XNAS:SCMR Quarterly Report 10-Q Filing - 4/28/2012

Effective Date 4/28/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED APRIL 28, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM              TO             

COMMISSION FILE NUMBER 000-27273

 

 

SYCAMORE NETWORKS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   04-3410558

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

220 Mill Road

Chelmsford, Massachusetts 01824

(Address of principal executive offices)

(Zip code)

(978) 250-2900

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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

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

 

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

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

The number of shares outstanding of the registrant’s Common Stock as of May 18, 2012 was 28,879,293.

 

 

 


Table of Contents

Sycamore Networks, Inc.

 

Index

       Page No.  

Part I.

 

FINANCIAL INFORMATION

     3   

Item 1.

 

Financial Statements (unaudited)

     3   
 

Consolidated Balance Sheets as of April 28, 2012 and July 31, 2011

     3   
 

Consolidated Statements of Operations for the three and nine months ended April 28, 2012 and April 30, 2011

     4   
 

Consolidated Statements of Cash Flows for the nine months ended April 28, 2012 and April 30, 2011

     5   
 

Notes to Consolidated Financial Statements

     6   

Item 2.

 

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

     15   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     23   

Item 4.

 

Controls and Procedures

     24   

Part II.

 

OTHER INFORMATION

     25   

Item 1.

 

Legal Proceedings

     25   

Item 1A.

 

Risk Factors

     26   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     26   

Item 6.

 

Exhibits

     27   

Signature

     28   

 

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Table of Contents

Part I. Financial Information

Item 1. Financial Statements

Sycamore Networks, Inc.

Consolidated Balance Sheets

(in thousands, except par value)

(unaudited)

 

     April 28,
2012
    July 31,
2011
 

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 60,683      $ 60,765   

Short-term investments

     290,588        335,847   

Accounts receivable, net of allowance for doubtful accounts of $42 at April 28, 2012 and $72 at July 31, 2011

     6,387        8,764   

Inventories

     9,316        11,537   

Prepaid and other current assets

     1,582        1,770   
  

 

 

   

 

 

 

Total current assets

     368,556        418,683   

Property and equipment, net

     5,281        5,978   

Long-term investments

     88,770        44,786   

Other assets

     320        290   
  

 

 

   

 

 

 

Total assets

   $ 462,927      $ 469,737   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Current liabilities:

    

Accounts payable

   $ 797      $ 1,664   

Accrued compensation

     2,229        2,325   

Accrued warranty

     1,083        1,140   

Accrued expenses

     1,669        1,889   

Accrued restructuring costs

     —          294   

Deferred revenue

     8,880        9,141   

Other current liabilities

     923        1,013   
  

 

 

   

 

 

 

Total current liabilities

     15,581        17,466   

Long term deferred revenue

     1,451        1,812   

Other long term liabilities

     2,122        1,702   
  

 

 

   

 

 

 

Total liabilities

     19,154        20,980   
  

 

 

   

 

 

 

Commitments and contingencies (Note 11)

    

Stockholders’ equity:

    

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

     —          —     

Common stock, $.001 par value; 250,000 shares authorized; 28,879 and 28,739 shares issued and outstanding at April 28, 2012 and July 31, 2011, respectively

     29        29   

Additional paid-in capital

     1,588,440        1,583,124   

Accumulated deficit

     (1,144,357     (1,133,958

Accumulated other comprehensive loss

     (339     (438
  

 

 

   

 

 

 

Total stockholders’ equity

     443,773        448,757   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 462,927      $ 469,737   
  

 

 

   

 

 

 

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

 

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Table of Contents

Sycamore Networks, Inc.

Consolidated Statements of Operations

(in thousands, except per share amounts)

(unaudited)

 

 

     Three Months Ended     Nine Months Ended  
     April 28,
2012
    April 30,
2011
    April 28,
2012
    April 30,
2011
 

Revenue:

        

Product

   $ 6,076      $ 5,958      $ 23,343      $ 17,275   

Service

     5,846        5,905        17,143        18,454   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     11,922        11,863        40,486        35,729   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue:

        

Product

     3,507        2,941        11,368        10,704   

Service

     1,948        1,940        5,784        6,179   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     5,455        4,881        17,152        16,883   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     6,467        6,982        23,334        18,846   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Research and development

     7,187        6,434        20,720        19,984   

Sales and marketing

     2,465        2,898        7,692        8,141   

General and administrative

     2,066        2,106        6,191        6,262   

Restructuring

     —          —          (271     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     11,718        11,438        34,332        34,387   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (5,251     (4,456     (10,998     (15,541

Interest and other income, net

     240        400        865        1,638   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (5,011     (4,056     (10,133     (13,903

Income tax expense

     80        80        266        277   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (5,091   $ (4,136   $ (10,399   $ (14,180
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share:

        

Basic

   $ (0.18   $ (0.14   $ (0.36   $ (0.50

Diluted

   $ (0.18   $ (0.14   $ (0.36   $ (0.50

Weighted average shares outstanding:

        

Basic

     28,853        28,593        28,783        28,525   

Diluted

     28,853        28,593        28,783        28,525   

Cash distribution paid per common share

         $ 6.50   

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

 

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Table of Contents

Sycamore Networks, Inc.

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

     Nine Months Ended  
     April 28,
2012
    April 30,
2011
 

Cash flows from operating activities:

    

Net loss

   $ (10,399   $ (14,180

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

    

Depreciation and amortization

     2,139        2,872   

Share-based compensation

     2,872        1,680   

Adjustments to provision for excess and obsolete inventory

     381        1,046   

Changes in operating assets and liabilities:

    

Accounts receivable

     2,377        7,295   

Inventories

     1,701        (1,697

Prepaids and other assets

     158        (53

Deferred revenue

     (622     (5,035

Accounts payable

     (867     (1,838

Accrued expenses and other current liabilities

     (43     (1,319

Accrued restructuring costs

     (294     (78
  

 

 

   

 

 

 

Net cash used in operating activities

     (2,597     (11,307
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of property and equipment

     (1,303     (1,796

Purchases of investments

     (257,891     (410,001

Proceeds from maturities and sales of investments

     259,265        600,867   
  

 

 

   

 

 

 

Net cash provided by investing activities

     71        189,070   
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Payment of cash distribution to common stockholders

     —          (185,446

Proceeds from issuance of common stock

     2,444        4,994   
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     2,444        (180,452
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (82     (2,689

Cash and cash equivalents, beginning of period

     60,765        104,416   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 60,683      $ 101,727   
  

 

 

   

 

 

 

Cash paid for income taxes

   $ 183      $ 91   
  

 

 

   

 

 

 

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

 

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Table of Contents

Sycamore Networks, Inc.

