Form 10-Q

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JFZ3K+XPjy7PYoggoeSZnLV/md+2O01EwTiVGmLHqCMSRGbD6jA4XJZzlur9FfEX 54DgT9a1y/o8rFTa1Blc1w== 0001193125-10-040834.txt : 20100225 0001193125-10-040834.hdr.sgml : 20100225 20100225165931 ACCESSION NUMBER: 0001193125-10-040834 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20100123 FILED AS OF DATE: 20100225 DATE AS OF CHANGE: 20100225 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SYCAMORE NETWORKS INC CENTRAL INDEX KEY: 0001092367 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 043410558 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-27273 FILM NUMBER: 10634372 BUSINESS ADDRESS: STREET 1: 220 MILL ROAD CITY: CHELMSFORD STATE: MA ZIP: 01824 BUSINESS PHONE: 9782502900 MAIL ADDRESS: STREET 1: 220 MILL ROAD CITY: CHELMSFORD STATE: MA ZIP: 01824 10-Q 1 d10q.htm FORM 10-Q Form 10-Q

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 JANUARY 23, 2010

¨	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 ¨ 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.

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 February 17, 2010 was 28,432,047.

Sycamore Networks, Inc.


Index		Page No.
Part I.	FINANCIAL INFORMATION	3

Item 1.	Financial Statements (unaudited)	3

	Consolidated Balance Sheets as of January 23, 2010 and July 31, 2009	3

	Consolidated Statements of Operations for the three months and six months ended January 23, 2010 and January 24, 2009	4

	Consolidated Statements of Cash Flows for the six months ended January 23, 2010 and January 24, 2009	5

	Notes to Consolidated Financial Statements	6

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27

Item 4.	Controls and Procedures	28

Part II.	OTHER INFORMATION	29

Item 1.	Legal Proceedings	29

Item 1A.	Risk Factors	31

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31

Item 4.	Submission of Matters to a Vote of Security Holders	32

Item 6.	Exhibits	33

Signature		34

Part I. Financial Information

Item 1.

Financial Statements

Sycamore Networks, Inc.

Consolidated Balance Sheets

(in thousands, except par value)

(unaudited)


	January 23, 2010			July 31, 2009
Assets
Current assets:
Cash and cash equivalents	$	64,853		$	347,696
Short-term investments		378,514			273,387
Accounts receivable, net of allowance for doubtful accounts of $72 at January 23, 2010 and July 31, 2009		16,716			12,860
Inventories		13,620			16,058
Prepaids and other current assets		3,765			2,388

Total current assets		477,468			652,389

Property and equipment, net		8,513			13,342
Long-term investments		189,313			305,725
Other assets		330			357

Total assets	$	675,624		$	971,813


Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	2,768		$	2,364
Accrued compensation		1,822			2,715
Accrued warranty		2,525			2,866
Accrued expenses		2,255			1,859
Accrued restructuring costs		578			2,509
Deferred revenue		12,071			11,003
Other current liabilities		1,099			1,721

Total current liabilities		23,118			25,037

Other long term liabilities		1,708			1,821
Long term deferred revenue		4,799			4,530

Total liabilities		29,625			31,388


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; 28,432 and 28,424 shares issued and outstanding at January 23, 2010 and July 31, 2009, respectively		28			28
Additional paid-in capital		1,757,906			2,040,317
Accumulated deficit		(1,112,960	)		(1,101,355	)
Accumulated other comprehensive income		1,025			1,435

Total stockholders’ equity		645,999			940,425

Total liabilities and stockholders’ equity	$	675,624		$	971,813

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

Sycamore Networks, Inc.

Consolidated Statements of Operations

(in thousands, except per share amounts)

(unaudited)


	Three Months Ended						Six Months Ended
	January 23, 2010			January 24, 2009			January 23, 2010			January 24, 2009
Revenue:
Product	$	10,316		$	5,622		$	20,368		$	15,644
Service		5,858			6,076			11,430			11,485

Total revenue		16,174			11,698			31,798			27,129


Cost of revenue:
Product		4,617			5,809			10,026			12,692
Service		2,262			2,695			4,700			5,170

Total cost of revenue		6,879			8,504			14,726			17,862


Gross profit		9,295			3,194			17,072			9,267


Operating expenses:
Research and development		7,761			12,912			16,433			24,367
Sales and marketing		2,759			3,644			5,344			7,718
General and administrative		2,444			1,518			4,752			3,253
Restructuring and related asset impairment		(88	)		189			6,216			817

Total operating expenses		12,876			18,263			32,745			36,155


Loss from operations		(3,581	)		(15,069	)		(15,673	)		(26,888	)
Interest and other income, net		1,641			5,026			3,461			11,020

Loss before income taxes		(1,940	)		(10,043	)		(12,212	)		(15,868	)
Income tax expense (benefit)		(727	)		88			(607	)		42

Net loss	$	(1,213	)	$	(10,131	)	$	(11,605	)	$	(15,910	)


Net loss per share:
Basic	$	(0.04	)	$	(0.36	)	$	(0.41	)	$	(0.56	)
Diluted	$	(0.04	)	$	(0.36	)	$	(0.41	)	$	(0.56	)

Weighted average shares outstanding:
Basic		28,420			28,352			28,418			28,348
Diluted		28,420			28,352			28,418			28,348
Cash distribution paid per common share	$	10.00					$	10.00

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

Sycamore Networks, Inc.

