Notes To Financial Statements (Unaudited)
1.
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Description of Business
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Prior to February 1, 2013, Sycamore Networks, Inc. (the Company or Sycamore) developed and marketed Intelligent
Bandwidth Management solutions for fixed line and mobile network operators worldwide and provided services associated with such products (the Intelligent Bandwidth Management Business), and, prior to November 1, 2012, the Company also
developed and marketed a mobile broadband optimization solution (the IQstream Business).
On October 23, 2012, the Company entered into an
Asset Purchase and Sale Agreement (the Asset Sale Agreement) with Sunrise Acquisition Corp. (now known as Coriant America Inc.), a portfolio company of Marlin Equity Partners (Buyer), pursuant to which Buyer agreed to acquire
substantially all of the assets (the Asset Sale) primarily related to the Intelligent Bandwidth Management Business, including inventory, fixed assets, accounts receivable, intellectual property rights (other than patents and patent
applications), contracts, certain real estate leases, the Companys subsidiaries in Shanghai, the Netherlands and Japan, and certain shared facilities and assets for $18.75 million in cash, subject to a working capital adjustment, and the
assumption by Buyer of certain liabilities. The Companys stockholders authorized the Asset Sale at a Special Meeting of Stockholders held on January 29, 2013 (the Special Meeting), and the Asset Sale was completed on January 31,
2013 (the transfer of the Companys equity interests in its Shanghai subsidiary, which was subject to the receipt of government approval, occurred on March 25, 2013). Upon the closing of the Asset Sale, Buyer acquired substantially all of the
Companys operating assets relating to the Intelligent Bandwidth Management Business, including the Companys accounts receivable, inventories and prepaid and other assets, and assumed most of the Companys remaining current
liabilities, including substantially all of the Companys deferred revenue and accrued warranty obligations. In conjunction with the approval of the Asset Sale Agreement, the Companys Board of Directors (the Board) also
approved the liquidation and dissolution of the Company (the Dissolution) pursuant to a Plan of Complete Liquidation and Dissolution (the Plan of Dissolution) following the completion of the Asset Sale. The Plan of
Dissolution was also approved by the stockholders at the Special Meeting and, following a review of the Companys strategic alternatives for all of the Companys assets and available options for providing value to the Companys
stockholders, the Company filed a certificate of dissolution with the Secretary of State of the State of Delaware (the Certificate of Dissolution) on March 7, 2013. For additional information regarding the Dissolution, please see the
Companys Definitive Proxy Statement on Schedule 14A filed with the SEC on December 28, 2012 and its Current Report on Form 8-K filed with the SEC on March 8, 2013.
In connection with the filing of the Certificate of Dissolution, on March 7, 2013, the Company closed its stock transfer books and discontinued recording
transfers of its common stock, $0.001 par value per share (the Common Stock). The Common Stock, and stock certificates evidencing shares of the Common Stock, are no longer assignable or transferable on the Companys books, other
than transfers by will, intestate succession or operation of law. The Company also submitted a request to The NASDAQ Stock Market (NASDAQ) to suspend trading of the Common Stock on The NASDAQ Global Select Market effective as of the
close of trading on March 7, 2013 and, on March 15, 2013, the Company filed a Form 25 with the SEC to delist its Common Stock, which became effective prior to the opening of trading on March 25, 2013. Since the suspension of trading of the Common
Stock on The NASDAQ Global Select Market, shares of our Common Stock held in street name with brokers have been trading in the over-the-counter market on the Pink Sheets, an electronic bulletin board established for unlisted securities.
As a result of the completion of the Asset Sale and the Companys previously announced halting of further development and marketing in connection with
the IQstream Business, the Company no longer has any operating assets or revenue. Since the filing of the Certificate of Dissolution, the Company has been operating in accordance with the Plan of Dissolution, which contemplates an orderly wind-down
of the Companys business, including the sale or monetization of the Companys remaining non-cash assets and the satisfaction or settlement of its liabilities and obligations, including contingent liabilities and claims. As of April 30,
2016, the Company had one remaining employee.
During fiscal year 2014, the Company completed the sale of its patent portfolios. On February 28, 2014, the
Company completed the sale of its portfolio of 40 patents and two patent applications related to the Intelligent Bandwidth Management Business (the IBM Patents) for $2.0 million to Dragon Intellectual Property, LLC. On May 22, 2014, the
Company completed the sale of its portfolio of three United States patents, six United States patent applications and certain foreign patents and patent applications related to the IQstream Business (the
5
IQstream Patents) for $0.3 million to Citrix Systems, Inc. Following the sale of the IQstream Patents, the Company has continued to pursue the sale of certain technology and equipment
relating to the IQstream Business; however, the Company does not expect to receive any additional material consideration for its remaining IQstream assets.