Notes To Consolidated Financial Statements (Unaudited)

1. Description of Business

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

2. Basis of Presentation

The accompanying financial data as of April 28, 2012 and for the three and nine months ended April 28, 2012 and April 30, 2011 has been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K as filed with the SEC for the fiscal year ended July 31, 2011.

In the opinion of management, the accompanying financial statements include all adjustments necessary to state fairly the financial position as of April 28, 2012 and results of operations and cash flows for the periods ended April 28, 2012 and April 30, 2011. The results of operations and cash flows for the period ended April 28, 2012 are not necessarily indicative of the operating results and cash flows for the full fiscal year or any future periods.

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

 

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3. Share-Based Compensation

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

 

     Three Months Ended      Nine Months Ended  
     April 28,
2012
     April 30,
2011
     April 28,
2012
     April 30,
2011
 

Cost of product revenue

   $ 43       $ 32       $ 121       $ 138   

Cost of service revenue

     112         83         345         158   

Research and development

     392         255         1,156         462   

Sales and marketing

     179         185         571         463   

General and administrative

     225         203         679         459   
  

 

 

    

 

 

    

 

 

    

 

 

 

Share-based compensation expense

   $ 951       $ 758       $ 2,872       $ 1,680   
  

 

 

    

 

 

    

 

 

    

 

 

 

Stock option activity under all of the Company’s stock plans since July 31, 2011 is summarized as follows:

 

     Number of
Shares
    Weighted
Average
Exercise

Price
     Weighted
Average
Contractual
Term
(Years)
 

Outstanding at July 31, 2011

     2,993,840      $ 20.33         5.59   

Options granted

     17,875        18.37      

Options exercised

     (140,485     17.40      

Options cancelled

     (482,188     23.99      
  

 

 

      

Outstanding at April 28, 2012

     2,389,042      $ 19.74         6.39   
  

 

 

      

Options vested and expected to vest

     2,350,371      $ 19.73         5.79   

Options exercisable at end of period

     1,650,962      $ 19.46         5.27   

Weighted average fair value of options granted for the nine months ended April 28, 2012

   $ 8.21        

The intrinsic value of options exercised during the nine months ended April 28, 2012 was $0.3 million.

As of April 28, 2012, there was $5.9 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Company’s stock plans. That cost is expected to be recognized over a weighted-average period of 1.9 years.

4. Net Loss Per Share

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

Employee stock options to purchase 2.4 million and 2.7 million shares have not been included in the computation of diluted net loss per share for the three and nine months ended April 28, 2012, respectively, because their effect would have been antidilutive. Employee stock options to purchase 2.9 million and 2.6 million shares have not been included in the computation of diluted net loss per share for the three and nine months ended April 30, 2011, respectively, because their effect would have been antidilutive.

 

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Table of Contents

5. Cash Equivalents and Marketable Securities

Cash equivalents are short-term, highly liquid investments with original maturity dates of three months or less at the date of acquisition. Cash equivalents are carried at cost plus accrued interest, which approximates fair market value. As of April 28, 2012, the Company’s short and long term investments, as classified on the balance sheet, were $290.6 million and $88.8 million, respectively. These investments are marketable securities classified as available-for-sale and are recorded at fair value with any unrealized gain or loss recorded as an element of stockholders’ equity. The fair value of short and long term investments is determined based on quoted market prices at the reporting date for those instruments. As of April 28, 2012 and July 31, 2011, aggregate cash and cash equivalents and short and long term investments consisted of (in thousands):

 

April 28, 2012:    Amortized
Cost
     Gross
Unrealized

Gains
     Gross
Unrealized

Losses
    Fair Market
Value
 

Cash and cash equivalents

   $ 60,683       $ —         $ —        $ 60,683   

Corporate securities

     11,976         —           (3     11,973   

Government securities

     367,412         87         (114     367,385   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 440,071       $ 87       $ (117   $ 440,041   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

July 31, 2011:    Amortized
Cost
     Gross
Unrealized

Gains
     Gross
Unrealized

Losses
    Fair Market
Value
 

Cash and cash equivalents

   $ 60,765       $ —         $ —        $ 60,765   

Corporate securities

     26,819         37         —          26,856   

Government securities

     353,907         27         (157     353,777   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 441,491       $ 64       $ (157   $ 441,398   
  

 

 

    

 

 

    

 

 

   

 

 

 

6. Inventories

Inventories consisted of the following (in thousands):

 

     April 28,
2012
     July 31,
2011
 

Raw materials

   $ 3,576       $ 4,398   

Work in process

     1,264         2,193   

Finished goods

     4,476         4,946   
  

 

 

    

 

 

 

Total

   $ 9,316       $ 11,537   
  

 

 

    

 

 

 

7. Comprehensive Loss

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

 

     Three Months Ended     Nine Months Ended  
     April 28,
2012
    April 30,
2011
    April 28,
2012
    April 30,
2011
 

Net loss

   $ (5,091   $ (4,136   $ (10,399   $ (14,180

Unrealized gain (loss) on investments

     (194     (132     99        (823
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

   $ (5,285   $ (4,268   $ (10,300   $ (15,003
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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8. Restructuring Charges

During the first quarter of fiscal 2012, the Company reversed the balance of a reserve for the consolidation of its Chelmsford, Massachusetts facility totaling $0.2 million. The adjustment relates to a change in the previously estimated restructuring liability resulting from an amendment to extend the term of the facility lease and was recorded to operating expenses.

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

There can be no assurance that further restructuring actions may not be required in the future.