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)


	Six Months Ended
	January 23, 2010			January 24, 2009
Cash flows from operating activities:
Net loss	$	(11,605	)	$	(15,910	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		3,733			6,132
Share-based compensation		1,676			2,403
Asset impairment		1,076			—
Loss on disposal of equipment		22			—
Adjustments to provision for excess and obsolete inventory		(96	)		1,066
Changes in operating assets and liabilities:
Accounts receivable		(3,856	)		(2,675	)
Inventories		2,391			279
Prepaids and other current assets		(1,350	)		(531	)
Deferred revenue		1,337			3,550
Accounts payable		404			248
Accrued expenses and other current liabilities		(1,238	)		(642	)
Accrued restructuring costs		(1,931	)		97

Net cash used in operating activities		(9,437	)		(5,983	)


Cash flows from investing activities:
Purchases of property and equipment		(194	)		(3,894	)
Purchases of investments		(247,112	)		(493,256	)
Proceeds from maturities and sales of investments		257,987			350,453

Net cash provided by (used in) investing activities		10,681			(146,697	)


Cash flows from financing activities:
Payment of cash distribution to common stockholders		(284,320	)		—
Proceeds from issuance of common stock		233			11

Net cash provided by (used in) financing activities		(284,087	)		11

Net decrease in cash and cash equivalents		(282,843	)		(152,669	)
Cash and cash equivalents, beginning of period		347,696			499,922

Cash and cash equivalents, end of period	$	64,853		$	347,253

Cash paid for income taxes	$	89		$	91

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

Sycamore Networks, Inc.

Notes To Consolidated Financial Statements

1. Description of Business

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 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 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 January 23, 2010 and for the three months and six months ended January 23, 2010 and January 24, 2009 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, 2009.

In the opinion of management, the accompanying financial statements include all adjustments necessary to present a fair statement of financial position as of January 23, 2010 and results of operations and cash flows for the periods ended January 23, 2010 and January 24, 2009. The results of operations and cash flows for the periods ended January 23, 2010 are not necessarily indicative of the operating results and cash flows for the full fiscal year or any future periods.

On December 15, 2009, the Company made a cash distribution to its stockholders of $1.00 per share of its common stock, par value $0.001, amounting to $284.3 million in the aggregate (or $10.00 per share of common stock after giving effect to the following reverse stock split) and, at the close of business on December 21, 2009, the Company effected a 1-for-10 reverse stock split of its common stock whereby every ten shares of its issued and outstanding common stock at the effective time were combined into one share of common stock. All periods presented in this report have been adjusted to give effect to the reverse stock split. As a result of having an accumulated deficit, the cash distribution has been recorded as a reduction to additional paid in capital.

In connection with the reverse stock split, the number of shares of common stock authorized under Company’s Amended and Restated Certificate of Incorporation was reduced from 2.5 billion to 250 million shares, without any change in par value per share of common stock. The number of shares of the Company’s authorized preferred stock was not changed in connection with the reverse stock split and remains at 5 million shares.

Sycamore Networks, Inc.

Notes To Consolidated Financial Statements—(Continued)

To give effect to the reverse stock split, the following July 31, 2009 balance sheet accounts have been adjusted:


	July 31, 2009
	As originally reported			As adjusted
Common stock	$	284		$	28
Additional paid-in capital		2,040,061			2,040,317
Accumulated deficit		(1,101,355	)		(1,101,355	)
Accumulated other comprehensive income		1,435			1,435

Total stockholders’ equity	$	940,425		$	940,425

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.

Sycamore Networks, Inc.

Notes To Consolidated Financial Statements—(Continued)

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				Six Months Ended
	January 23, 2010		January 24, 2009		January 23, 2010		January 24, 2009
Cost of product revenue	$	62	$	71	$	120	$	164
Cost of service revenue		68		70		135		148
Research and development		265		503		589		1,008
Sales and marketing		242		295		454		651
General and administrative		209		256		378		432

Share-based compensation expense	$	846	$	1,195	$	1,676	$	2,403

Stock option activity under all of the Company’s stock plans since July 31, 2009 is summarized as follows:


	Number of Shares		Weighted Average Exercise Price		Weighted Average Contractual Term (Years)
Outstanding at July 31, 2009		2,765,243	$	42.34	4.0

Options granted		30,282		20.38
Options exercised		22,523		22.34
Options canceled		575,596		74.33

Outstanding at January 23, 2010		2,197,406	$	33.86	4.5

Options vested and expected to vest		2,175,714	$	33.97	4.5

Options exercisable at end of period		1,822,945	$	35.76	3.8

Weighted average fair value of options granted for the six months ended January 23, 2010	$	13.45

The intrinsic value of options exercised during the six months ended January 23, 2010 was $0.2 million.

In accordance with the provisions of the Company’s stock plans, an equitable adjustment was made to all outstanding option awards to give effect to the December 15, 2009 cash distribution to its common stockholders. Accordingly, no stock compensation charge was recorded in connection with the adjustment. On December 21, 2009, the Company effected a 1-for-10 reverse stock split of its common stock whereby every ten shares of its issued and outstanding common stock at the effective time were combined into one share of common stock. The stock option table has been adjusted to reflect both the equitable adjustment and the 1-for10 reverse stock split.

As of January 23, 2010, there was $4.1 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 2.3 years.

Sycamore Networks, Inc.

Notes To Consolidated Financial Statements—(Continued)

Restricted Stock

The following table summarizes the status of the Company’s nonvested restricted shares since July 31, 2009:


	Number of Shares	Weighted Average Fair Value
Nonvested at July 31, 2009	25,544	$	37.10
Granted	—		—
Vested	8,101		37.05
Forfeited	5,752		37.00

Nonvested at January 23, 2010	11,691	$	37.19

The restricted stock table has been adjusted to reflect the 1-for-10 reverse stock split.

Sycamore Networks, Inc.

Notes To Consolidated Financial Statements—(Continued)

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 since the effect would be antidilutive.

