<PAGE>
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 APRIL 29, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NUMBER 333-25853
SYCAMORE NETWORKS, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3410558
(State 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 X No ___.
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 May 31,
2000 was 244,814,474.
1
<PAGE>
Sycamore Networks, Inc.
Index
<TABLE>
<CAPTION>
Part I. Financial Information
Page No.
<S> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of April 29, 2000 and July 31, 1999 3
Consolidated Statements of Operations for the three and nine months
ended April 29, 2000 and May 1, 1999 4
Consolidated Statements of Cash Flows for the nine months
ended April 29, 2000 and May 1, 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosure About Market Risk 21
Part II. Other Information
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 22
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
</TABLE>
2
<PAGE>
Part I. Financial Information
Item 1. Consolidated Financial Statements
Sycamore Networks, Inc.
Consolidated Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
April 29, July 31,
2000 1999
---- ----
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 677,063 $ 21,969
Marketable securities 508,597 7,020
Accounts receivable 30,473 11,410
Inventories 26,641 6,608
Prepaids and other current assets 15,989 5,153
---------- --------
Total current assets 1,258,763 52,160
Property and equipment, net 21,453 5,288
Marketable securities 328,418 -
Other assets 2,023 464
---------- --------
Total assets $1,610,657 $ 57,912
========== ========
Liabilities, Redeemable Convertible Preferred Stock and
Stockholders' Equity (Deficit)
Current liabilities:
Current portion of notes payable $ - $ 1,097
Accounts payable 20,490 5,750
Accrued compensation 1,816 1,334
Accrued expenses 5,319 1,751
Deferred revenue 32,026 472
Income tax payable 5,026 -
Other current liabilities 617 1,306
---------- --------
Total current liabilities 65,294 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; 1,500,000,000 shares 245 69
authorized; 244,793,474 and 69,819,336 shares issued and
outstanding
Additional paid-in capital 1,607,440 30,780
Accumulated deficit (18,114) (20,183)
Notes receivable (280) (360)
Deferred compensation (47,508) (23,929)
Accumulated other comprehensive income 3,580 -
---------- --------
Total stockholders' equity (deficit) 1,545,363 (13,623)
---------- --------
Total liabilities, redeemable convertible preferred stock and
stockholders' equity (deficit) $1,610,657 $ 57,912
========== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
Sycamore Networks, Inc.
Consolidated Statements of Operations
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
April 29, May 1, April 29, May 1,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 59,183 $ - $107,742 $ -
Cost of revenues (exclusive of the non-cash stock compensation
expense of $328, $25, $918 and $45, respectively) 31,367 934 57,103 1,173
-------- -------- -------- --------
Gross profit (loss) 27,816 (934) 50,639 (1,173)
Operating expenses:
Research and development (exclusive of the non-cash stock
compensation expense of $1,032, $202, $3,168 and $292,
respectively) 14,892 3,334 32,911 6,572
Sales and marketing (exclusive of the non-cash stock
compensation expense of $921, $87, $3,448 and $126,
respectively) 8,062 1,176 16,457 1,598
General and administrative (exclusive of the non-cash
stock compensation expense of $858, $278, $1,960 and
$339, respectively) 1,909 379 3,819 752
Amortization of stock compensation 3,139 592 9,494 802
-------- -------- -------- --------
Total operating expenses 28,002 5,481 62,681 9,724
Loss from operations (186) (6,415) (12,042) (10,897)
Interest income, net 13,090 295 17,595 488
-------- -------- -------- --------
Income (loss) before income taxes 12,904 (6,120) 5,553 (10,409)
Provision for income taxes 3,484 - 3,484 -
-------- -------- -------- --------
Net income (loss) $ 9,420 $ (6,120) $ 2,069 $(10,409)
======== ======== ======== ========
Basic net income (loss) per share $ 0.05 $ (0.65) $ 0.02 $ (1.13)
Diluted net income (loss) per share $ 0.04 $ (0.65) $ 0.01 $ (1.13)
Shares used in calculating:
Basic net income (loss) per share 192,723 9,423 135,944 9,248
Diluted net income (loss) per share 250,942 9,423 195,915 9,248
Pro forma basic net income (loss) per share (1) $ (0.04) $ 0.01 $ (0.10)
Pro forma diluted net income (loss) per share (1) $ (0.04) $ 0.01 $ (0.10)
Shares used in calculating:
Pro forma basic net income (loss) per share 137,259 179,070 104,189
Pro forma diluted net income (loss) per share 137,259 239,042 104,189
</TABLE>
(1) Pro forma basic and diluted net income (loss) per share assumes the
conversion of all redeemable convertible preferred stock into common stock
as if such conversion occurred at the date of original issuance.
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
Sycamore Networks, Inc.
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Nine months ended
-----------------
April 29, May 1,
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,069 $(10,409)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 3,741 404
Amortization of stock compensation 9,494 802
Deferred income taxes (2,000) -
Changes in operating assets and liabilities:
Accounts receivable (19,063) -
Inventories (20,033) (6,220)
Prepaids and other current assets (8,836) (164)
Deferred revenue 31,554 -
Accounts payable 14,739 5,479
Accrued expenses and other current 8,387 227
liabilities ----------- --------
Net cash provided by (used in) operating 20,052 (9,881)
activities ----------- --------
Cash flows from investing activities:
Purchases of property and equipment (19,906) (4,295)
Purchases of marketable securities (1,027,718) (6,030)
Maturities of marketable securities 201,303 6,177
Increase in other assets (1,559) (105)
----------- --------
Net cash used in investing activities (847,880) (4,253)
----------- --------
Cash flows from financing activities:
Proceeds from issuance of redeemable
convertible preferred stock, net - 35,150
Proceeds from issuance of common stock, net 1,487,893 193
Payments received for notes receivable 180 -
Proceeds from issuance of notes - 1,000
Payments on notes payable (5,151) -
----------- --------
Net cash provided by financing activities 1,482,922 36,343
----------- --------
Net increase in cash and cash equivalents 655,094 22,209
Cash and cash equivalents, beginning of period 21,969 1,197
----------- --------
Cash and cash equivalents, end of period $ 677,063 $ 23,406
=========== ========
Supplemental cash flow information:
Cash paid for interest $ 139 $ 48
Cash paid for income taxes $ 458 $ -
Supplementary non-cash activity:
Issuance of common stock in exchange for
notes receivable $ 100 $ -
Conversion of preferred stock into common
stock $ 55,771 $ -
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
Sycamore Networks, Inc.