The Company has completed its cash restructuring payments. A roll-forward of the restructuring accrual since July 31, 2011 is summarized below (in thousands):

 

     Accrual
Balance at
July  31,

2011
     Adjustments     Payments      Accrual
Balance at
April 28,
2012
 

Workforce reduction

   $ 67       $ —        $ 67       $ —     

Facility consolidations

     227         (227     —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 294       $ (227   $ 67       $ —     
  

 

 

    

 

 

   

 

 

    

 

 

 

9. Income Taxes

As of April 28, 2012 and July 31, 2011, the Company had a liability of $1.8 million and $1.7 million, respectively, for taxes, interest and penalties for unrecognized tax benefits related to various foreign income tax matters. If recognized, the entire amount would impact the Company’s effective tax rate. During fiscal 2012 it is reasonably possible that we may recognize up to $0.2 million of previously unrecognized tax benefits related to various foreign tax positions.

As of April 28, 2012 and July 31, 2011, the Company had $0.5 million and $0.4 million, respectively, accrued for interest and penalties related to uncertain tax positions. The Company accounts for interest and penalties related to uncertain tax positions as part of its provision for federal, international, and state income taxes.

The Company is currently open to audit under statutes of limitation by the Internal Revenue Service, various foreign jurisdictions, and state jurisdictions for the fiscal years ended July 31, 2005 through July 31, 2011. However, limited audit adjustments could be made to federal and state tax returns in earlier years resulting in a reduction of net operating loss carryforwards.

Income tax expense was $0.1 million and $0.3 million for the three and nine months ended April 28, 2012 and April 30, 2011, respectively, primarily related to income tax expense in certain states and profitable foreign jurisdictions.

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

The occurrence of ownership changes, as defined in Section 382 of the Internal Revenue Code, as amended (the “Code”), is not controlled by the Company, and could significantly limit the amount of net operating loss

 

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carryforwards and research and development credits that can be utilized annually to offset future taxable income. The Company completed an updated Section 382 study for the period April 2006 through July 31, 2011 and the results of this study showed that no ownership change within the meaning of the Code had occurred from April 2006 through July 31, 2011.

10. Recent Accounting Pronouncements

On June 16, 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASU 2011-05”), which revises the manner in which entities present comprehensive income in their financial statements. The new guidance requires companies to report components of comprehensive income in either: (1) a continuous statement of comprehensive income; or (2) two separate consecutive statements. In addition, in December 2011, the FASB issued an amendment which defers the requirement to present components of reclassifications of other comprehensive income on the face of the income statement. ASU 2011-05 does not change the items that must be reported in other comprehensive income. ASU 2011-05 will be effective for the Company beginning August 1, 2012. The Company is currently considering the appropriate presentation upon adoption.

On May 12, 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS (“ASU 2011-04”), which provides guidance on how (not when) to measure fair value and what disclosures to provide about fair value measurements. ASU 2011-04 expands previously existing disclosure requirements for fair value measurements, including disclosures regarding transfers between Level 1 and Level 2 in the fair value hierarchy currently disclosed. ASU 2011-04 was effective for the Company beginning January 29, 2012, the first day of our third fiscal quarter. The adoption of ASU 2011-04 did not have a material impact on the consolidated financial statements.

 

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11. Commitments and Contingencies

Litigation

Derivative Lawsuits

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

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

On January 24, 2011, the underwriters filed a motion to stay the issuance of the Ninth Circuit’s mandate in the cases involving the non-moving issuers. On January 25, 2011, the Ninth Circuit granted the underwriters’ motion and ordered that the mandate in the cases involving the non-moving issuers is stayed for ninety days pending the filing of a petition for writ of certiorari in the United States Supreme Court. Appellant Vanessa Simmonds moved to join the underwriters’ motion and requested the Ninth Circuit stay the mandate in all cases. On January 26, 2011, the Ninth Circuit granted Appellant’s motion and ruled that the mandate in all cases (including the Company’s and other moving issuers) is stayed for ninety days. On April 5, 2011, Appellant filed a petition for writ of certiorari in the United States Supreme Court seeking reversal of the Ninth Circuit’s December 2, 2010 decision. On April 15, 2011, the underwriters filed a petition for writ of certiorari with the U.S. Supreme Court seeking reversal of the Ninth Circuit’s December 2, 2010 decision relating to the statute of limitations issue. On June 27, 2011, the Supreme Court denied Simmonds’ petition regarding the demand issue and granted the underwriters’ petition relating to the statute of limitations issue. The Supreme Court heard oral arguments on November 29, 2011. On March 26, 2012 the Supreme Court ruled that the two year-statute of limitations for suits under the short swing liability rules of Section 16(b) of the Securities Exchange Act of 1934 is not tolled until an insider files a Section 16(a) disclosure statement thereby reversing the Ninth Circuit’s ruling of “endless tolling”. The Supreme Court remanded the case to the District Court to determine how the traditional equitable tolling principles would apply to this case.

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

Other Matters

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

Guarantees

As of April 28, 2012, the Company’s guarantees requiring disclosure consist of its accrued warranty obligations, indemnifications for intellectual property infringement claims and indemnifications for officers and directors.

In the normal course of business, the Company may also agree to indemnify other parties, including customers, lessors and parties to other transactions with the Company with respect to certain matters. The Company has agreed to hold these other parties harmless against losses arising from a breach of representations or covenants, or other

 

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claims made against certain parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. It is not possible to determine the maximum potential amount under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the Company under these agreements have not had a material impact on the Company’s operating results or financial position. Accordingly, the Company has not recorded a liability for these agreements at April 28, 2012 or July 31, 2011 as the Company believes the exposure for any related payments is not material.

The Company has agreed to indemnify its officers and directors for certain events or occurrences arising as a result of the officer or director serving in such capacity. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is not limited; however, the Company maintains liability insurance coverage that may enable the Company to recover all or a portion of any future amounts paid. The Company did not incur any expense under these arrangements through the third quarter of fiscal year 2012 or fiscal year 2011. Due to the Company’s inability to estimate liabilities in connection with these agreements, if and when they might be incurred, the Company has not recorded any liability for these agreements at April 28, 2012 or July 31, 2011.