In accordance with the Purchase and Sale Agreement by and between the Company and Princeton Tyngsborough Commons, LLC (Tyngsborough Commons) dated
October 10, 2014, and amended on each of February 24, 2015, March 27, 2015, March 30, 2015, July 30, 2015, September 15, 2015, September 30, 2015 and October 9, 2015 (as amended, the Purchase Agreement), on December 4, 2015 the
Company completed the sale of approximately 102 acres of undeveloped land located in Tyngsborough, Massachusetts to Tyngsborough Commons for a total purchase price of $2.5 million. In accordance with the terms of the Purchase Agreement, all
representations and warranties which survived the closing expired on February 29, 2016.
The Company is continuing to pursue the liquidation to cash of
its remaining non-cash assets, which primarily consist of the Companys investment in Tejas Networks India Private Limited, a private company in India that provides optical transport solutions to telecommunications carriers (Tejas).
In July 2000, the Company made an investment of $2.2 million in Tejas, and it currently owns approximately 5% of the outstanding equity interests in Tejas. The Company is evaluating its available options with respect to its investment in Tejas. The
Company currently believes that while it may be possible to realize some value with respect to its investment in Tejas, any present sale of the Companys Tejas shares would be subject to a discount due to the currently illiquid market for the
Tejas shares, among other factors. As a result, and following consideration of potential options that might arise with respect to the Companys Tejas investment, the Board determined that additional time would be useful to further evaluate
whether any potential value that might be realizable from the Tejas investment would exceed the additional costs that would be anticipated to be incurred as a result of extending the Companys Dissolution period. Accordingly, on February 12,
2016, the Company filed a petition (the Petition) in the Delaware Court of Chancery (the Court of Chancery) requesting an extension in accordance with the General Corporation Law of the State of Delaware of up to an
additional two years of the Companys wind down period, or such shorter period as the Board deems necessary, to make a final determination with respect to the Companys Tejas investment, which was granted on February 25, 2016.
Although the Board believes that it may be possible to realize some value with respect to its investment in Tejas, such potential value is presently uncertain
and subject to substantial risks and uncertainties that are outside of Sycamores control, including risks and uncertainties that arise from or relate to certain agreements and obligations among the shareholders of Tejas. As a result, the Board
has determined that it cannot reasonably provide an estimate of the net realizable value of its Tejas investment at this time, and Sycamore has assigned no value to the Tejas shares for the purposes of its Statement of Net Assets. The Company cannot
provide any assurance as to when, if ever, the Company will be able to realize any value from its investment in Tejas, or that the amount realized will equal or exceed the amount expected to be incurred as a result of the extension of the
Dissolution period.
On April 29, 2016, the Company paid a liquidating cash distribution to stockholders of $0.29 per share of Common Stock, or $8.38
million in the aggregate. The Board declared this liquidating distribution after the Court of Chancery, on February 25, 2016, entered an order extending Sycamores corporate existence for an additional period of up to two years, ending on March
7, 2018, or such shorter period as the Board deems necessary, to make a final determination with respect to the Companys remaining non-cash assets. In accordance with that order, the Court of Chancery affirmed that approximately $3.54 million
is sufficient to be retained for anticipated wind down costs and expenses, of which any portion that is not required to cover such wind down costs and expenses may be distributed from time to time to the Companys stockholders in the discretion
of the Board in accordance with its fiduciary duties.
Following a final determination by the Board with respect to the remaining non-cash assets, the
Company would expect to make a final liquidating distribution and conclude the Dissolution period. In addition, subject to uncertainties inherent in the winding-down of the Companys business, the Company may make one or more additional
liquidating distributions prior to the conclusion of the Dissolution period after payment of, or provision for, outstanding claims in accordance with Delaware law. However, the Dissolution process and the payment of any distribution to
stockholders involve substantial risks and uncertainties. Accordingly, it is not possible to predict the timing of the completion of the Dissolution, the timing of any further distributions to stockholders or the aggregate amount of any such
distributions, and no assurance can be given that the distributions will equal or exceed the estimate of net assets presented in the Companys Statement of Net Assets. The Company will continue to analyze its estimates of liquidation expenses
on an ongoing basis, and determine whether further distributions of assets to its stockholders are appropriate at such times.
6
The accompanying financial data has been prepared by the Company, without audit, pursuant to the rules and regulations of the 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. The financial statements should be read in conjunction with the financial statements and the notes thereto included in the
Companys Annual Report on Form 10-K for the fiscal year ended July 31, 2015, as filed with the SEC on October 27, 2015.
In the opinion of
management, the accompanying financial data reflect all adjustments (consisting of only normal recurring adjustments) necessary for a fair statement of net assets. 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 at the dates of the financial statements. Actual results could differ from these
estimates.