Notes To Consolidated Financial Statements
1. Description of Business
Sycamore Networks, Inc. (the "Company") was incorporated in Delaware on February
17, 1998. The Company develops and markets networking products that enable
service providers to quickly and cost effectively provide bandwidth and create
new high-speed data services. To date, the Company has principally marketed its
products in the United States. 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 unaudited consolidated financial statements, 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 consolidated 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 for the year
ended July 31, 1999 included in the Company's Registration Statement on Form S-1
(File No. 333-30630) filed with the SEC.
3. Net Income (Loss) Per Share and Pro Forma Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing the net income (loss)
for the period by the weighted average number of common shares outstanding
during the period. Diluted net income (loss) per share is computed by dividing
the net income (loss) for the period by the weighted average number of common
and common equivalent shares outstanding during the period, if dilutive. Common
equivalent shares are composed of unvested shares of restricted common stock and
the incremental common shares issuable upon the exercise of stock options and
unvested restricted common shares.
Pro forma net income (loss) per share is computed using the weighted average
number of common shares outstanding, including the pro forma effects of the
automatic conversion of the Company's Series A, B, C and D redeemable
convertible preferred stock into shares of the Company's common stock effective
upon the closing of the Company's initial public offering as if such conversion
occurred at the date of original issuance.
The Company effected a three-for-one stock split paid as a 200% stock dividend
on February 11, 2000 to stockholders of record as of February 4, 2000. This
stock split has been reflected in the consolidated financial statements for all
periods presented.
6
<PAGE>
The following table sets forth the computation of basic and diluted net income
(loss) per share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------- ----------------------
April 29, May 1, April 29, May 1,
2000 1999 2000 1999
---- ---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Numerator
Net income (loss) $ 9,420 $ (6,120) $ 2,069 $(10,409)
======== ======== ======== ========
Denominator
Historical:
Weighted-average shares of common stock outstanding 240,463 48,893 187,336 42,372
Weighted-average shares subject to repurchase (47,740) (39,470) (51,392) (33,124)
-------- -------- -------- --------
Shares used in calculating basic net income (loss) per share 192,723 9,423 135,944 9,248
Weighted common stock equivalents 58,219 - 59,971 -
-------- -------- -------- --------
Shares used in calculating diluted net income (loss) per share 250,942 9,423 195,915 9,248
Net income (loss) per share:
Basic $ 0.05 $ (0.65) $ 0.02 $ (1.13)
======== ======== ======== ========
Diluted $ 0.04 $ (0.65) $ 0.01 $ (1.13)
======== ======== ======== ========
Denominator
Pro Forma:
Weighted-average shares of common stock outstanding 48,893 230,462 42,372
Weighted-average number of shares assumed upon
conversion of redeemable convertible preferred stock 127,836 - 94,941
Weighted-average shares subject to repurchase (39,470) (51,392) (33,124)
-------- -------- --------
Shares used in calculating pro forma basic net income (loss)
per share 137,259 179,070 104,189
Weighted common stock equivalents - 59,972 -
-------- -------- --------
Shares used in calculating pro forma diluted net income (loss)
per share 137,259 239,042 104,189
======== ======== ========
Net income (loss) per share:
Pro forma basic $ (0.04) $ 0.01 $ (0.10)
======== ======== ========
Pro forma diluted $ (0.04) $ 0.01 $ (0.10)
======== ======== ========
</TABLE>
Options to purchase 1,796,000, 2,467,000, 572,283 and 1,578,728 shares of common
stock at respective average exercise prices of $115.69, $70.71, $0.05 and $0.03
have not been included in the computation of diluted net income (loss) per share
for the three and nine months ended April 29, 2000 and May 1, 1999,
respectively, as their effect would have been anti-dilutive.
4. Inventory
Inventory consisted of the following (in thousands):
<TABLE>
<CAPTION>
April 29, July 31,
2000 1999
---- ----
<S> <C> <C>
Raw materials $ 6,058 $2,164
Work in process 7,091 3,026
Finished goods 13,492 1,418
------- ------
$26,641 $6,608
======= ======
</TABLE>
7
<PAGE>
5. Other Comprehensive Income (Loss)
The table below sets forth comprehensive income (loss) as defined by Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," for
the three and nine months ended April 29, 2000 and May 1, 1999 (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
April 29, 2000 May 1, 1999 April 29, 2000 May 1, 1999
---------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net income (loss) $ 9,420 $(6,120) $2,069 $(10,409)
Other comprehensive income, net of tax
Unrealized holding gain (loss) on investments 2,636 - 2,613 -
------- ------- ------ --------
Comprehensive income (loss) $12,056 $(6,120) $4,682 $(10,409)
======= ======= ====== ========
</TABLE>
6. Public Offerings
On October 21, 1999, the Company completed its initial public offering ("IPO")
in which it sold 22,425,000 shares of common stock at a price to the public of
$12.67 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 141,849,675 shares of common stock.
On March 14, 2000, the Company completed a follow-on public offering of
10,200,000 shares of common stock at $150.25 per share. Of the 10,200,000
shares offered, 8,428,401 shares were sold by the Company and 1,771,599 shares
were sold by existing stockholders of the Company. The net proceeds of this
offering, to the Company, after deducting underwriting discounts and other
expenses, were approximately $1.2 billion.
7. Income Taxes
During the quarter ended April 29, 2000, the Company reduced its valuation
allowance related to its deferred tax assets by $2 million as the realization of
such assets became probable. The Company currently estimates that its annual
effective income tax rate will be approximately 27.0% for the remainder of its
fiscal year ending July 31, 2000, primarily due to the reduction in the
valuation allowance and the use of its net operating loss carryforwards.
8. New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts. The Company will
adopt SFAS 133 as required by SFAS 137, "Deferral of the Effective Date of FASB
Statement No. 133", in fiscal year 2001. To date, the Company has not utilized
derivative instruments or hedging activities and, therefore, the Company does
not expect the adoption of SFAS 133 to have a material impact on its financial
position or results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB 101"),
"Revenue Recognition in Financial Statements." SAB 101 summarizes the SEC's view
in applying generally accepted accounting principles to selected revenue
recognition issues. The application of the guidance in SAB 101 will be required
in the Company's first quarter of fiscal year 2001. The effects of applying
this guidance, if any, will be reported as a cumulative effect adjustment
resulting in a change in accounting principle. The Company's evaluation of SAB
101 is not yet complete.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation--an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and is effective July 1, 2000,
but certain conclusions in FIN 44 cover specific events if they had occurred
after either December 15, 1998 or January 12, 2000. The Company does not expect
the application of FIN 44 to have a material impact on its financial position or
results of operations.