Warranty Liability

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

 

     Three Months Ended     Nine Months Ended  
     April 28,
2012
    April 30,
2011
    April 28,
2012
    April 30,
2011
 

Beginning balance

   $ 1,125      $ 1,529      $ 1,140      $ 1,720   

Accruals /adjustments

     43        (173     164        (181

Settlements

     (85     (132     (221     (315
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 1,083      $ 1,224      $ 1,083      $ 1,224   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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12. Fair Value Measurements

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

 

Level 1

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

Level 2

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

Level 3

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

Assets and liabilities of the Company measured at fair value on a recurring basis as of April 28, 2012, are summarized as follows (in thousands):

 

            Fair Value Measurements at Reporting Date Using  

Description

   April 28, 2012      Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant Unobservable
Inputs

(Level 3)
 

Assets

           

Cash and Cash Equivalents

   $ 60,683       $ 60,683       $ —         $ —     

Corporate Obligations

     11,973         11,973         —           —     

Government Obligations

     367,385         367,385         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 440,041       $ 440,041       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash and Cash Equivalents

Cash and cash equivalents of $60.7 million consisting of money market funds and U.S. federal government and U.S. government agency obligations are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets.

Corporate Obligations

Available-for-sale securities of $12.0 million consisting of U.S. corporate obligations are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices on active markets.

Government Obligations

Available-for-sale securities of $367.4 million consisting of U.S. federal government and U.S. government agency obligations are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets.

 

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Assets and liabilities of the Company measured at fair value on a recurring basis as of July 31, 2011, are summarized as follows (in thousands):

 

            Fair Value Measurements at Reporting Date Using  

Description

   July 31, 2011      Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant Unobservable
Inputs

(Level 3)
 

Assets

           

Cash and Cash Equivalents

   $ 60,765       $ 60,765       $ —         $ —     

Corporate Obligations

     26,856         26,856         —           —     

Government Obligations

     353,777         353,777         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 441,398       $ 441,398       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash and Cash Equivalents

Cash and cash equivalents of $60.8 million consisting of money market funds and U.S. federal government and U.S. government agency obligations are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets.

Corporate Obligations

Available-for-sale securities of $26.9 million consisting of U.S. corporate obligations are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices on active markets.

Government Obligations

Available-for-sale securities of $353.8 million consisting of U.S. federal government and U.S. government agency obligations are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets.

 

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Item 2.

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

Except for the historical information contained herein, we wish to caution you that certain matters discussed in this report constitute forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those stated or implied in forward-looking statements due to a number of factors, including, without limitation, those risks and uncertainties discussed under the heading “Risk Factors” contained in our Annual Report on Form 10-K for the fiscal year ended July 31, 2011. The information discussed in this report should be read in conjunction with our Annual Report on Form 10-K and other reports we file from time to time with the SEC. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future results or otherwise. Forward-looking statements include statements regarding our expectations, beliefs, intentions or strategies regarding the future and can be identified by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “should,” “will,” and “would” or similar words.

Available Information

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

Executive Summary

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

We believe the portion of the bandwidth management market that we serve is in secular decline and continues to be challenged by high customer concentration, the project-oriented nature of purchasing patterns and uncertainty with regard to the level and timing of capital expenditures by service providers. With purchasing power concentrated in a small number of customers and with a large number of suppliers, competition remains intense. We believe that these factors will result in a limited number of new opportunities for revenue growth, and will continue to influence quarterly revenue variability in this area of our business. Accordingly, our investments in these products will remain focused on customer support and sustaining engineering efforts, including limited new feature development tied to tangible revenue opportunities. At the same time, we have continued to invest in IQstream, our mobile broadband solution designed to help operators reduce congestion in mobile access networks caused by rising demand for Internet video and other rich media subscriber content.

We continue to work closely with our trial prospects in validating our IQstream solution. Our trial activities remain ongoing and to date have been valuable in demonstrating IQstream’s core platform capabilities, including system reliability, multi-vendor interoperability and the ability to deliver benefit in backhaul networks. We also continue to enhance the existing platform to support evolving customer requirements.

During the quarter we proceeded with an additional phase of testing to incorporate base station locations with increased traffic volumes and higher anticipated levels of congestion driven by repeat traffic patterns. While this phase of testing is not yet complete, initial test results have shown performance gains during periods of increased repeat traffic. However, we are still working toward demonstrating the value proposition of our solution to our trial customers to support the case for commercial deployment.

 

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We believe the market environment for mobile optimization is evolving, and will continue to evolve, over time. At the time of its introduction, IQstream represented a new and innovative approach to addressing the problem of mobile broadband data growth in the backhaul, an area of the network that had not been previously addressed by other mobile optimization offerings. As such, we believe that mobile operators’ thinking about this problem was still in its formative stages at that time. Through the course of our trial engagements and discussions with mobile operators, we have received indications of potentially heightened interest in a more integrated, end-to-end mobile optimization strategy. In light of this feedback, we have identified opportunities for extensions to IQstream that would allow us to address this need should it emerge as a market requirement. Should operator interest in an integrated, end-to-end optimization strategy become more pronounced, it may require testing of a broader solution set and extend the length of trials. The timing and extent of potential investment aimed at extending our solution to address this potentially emerging requirement will be determined by the business case and market acceptance of our initial IQstream application.

As we go forward, we will continue to closely monitor our IQstream strategy in the context of our ongoing consideration of strategic options. These strategic options may include: recapitalization alternatives, such as cash distributions; the sale or divestiture of assets; the discontinuation of certain products or product lines; and acquisitions of, or mergers or other business combinations with, companies with complementary technologies or companies in other market segments.

Critical Accounting Policies and Estimates

Preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Management believes the most complex and sensitive judgments, because of their significance to the consolidated financial statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Management’s Discussion and Analysis in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2011 describes the significant accounting estimates and policies used in the preparation of the financial statements. Actual results in these areas could differ from management’s estimates. There have been no significant changes in the Company’s critical accounting policies during the first nine months of fiscal 2012, however, we have broadened the disclosure of our revenue recognition policy to provide additional information regarding our revenue arrangements.

Revenue Recognition

The Company sells primarily bundled hardware and software products that function together to deliver the tangible products’ essential functionality (referred to herein collectively as “hardware” products), as well as services related to those hardware products. Services include maintenance arrangements for the products with terms typically of one year, as well as to a lesser extent, professional services and training services. The Company sells a limited amount of stand-alone software products.

The Company recognizes revenue when all of the following criteria have been met:

 

   

Persuasive evidence of an arrangement exists. Evidence of an arrangement generally consists of sales contracts or agreements and customer purchase orders;

 

   

Delivery has occurred. Delivery occurs when title and risk of loss are transferred to the customer or the Company receives written evidence of customer acceptance, when applicable, to verify delivery or performance;

 

   

Sales price is fixed or determinable. The Company assesses whether the sales price is fixed or determinable based on payment terms and whether the sales price is subject to refund or adjustment; and

 

   

Collectability is reasonably assured. Collectability is assessed based on the creditworthiness of the customer as determined by credit checks and the customer’s payment history with the Company.