On March 24, 2013, following the Companys filing of the Certificate of Dissolution, the Company adopted the liquidation basis of
accounting. See Note 3 to the financial statements, Liquidation Basis of Accounting, for further information regarding the Companys adoption of the liquidation basis of accounting.
3.
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Liquidation Basis of Accounting
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Net assets in liquidation were $0.75 million and $10.08 million as of April 30, 2016 and July 31, 2015, respectively, a decrease of $9.33
million. The decrease was primarily due to the Companys payment of a liquidating distribution to stockholders on April 29, 2016 of approximately $8.38 million.
As of April 30, 2016, total assets consisted of cash and cash equivalents of $3.99 million and other assets of $0.05 million. The decrease in the realizable
value of our assets for the three and nine month periods ending April 30, 2016 was primarily due to the Companys payment of the liquidating distribution on April 29, 2016. Based on the Companys expectation that we do not expect to
receive any additional material consideration for our remaining IQstream assets, we have assigned no value to these assets for purposes of the Statement of Net Assets. In addition, due to the uncertainty surrounding our ability to liquidate our
Tejas investment, we have determined that we cannot reasonably provide an estimate of the net realizable value of our Tejas investment at this time and, accordingly, have assigned no value to the Tejas investment for purposes of the Statement of Net
Assets.
As of April 30, 2016, liabilities consisted of our reserve for estimated costs during the Dissolution period of $1.7 million and other
liabilities of $1.59 million. For additional information concerning other liabilities, see Note 5. Income Taxes.
During the three months
ended April 30, 2016, the Company reclassified certain amounts among the categories of costs shown in the table below, but did not adjust its estimated settlement amounts of liabilities. During the nine months ended April 30, 2016, the Company
adjusted its estimated settlement amounts of liabilities, resulting in a net decrease to net assets of $0.95 million. The adjustments were primarily related to the increase in the reserve for estimated costs of $1.44 million as a result of the
extension of the Dissolution period by up to two additional years, offset in part by a decrease in the Companys previously reserved estimated costs during the Dissolution period of $0.44 million and a decrease in accrued expenses of $0.05
million.
The increase of $1.44 million as a result of the extension of the Dissolution period assumes a final dissolution date of March 7, 2018, and is
comprised of estimated compensation and consulting costs of $0.45 million, other expenses associated with wind down activities of $0.41 million, insurance of $0.22 million, and professional fees of $0.36 million. The decrease in the Companys
previously reserved estimated costs during the Dissolution period relates to estimated costs for the period through March 7, 2016, and is comprised of other expenses associated with wind down activities of $0.35 million, compensation and consulting
costs of $0.05 million and professional fees of $0.04 million. The decrease in other expenses associated with wind down activities for the period through March 7, 2016 is primarily related to the expiration of the statute of limitations
relating to potential tax liabilities in certain state jurisdictions. The decrease in compensation and consulting costs and professional fees for the period through March 7, 2016 is primarily related to a determination that those expenditures
are no longer expected to be incurred.
7
The table below summarizes the reserve for estimated costs during the Dissolution period as of April 30, 2016 and
July 31, 2015 (in thousands):
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|
|
|
|
|
|
|
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April 30, 2016
|
|
|
July 31, 2015
|
|
Compensation
|
|
$
|
602
|
|
|
$
|
376
|
|
Professional fees
|
|
|
358
|
|
|
|
568
|
|
Other expenses associated with wind down activities
|
|
|
528
|
|
|
|
646
|
|
Insurance
|
|
|
217
|
|
|
|
186
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,705
|
|
|
$
|
1,776
|
|
|
|
|
|
|
|
|
|
|
These estimated costs will continue to be reviewed periodically and adjusted as appropriate.
As of February 29, 2016, all surviving representations and warranties under the Purchase Agreement had expired without Tyngsborough Commons asserting any
indemnification claims against the Company. Accordingly, the Company has not recorded, nor does it expect to record, any liability in connection with those obligations.
4.
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Cash Equivalents and Marketable Securities
|
Cash equivalents are short-term, highly liquid investments with original or remaining maturity dates of three months or less at the date of
acquisition. Cash equivalents are carried at cost plus accrued interest, which approximates fair market value. As of April 30, 2016 and July 31, 2015, aggregate cash and cash equivalents consisted of (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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April 30, 2016:
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|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Market
Value
|
|
Cash and cash equivalents
|
|
$
|
3,993
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,993
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2015:
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Market
Value
|
|
Cash and cash equivalents
|
|
$
|
10,943
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
10,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,943
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
10,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company is currently open to audit under statutes of limitation by the Internal Revenue Service, various foreign jurisdictions, and
state jurisdictions for the fiscal years ended July 31, 2009 through July 31, 2015. However, limited adjustments can be made to federal and state tax returns in earlier years in order to reduce net operating loss carryforwards.