The following table sets forth the computation of basic and diluted net loss per share

(in thousands, except per share data):


	Three Months Ended						Six Months Ended
	January 23, 2010			January 24, 2009			January 23, 2010			January 24, 2009
Numerator:
Net loss	$	(1,213	)	$	(10,131	)	$	(11,605	)	$	(15,910	)

Denominator:
Weighted-average shares of common stock outstanding		28,432			28,388			28,432			28,387
Weighted-average shares subject to repurchase		(12	)		(36	)		(14	)		(39	)

Shares used in per-share calculation – basic		28,420			28,352			28,418			28,348

Weighted-average shares of common stock outstanding		28,420			28,352			28,418			28,348
Weighted common stock equivalents		—			—			—			—

Shares used in per-share calculation – diluted		28,420			28,352			28,418			28,348

Net loss per share:
Basic	$	(0.04	)	$	(0.36	)	$	(0.41	)	$	(0.56	)

Diluted	$	(0.04	)	$	(0.36	)	$	(0.41	)	$	(0.56	)

All periods presented have been adjusted for the 1-for-10 reverse stock split.

Employee stock options to purchase 2.3 million and 2.5 million shares have not been included in the computation of diluted net loss per share for the three month and six month periods ended January 23, 2010, respectively, because their effect would have been antidilutive. Employee stock options to purchase 2.2 million and 2.2 million shares have not been included in the computation of diluted net loss per share for the three and six month periods ended January 24, 2009, respectively, because their effect would have been antidilutive.

Sycamore Networks, Inc.

Notes To Consolidated Financial Statements—(Continued)

5. Cash Equivalents and Investments

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. The Company’s short and long term investments, $378.5 million and $189.3 million, respectively, are 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 January 23, 2010 and July 31, 2009, aggregate cash and cash equivalents and short and long term investments consisted of (in thousands):

January 23, 2010:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Market Value
Cash and cash equivalents	$	64,853	$	—	$	—		$	64,853
Government securities		566,479		1,351		(3	)		567,827

Total	$	631,332	$	1,351	$	(3	)	$	632,680

July 31, 2009:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Market Value
Cash and cash equivalents	$	347,696	$	—	$	—		$	347,696
Government securities		577,398		1,767		(53	)		579,112

Total	$	925,094	$	1,767	$	(53	)	$	926,808

A cash distribution in the amount of $284.3 million was paid to common stockholders on December 15, 2009, which reduced the Company’s available cash and cash equivalents.

6. Inventories

Inventories consisted of the following (in thousands):


	January 23, 2010		July 31, 2009
Raw materials	$	6,152	$	6,755
Work in process		856		500
Finished goods		6,612		8,803

Total	$	13,620	$	16,058

Sycamore Networks, Inc.

Notes To Consolidated Financial Statements—(Continued)

7. Comprehensive Loss

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


	Three Months Ended						Six Months Ended
	January 23, 2010			January 24, 2009			January 23, 2010			January 24, 2009
Net loss	$	(1,213	)	$	(10,131	)	$	(11,605	)	$	(15,910	)
Unrealized gain (loss) on investments		(104	)		4,094			(410	)		3,642

Comprehensive loss	$	(1,317	)	$	(6,037	)	$	(12,015	)	$	(12,268	)

8. Restructuring and Impairment Charges

In conjunction with the workforce reduction and early lease termination plans initiated during the past year, certain additional actions were implemented in the first quarter of fiscal 2010. These actions were taken to further re-align our cost structure, pace our development more closely in line with customer requirements and to better position the Company for success in the longer-term. During the first quarter of fiscal 2010, the Company recorded a restructuring and related asset impairment charge of $6.4 million of which $6.3 million was charged to operating expense and $0.1 million to cost of product revenue. This charge related to (i) employee separation packages including severance pay, benefits continuation and outplacement costs amounting to $3.4 million, of which $3.3 million was charged to operating expense and $0.1 million to cost of product revenue, (ii) a facility related termination agreement of $1.9 million, and (iii) a related asset impairment charge of $1.1 million. During the second quarter of fiscal 2010, the Company recorded an adjustment of $0.1 million for unused outplacement services.

We continuously monitor our costs. If current market and economic conditions persist, it would increase the likelihood of incurring future restructuring and/or impairment charges.

As of January 23, 2010, remaining future cash payments associated with these actions approximated $0.6 million and consist primarily of employee separation packages to be paid over the next nine months. A rollforward of the restructuring accrual is summarized below (in thousands):


	Accrual Balance at July 31, 2009		Additions		Adjustments			Payments			Accrual Balance at January 23, 2010
Workforce reduction	$	1,847	$	3,427	$	(101	)	$	(4,595	)	$	578

Facility consolidations		662		1,879		—			(2,541	)		—

Total	$	2,509	$	5,306	$	(101	)	$	(7,136	)	$	578

Sycamore Networks, Inc.

Notes To Consolidated Financial Statements—(Continued)

9. Income Taxes

As of July 31, 2009, the Company had a liability of $1.3 million for taxes, interest and penalties for unrecognized tax benefits related to various foreign income tax matters. As of January 23, 2010, the total liability amounted to approximately $1.5 million. If recognized, the entire amount would impact the Company’s effective tax rate. The Company does not expect that the amount of unrecognized tax benefits will change significantly within the next 12 months.

As of July 31, 2009 and January 23, 2010, the Company accrued $0.3 million of 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 the statute of limitations by the Internal Revenue Service, various foreign jurisdictions, and state jurisdictions for the fiscal years ended July 31, 2004 through July 31, 2009.