 

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The Company adopted Accounting Standards Update (“ASU”) No. 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements (“ASU 2009-13”) and ASU No. 2009-14, Software (Topic 985): Certain Revenue Arrangements That Include Software Elements (“ASU 2009-14”) on a prospective basis as of the beginning of fiscal 2011 for new and materially modified arrangements originating on or after August 1, 2010. ASU 2009-14 amends industry-specific revenue accounting guidance for software and software-related transactions to exclude from its scope tangible products containing software components and non-software components that function together to deliver the product’s essential functionality. As a result of adopting the new guidance, nearly all of the Company’s products and related services are no longer accounted for under the software revenue recognition rules, Accounting Standards Codification (“ASC”) Topic 985.

For fiscal 2011 and future periods, pursuant to the guidance of ASU 2009-13, when a sales arrangement contains multiple elements, particularly hardware products and related services, revenue is allocated to each element based on a selling price hierarchy, using a relative selling price allocation approach. The selling price for a deliverable is based on our vendor-specific objective evidence (“VSOE”), if available, third-party evidence (“TPE”) if VSOE is not available, or best estimate of selling price (“BESP”) if neither VSOE nor TPE is available. The Company establishes VSOE for its services based on the price charged for each service element when sold separately. The Company is typically not able to determine TPE for its hardware products or services because the Company’s various product and service offerings contain a significant level of differentiation and therefore, comparable pricing of competitors’ products and services with similar functionality cannot be obtained. The Company determines BESP for products and services based on an assessment of multiple factors, including, but not limited to, pricing practices, customer classes and distribution channels. We then recognize revenue allocated to each deliverable in accordance with the four criteria identified above. Our multiple element arrangements typically include both products and services, with maintenance being the most common service element. Maintenance services are delivered over the contractual support period which can vary in length, but typically is twelve months. In those limited instances where both hardware and stand-alone software products are included in a multiple element arrangement, the hardware and related services and the software and related services are separated and then allocated a pro rata portion of the total transaction value based upon BESP of each of the hardware and software groups, using a relative selling price allocation approach. The hardware group is then accounted for under the ASC Topic 605 guidance described above and the software group is accounted for under the ASC Topic 985 guidance.

For transactions initiated prior to August 1, 2010, revenue for arrangements with multiple elements is accounted for primarily pursuant to ASC Topic 985 because software is considered more than incidental to the functionality of the product. The transaction price is allocated to each element using the residual method based on the VSOE of fair value of the undelivered items pursuant to Topic 985. Under the residual method, the amount of revenue allocated to delivered elements equals the total arrangement consideration less the aggregate fair value of any undelivered elements. If VSOE of fair value of one or more undelivered items does not exist, revenue from the entire arrangement is deferred and recognized at the earlier of (i) delivery of those elements or (ii) when fair value can be established unless maintenance is the only undelivered element, in which case, the entire arrangement fee is recognized ratably over the contractual support period.

As a result of the adoption of ASU 2009-13 and ASU 2009-14, revenue for the year ended July 31, 2011, was approximately $0.7 million higher than the revenue that would have been recorded under the prior revenue recognition guidance. The Company entered into a multiple element arrangement that included hardware and stand-alone software deliverables. The hardware element was delivered during the fiscal year and the software element was undelivered as of July 31, 2011. The Company recognized $0.7 million in revenue in fiscal 2011 corresponding to the hardware elements based on BESP and deferred $0.1 million corresponding to the stand-alone software elements. Under the prior revenue recognition guidance, the Company would have deferred $0.8 million for this multiple element transaction because the Company does not have VSOE for its software products and the software in this transaction was undelivered.

Service revenues include revenue from maintenance, training, and installation services. Revenue from maintenance service contracts is deferred and recognized ratably over the contractual support period. Revenue from training and installation services is recognized as the services are completed or ratably over the service period.

 

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Results of Operations

Revenue

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

 

     Three Months Ended     Nine Months Ended  
     April 28,
2012
     April 30,
2011
     Variance
in Dollars
    Variance
in Percent
    April 28,
2012
     April 30,
2011
     Variance
in Dollars
    Variance
in Percent
 

Revenue

                    

Product

   $ 6,076       $ 5,958       $ 118        2   $ 23,343       $ 17,275       $ 6,068        35

Service

     5,846         5,905         (59     (1 )%      17,143         18,454         (1,311     (7 )% 
  

 

 

    

 

 

    

 

 

     

 

 

    

 

 

    

 

 

   

Total revenue

   $ 11,922       $ 11,863       $ 59        —     $ 40,486       $ 35,729       $ 4,757        13
  

 

 

    

 

 

    

 

 

     

 

 

    

 

 

    

 

 

   

Total revenue was derived exclusively from our Intelligent Bandwidth Management products and services, which increased slightly for the three months ended April 28, 2012 and by $4.8 million for the nine months ended April 28, 2012 compared to the same periods ended April 30, 2011. Product revenue increased $0.1 million for the three months ended April 28, 2012 compared to the same period ended April 30, 2011, primarily due to increased demand for our multiservice access products, offset by a reduction for our optical switching products due to the timing of customer deployments. Product revenue increased $6.1 million for the nine months ended April 28, 2012 compared to the same period ended April 30, 2011, primarily due to increased demand for both our multiservice access and optical switching products. Service revenue consists primarily of fees for services relating to maintenance of our products, installation services and training. Service revenue decreased slightly for the three months ended April 28, 2012 compared to the same period ended April 30, 2011, primarily due to decreased training services. Service revenue decreased $1.3 million for the nine months ended April 28, 2012 compared to the same period ended April 30, 2011, primarily due to decreased maintenance and installation services.

For the three months ended April 28, 2012, two customers each accounted for more than 10% of our total revenue. International revenue represented 22% of our total revenue. We expect future revenue to continue to be highly concentrated in a relatively small number of customers. The timing of customer requirements during a fiscal year may cause shifts between quarterly periods in the level and type of revenue, the number of customers who account for more than 10% of our revenue, and in the mix of domestic versus international revenue. The loss or any substantial reduction or delay in orders by any one of these customers could materially adversely affect our business and, accordingly, our financial condition and results of operations.

