
stocks are at or near historical highs and these trading prices and multiples
are substantially above historical levels. These trading prices and multiples
may not be sustained. These broad market and industry factors may materially
adversely affect the market price of our common stock, regardless of our actual
operating performance. In the past, following periods of volatility in the
market price of a company's securities, securities class-action litigation has
often been instituted against such companies. Such litigation, if instituted,
could result in substantial costs and a diversion of management's attention and
resources.
20
Insiders Have Substantial Control Over Sycamore And Could Limit The Ability Of
Other Stockholders To Influence The Outcome Of Key Transactions, Including
Changes of Control
The executive officers, directors and entities affiliated with them, in the
aggregate, beneficially own approximately 64% of Sycamore's outstanding common
stock. These stockholders, if acting together, would be able to influence
significantly all matters requiring approval by Sycamore's stockholders,
including the election of directors and the approval of mergers or other
business combination transactions.
Provisions Of Sycamore's Charter Documents And Delaware Law May Have Anti-
Takeover Effects That Could Prevent A Change Of Control
Provisions of Sycamore's amended and restated certificate of incorporation,
bylaws, and Delaware law could make it more difficult for a third party to
acquire Sycamore, even if doing so would be beneficial to Sycamore's
stockholders.
There May Be Sales Of A Substantial Amount Of Sycamore's Common Stock That Could
Cause Sycamore's Stock Price To Fall
Certain of Sycamore's current stockholders hold a substantial number of shares
which are currently subject to lock up agreements or other restrictions limiting
such stockholders ability to sell such shares. These stockholders may be able to
sell such shares in the public market in the near future. Sales of a substantial
number of shares of Sycamore's common stock within a short period of time could
cause Sycamore's stock price to fall. In addition, the sale of these shares
could impair Sycamore's ability to raise capital through the sale of additional
stock.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Sycamore does not use derivative financial instruments. Sycamore generally
places its marketable security investments in high credit quality instruments,
primarily U.S. Government obligations and corporate obligations with contractual
maturities of less than one year. Sycamore does not expect any material loss
from its marketable security investments and therefore believes that the
potential interest rate exposure is not material.
Sycamore operates primarily in the United States, and all sales to date have
been made in US dollars. Accordingly, there has not been any material exposure
to foreign currency rate fluctuations.
Part II Other Information
Item 1. Legal Proceedings
In the ordinary course of business, the Company becomes involved in various
lawsuits and claims. While the outcome of these matters is not currently
determinable, management believes, after consultation with legal counsel, that
the outcome will not have a material adverse effect on the Company's results of
operations or its financial position.
Item 2. Changes in Securities and Use of Proceeds
(a) Initial Public Offering
On October 21, 1999, in connection with Sycamore's initial public offering, a
Registration Statement on Form S-1 (No. 333-84635) was declared effective by the
Securities and Exchange Commission, pursuant to which 7,475,000 shares of common
stock were offered and sold at a price to the public of $38.00 per share,
generating gross offering proceeds of $284.0 million. The managing underwriters
were Morgan Stanley Dean Witter, Lehman Brothers, J.P. Morgan Securities Inc,
and Dain Rauscher Wessels. After deducting approximately $19.9 million in
underwriting discounts and approximately $1.1 million in other related expenses,
the net proceeds of the offering were approximately $263.0 million.
(b) Certain Grants and Exercises of Stock Options
During the quarterly period ended October 30, 1999, the Registrant granted stock
options to purchase 3,903,696 shares of common stock at exercise prices ranging
from $4.00 to $177.06 per share to employees, consultants and directors pursuant
to its 1998 Stock Incentive Plan, as amended and its 1999 Stock Incentive Plan
and 1999 Non Employee Director Plan.
During the quarterly period ended October 30, 1999, the Registrant issued and
sold an aggregate of 725,147 shares of its common stock to employees,
consultants and directors for aggregate consideration of $4,067,241 pursuant to
exercises of options pursuant to its 1998 Stock Incentive Plan, as amended and
its 1999 Stock Incentive Plan and 1999 Non Employee Director Plan. Such sales
were made in reliance upon an exemption from the registration provisions of the
Securities Act set forth in Rule 701 of the Securities Act of 1933.