8
<PAGE>
9. Subsequent Event
On June 6, 2000, the Company announced a definitive agreement to merge with
Sirocco Systems which has been approved by both companies Board of Directors.
Under the terms of the agreement, 28.4 million shares of the Company's common
stock will be exchanged for all outstanding shares of Sirocco and the company
will assume the outstanding options of Sirocco. Based upon the closing price of
Sycamore's common stock on June 5, 2000, the deal is valued at approximately
$2.9 billion. The transaction, which is subject to customary conditions and
regulatory approvals, is expected to be completed during the Company's first
fiscal quarter, which ends October 28, 2000, and is expected to be accounted for
as a pooling-of-interests.
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 Form 10-Q constitute forward-looking
statements that involve risks and uncertainties. Our actual results could
differ materially from those stated or implied in forward-looking statements due
to a number of factors, including, without limitation, those risks and
uncertainties discussed under the heading `Risk Factors' contained in our
Registration Statement on Form S-1 (file no. 333-30630) we filed in connection
with our follow-on public offering and other reports we filed from time to time
with the SEC and the risks and uncertainties discussed under the captions "Risks
Related To Our Business" and "Risks Related to the Securities Market." Forward
looking statements include statements regarding our expectations, beliefs,
intentions or strategies regarding the future and can be identified by forward-
looking words such as "anticipate," "believe," "could," "estimate," "expect,"
"intend," "may, "should," "will," and "would" or similar words.
Overview
We develop and market products that transport voice and data traffic over
wavelengths of light. Our products enable service providers to quickly and cost
effectively provide bandwidth and create new high-speed data services. From our
inception in February 1998 through May 1, 1999, our operating activities
consisted primarily of research and development, product design, development and
testing. During this period, we also staffed and trained our administrative,
marketing and sales personnel and began sales and marketing activities. We
began shipping our SN 6000 Intelligent Optical Transport product in May 1999,
our SN 8000 Intelligent Optical Node in August 1999 and our Silvx Manager
Network Management System in November 1999. To date all of our product revenues
have been derived from these products. During the quarter ended April 29, 2000,
we had a loss from operations but achieved profitability for the first time on a
net income basis. During periods prior to our most recent fiscal quarter, we
incurred significant losses. As of April 29, 2000, we had an accumulated
deficit of $18.1 million. We have not achieved profitability on an annual
basis.
Results of Operations
Revenues
Revenues for the three and nine months ended April 29, 2000 were $59.2 million
and $107.7 million, respectively, compared to none for the same periods in
fiscal 1999. We began shipping the SN 6000 in May 1999, the SN 8000 in August
1999, and Silvx Manager in November 1999. For the three and nine months ended
April 29, 2000, one customer accounted for substantially all of our revenues.
Cost of Revenues
Cost of revenues were $31.4 million and $57.1 million for the three and nine
months ended April 29, 2000, respectively, compared to $934,000 and $1.2 million
for the same periods in fiscal 1999. The increase in cost of revenues is
primarily related to increased revenues since we began shipping products in May
1999, as well as headcount increases in our manufacturing overhead and customer
service organizations, warranty and other period costs. We expect cost of
revenues to continue to increase as net revenues increase.
Research and Development Expenses
9
<PAGE>
Research and development expenses increased $11.6 million to $14.9 million for
the three months ended April 29, 2000 compared to $3.3 million for the same
period in fiscal 1999. Research and development expenses increased $26.3 million
to $32.9 million for the nine months ended April 29, 2000 compared to $6.6
million for the same period in fiscal 1999. The increases in expenses were
primarily due to increased costs associated with a significant increase in
personnel and personnel-related expenses, increases in non-recurring engineering
costs and increases in prototype expenses for the design and development of new
products as well as enhancements to existing products. Research and development
is essential to our future success and we expect the dollar amounts of research
and development expenses will increase in future periods to support the
continued development of our intelligent optical transport and optical switching
products as well as new or complementary technologies.
Sales and Marketing Expenses
Sales and marketing expenses increased $6.9 million to $8.1 million for the
three months ended April 29, 2000 compared to $1.2 million for the same period
in fiscal 1999. Sales and marketing expenses increased $14.9 million to $16.5
million for the nine months ended April 29, 2000 compared to $1.6 million for
the same period in fiscal 1999. The increases in expenses reflect the hiring of
additional sales and marketing personnel, sales based commissions, additional
office space and marketing program costs, including web development, trade shows
and new product launch activities. We intend to continue to expand our domestic
and international sales force and marketing efforts, and as a result, expect
that the dollar amounts of sales and marketing expenses will increase in future
periods.
General and Administrative Expenses
General and administrative expenses increased $1.5 million to $1.9 million for
the three months ended April 29, 2000 compared to $379,000 for the same period
in fiscal 1999. General and administrative expenses increased $3.1 million to
$3.8 million for the nine months ended April 29, 2000 compared to $752,000 for
the same period in fiscal 1999. The increases in expenses reflect the hiring of
additional general and administrative personnel and expenses necessary to
support increased levels of business activities. We expect that the dollar
amounts of general and administrative expenses will increase in future periods
as a result of expansion of business activity and increases in the number of our
employees.
Amortization of Stock Compensation
Amortization of stock compensation expense was $3.1 million and $9.5 million for
the three and nine months ended April 29, 2000, respectively, and $592,000 and
$802,000 for the same period in fiscal 1999. Amortization of stock compensation
expense primarily resulted from the granting of stock options and restricted
shares with an exercise or sale prices which were deemed to be below fair market
value. Amounts for the three and nine months ended April 29, 2000 also include
$295,000 and $1.4 million, respectively, of compensation expense associated with
the grant of options to purchase common stock to non-employees and consultants.
Amortization of stock compensation relating to these grants is expected to
impact our reported results of operations through the first quarter of fiscal
2005.
Interest Income, Net
Interest income, net increased $12.8 million to $13.1 million for the three
months ended April 29, 2000 compared to $295,000 for the same period in fiscal
1999. Interest income, net increased $17.1 million to $17.6 million for the
nine months ended April 29, 2000 compared to $488,000 for the same period in
fiscal 1999. The increase in interest income primarily reflects the invested
proceeds from our two public offerings within fiscal year 2000.
Provision for Income Taxes
During the quarter ended April 29, 2000, we reduced our valuation allowance
related to our deferred tax assets by $2 million as the realization of such
assets became probable. We currently estimate that our annual effective income
tax rate will be approximately 27.0% for the remainder of our fiscal year ending
July 31, 2000, primarily due to the reduction in the valuation allowance and the
use of our net operating loss carryforwards.