Gross Profit

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

 

     Three Months Ended     Nine Months Ended  
     April 28,
2012
    April 30,
2011
    April 28,
2012
    April 30,
2011
 

Gross profit:

        

Product

   $ 2,569      $ 3,017      $ 11,975      $ 6,571   

Service

     3,898        3,965        11,359        12,275   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 6,467      $ 6,982      $ 23,334      $ 18,846   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit:

        

Product

     42     51     51     38

Service

     67     67     66     66

Total

     54     59     58     53

Product gross profit

Cost of product revenue consists primarily of amounts paid to third-party contract manufacturers for purchased materials and services, other fixed manufacturing costs and provisions for warranty, scrap, rework, and provisions

 

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which may be taken for excess or slow moving inventory. Product gross profit decreased for the three months ended April 28, 2012 compared to the same period ended April 30, 2011. The decrease was primarily due to a provision of $0.3 million for certain inventory which was deemed to be in excess of demand. Product gross profit increased for the nine months ended April 28, 2012 compared to the same period ended April 30, 2011. The increase was primarily due to higher revenue and a more favorable product mix for our optical switching products coupled with lower fixed manufacturing costs. Additionally, the prior year nine month period was negatively impacted by a provision of $0.9 million for certain inventory which was deemed to be in excess of demand and a provision of $0.3 million for severance and benefits related to the restructuring of our operations organization. Product gross profit may fluctuate from period to period due to volume fluctuations, pricing pressures resulting from intense competition in our industry, and the enhanced negotiating leverage of larger customers. In addition, product gross profit may be affected by changes in the mix of products sold, channels of distribution, overhead absorption, sales discounts, increases in labor costs, excess inventory and obsolescence charges, increases in component pricing or other material costs, the introduction of new products, or the entry into new markets with different pricing and cost structures.

Service gross profit

Cost of service revenue consists primarily of costs of providing services under customer service contracts which include salaries and related expenses and other fixed costs. Service gross profit decreased slightly for the three and nine months ended April 28, 2012 compared to the same periods ended April 30, 2011. The decrease for the three month period was primarily due to decreased training services. The decrease for the nine month period was primarily due to decreased maintenance and installation services. As most of our service cost of revenue is fixed, increases or decreases in revenue can have a significant impact on service gross profit. Service gross profit may also be affected in future periods by various factors including, but not limited to, the change in mix between technical support services and advanced services, competitive and economic pricing pressures, the enhanced negotiating leverage of certain larger customers, maintenance contract renewals, and the timing of renewals.

Operating Expenses

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

 

     Three Months Ended     Nine Months Ended  
     April 28,
2012
     April 30,
2011
     Variance
in Dollars
    Variance
in Percent
    April 28,
2012
    April 30,
2011
     Variance
in Dollars
    Variance
in Percent
 

Research and development

   $ 7,187       $ 6,434       $ 753        12   $ 20,720      $ 19,984       $ 736        4

Sales and marketing

     2,465         2,898         (433     (15 )%      7,692        8,141         (449     (6 )% 

General and administrative

     2,066         2,106         (40     (2 )%      6,191        6,262         (71     (1 )% 

Restructuring

     —           —           —          —       (271     —           (271     —  
  

 

 

    

 

 

    

 

 

     

 

 

   

 

 

    

 

 

   

Total operating expenses

   $ 11,718       $ 11,438       $ 280        2   $ 34,332      $ 34,387       $ (55     —  
  

 

 

    

 

 

    

 

 

     

 

 

   

 

 

    

 

 

   

Research and Development Expenses

Research and development expenses consist primarily of salaries and related expenses and prototype costs relating to design, development, testing and enhancements of our products. Research and development expenses increased for the three and nine months ended April 28, 2012 compared to the same periods ended April 30, 2011. The increase for the three month period was primarily related to an increase in discretionary spending of $0.5 million and an increase in personnel expenses of $0.4 million, partially offset by a decrease in fixed and allocated costs. The increase in personnel expenses was partially related to an increase in stock compensation expense associated with a broad based grant of employee stock options made during the third quarter of fiscal 2011. The increase in discretionary expenses was primarily related to costs associated with our IQstream initiative and the timing of such costs. The decrease in fixed and allocated costs is a result of our cost containment initiatives.

The increase for the nine month period was primarily related to an increase in personnel expenses of $1.5 million offset by a decrease in fixed and allocated costs of $0.6 million and a decrease in discretionary expenses. The increase in personnel expenses was partially related to an increase in stock compensation expense associated with a broad based grant of employee stock options made during the third quarter of fiscal 2011 and the favorable impact of the reversal of certain previously expensed personnel costs based upon a change in estimate of both the amount and timing of such costs. The decrease in fixed and allocated costs is a result of our cost containment initiatives. The decrease in discretionary expenses was primarily related to the timing of cost incurred for our IQstream initiative.

 

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Sales and Marketing Expenses

Sales and marketing expenses consist primarily of salaries, commissions and related expenses, and other sales and marketing support expenses. Sales and marketing expenses decreased for the three and nine months ended April 28, 2012 compared to the same periods ended April 30, 2011, primarily due to a reduction in personnel expenses of $0.3 million. The decrease in personnel expenses was primarily associated with lower consulting expenses and lower travel expenses. Within our existing spending levels, we continue to allocate sales and marketing resources to those geographic regions where we see the most attractive opportunities.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related expenses, professional fees and other general corporate expenses. General and administrative expenses decreased for the three and nine months ended April 28, 2012 compared to the same periods ended April 30, 2011. The decrease was primarily due to a decrease in personnel expenses as a result of lower headcount and a decrease in fixed and allocated costs as a result of our cost containment initiatives. These decreases were partially offset by an increase in professional fees.

Restructuring and Impairment Charges

During the first quarter of fiscal 2012, the Company reversed the balance of a reserve for the consolidation of its Chelmsford, Massachusetts facility totaling $0.2 million. The adjustment relates to a change in the previously estimated restructuring liability resulting from an amendment to extend the term of the facility lease and was recorded to operating expenses.

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

The Company has completed its cash restructuring payments.