The income tax benefit was $0.7 million and $0.6 million for the three and six months ended January 23, 2010. The recognized tax benefit reflects the tax effect of the November 2009 enactment of the Home Ownership and Business Assistance Act of 2009. The new law provides for the utilization of 100% (previously 90%) of certain net operating loss carrybacks against alternative minimum taxable income and results in an aggregate refund of alternative minimum tax paid of $0.8 million for fiscal 2006 and fiscal 2007.

As a result of having realized substantial accumulated net operating losses, the Company determined that it is more likely than not that our deferred tax assets may 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.

Sycamore Networks, Inc.

Notes To Consolidated Financial Statements—(Continued)

10. Recent Accounting Pronouncements

In December 2007, the FASB issued a new pronouncement on business combinations. This pronouncement replaces the old business combination pronouncement and provides greater consistency in the accounting and financial reporting of business combinations. The pronouncement requires the acquiring entity in a business combination to recognize all assets acquired and liabilities assumed in the transaction at fair value, establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed, establishes principles and requirements for how an acquirer recognizes and measures any non-controlling interest in the acquiree and the goodwill acquired, and requires the acquirer to disclose the nature and financial effect of the business combination. Among other changes, this statement also requires that "negative goodwill" be recognized in earnings as a gain attributable to the acquisition without first reducing other acquired assets, that acquisition-related costs are to be recognized separately from the acquisition and expensed as incurred and that any deferred tax benefits resulting from a business combination are to be recognized in income from continuing operations in the period of the combination. This pronouncement is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008 and as a result, the Company adopted the pronouncement in the first quarter of fiscal 2010 and it did not have a material impact on its consolidated financial statements.

In April 2009, the FASB issued new guidance on accounting for assets acquired and liabilities assumed in a business combination that arise from contingencies. This new guidance amends the prior guidance for the initial recognition and measurement, subsequent measurement and accounting, and disclosures for assets and liabilities arising from contingencies in business combinations. The new guidance eliminates the distinction between contractual and non-contractual contingencies. The new guidance is effective for contingent assets and contingent liabilities acquired in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008 and as a result, the Company adopted the new guidance in the first quarter of fiscal 2010 and it did not have a material impact on its consolidated financial statements.

In February 2008, the FASB issued new guidance that delays fair value accounting for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on at least an annual basis until 2009. The Company adopted fair value accounting beginning August 1, 2008 and deferred the application of fair value accounting for nonfinancial assets and liabilities until August 1, 2009. The Company adopted fair value accounting for nonfinancial assets and liabilities in the first quarter of fiscal 2010 and it did not have a material impact on its consolidated financial statements.

In June 2009, the FASB issued guidance on the FASB Accounting Standards Codification and the hierarchy of generally accepted accounting principles. The FASB Accounting Standards Codification, or the Codification, is the single source of authoritative nongovernmental generally accepted accounting principles in the U.S. (GAAP). The Codification was effective for interim and annual periods ending after September 15, 2009. The adoption of the Codification had no impact on the Company’s financial position or results of operations.

In September 2009, the Emerging Issues Task Force issued new guidance pertaining to the accounting for revenue arrangements with multiple deliverables. The new guidance addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting, and how the arrangement consideration should be allocated among the separate units of accounting. The new guidance is effective for fiscal years beginning after June 15, 2010 and may be applied retrospectively or prospectively for new or materially modified arrangements. In addition, early adoption is permitted. The Company is currently evaluating the potential impact of the new guidance on its consolidated financial statements.

In September 2009, the Emerging Issues Task Force issued new guidance that changes the accounting model for revenue arrangements that include both tangible products and software elements that are “essential to the functionality” and removes these products from the scope of current software revenue guidance. The new guidance shall be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Earlier application is permitted as of the beginning of a company’s fiscal year provided the company has not previously issued financial statements for any period within that year. An entity shall not elect early application of this guidance unless it also elects early application of the new rule pertaining to accounting for revenue arrangements with multiple deliverables. The Company is currently evaluating the potential impact of the new guidance on its consolidated financial statements.

Sycamore Networks, Inc.

Notes To Consolidated Financial Statements—(Continued)

11. Commitments and Contingencies

Litigation

IPO Allocation Case

Beginning on July 2, 2001, several purported class action complaints were filed in the United States District Court for the Southern District of New York against the Company and several of its officers and directors (the “Individual Defendants”) and the underwriters for the Company’s initial public offering on October 21, 1999. Some of the complaints also include the underwriters for the Company’s follow-on offering on March 14, 2000. An amended complaint, which is the operative complaint, was filed on April 19, 2002 on behalf of persons who purchased the Company’s common stock between October 21, 1999 and December 6, 2000. The amended complaint alleges claims against the Company, several of the Individual Defendants and the underwriters for violations under Sections 11 and 15 of the Securities Act of 1933, as amended (the “Securities Act”), primarily based on the assertion that the Company’s lead underwriters, the Company and several of the Individual Defendants made material false and misleading statements in the Company’s Registration Statements and Prospectuses filed with the Securities and Exchange Commission, or the SEC, in October 1999 and March 2000 because of the failure to disclose (a) the alleged solicitation and receipt of excessive and undisclosed commissions by the underwriters in connection with the allocation of shares of common stock to certain investors in the Company’s public offerings and (b) that certain of the underwriters allegedly had entered into agreements with investors whereby underwriters agreed to allocate the public offering shares in exchange for which the investors agreed to make additional purchases of stock in the aftermarket at pre-determined prices. It also alleges claims against the Company, the Individual Defendants and the underwriters under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), primarily based on the assertion that the Company’s lead underwriters, the Company and the Individual Defendants defrauded investors by participating in a fraudulent scheme and by making materially false and misleading statements and omissions of material fact during the period in question. The amended complaint seeks damages in an unspecified amount.