Liquidity and Capital Resources
As of April 29, 2000, we had $677.1 million in cash and cash equivalents,
$508.6 million in marketable securities and $328.4 million in long-term
marketable securities and investments. We have primarily financed our
operations
10
<PAGE>
through the sale of equity securities and through borrowings on long-term debt
agreements for the purchase of capital equipment. We completed our initial
public offering of 22,425,000 common shares in October 1999 and raised
approximately $263.0 million, net of offering costs. We completed a follow-on
public offering of 10,200,000 common shares in March 2000, of which we sold
8,428,401 common shares and existing stockholders sold 1,771,599 common shares.
In this follow-on offering, we raised approximately $1.2 billion, net of
offering costs. We primarily invest excess funds in investment grade short-term
money market funds, commercial paper, government and non-government debt
securities.
Cash provided by operating activities for the nine months ended April 29, 2000
was $20.1 million, compared to $9.9 million cash used in the nine months ended
May 1, 1999. The increase in cash provided by operating activities is primarily
due to decreased net losses and increased non-cash charges for amortization of
stock compensation and depreciation, increased accrued expenses, deferred
revenue and accounts payable, partially offset by increased inventory purchases
and accounts receivable.
Cash used in investing activities was $847.9 million in the nine months ended
April 29, 2000, compared to $4.3 million for the nine months ended May 1, 1999.
The increase in net cash used in investing activities reflects the net
investment of our public offerings proceeds into marketable securities and
increased purchases of property and equipment, primarily for computers and test
equipment for our development and manufacturing activities.
Cash provided by financing activities was $1.5 billion in the nine months ended
April 29, 2000, compared to $36.3 million for the nine months ended May 1, 1999.
The increase in cash provided by financing activities is primarily due to net
proceeds raised through our public offerings and the exercise of stock options.
Increasingly, as a result of the financial demands of major network deployments,
service providers are looking to their suppliers for financing assistance. From
time to time we may provide or commit to extend credit or credit support to our
customers as we consider appropriate in the course of our business, considering
our limited resources. This financing may include extending credit to customers
or guaranteeing the indebtedness of customers to third parties. Depending on
market conditions, we may seek to factor these arrangements to financial
institutions and investors to free up our capital and reduce the amount of our
commitments for such arrangements. Our ability to provide customer financing is
limited and depends on a number of factors, including our capital structure and
level of our available credit and our ability to factor commitments. Any
extension of financing to our customers will limit the capital that we have
available for other uses.
Although we believe that our current cash will be sufficient to fund our
operations for at least the next 12 months, there can be no assurance that we
will not require additional financing within this time frame or that such
additional funding, if needed, will be available on terms acceptable to us or at
all.
Year 2000 Computer Systems Compliance
To date, the results of our year 2000 readiness plan indicate that our
assessment, improvement and testing program succeeded in providing us with a
smooth transition to the year 2000. We have not experienced any significant year
2000 disruptions with our products, our internal information technology systems
or our major vendors. Based on our experience to date, we do not anticipate
incurring material expenses or experiencing any material operational disruption
related to the year 2000 transition. We will continue to monitor our mission
critical computer applications and those of our suppliers and vendors throughout
the year 2000 to ensure that any latent year 2000 matters that may arise are
addressed promptly.
Risks Related to Our Business
We Expect That Substantially All Of Our Revenues Will Be Generated From A
Limited Number Of Customers, And That Our Revenues Will Not Grow If We Do Not
Successfully Sell Products To These Customers
We currently have a limited number of customers, one of whom, Williams
Communications, accounts for a substantial amount of our revenues to date.
Williams is not contractually committed to purchase any minimum quantities of
products from us. We expect that in the foreseeable future a substantial amount
of our revenues will continue to depend on sales of our intelligent optical
networking products to Williams and a limited number of potential new 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.
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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 downturn in their business, would seriously harm our financial
condition or results of our operations.
We Have Been In Business For A Short Period Of Time And Your Basis For
Evaluating Us Is Limited
We were founded in February 1998. We shipped our SN 6000 Intelligent Optical
Transport product in May 1999, our SN 8000 Intelligent Optical Node in August
1999 and our SilvxManager Network Management System in November 1999. We have
limited meaningful historical financial data upon which to base projected
revenues and planned operating expenses and upon which investors may evaluate us
and our prospects. In addition, our operating expenses are largely based on
anticipated revenue trends, and a high percentage of our expenses are and will
continue to be fixed. You should consider the risks and difficulties frequently
encountered by companies like ours in a new and rapidly evolving market. Our
ability to sell products, and the level of success, if any, we achieve, depends,
among other things, on the level of demand for intelligent optical networking
products, which is a new and rapidly evolving market.
Our Failure To Increase Our Revenues Would Prevent Us From Maintaining
Profitability
We have a history of losses and have not achieved profitability on an annual
basis. While we had a loss from operations in the quarter ended April 29, 2000,
we achieved profitability for the first time in this quarter on a net income
basis. We may not sustain profitability on a quarterly basis or achieve
profitability on an annual basis. We cannot assure you that our revenues will
grow or that we will generate sufficient revenues to sustain profitability. We
have large fixed expenses and we expect to continue to incur significant and
increasing sales and marketing, product development, administrative and other
expenses. Although our revenue has grown in recent quarters, we cannot be
certain that our revenue growth will continue or increase in the future or that
we will realize sufficient revenues to be profitable on an annual or quarterly
basis.
We Are Entirely Dependent On Our Line Of Intelligent Optical Networking Products
And Our Future Revenue Depends On Their Commercial Success
Our future growth depends on the commercial success of our line of intelligent
optical networking products. To date, our SN 6000 Intelligent Optical Transport
product, SN 8000 Intelligent Optical Network Node and our Silvx Manager Network
Management System are the only products that have been shipped to customers.
Our newest product is the SN 16000 Intelligent Optical Switch. This product is
currently in the test stage. We intend to develop and introduce new products
and enhancements to existing products in the future. We cannot assure you that
we will be successful in completing the development or introduction of these
products. Failure of our current or planned products to operate as expected
could delay or prevent their adoption. If our target customers do not adopt,
purchase and successfully deploy our current and planned products, our revenues
will not grow significantly.
Because Our Products Are Complex And Are Deployed In Complex Environments, They
May Have Errors Or Defects That We Find Only After Full Deployment, Which Could
Seriously Harm Our Business
Our intelligent optical networking products are complex and are designed to be
deployed in large and complex networks. Because of the nature of the products,
they can only be fully tested when completely deployed in very large networks
with high amounts of traffic. Our customers may discover errors or defects in
the hardware or the software, or the product may not operate as expected after
it has been fully deployed. If we are unable to fix errors or other problems
that may be identified in full deployment, we could experience:
. loss of or delay in revenues and loss of market share;
. loss of customers;
. failure to attract new customers or achieve market acceptance;
. diversion of development resources;
. increased service and warranty costs;
. legal actions by our customers; and
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. increased insurance costs.