There can be no assurance that further restructuring actions may not be required in the future.

Interest and Other Income, Net

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

 

     Three Months Ended     Nine Months Ended  
     April 28,
2012
     April 30,
2011
     Variance
in Dollars
    Variance
In Percent
    April 28,
2012
     April 30,
2011
     Variance
in Dollars
    Variance
In Percent
 

Interest and other income, net

   $ 240       $ 400       $ (160     (40 )%    $ 865       $ 1,638       $ (773     (47 )% 
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Interest and other income net decreased $0.2 million and $0.8 million for the three and nine months ended April 28, 2012, respectively, compared to the same periods ended April 30, 2011. The decrease for the three month period was primarily due to maturing securities being reinvested at lower prevailing rates. The decrease for the nine month period was primarily due to a lower average investment balance as a result of the cash distribution in the amount of $185.4 million that was paid on December 22, 2010 and maturing securities being reinvested at lower prevailing rates, partially offset by a one-time recovery of $0.2 million in the second quarter of fiscal 2012 in the form of a liquidation dividend for amounts previously owed to the Company.

 

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Table of Contents

Income Tax Expense

Income tax expense was $0.1 million and $0.3 million for the three and nine months ended April 28, 2012 and April 30, 2011, respectively, primarily related to income tax expense in certain states and profitable foreign jurisdictions.

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

The occurrence of ownership changes, as defined in Section 382 of the Internal Revenue Code, as amended (the “Code”), is not controlled by the Company, and could significantly limit the amount of net operating loss carryforwards and research and development credits that can be utilized annually to offset future taxable income. The Company completed an updated Section 382 study for the period April 2006 through July 31, 2011 and the results of this study showed that no ownership change within the meaning of the Code had occurred from April 2006 through July 31, 2011.

Liquidity and Capital Resources

Total cash, cash equivalents and investments were $440.0 million at April 28, 2012 compared to $441.4 million at July 31, 2011. Included in the April 28, 2012 balances were cash and cash equivalents of $60.7 million, compared to $60.8 million at July 31, 2011. The decrease in cash and cash equivalents of $0.1 million was primarily attributable to cash used in operating activities of $2.6 million, offset by cash provided by financing activities of $2.4 million and cash provided by investing activities of $0.1 million.

Net cash provided by investing activities was $0.1 million and consisted of net maturities of investments of $1.4 million offset by purchases of property and equipment of $1.3 million.

Net cash used in operating activities was $2.6 million. Net loss was $10.4 million including non-cash charges for share-based compensation of $2.9 million, an inventory provision of $0.4 million and depreciation and amortization of $2.1 million. Accounts receivable decreased to $6.4 million at April 28, 2012 from $8.8 million at July 31, 2011. The decrease was primarily due to the timing of shipments within the fiscal quarter and service contract renewals. Our accounts receivable and days sales outstanding are impacted primarily by the timing of shipments, collections performance and timing of support contract renewals. Deferred revenue decreased to $10.3 million at April 28, 2012 from $10.9 million at July 31, 2011. The increase was primarily due to the timing of service contract renewals.

Net cash provided by financing activities was $2.4 million and relates to proceeds from the exercise of employee stock options.

Our primary source of liquidity comes from our cash, cash equivalents and investments, which totaled $440.0 million as of April 28, 2012, the majority of which is held in the United States. Our investments are classified as available-for-sale and consist of marketable securities that are readily convertible to cash, including certificates of deposits and government securities. As of April 28, 2012, $290.6 million of investments with maturities of less than one year were classified as short-term investments. Based on our current expectations, we anticipate that some portion of our existing cash and cash equivalents and investments will be consumed by operations. Certain investments have unrealized losses and the Company’s intent and ability is to hold the investment for a period of time sufficient to allow for recovery in market value at maturity or disposition. Our accounts receivable, while not considered a primary source of liquidity, represents a concentration of credit risk because the accounts receivable balance at any point in time typically consists of a relatively small number of customer account balances. As of April 28, 2012, more than 50% of our accounts receivable balance was attributable to three of our customers. As of April 28, 2012, we do not have any outstanding debt or credit facilities, and do not anticipate entering into any debt or credit agreements in the foreseeable future. Our fixed commitments for cash expenditures consist primarily of payments under operating leases and inventory purchase commitments. We do not currently have any material commitments for capital expenditures, or any other material commitments aside from operating leases for our facilities and inventory purchase commitments. We currently intend to fund our operations, including our fixed commitments under operating leases, and any required capital expenditures using our existing cash, cash equivalents and investments.

 

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Table of Contents

We believe that our current cash, cash equivalents and investments will be sufficient to satisfy our anticipated cash requirements for at least the next twelve months.

Commitments, Contractual Obligations and Off-Balance Sheet Arrangements

As of April 28, 2012, our future obligations, which consist of contractual commitments for operating leases and inventory and other purchase commitments, were as follows (in thousands):

 

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

Operating leases

   $ 4,229       $ 1,861       $ 2,022       $ 346       $ —     

Inventory and other purchase commitments

     7,317         7,317         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 11,546       $ 9,178       $ 2,022       $ 346       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Payments made under operating leases will be treated as rent expense. During the first quarter of fiscal 2012 we extended the term of the lease for our facility in Chelmsford, Massachusetts, which now expires in August 2015. Payments made for inventory purchase commitments will initially be capitalized as inventory and then be recorded as cost of product revenue as the inventory is sold or otherwise disposed of.

Reserves for unrecognized tax benefits of $1.8 million have not been included in the above table because the periods of cash settlement with the respective tax authority cannot be reasonably estimated.

Recent Accounting Pronouncements

On June 16, 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASU 2011-05”), which revises the manner in which entities present comprehensive income in their financial statements. The new guidance requires companies to report components of comprehensive income in either: (1) a continuous statement of comprehensive income; or (2) two separate consecutive statements. In addition, in December 2011, the FASB issued an amendment which defers the requirement to present components of reclassifications of other comprehensive income on the face of the income statement. ASU 2011-05 does not change the items that must be reported in other comprehensive income. ASU 2011-05 will be effective for the Company beginning August 1, 2012. The Company is currently considering the appropriate presentation upon adoption.