As of April 30, 2016 and July 31, 2015, the Company had a liability of $1.59 million for taxes, interest and penalties for unrecognized tax benefits related
to various foreign income tax matters. As of April 30, 2016 and July 31, 2015, the Company had $0.6 million accrued for interest and penalties related to uncertain tax positions. The Company accounts for interest and penalties related to
uncertain tax positions as part of its provision for federal, international and state income taxes. This liability is subject to change, perhaps materially.
As a result of having substantial net operating losses over recent years and no current operations, the Company determined that it is more likely than not
that our deferred tax assets will not be realized. Therefore, we maintain a valuation allowance on the full amount of our net deferred tax assets.
The occurrence of ownership changes, as defined in Section 382 of the Internal Revenue Code of 1986, as amended (the Code), is not controlled by
the Company, and could significantly limit the amount of net operating loss carryforwards and research and development credits that can be utilized annually to offset future taxable income. The Company completed an updated Section 382 study for the
period April 2006 through July 31, 2011 and the
8
results of this study showed that no ownership change within the meaning of the Code had occurred from April 2006 through July 31, 2011. The Company has not, however, conducted a Section 382
study for any periods after July 31, 2011 and, accordingly, the Company cannot provide any assurance that an ownership change within the meaning of the Code has not occurred since that date.
6.
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Commitments and Contingencies
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Guarantees
The Companys
guarantees requiring disclosure consist of its indemnification obligations under the Purchase Agreement, for officers and directors, and for other claims.
Prior to the Asset Sale and the Dissolution, in the normal course of business, the Company agreed to indemnify other parties, including customers, lessors and
parties to other transactions with the Company with respect to certain matters. Historically, payments made by the Company under these agreements had not had a material impact on the Companys operating results or financial position.
Furthermore, most of these obligations were assumed by Buyer in connection with the Asset Sale. Accordingly, the Company has not recorded a liability for these agreements as of April 30, 2016 or July 31, 2015, as the Company believes the exposure
for any related payments is not material.
We entered into our standard form of indemnification agreement with each of our current and former directors
and executive officers, which is in addition to the indemnification provided for in our amended and restated certificate of incorporation, as amended. The Plan of Dissolution also provides that we continue to indemnify such directors and executive
officers in accordance with such agreements and our amended and restated certificate of incorporation, as amended. The indemnification agreements, among other things, provide for indemnification of such directors and executive officers for a number
of expenses, including attorneys fees and other related expenses, as well as certain judgments, fines, penalties and settlement amounts incurred by any such person in any action, suit or proceeding, including any action by or in the right of
the Company, arising out of such persons service as a director or executive officer of the Company or any other company or enterprise to which the person provided services at our request. The Company did not incur any expense under these
arrangements during the first nine months of fiscal 2016 or fiscal 2015. Due to the Companys 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 30, 2016 or July 31, 2015. During the Dissolution period, we intend to continue to indemnify each of our current and former directors and executive officers to the extent permitted under Delaware law, our amended and
restated certificate of incorporation, as amended, and the indemnification agreements. The Company has also continued to maintain directors and officers insurance coverage since the filing of the Certificate of Dissolution, and intends
to maintain such coverage through the end of the Dissolution period and to obtain a tail policy following the completion of the Dissolution.
As of
February 29, 2016, all surviving representations and warranties under the Purchase Agreement had expired without Tyngsborough Commons asserting any indemnification claims against the Company. Accordingly, the Company has not recorded, nor does
it expect to record, any liability in connection with those obligations.
Other Matters
Prior to April 7, 2016, the Companys 401(k) was the subject of a scheduled investigation by the U.S. Department of Labor (the DOL). On April
7, 2016, the DOL informed the Company that its investigation had concluded and that no further action by the DOL was then contemplated.
7.
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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:
|
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Level 1
|
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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.
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9
|
|
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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.
|
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Level 3
|
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Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
Assets and liabilities of the Company measured at fair value on a recurring basis as of April 30, 2016, are summarized as
follows (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
Description
|
|
April 30, 2016
|
|
|
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant Unobservable
Inputs
(Level 3)
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
$
|
3,993
|
|
|
$
|
3,993
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,993
|
|
|
$
|
3,993
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
Cash and cash equivalents of $3.99 million consisting of money market funds are classified within Level 1 of the fair value hierarchy because they are valued
using quoted market prices in active markets.
Assets and liabilities of the Company measured at fair value on a recurring basis as of July 31, 2015, are
summarized as follows (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
Description
|
|
July 31, 2015
|
|
|
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant Unobservable
Inputs
(Level 3)
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
$
|
10,943
|
|
|
$
|
10,943
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
10,943
|
|
|
$
|
10,943
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
Cash and cash equivalents of $10.94 million consisting of money market funds are classified within Level 1 of the fair value hierarchy because they are valued
using quoted market prices in active markets.
None.
10