The Long And Variable Sales Cycles For Our Products May Cause Revenues And
Operating Results To Vary Significantly From Quarter To Quarter
A customer's decision to purchase our intelligent optical networking products
involves a significant commitment of its resources and a lengthy evaluation,
testing and product qualification process. As a result, our sales cycle is
likely to be lengthy. Throughout the sales cycle, we spend considerable time
and expense educating and providing information to prospective customers about
the use and features of our products. Even after making a decision to purchase,
we believe that our customers will deploy the products slowly and deliberately.
Timing of deployment can vary widely and depends on the skills of the customer,
the size of the network deployment, the complexity of the customer's network
environment and the degree of hardware and software configuration necessary.
Customers with complex networks usually expand their networks in large
increments on a periodic basis. Accordingly, we may receive purchase orders for
significant dollar amounts on an irregular and unpredictable basis. Because of
our limited operating history and the nature of our business, we cannot predict
these sales and deployment cycles. The long sales cycles, as well as our
expectation that customers will tend to sporadically place large orders with
short lead times, may cause our revenues and results of operations to vary
significantly and unexpectedly from quarter to quarter.
We May Not Be Successful If Our Customer Base Does Not Grow
Our future success will depend on our attracting additional customers. The
growth of our customer base could be adversely affected by:
. customer unwillingness to implement our new optical networking architecture;
. any delays or difficulties that we may incur in completing the development and
introduction of our planned products or product enhancements;
. new product introductions by our competitors;
. any failure of our products to perform as expected; or
. any difficulty we may incur in meeting customers' delivery requirements.
The Intelligent Optical Networking Market Is New And Our Business Will Suffer If
It Does Not Develop As We Expect
The market for intelligent optical networking products is new. We cannot assure
you that a viable market for our products will develop or be sustainable. If
this market does not develop, or develops more slowly than we expect, our
business, results of operations and financial condition would be seriously
harmed.
If We Do Not Respond Rapidly To Technological Changes, Our Products Could Become
Obsolete
The market for intelligent optical networking products is likely to be
characterized by rapid technological change, frequent new product introductions
and changes in customer requirements. We may be unable to respond quickly or
effectively to these developments. We may experience design, manufacturing,
marketing and other difficulties that could delay or prevent our development,
introduction or marketing of new products and enhancements. The introduction of
new products by competitors, market acceptance of products based on new or
alternative technologies or the emergence of new industry standards, could
render our existing or future products obsolete.
In developing our products, we have made, and will continue to make, assumptions
about the standards that may be adopted by our customers and competitors. If
the standards adopted are different from those which we have chosen to support,
market acceptance of our products may be significantly reduced or delayed and
our business will be seriously harmed. In addition, the introduction of
products incorporating new technologies and the emergence of new industry
standards could render our existing products obsolete.
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In addition, in order to introduce products incorporating new technologies and
new industry standards, we must be able to gain access to the latest
technologies of our customers, our suppliers and other network vendors. Any
failure to gain access to the latest technologies could impair the
competitiveness of our products.
Customer Requirements Are Likely To Evolve, And We Will Not Retain Customers or
Attract New Customers If We Do Not Anticipate And Meet Specific Customer
Requirements
Our current and prospective customers may require product features and
capabilities that our current products do not have. To achieve market
acceptance for our products, we must effectively and timely anticipate and adapt
to customer requirements and offer products and services that meet customer
demands. Our failure to develop products or offer services that satisfy
customer requirements would seriously harm our ability to increase demand for
our products.
We intend to continue to invest in product and technology development. The
development of new or enhanced products is a complex and uncertain process that
requires the accurate anticipation of technological and market trends. We may
experience design, manufacturing, marketing and other difficulties that could
delay or prevent the development, introduction or marketing of new products and
enhancements. The introduction of new or enhanced products also requires that
we manage the transition from older products in order to minimize disruption in
customer ordering patterns and 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 Would
Limit Our Ability to Increase Our Market Share
Competition in the public network infrastructure market is intense. This market
has historically been dominated by large companies, such as Lucent Technologies,
Nortel Networks, Cisco Systems and Ciena Corporation. In addition, a number of
private companies have announced plans for new products to address the same
network problems which our products address. Many of our current and potential
competitors have significantly greater selling and marketing, technical,
manufacturing, financial, and other resources, including vendor-sponsored
financing programs. Moreover, our competitors may foresee the course of market
developments more accurately and could in the future develop new technologies
that compete with our products or even render our products obsolete. Due to the
rapidly evolving markets in which we compete, additional competitors with
significant market presence and financial resources may enter those markets,
thereby further intensifying competition.
In order to compete effectively, we must deliver products that:
. provide extremely high network reliability;
. scale easily and efficiently with minimum disruption to the network;
. interoperate with existing network designs and equipment vendors;
. reduce the complexity of the network by decreasing the need for overlapping
equipment;
. provide effective network management; and
. provide a cost-effective solution for service providers.
In addition, we believe that a knowledge of the infrastructure requirements
applicable to service providers, experience in working with service providers to
develop new services for their customers, and an ability to provide vendor-
sponsored financing, are important competitive factors in our market. We have
limited ability to provide vendor-sponsored financing and this may influence the
purchasing decisions of prospective customers, who may decide to purchase
products from one of our competitors who are able to provide more extensive
financing programs.
If we are unable to compete successfully against our current and future
competitors, we could experience price reductions, order cancellations and
reduced gross margins, any one of which could materially and adversely affect
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our business, results of operations and financial condition.
We Are Likely To Face Difficulties In Obtaining And Retaining Customers If We Do
Not Expand Our Sales Organization And Our Customer Service And Support
Operations
Our products and services require a sophisticated sales effort targeted at a
limited number of key individuals within our prospective customers'
organizations. This effort requires specialized sales personnel and consulting
engineers. We are in the process of building our direct sales force and plan to
hire additional qualified sales personnel and consulting engineers. Competition
for these individuals is intense, and we might not be able to hire and train the
kind and number of sales personnel and consulting engineers required for us to
be successful. In addition, we believe that our future success is dependent
upon our ability to establish successful relationships with a variety of
distribution partners. If we are unable to expand our direct sales operations,
or expand our indirect sales channel, we may not be able to increase market
awareness or sales of our products, which may prevent us from achieving and
maintaining profitability.