21
To date, Sycamore has utilized approximately $5.1 million of the proceeds from
the initial public offering to repay borrowings under its outstanding equipment
lines of credit. Sycamore expects to use the remaining net proceeds of the
offering for working capital and general corporate purposes, including increased
spending on sales and marketing, customer support, research and development,
expansion of its operational and administrative infrastructure, Specific amounts
for these purposes have not been determined. In addition, Sycamore may use a
portion of the net proceeds to acquire or invest in complementary businesses,
technologies, product lines or products. Pending these uses, Sycamore intends to
invest the net proceeds in investment grade, interest-bearing securities.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
On August 17, 1999 the stockholders of the Company approved by written consent a
Certificate of Amendment to the Company's Certificate of Incorporation. The
affirmative vote of 43,626,921 shares was received by written consent.
On September 20, 1999 the stockholders of the Company approved by written
consent the following matters: (i) the Company's Amended and Restated
Certificate of Incorporation, to be filed upon the closing of the Company's IPO;
(ii) the Company's Amended and Restated By-laws, to be effective upon the
closing of the Company's IPO; (iii) the Company's 1999 Stock Incentive Plan;
(iv) the Company's 1999 Employee Stock Purchase Plan; and (v) the Company's 1999
Non-Employee Director Stock Option Plan. The affirmative vote of 43,626,921
shares was received by written consent.
The Annual Meeting of Stockholders of Sycamore Networks, Inc. was held on
October 8, 1999 at 9:00 a.m. in Boston, Massachusetts. Of the 71,141,447 shares
outstanding as of September 30, 1999, the record date, 54,632,938 shares (77%)
were present or represented by proxy at the meeting.
1. The table below presents the results of the election to Sycamore's board of
directors.
Nominee Votes For Witheld Against
- ------- --------- ------- -------
Gururaj Deshpande 54,632,938 - -
Daniel E. Smith 54,632,938 - -
Paul J. Ferri 54,632,938 - -
Timothy Barrows 54,632,938 - -
John W. Gerdelman 54,632,938 - -
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits
Number Exhibit Description
------ -------------------
*3.1 Amended and Restated Certificate of Incorporation of the
Company
*3.2 By-Laws of the Company
22
*4.1 Specimen common stock certificate
*4.2 See Exhibits 3.1 and 3.2, for provisions of the Certificate of
Incorporation and By-Laws of the Registrant defining the rights
of holders of common stock of the Company
10.1 Form of Indemnification Agreement between the Company, the
Directors of the Company and certain officers of the Company
10.2 Form of Change in Control Agreement between the Company and
certain officers of the Company
+10.3 Addendum to Purchase and License Agreement between the Company
and Williams Communications, Inc. dated November 21, 1999
10.4 Promissory Note and Pledge Agreement between the Company and
Kevin Oye, Vice President of Business Development
27.1 Financial Data Schedule (Filed Electronically)
* Filed with the Company's Registration Statement on Form S-1 (No. 333-84635)
filed with the Securities and Exchange Commission by the Company in connection
with its initial public offering which became effective October 21, 1999
+ Confidential treatment requested for certain portions of this Exhibit pursuant
to Rule 406 promulgated under the Securities Act, which portions are omitted and
filed separately with the Securities and Exchange Commission.
(b) Reports on Form 8-K: The Company did not file any reports on Form 8-K
during the quarter ended October 30, 1999.
23
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
- ---------------------
Chief Financial Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
Dated: December 13, 1999
24
Exhibit Index
Number Exhibit Description
------ -------------------
*3.1 Amended and Restated Certificate of Incorporation of the Company
*3.2 By-Laws of the Company
*4.1 Specimen common stock certificate
*4.2 See Exhibits 3.1 and 3.2, for provisions of the Certificate of
Incorporation and By-Laws of the Registrant defining the rights
of holders of common stock of the Company
10.1 Form of Indemnification Agreement between the Company, the
Directors of the Company and certain officers of the Company
10.2 Form of Change in Control Agreement between the Company and
certain officers of the Company
+10.3 Addendum to Purchase and License Agreement between the Company
and Williams Communications, Inc. dated November 21, 1999
10.4 Promissory Note and Pledge Agreement between the Company and
Kevin Oye, Vice President of Business Development
27.1 Financial Data Schedule (Filed Electronically)
* Filed with the Company's Registration Statement on Form S-1 (No. 333-84635)
filed with the Securities and Exchange Commission by the Company in connection
with its initial public offering which became effective October 21, 1999
+ Confidential treatment requested for certain portions of this Exhibit
pursuant to Rule 406 promulgated under the Securities Act, which portions are
omitted and filed separately with the Securities and Exchange Commission.