On May 12, 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS (“ASU 2011-04”), which provides guidance on how (not when) to measure fair value and what disclosures to provide about fair value measurements. ASU 2011-04 expands previously existing disclosure requirements for fair value measurements, including disclosures regarding transfers between Level 1 and Level 2 in the fair value hierarchy currently disclosed. ASU 2011-04 was effective for the Company beginning January 29, 2012, the first day of our third fiscal quarter. The adoption of ASU 2011-04 did not have a material impact on the consolidated financial statements.

 

22


Table of Contents

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Sensitivity

The primary objective of our current investment activities is to preserve investment principal while maximizing income without significantly increasing risk. We maintain a portfolio of cash equivalents and short-term and long-term investments in a variety of securities including money market funds and government debt securities. These available-for-sale investments are subject to interest rate risk and may decline in value if market interest rates increase. If market interest rates increased immediately and uniformly by 10 percent from levels at April 28, 2012, the fair value of the portfolio would decline by approximately $0.1 million. We have the ability to hold our fixed income investments until maturity, and therefore do not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on our investment portfolio.

Exchange Rate Sensitivity

While the majority of our operations are based in the United States, our business is global, with international revenue representing 33% of total revenue in fiscal 2011 and 23% of revenue in the first nine months of fiscal 2012. To date, our revenue has been primarily denominated in US dollars. Additionally, we have a development center in Shanghai, China. Currency fluctuations to date have not had a significant impact on our financial results. We expect international sales to continue to represent a significant portion of our revenue and that we will continue to incur costs in our Shanghai development center. Should our exposure to foreign currency fluctuations become material, we are prepared to hedge against such fluctuations, although we have not engaged in hedging activities to date.

 

23


Table of Contents

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures. Our management (with the participation of our Chief Executive Officer and Chief Financial Officer) evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of April 28, 2012. Disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported on a timely basis and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures are effective and designed to ensure that the information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the requisite time periods.

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

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

 

24


Table of Contents

Part II. Other Information

Item 1. Legal Proceedings

Litigation

Derivative Lawsuits

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

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

On January 24, 2011, the underwriters filed a motion to stay the issuance of the Ninth Circuit’s mandate in the cases involving the non-moving issuers. On January 25, 2011, the Ninth Circuit granted the underwriters’ motion and ordered that the mandate in the cases involving the non-moving issuers is stayed for ninety days pending the filing of a petition for writ of certiorari in the United States Supreme Court. Appellant Vanessa Simmonds moved to join the underwriters’ motion and requested the Ninth Circuit stay the mandate in all cases. On January 26, 2011, the Ninth Circuit granted Appellant’s motion and ruled that the mandate in all cases (including the Company’s and other moving issuers) is stayed for ninety days. On April 5, 2011, Appellant filed a petition for writ of certiorari in the United States Supreme Court seeking reversal of the Ninth Circuit’s December 2, 2010 decision. On April 15, 2011, the underwriters filed a petition for writ of certiorari with the U.S. Supreme Court seeking reversal of the Ninth Circuit’s December 2, 2010 decision relating to the statute of limitations issue. On June 27, 2011, the Supreme Court denied Simmonds’ petition regarding the demand issue and granted the underwriters’ petition relating to the statute of limitations issue. The Supreme Court heard oral arguments on November 29, 2011. On March 26, 2012 the Supreme Court ruled that the two year-statute of limitations for suits under the short swing liability rules of Section 16(b) of the Securities Exchange Act of 1934 is not tolled until an insider files a Section 16(a) disclosure statement thereby reversing the Ninth Circuit’s ruling of “endless tolling”. The Supreme Court remanded the case to the District Court to determine how the traditional equitable tolling principles would apply to this case.

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

Other Matters

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

 

25


Table of Contents

Item 1A. Risk Factors

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended July 31, 2011, as filed with the SEC on September 21, 2011. There have been no material changes to our risk factors from those previously disclosed in our Form 10-K. Additional risks and uncertainties, including risks and uncertainties not presently known to us, or that we currently deem immaterial, could also have an adverse effect on our business, financial condition and/or results of operations.

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

The Company has not: (1) publicly announced any programs to repurchase shares of Common Stock; or (2) sold, within the last three years, Company securities that were not registered under the Securities Act.

 

26


Table of Contents

Item 6. Exhibits

Exhibits:

(a) List of Exhibits

 

Number

  

Exhibit Description

    3.1    Amended and Restated Certificate of Incorporation of the Company (2)
    3.2    Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Company (2)
    3.3    Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Company (3)
    3.4    Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Company (5)
    3.5    Amended and Restated By-Laws of the Company (4)
    4.1    Specimen common stock certificate (1)
    4.2    See Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5 for provisions of the Certificate of Incorporation and By-Laws of the Registrant defining the rights of holders of common stock of the Company (2)(3)(4)(5)
  31.1    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  31.2    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  32.1    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  32.2    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
100.INS*    XBRL Instance Document
100.SCH*    XBRL Taxonomy Extension Schema Document
100.CAL*    XBRL Taxonomy Extension Calculation Linkbase
100.DEF*    XBRL Taxonomy Extension Definition Linkbase
100.LAB*    XBRL Taxonomy Extension Label Linkbase
100.PRE*    XBRL Taxonomy Extension Presentation Linkbase

 

* Pursuant to Rule 406T of Regulation S-T, these interactive data files shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.

 

(1) Incorporated by reference to Sycamore Networks, Inc.’s Registration Statement on Form S-1 (Registration Statement No. 333-84635).

 

(2) Incorporated by reference to Sycamore Networks, Inc.’s Registration Statement on Form S-1 (Registration Statement No. 333-30630).

 

(3) Incorporated by reference to Sycamore Networks, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended January 27, 2001 filed with the Securities and Exchange Commission on March 13, 2001.

 

(4) Incorporated by reference to Sycamore Networks, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended October 27, 2007 filed with the Securities and Exchange Commission on November 28, 2007.

 

(5) Incorporated by reference to Sycamore Networks, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 21, 2009.

 

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Table of Contents

Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Sycamore Networks, Inc.

/s/ Paul F. Brauneis

Paul F. Brauneis

Chief Financial Officer,

Vice President, Finance and Administration,

Treasurer

(Duly Authorized Officer and Principal

Financial and Accounting Officer)

Dated: May 23, 2012

 

28

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XNAS:SCMR Quarterly Report 10-Q Filing - 4/28/2012
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