The action against the Company is being coordinated with approximately three hundred other nearly identical actions filed against other companies. Due to the large number of nearly identical actions, the court has ordered the parties to select up to twenty “test” cases. The Company’s case has been selected as one such test case. As a result, among other things, the Company will be subject to broader discovery obligations and expenses in the litigation than non-test case issuer defendants.

On October 9, 2002, the court dismissed the Individual Defendants from the case without prejudice. This dismissal disposed of the Section 15 and Section 20(a) claims without prejudice, because these claims were asserted only against the Individual Defendants. On October 13, 2004, the court denied the certification of a class in the action against the Company with respect to the Section 11 claims alleging that the defendants made material false and misleading statements in the Company’s Registration Statement and Prospectuses. The certification was denied because no class representative purchased shares between the date of the IPO and January 19, 2000 (the date unregistered shares entered the market), and thereafter suffered a loss on the sale of those shares. The court certified a class in the action against the Company with respect to the Section 10(b) claims alleging that the Company and the Individual Defendants defrauded investors by participating in a fraudulent scheme and by making materially false and misleading statements and omissions of material fact during the period in question. On December 5, 2006, the Second Circuit vacated the district court’s class certification decision. On April 6, 2007, the Second Circuit panel denied a petition for rehearing filed by the plaintiffs, but noted that the plaintiffs could ask the district court to certify a more narrow class than the one that was rejected.

On August 14, 2007, the plaintiffs filed a Second Amended Class Action complaint against the Company. The Company and the underwriters filed separate motions to dismiss the amended complaint on November 14, 2007. On March 26, 2008, the Court denied the motion to dismiss the Section 10(b) claims but dismissed certain Section 11 claims against the Company. On June 5, 2008, the Court dismissed the remaining Section 11 claims against the Company in response to a motion for partial reconsideration.

The parties in the approximately 300 coordinated cases, including the Company’s case, reached a settlement. The insurers for the issuer defendants in the coordinated cases will make the settlement payment on behalf of the issuers, including the Company. On October 5, 2009, the Court granted final approval of the settlement. The thirty day deadline to appeal the final approval order will start to run when the judgment is entered. The judgment has not yet been entered. A group of three objectors has filed a petition to the Second Circuit seeking permission to appeal the District Court’s final approval order on the basis that the settlement class is broader than the class previously

Sycamore Networks, Inc.

Notes To Consolidated Financial Statements—(Continued)

rejected by the Second Circuit in its December 5, 2006 order vacating the District Court’s order certifying classes in the focus cases. Plaintiffs have filed an opposition to the petition. Six notices of appeal to the Second Circuit have also been filed by different groups of objectors. A briefing schedule has not yet been established.

Due to the inherent uncertainties of litigation, the Company cannot accurately predict the ultimate outcome of the matter. If the settlement does not survive appeal, the litigation continues, and the Company is found liable, the Company is unable to estimate or predict the potential damages that might be awarded, whether such damages would be greater than the Company’s insurance coverage, and whether such damages would have a material impact on our results of operations or financial condition in any future period.

Derivative Lawsuits

In October 2007, a purported Sycamore Networks, Inc. shareholder 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., in 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. Briefing before the Ninth Circuit was complete as of November 17, 2009. Oral argument has not yet been scheduled. The Company is named as a nominal defendant. No recovery is sought from the Company in this matter.

Other Matters

On June 29, 2006, a former employee of the Company filed a complaint against the Company and the Company’s Chief Executive Officer in Massachusetts Superior Court alleging, among other things, claims relating to wrongful termination of an employment agreement, fraud in the inducement, retaliation and claims relating to certain of the Company’s stock option grant practices in 1999-2001. The complaint demanded lost wages, unspecified monetary damages and reinstatement of medical benefits, among other things. The case was moved to the Business Litigation Session of the Suffolk County Superior Court and, following an oral hearing on a motion to dismiss, the case was ordered dismissed on January 24, 2007. The plaintiff filed a Notice of Appeal of the order and judgment and oral argument was held on October 14, 2009. On December 22, 2009, the Appeals Court affirmed dismissal of the case, ruling in favor of the Company on every claim. On January 22, 2010, the plaintiff filed an application for further appellate review with the Supreme Judicial Court, which the Company has opposed. Plaintiff’s application for further appellate review remains pending.

From time to time the Company is a party to litigation and other disputes which it considers routine and incidental to its business. 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 January 23, 2010, 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 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 January 23, 2010 or July 31, 2009.

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 has directors and officers’ insurance coverage that reduces its exposure and may enable the Company to recover a portion of any future amounts paid. The Company has previously incurred expenses under these agreements on behalf of eligible persons for legal fees incurred by them in connection with the stock option investigations, the

Sycamore Networks, Inc.

Notes To Consolidated Financial Statements—(Continued)

resulting restatement of previously issued financial statements and the subsequent inquiry by the SEC and DOJ of information and documentation related thereto as previously disclosed in the Company’s periodic reports to the SEC on Form 10-K and Form 10-Q. Due to the Company’s inability to estimate its liabilities in connection with these agreements, the Company has not recorded a liability for these agreements at January 23, 2010 or July 31, 2009. The Company maintains insurance policies whereby certain payments may be recoverable, including indemnification payments made on behalf of certain officers and directors, subject to the terms and conditions provided in such policies. The Company received insurance recoveries of $0.2 million and $3.2 million for the first six months of fiscal 2010 and fiscal 2009, respectively.

Warranty Liability

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


	Three Months Ended						Six Months Ended
	January 23, 2010			January 24, 2009			January 23, 2010			January 24, 2009
Beginning balance	$	2,661		$	3,837		$	2,866		$	3,829
Accruals /adjustments		(133	)		(57	)		(277	)		64
Settlements		(3	)		(161	)		(64	)		(274	)

Ending balance	$	2,525		$	3,619		$	2,525		$	3,619

Sycamore Networks, Inc.