We currently have a small customer service and support organization and will
need to increase our staff to support new customers. The support of our
products requires highly trained customer service and support personnel. Hiring
customer service and support personnel is very competitive in our industry
because there are a limited number of people available with the necessary
technical skills and understanding of our market. Once we hire them, they may
require extensive training in our intelligent optical networking products. If
we are unable to expand our customer service and support organization and train
our personnel rapidly, we may not be able to increase sales of our products.
We Depend Upon Contract Manufacturers And Any Disruption In These Relationships
May Cause Us To Fail To Meet The Demands Of Our Customers And Damage Our
Customer Relationships
We do not have internal manufacturing capabilities. We rely on a small number
of contract manufacturers to manufacture our products in accordance with our
specifications, and to fill orders on a timely basis. We have a supply contract
with Celestica Corporation, which provides comprehensive manufacturing services,
including assembly, test, control and shipment to our customers, and procures
material on our behalf. We may not be able to effectively manage our
relationship with Celestica, and Celestica 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. Except for our contract with Celestica, which is cancelable by Celestica
without cause on one-year's advance notice, we do not have any on-going supply
contracts with any other manufacturers. At present, we purchase products from
these other manufacturers on a purchase order basis. Qualifying a new contract
manufacturer and commencing volume production is expensive and time consuming
and could result in a significant interruption in the supply of our products. If
we are required or choose to change contract manufacturers, we may lose revenue
and damage our customer relationships.
We Rely On Single Sources For Supply Of Certain Components And Our Business May
Be Seriously Harmed If Our Supply Of Any Of These Components And Other
Components Is Disrupted
We currently purchase several key components, including commercial digital
signal processors, RISC processors, field programmable gate arrays, SONET
transceivers and erbium doped fiber amplifiers, from single or limited sources.
We purchase each of these components on a purchase order basis and have no long-
term contracts for these components. Although we believe that there are
alternative sources for each of these components, in the event of a disruption
in supply, we may not be able to develop an alternate source in a timely manner
or at favorable prices. Such a failure could hurt our ability to deliver our
products to our customers and negatively affect our operating margins. In
addition, our reliance on our suppliers exposes us to potential supplier
production difficulties or quality variations. Any such disruption in supply
would seriously impact present and future sales and revenue. Further, the
optical component industry is expanding rapidly and manufacturers of optical
components may be unable to meet the unpredictable and growing demand for
components. Because optical components are integrated into our products, a
shortage or decrease in supply would seriously impact our future sales and
revenue.
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The Unpredictability Of Our Quarterly Results May Adversely Affect The Trading
Price Of Our Common Stock
Our revenues and operating results will vary significantly from quarter to
quarter due to a number of factors, many of which are outside of our control and
any of which may cause our stock price to fluctuate. The primary factors that
may affect us include the following:
. fluctuation in demand for intelligent optical networking products;
. the timing and size of sales of our products;
. the length and variability of the sales cycle for our products;
. the timing of recognizing revenue and deferred revenue;
. new product introductions and enhancements by our competitors and ourselves;
. changes in our pricing policies or the pricing policies of our competitors;
. our ability to develop, introduce and ship new products and product
enhancements that meet customer requirements in a timely manner;
. our ability to obtain sufficient supplies of sole or limited source
components;
. increases in the prices of the components we purchase;
. our ability to attain and maintain production volumes and quality levels for
our products;
. the timing and level of prototype expenses;
. costs related to acquisitions of technology or businesses; and
. general economic conditions as well as those specific to the
telecommunications, Internet and related industries.
We plan to increase significantly our operating expenses to fund greater levels
of research and development, expand our sales and marketing operations, broaden
our customer support capabilities and develop new distribution channels. We also
plan to expand our general and administrative capabilities to address the
increased reporting and other administrative demands which will result from the
increasing size of our business. Our operating expenses are largely based on
anticipated organizational growth and revenue trends and a high percentage of
our expenses are, and will continue to be, fixed. As a result, a delay in
generating or recognizing revenue for the reasons set forth above, or for any
other reason, could cause significant variations in our operating results from
quarter to quarter and could result in substantial operating losses.
Due to the foregoing factors, we believe that quarter-to-quarter comparisons of
our operating results are not a good indication of our future performance. You
should not rely on our results or growth for one quarter as any indication of
our future performance. It is likely that in some future quarters, our
operating results may be below the expectations of public market analysts and
investors. In this event, the price of our common stock could decrease.
If Our Products Do Not Interoperate With Our Customers' Networks, Installations
Will Be Delayed Or Cancelled And Could Result In Substantial Product Returns,
Which Could Seriously Harm Our Business
Many of our customers will require that our products be specifically designed to
interface with their existing networks, each of which may have different
specifications and utilize multiple protocol standards. Our customers' networks
contain multiple generations of products that have been added over time as these
networks have grown and evolved. Our products must interoperate with all of the
products within these networks as well as future products in order to meet our
customers' requirements. The requirement that we modify product design in order
to achieve a sale may result in a longer sales cycle, increased research and
development expense and reduced margins on our products. If we find errors in
the existing software used in our customers' networks, we will have to modify
our products to fix or overcome these errors so that our products will
interoperate and scale with the existing
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software and hardware. If our products do not interoperate with those of our
customers' networks, installations could be delayed, orders for our products
could be cancelled or our products could be returned. This would also seriously
harm our reputation, all of which could seriously harm our business and
prospects.
Undetected Software Or Hardware Errors And Problems Arising From Use Of Our
Products In Conjunction With Other Vendors' Products Could Result In Delays or
Loss of Market Acceptance of Our Products
Networking products frequently contain undetected software or hardware errors
when first introduced or as new versions are released. We expect that errors
will be found from time to time in new or enhanced products after we begin
commercial shipments. In addition, service providers typically use our products
in conjunction with products from other vendors. As a result, when problems
occur, it may be difficult to identify the source of the problem. These
problems may cause us to incur significant warranty, support and repair costs,
divert the attention of our engineering personnel from our product development
efforts and cause significant customer relations problems. The occurrence of
these problems could result in the delay or loss of market acceptance of our
products and would likely have a material adverse effect on our business,
results of operations and financial condition. Defects, integration issues or
other performance problems in our products could result in financial or other
damages to our customers or could damage market acceptance for our products.
Our customers could also seek damages for losses from us. A product liability
claim brought against us, even if unsuccessful, would likely be time consuming
and costly.
