10. Commitments and Contingencies

Litigation

On April 22, 2013, the Company filed a complaint in the Complex Commercial Litigation Division of the Superior Court of the State of Delaware against Buyer, Marlin Executive Fund III, L.P. and Marlin Equity III, L.P. (collectively with Buyer, the “Marlin Parties”) in connection with the Asset Sale. The complaint asserted claims for breach of contract against the Marlin Parties and for declaratory judgment against Buyer for certain amounts due to the Company under the Asset Sale Agreement and certain agreements related thereto.

The complaint sought (1) judgment in favor of the Company in the amount of $894,598, together with interest accrued, with respect to reimbursement for the Company’s operation of Sycamore Networks (Shanghai) Co. Ltd. (“Sycamore Shanghai”) for the benefit of Buyer during the period from the Asset Sale until the receipt of regulatory approval for the transfer of Sycamore Shanghai to Buyer, (2) declaratory judgment that cash in the amount of $345,932 remaining in the accounts of subsidiaries of the Company transferred to Buyer in the Asset Sale are excluded assets under terms of the Asset Sale Agreement and, accordingly, belong to the Company and (3) declaratory judgment that Buyer’s assertion that a $1.1 million decrease in the calculation of net working capital is necessary was untimely because it was made after the expiration of the forty-five day time period set forth in the Asset Sale Agreement. The complaint alleged that, among other things, in communications between the Company and Buyer, Buyer had acknowledged that the $894,598 reimbursement in respect of Sycamore Shanghai was then due and owing to the Company, but, despite repeated requests, Buyer had refused to remit such amount to the Company.

On May 28, 2013, the Company and the Marlin Parties entered into an agreement pursuant to which Buyer paid the Company an aggregate amount of approximately $1.7 million, comprising (i) the undisputed amount with respect to reimbursement for the Company’s operation of its subsidiary in Sycamore Shanghai during the period between the closing of the Asset Sale and the transfer of Sycamore Shanghai to Buyer and (ii) the undisputed portion of the working capital adjustment. Following receipt of those undisputed amounts, the Company dismissed the pending lawsuit against the Marlin Parties without prejudice. The Company and the Marlin Parties have agreed to jointly select a Neutral Accountant (as defined in the Asset Sale Agreement) to determine in arbitration whether the cash that remained, immediately prior to closing of the Asset Sale, in the accounts of subsidiaries transferred to Buyer in the Asset Sale is ultimately for the account of the Company or Buyer and whether the value of inventory for purposes of the working capital adjustment should be as proposed by the Company or as proposed by Buyer, or some value in between. The Company has agreed to file a notice of dismissal with prejudice (or otherwise appropriately document dismissal with prejudice) with respect to the litigation as soon as the arbitration is completed, provided the Neutral Accountant has determined both aforementioned issues.

The Company intends to vigorously pursue all amounts owed to the Company by the Marlin Parties pursuant to the Asset Sale Agreement and related agreements.

Guarantees

As of April 27, 2013, the Company’s guarantees requiring disclosure consist of its warranty obligations, indemnification obligations as set forth in the Asset Sale Agreement, indemnification for intellectual property infringement claims and indemnification for officers and directors.

In connection with the closing of the Asset Sale and as set forth in the Asset Sale Agreement, the Company has agreed to indemnify Buyer and certain of its related parties for any damages arising out of any breach of any of our representations or warranties or failure to perform any of our covenants or agreements in the Asset Sale Agreement, our failure to fully or timely pay, satisfy or perform any retained liabilities or our failure to pay any taxes associated with the assets and subsidiaries being sold for periods prior to the closing date of the Asset Sale, including any capital gain or corporate income taxes resulting from the transfer of our China subsidiary. The Company’s aggregate indemnification liability for breaches of representations or warranties is limited to $2,812,500. The Company’s indemnification obligations for breaches of representations or warranties expire no later than twelve months following the closing date of the Asset Sale.

Prior to the Asset Sale and the Dissolution, in the normal course of business, the Company also agreed to indemnify other parties, including customers, lessors and parties to other transactions with the Company with respect to certain matters. The Company 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. Although the Company does not believe that there exists any basis for any such claims, 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 as of April 27, 2013 or July 31, 2012, 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 any 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 it 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 2013 or during fiscal year 2012. 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 as of April 27, 2013 or July 31, 2012.

Warranty Liability

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


	Two months ended March 23, 2013			Three months ended April 28, 2012			Eight months ended March 23, 2013			Nine months ended April 28, 2012
Beginning balance	$	1,075		$	1,125		$	1,072		$	1,140
Accruals/adjustments		(1,075	)		43			(993	)		164
Settlements		0			(85	)		(79	)		(221	)

Ending balance	$	0		$	1,083		$	0		$	1,083