Notes To Consolidated Financial Statements—(Continued)

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 January 23, 2010, are summarized as follows (in thousands):


			Fair Value Measurements at Reporting Date Using
Description	January 23, 2010		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Cash Equivalents	$	64,853	$	64,853	$	—	$	—
Available-for-sale securities		567,827		567,827		—		—

Total Assets	$	632,680	$	632,680	$	—	$	—

Cash Equivalents

Cash equivalents of $64.9 million consisting of money market funds and federal government and government agency obligations are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets.

Available-For-Sale Securities

Available-for-sale securities of $567.8 million consisting of federal government and government agency obligations are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets.

13. Subsequent Events

The Company evaluated its events and transactions subsequent to its January 23, 2010 balance sheet date and determined that there were no significant subsequent events to report through February 25, 2010, which is the date the Company issued its financial statements.

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, 2009. 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 Securities and Exchange Commission (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 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

Revenue for the three months ended January 23, 2010 increased 38% to $16.2 million year over year. Net loss was $1.2 million for the three months ended January 23, 2010, compared to net loss of $10.1 million for the same period ended January 24, 2009.

We operate in a challenging market environment subject to concentration of purchasing power with a small number of customers, extreme pricing pressure, and competitive leverage for incumbent equipment suppliers. In addition, the service provider markets we serve continue to be impacted by reduced or delayed capital spending on networking projects.

Our total cash, cash equivalents and investments were $632.7 million at January 23, 2010. Included in this amount were cash and cash equivalents of $64.9 million. We intend to fund our operations for the foreseeable future, including fixed commitments under operating leases and any required capital expenditures, using our existing cash, cash equivalents and investments. We believe that current balances will be sufficient to satisfy our operating requirements and enable us to pursue strategic alternatives.

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, 2009 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 six months of fiscal 2010.

Results of Operations

Revenue

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


	Three Months Ended									Six Months Ended
	January 23, 2010		January 24, 2009		Variance in Dollars			Variance in Percent		January 23, 2010		January 24, 2009		Variance in Dollars			Variance in Percent
Revenue
Product	$	10,316	$	5,622	$	4,694		83	%	$	20,368	$	15,644	$	4,724		30	%
Service		5,858		6,076		(218	)	(4	)%		11,430		11,485		(55	)	—	%

Total revenue	$	16,174	$	11,698	$	4,476		38	%	$	31,798	$	27,129	$	4,669		17	%

Total revenue increased for the three and six months ended January 23, 2010 compared to the comparable periods ended January 24, 2009. Product revenue consists primarily of sales of our intelligent bandwidth management solutions. Product revenue increased for the three and six months ended January 23, 2010 compared to the same periods ended January 24, 2009, primarily due to increased spending from a domestic customer during the current fiscal year three month period. Service revenue consists primarily of fees for services relating to the maintenance of our products, installation services and training. Service revenue decreased for the three and six months ended January 23, 2010 compared to the same periods ended January 24, 2009. The decrease was primarily due to decreased installation services and training, slightly offset by increased maintenance revenue.

For the three months ended January 23, 2010, two customers accounted for more than 10% of our total revenue. International revenue represented 30% of our total revenue. We expect future revenue will 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 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						Six Months Ended
	January 23, 2010			January 24, 2009			January 23, 2010			January 24, 2009
Gross profit:
Product	$	5,699		$	(187	)	$	10,342		$	2,952
Service		3,596			3,381			6,730			6,315

Total	$	9,295		$	3,194		$	17,072		$	9,267

Gross profit:
Product		55	%		(3	)%		51	%		19	%
Service		61	%		56	%		59	%		55	%

Total		58	%		27	%		54	%		34	%

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 which may be taken for excess or slow moving inventory. Product gross profit increased for the three and six months ended January 23, 2010 compared to the same periods ended January 24, 2009. The increase in gross profit was primarily due to lower operations costs resulting from the cost reduction actions initiated during the past year, significantly lower provisions for inventory obsolescence and warranty, and higher margins on increased revenue combined with a more favorable mix of products sold. 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 increased for the three and six months ended January 23, 2010 compared to the same periods ended January 24, 2009. The increase in service gross profit was primarily due to a decrease in our fixed service costs, partially offset by lower service revenue. 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										Six Months Ended
	January 23, 2010			January 24, 2009		Variance in Dollars			Variance in Percent		January 23, 2010		January 24, 2009		Variance in Dollars			Variance in Percent
Research and development	$	7,761		$	12,912	$	(5,151	)	(40	)%	$	16,433	$	24,367	$	(7,934	)	(33	)%
Sales and marketing		2,759			3,644		(885	)	(24	)%		5,344		7,718		(2,374	)	(31	)%
General and administrative		2,444			1,518		926		61	%		4,752		3,253		1,499		46	%
Restructuring and asset impairment		(88	)		189		(277	)	(147	)%		6,216		817		5,399		661	%

Total operating expenses	$	12,876		$	18,263	$	(5,387	)	(29	)%	$	32,745	$	36,155	$	(3,410	)	(9	)%

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 decreased for the three and six months ended January 23, 2010 compared to the same periods ended January 24, 2009. The decrease was primarily due to lower personnel expenses of $3.9 million and $6.2 million for the three and six months ended January 23, 2010 resulting from the cost reduction actions initiated over the past year. The decrease was also due to reductions in certain fixed and allocated costs resulting from cost containment actions.