Our Failure To Establish And Maintain Key Customer Relationships May Result In
Delays In Introducing New Products Or Cause Customers To Forego Purchasing Our
Products
Our future success will also depend upon our ability to develop and manage key
customer relationships in order to introduce a variety of new products and
product enhancements that address the increasingly sophisticated needs of our
customers. Our failure to establish and maintain these customer relationships
may adversely affect our ability to develop new products and product
enhancements. In addition, we may experience delays in releasing new products
and product enhancements in the future. Material delays in introducing new
products and enhancements or our inability to introduce competitive new products
may cause customers to forego purchases of our products and purchase those of
our competitors, which could seriously harm our business.
Our Failure To Continually Improve Our Internal Controls And Systems, And Hire
Needed Personnel, Could Impair Our Future Growth
We have expanded our operations rapidly since our inception. We continue to
increase the scope of our operations and have grown our headcount substantially.
For example, at July 31, 1999, we had a total of 148 employees and at April 29,
2000, we had a total of 407 employees. In addition, we plan to continue to hire
a significant number of employees this fiscal year. Our growth has placed, and
our anticipated growth will continue to place, a significant strain on our
management systems and resources. Our ability to successfully offer our
products and implement our business plan in a rapidly evolving market requires
an effective planning and management process. We expect that we will need to
continue to improve our financial, managerial and manufacturing controls and
reporting systems, and will need to continue to expand, train and manage our
work force worldwide. We may not be able to implement adequate control systems
in an efficient and timely manner. Competition for highly skilled personnel is
intense, especially in the New England area. Any failure to attract, assimilate
or retain qualified personnel to fulfill our current or future needs could
impair our growth.
We Depend On Our Key Personnel To Manage Our Business Effectively In A Rapidly
Changing Market And If We Are Unable To Retain Our Key Employees, Our Ability To
Compete Could Be Harmed
Our future success depends upon the continued services of our executive officers
and other key engineering, sales, marketing and support personnel, who have
critical industry experience and relationships that we rely on to implement our
business plan. None of our officers or key employees is bound by an employment
agreement for any specific term. We do not have "key person" life insurance
policies covering any of our employees. The loss of the services of any of our
key employees could delay the development and introduction of, and negatively
impact our ability to sell, our products.
If We Become Subject To Unfair Hiring Claims, We Could Incur Substantial Costs
In Defending Ourselves
Companies in our industry, whose employees accept positions with competitors,
frequently claim that their competitors have engaged in unfair hiring practices.
We cannot assure you that we will not receive claims of this
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kind or other claims relating to our employees in the future as we seek to hire
qualified personnel or that those claims will not result in material litigation.
We could incur substantial costs in defending ourselves or our employees against
such claims, regardless of their merits. In addition, defending ourselves or our
employees from such claims could divert the attention of our management away
from our operations.
Our Ability To Compete Could Be Jeopardized If We Are Unable To Protect Our
Intellectual Property Rights From Third-Party Challenges
We rely on a combination of patent, copyright, trademark and trade secret laws
and restrictions on disclosure to protect our intellectual property rights. We
also enter into confidentiality or license agreements with our employees,
consultants and corporate partners, and control access to and distribution of
our software, documentation and other proprietary information. Despite our
efforts to protect our proprietary rights, unauthorized parties may attempt to
copy or otherwise obtain and use our products or technology. Monitoring
unauthorized use of our products is difficult and we cannot be certain that the
steps we have taken will prevent unauthorized use of our technology,
particularly in foreign countries where the laws may not protect our proprietary
rights as fully as in the United States. If competitors are able to use our
technology, our ability to compete effectively could be harmed.
If Necessary Licenses Of Third-Party Technology Are Not Available To Us Or Are
Very Expensive, Our Products Could Become Obsolete
From time to time we may be required to license technology from third parties to
develop new products or product enhancements. We cannot assure you that third
party licenses will be available to us on commercially reasonable terms, if at
all. The inability to obtain any third-party license required to develop new
products and product enhancements could require us to obtain substitute
technology of lower quality or performance standards or at greater cost, either
of which could seriously harm the competitiveness of our products.
We Could Become Subject To Litigation Regarding Intellectual Property Rights,
Which Could Seriously Harm Our Business And Require Us To Incur Significant
Costs
In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. Although we have not
been involved in any intellectual property litigation, we may be a party to
litigation in the future to protect our intellectual property or as a result of
an allegation that we infringe others' intellectual property. Any parties
asserting that our products infringe upon their proprietary rights would force
us to defend ourselves and possibly our customers or manufacturers against the
alleged infringement. These claims and any resulting lawsuit, if successful,
could subject us to significant liability for damages and invalidation of our
proprietary rights. These lawsuits, regardless of their success, would likely
be time-consuming and expensive to resolve and would divert management time and
attention. Any potential intellectual property litigation also could force us
to do one or more of the following:
. stop selling, incorporating or using our products that use the challenged
intellectual property;
. obtain from the owner of the infringed intellectual property right a license
to sell or use the relevant technology, which license may not be available on
reasonable terms, or at all; or
. redesign those products that use such technology.
If we are forced to take any of the foregoing actions, our business may be
seriously harmed.
We May Face Risks Associated With Our International Expansion That Could Impair
Our Ability To Grow Our Revenues Abroad
We intend to continue to expand our sales into international markets. This
expansion will require significant management attention and financial resources
to develop successfully direct and indirect international sales and support
channels and to support customers in international markets. We may not be able
to develop international market demand for our products.
We have limited experience in marketing, distributing and supporting our
products internationally and to do so, we expect that we will need to develop
versions of our products that comply with local standards. In addition,
international operations are subject to other inherent risks, including:
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. 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.
Any Acquisitions We Make Could Disrupt Our Business And Seriously Harm Our
Financial Condition
As part of our ongoing business development strategy, we consider acquisitions
and strategic investments in complementary companies, products or technologies.
On June 6, 2000 we announced our intention to acquire Sirocco Systems, Inc., and
may also evaluate other potential transactions and transaction prospects. In
the event of any purchases, we could:
. issue stock that would dilute our current stockholders' percentage ownership;
. incur debt;
. assume liabilities;
. incur amortization expenses related to goodwill and other intangible assets;
or
. incur large and immediate write-offs.
Our 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 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
. potential loss of key employees, particularly those of the purchased
organizations.
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.
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Risks Related to The Securities Market
Our Stock Price May Be Volatile
An active public market for our common stock may not be sustained. The market
for technology stocks has been extremely volatile. The following factors could
cause the market price of our common stock to fluctuate significantly:
. our loss of a major customer;
. 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;
. acquisitions, distribution partnerships, joint ventures or capital
commitments;
. changes in financial estimates by securities analysts;
. our 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. These broad market and industry factors may
materially adversely affect the market price of our common stock, regardless of
our actual operating performance. In the past, following periods of volatility
in the market price of a company's securities, securities class-action
litigation has often been instituted against such companies. Such litigation,
if instituted, could result in substantial costs and a diversion
of management's attention and resources.