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 six months ended January 23, 2010 compared to the same periods ended January 24, 2009. The decrease was primarily due to lower personnel expenses of $0.6 million and $1.7 million for the three and six months ended January 23, 2010 resulting from the cost reduction actions and reductions in other discretionary spending initiated over the past year. 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 costs are net of insurance recoveries associated with the Company’s now concluded stock option investigation. The increase in general and administrative expenses for the three and six months ended January 23, 2010 compared to the same periods ended January 24, 2009 was primarily due to a larger insurance recovery of $1.7 million and $3.2 million recognized in the prior year periods compared to no insurance recovery and $0.2 million in the three and six months ended January 23, 2010. The increase in expenses due to the impact of the insurance recoveries was partially offset by a decrease in personnel expenses of $0.3 million and $0.6 million in the three and six months ended January 23, 2010 resulting from the cost reductions initiated over the past year and a decrease in the amortization of intangible assets of $0.3 million and $0.6 million for the three and six month periods due to the full write-off of such assets in the fourth quarter of fiscal 2009.

Restructuring and Impairment Charges

In conjunction with the workforce reduction and early lease termination plans initiated during the past year, certain additional actions were implemented in the first quarter of fiscal 2010. These actions were taken to further re-align our cost structure, pace our development more closely in line with customer requirements and to better position the Company for success in the longer-term. During the first quarter of fiscal 2010, the Company recorded a restructuring and related asset impairment charge of $6.4 million of which $6.3 million was charged to operating expense and $0.1 million to cost of product revenue. This charge relates to (i) employee separation packages including severance pay, benefits continuation and outplacement costs amounting to $3.4 million, of which $3.3 million was charged to operating expense and $0.1 million to cost of product revenue, (ii) a facility related termination agreement of $1.9 million, and (iii) a related asset impairment charge of $1.1 million. During the second quarter of fiscal 2010, the Company recorded an adjustment of $0.1 million for unused outplacement services.

We continuously monitor our costs. If current market and economic conditions persist, it could increase the likelihood of incurring future restructuring and/or impairment charges.

Interest and Other Income, Net

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


	Three Months Ended									Six Months Ended
	January 23, 2010		January 24, 2009		Variance in Dollars			Variance In Percent		January 23, 2010		January 24, 2009		Variance in Dollars			Variance In Percent
Interest and other income, net	$	1,641	$	5,026	$	(3,385	)	(67	)%	$	3,461	$	11,020	$	(7,559	)	(69	)%

Interest and other income net decreased for the three and six months ended January 23, 2010 compared to the same periods ended January 24, 2009. The decrease was primarily due to lower interest rates in fiscal 2010 when compared to fiscal 2009 and a lower average investment balance as a result of the cash distribution that was paid on December 15, 2009.

Income Tax Expense/Benefit

The income tax benefit was $0.7 million and $0.6 million for the three and six months ended January 23, 2010, respectively. The recognized tax benefit reflects the tax effect of the November 2009 enactment of the Home Ownership and Business Assistance Act of 2009. The new law provides for the utilization of 100% (previously 90%) of certain net operating loss carrybacks against alternative minimum taxable income and results in an aggregate refund of alternative minimum tax paid of $0.8 million for fiscal 2006 and fiscal 2007. Income tax expense of $88 thousand and $42 thousand was recorded for the three and six months ended January 24, 2009, primarily related to income tax expense in certain states and profitable foreign jurisdictions.

Liquidity and Capital Resources

Total cash, cash equivalents and investments were $632.7 million at January 23, 2010. Included in this amount were cash and cash equivalents of $64.9 million compared to $347.7 million at July 31, 2009. The decrease in cash and cash equivalents was primarily attributable to the cash distribution paid on December 15, 2009.

Net cash provided by investing activities was $10.7 million for the six months ended January 23, 2010 and consisted primarily of net proceeds of investments of $10.9 million partially offset by purchases of property and equipment of $0.2 million.

Net cash used in operating activities was $9.4 million for the six months ended January 23, 2010. Net loss for the six months ended January 23, 2010 was $11.6 million and included non-cash charges including share-based compensation of $1.7 million, an impairment charge of $1.1 million, and depreciation and amortization of $3.7 million. Accounts receivable increased to $16.7 million at January 23, 2010 from $12.9 million at July 31, 2009. The increase was primarily due to the timing of shipments and timing of support 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. Inventory levels decreased to $13.6 million at January 23, 2010 from $16.1 million at July 31, 2009. The decrease was primarily due to the sale of existing on-hand inventory. Deferred revenue increased to $16.9 million at January 23, 2010 from $15.5 million at July 31, 2009 due to the timing of service contract renewals and the revenue recognition of prior quarter product shipments.

Our primary source of liquidity comes from our cash, cash equivalents and investments, which totaled $632.7 million at January 23, 2010. Our investments are classified as available-for-sale and consist of securities that are readily convertible to cash, including certificates of deposits and government securities. At January 23, 2010, $378.5 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, cash equivalents and investments may be consumed by operations. Our accounts receivable, while not considered the 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. At January 23, 2010, more than 50% of our accounts receivable balance was attributable to three of our customers. As of January 23, 2010, we have no 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. We currently intend to fund our operations, including our fixed operating leases, purchase commitments and any required capital expenditures using our existing cash, cash equivalents and investments.

As of January 23, 2010, future cash restructuring payments of $0.6 million consist primarily of costs related to workforce reductions that will be substantially paid over the next nine months.

Net cash used in financing activities was $284.1 million. On December 15, 2009, the Company made a cash distribution to its stockholders of $1.00 per share of its common stock, par value $0.001, amounting to $284.3 million in the aggregate (or $10.00 per share of common stock after giving effect to the following reverse stock split) and, at the close of business on December 21, 2009, the Company effected a 1-for-10 reverse stock split of its common stock whereby every ten shares of its issued and outstanding common stock at the effective time were combined into one share of common stock. All periods presented in this report have been adjusted to give effect to the reverse stock split. As a result of having an accumulated deficit, the cash distribution has been recorded as a reduction to additional paid in capital.