There May Be Sales Of A Substantial Amount Of Our Common Stock That Could Cause
Our Stock Price To Fall
Shares of our common stock from our follow-on offering began trading on the
Nasdaq National Market on March 14, 2000. Certain of our 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. In addition, as of April 29, 2000, options to purchase a
total of 24,479,310 shares of common stock were outstanding, which options are
subject to vesting schedules.
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 April 29, 2000, the executive officers, directors and entities affiliated
with them, in the aggregate, beneficially own approximately 61.5% 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.
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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, bylaws, and
Delaware law could make it more difficult for a third party to acquire us, even
if doing so would be beneficial to our stockholders.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The following discussion about our market risk disclosures involves forward-
looking statements. Actual results could differ materially from those projected
in the forward-looking statements. We are exposed to market risk related to
changes in interest rates and foreign currency exchange rates. We do not use
derivative financial instruments for speculative or trading purposes.
Interest Rate Sensitivity
We maintain a portfolio of cash equivalents and short-term and long-term
investments in a variety of securities including; commercial paper, certificates
of deposit, money market funds and government and non-government debt
securities. These available for sale securities are subject to interest rate
risk and may fall in value if market interest rates increase. If market interest
rates were to increase immediately and uniformly by 10 percent from levels at
April 29, 2000, the fair value of the portfolio would decline by approximately
$6.7 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 its securities portfolio.
Exchange Rate Sensitivity
We operate primarily in the United States, and all sales to date have been made
in US dollars. Accordingly, there has not been any material exposure to foreign
currency rate fluctuations.
Part II. Other Information
Item 1. Legal Proceedings
In the ordinary course of business, we become involved in various lawsuits and
claims. In addition, we have in certain instances agreed to assume the costs of
defending lawsuits brought against our current or prospective employees by their
former employers. While the outcome of these matters is not currently
determinable, we believe, after consultation with legal counsel, that the
outcome will not have a material adverse effect on the results of our operations
or our financial position.
21
<PAGE>
Item 2. Changes in Securities and Use of Proceeds
We effected a three-for-one stock split paid as a 200% stock dividend on
February 11, 2000 to stockholders of record as of February 4, 2000.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
(a) List of Exhibits
Number Exhibit Description
------ -------------------
**3.1 Amended and Restated Certificate of Incorporation
**3.2 Certificate of Amendment to the Amended and Restated
Certificate of Incorporation
**3.3 Amended and Restated By-Laws
* 4.1 Specimen common stock certificate
**4.2 See Exhibits 3.1 and 3.2, for provisions of the Certificate
of Incorporation and By-Laws of the Registrant defining the
rights of holders of common stock
*4.3 Second Amended and Restated Investor Rights Agreement dated
February 26, 1999, as amended by Amendment No. 1 dated as of
July 23, 1999.
**4.4 Amendment No. 2 dated as of August 5, 1999 to the Second
Amended and Restated Investor Rights Agreement dated
February 26, 1999.
**4.5 Amendment No. 3 dated as of September 20, 1999 to the Second
Amended and Restated Investor Rights Agreement dated
February 26, 1999.
**4.6 Amendment No. 4 dated as of February 11, 2000 to the Second
Amended and Restated Investor Rights Agreement dated
February 26, 1999.
**+10.1 Manufacturing Services Agreement between Sycamore Networks
and Celestica Corporation dated February 9, 2000.
**10.2 Promissory Note dated February 5, 2000 between Sycamore
Networks and Eric Swanson.
**10.3 Lease Agreement between Sycamore Networks and New Boston
Mill Road Limited Partnership dated March 8, 2000.
**10.4 Assignment of Subleases between Sycamore Networks and
Thermedics Detection, Inc. dated March 8, 2000.
10.5 Lease Agreement between Sycamore Networks and Farley White
Associates, LLC dated March 23, 2000
27.1 Financial Data Schedule (Filed Electronically)
22
<PAGE>
* Incorporated by reference to Sycamore Network's Registration Statement on
Form S-1 (Registration Statement File No. 333-84635).
** Incorporated by reference to Sycamore Network's Registration Statement on
Form S-1 (Registration Statement File No. 333-30630).
+ Confidential treatment granted 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 : We filed a Current Report on Form 8-K on February 14,
2000 relating to a three-for-one stock split approved by the Board of Directors.
23
<PAGE>
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: June 12, 2000
24
<PAGE>
Exhibit Index
Number Exhibit Description
------ -------------------
**3.1 Amended and Restated Certificate of Incorporation
**3.2 Certificate of Amendment to the Amended and Restated Certificate
of Incorporation
**3.3 Amended and Restated By-Laws
* 4.1 Specimen common stock certificate
**4.2 See Exhibits 3.1 and 3.2, for provisions of the Certificate of
Incorporation and By-Laws of the Registrant defining the rights
of holders of common stock
*4.3 Second Amended and Restated Investor Rights Agreement dated
February 26, 1999, as amended by Amendment No. 1 dated as of July
23, 1999.
**4.4 Amendment No. 2 dated as of August 5, 1999 to the Second Amended
and Restated Investor Rights Agreement dated February 26, 1999
**4.5 Amendment No. 3 dated as of September 20, 1999 to the Second
Amended and Restated Investor Rights Agreement dated February 26,
1999
**4.6 Amendment No. 4 dated as of February 11, 2000 to the Second
Amended and Restated Investor Rights Agreement dated February 26,
1999
**+10.1 Manufacturing Services Agreement between Sycamore Networks and
Celestica Corporation dated February 9, 2000.
**10.2 Promissory Note dated February 5, 2000 between Sycamore Networks
and Eric Swanson
**10.3 Lease Agreement between Sycamore Networks and New Boston Mill
Road Limited Partnership dated March 8, 2000.
**10.4 Assignment of Subleases between Sycamore Networks and Thermedics
Detection, Inc. dated March 8, 2000.
10.5 Lease Agreement between Sycamore Networks and Farley White
Associates, LLC dated March 23, 2000
27.1 Financial Data Schedule (Filed Electronically)
* Incorporated by reference to Sycamore Network's Registration Statement on
Form S-1 (Registration Statement File No. 333-84635).
** Incorporated by reference to Sycamore Network's Registration Statement on
Form S-1 (Registration Statement File No. 333-30630).
+ Confidential treatment granted 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.
25