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. We will continue to consider appropriate action with respect to our cash position in light of present and anticipated business needs as well as providing a means by which our stockholders may realize value in connection with their investment.

Commitments, Contractual Obligations and Off-Balance Sheet Arrangements

At January 23, 2010, 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		Other
Operating leases	$	4,443	$	2,097	$	2,346	$	—	$	—	$	—
Inventory and other purchase commitments		7,098		7,098		—		—		—		—
Other tax liabilities (1)		1,465		—		—		—		—		1,465

Total	$	13,006	$	9,195	$	2,346	$	—	$	—	$	1,465

(1)	Represents tax liabilities related to unrecognized tax benefits.

Payments made under operating leases will be treated as rent expense for the facilities currently being utilized. Payments made for inventory purchase commitments will initially be capitalized as inventory and will then be recorded as cost of revenue as the inventory is sold or otherwise disposed of.

Recent Accounting Pronouncements

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 January 23, 2010, the fair value of the portfolio would decline by approximately $0.3 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 35% of total revenue in fiscal 2009 and 39% of revenue in the first six months of fiscal 2010. 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 cost 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.

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 January 23, 2010. 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 second fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II. Other Information

Item 1.

Legal Proceedings

Litigation

IPO Allocation Case

been entered. A group of three objectors has filed a petition to the Second Circuit seeking permission to appeal the District Court’s final approval order on the basis that the settlement class is broader than the class previously rejected by the Second Circuit in its December 5, 2006 order vacating the District Court’s order certifying classes in the focus cases. Plaintiffs have filed an opposition to the petition. Six notices of appeal to the Second Circuit have also been filed by different groups of objectors. A briefing schedule has not yet been established.

Derivative Lawsuits

Other Matters

From time to time the Company is a party to litigation and other disputes which we consider routine and incidental to our business. Management does not expect the results of any of these actions to have a material adverse effect on our business, results of operations or financial condition.

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, 2009, as filed with the SEC on September 29, 2009. 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

In the three months ended January 23, 2010, the following shares of common stock were surrendered to the Company:


	Total shares surrendered *	Average price paid per share
October 25, 2009 – November 21, 2009	167	$	—
November 22, 2009 – December 19, 2009	167		—
December 20, 2009 – January 23, 2010	—		—

Total	334	$	—

*	Surrendered by departing employees to the Company for no consideration pursuant to pre-existing contractual rights.

The Company has not publicly announced any programs to repurchase shares of Common Stock.

Item 4.

Submission of Matters to a Vote of Security Holders

At our Annual Meeting of Stockholders (the “Annual Meeting”) held on January 5, 2010, the Company’s stockholders elected each of the following nominees to serve for a three-year term as a Class I Director and until his respective successor is elected and qualified:


Nominees	For	Withheld	Non-votes
Robert E. Donahue	24,809,739	313,067	2,618,695
John W. Gerdelman	24,366,003	756,803	2,618,695

Daniel E. Smith, Craig R. Benson and Gururaj Deshpande also continued to serve as directors of the Company after the Annual Meeting.

At the Annual Meeting, the Company’s stockholders also ratified the appointment of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for the fiscal year ending July 31, 2010 by the following vote:


For	Against	Abstention	Non-votes
26,444,657	440,618	856,228	0

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 and 3.4, for provisions of the Certificate of Incorporation and By-Laws of the Registrant defining the rights of holders of common stock of the Company (2)(3)(4)

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

(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.

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: February 25, 2010

EX-31.1 2 dex311.htm CERTIFICATION OF CEO PURSUANT TO SECTION 302 Certification of CEO Pursuant to Section 302

EXHIBIT 31.1 – CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Daniel E. Smith, certify that:

1)	I have reviewed this Quarterly Report on Form 10-Q of Sycamore Networks, Inc.;

2)	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3)	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5)	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 25, 2010

/s/ Daniel E. Smith

Daniel E. Smith

President and Chief Executive Officer

EX-31.2 3 dex312.htm CERTIFICATION OF CFO PURSUANT TO SECTION 302 Certification of CFO Pursuant to Section 302

EXHIBIT 31.2 – CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Paul F. Brauneis, certify that:

1)	I have reviewed this Quarterly Report on Form 10-Q of Sycamore Networks, Inc.;

2)	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3)	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5)	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 25, 2010

/s/ Paul F. Brauneis

Paul F. Brauneis

Chief Financial Officer,

Vice President, Finance and Administration,

Treasurer

EX-32.1 4 dex321.htm CERTIFICATION OF CEO PURSUANT TO SECTION 906 Certification of CEO Pursuant to Section 906

EXHIBIT 32.1 – CERTIFICATION OF CHIEF EXECUTIVE OFFICER

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Sycamore Networks, Inc. (the “Company”) on Form 10-Q for the period ending January 23, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Daniel E. Smith, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company, as of, and for the periods presented in the Report.

/s/ Daniel E. Smith

Daniel E. Smith

President and Chief Executive Officer

February 25, 2010

EX-32.2 5 dex322.htm CERTIFICATION OF CFO PURSUANT TO SECTION 906 Certification of CFO Pursuant to Section 906

EXHIBIT 32.2 – CERTIFICATION OF CHIEF FINANCIAL OFFICER

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Sycamore Networks, Inc. (the “Company”) on Form 10-Q for the period ending January 23, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Paul F. Brauneis, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

/s/ Paul F. Brauneis

Paul F. Brauneis

Chief Financial Officer, Vice President,

Finance and Administration,

Treasurer

February 25, 2010

-----END PRIVACY-ENHANCED MESSAGE-----

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller Reporting Company