10-Q 1 d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended March 31, 2009

OR

 

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

For the transition period from             to             

Commission file number 000-30865

 

 

SOAPSTONE NETWORKS INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   02-0493372

(State or Other Jurisdiction

of Organization)

 

(I.R.S. Employer

Identification No.)

1 Federal Street

Billerica, Massachusetts 01821

(Address of Principal Executive Offices) (Zip 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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer   ¨    Accelerated Filer   x
Non-accelerated Filer   ¨  (do not check if a smaller reporting company)    Smaller reporting company   ¨

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

At April 27, 2009 14,866,870 shares of the registrant’s Common Stock, par value $0.0001 per share, were outstanding.

 

 

 


Table of Contents

SOAPSTONE NETWORKS INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2009

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION  
 

ITEM 1.

  Financial Statements (Unaudited)  
    Consolidated Balance Sheets as of March 31, 2009 and December 31, 2008   3
    Consolidated Statements of Operations for the three months ended March 31, 2009 and 2008   4
    Consolidated Statements of Cash Flows for the three months ended March 31, 2009 and 2008   5
    Notes to Consolidated Financial Statements   6
 

ITEM 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations   13
 

ITEM 3.

  Quantitative and Qualitative Disclosures About Market Risk   19
 

ITEM 4.

  Controls and Procedures   19
PART II. OTHER INFORMATION
 

ITEM 1.

  Legal Proceedings   20
 

ITEM 1A.

  Risk Factors   22
 

ITEM 6.

  Exhibits   23
SIGNATURE   24

 

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PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

SOAPSTONE NETWORKS INC.

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

(unaudited)

 

     March 31,
2009
    December 31,
2008
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 76,272     $ 83,124  

Marketable securities

     6,028       6,042  

Prepaid expenses and other current assets

     918       1,245  
                

Total current assets

     83,218       90,411  

Property and equipment, net

     3,960       4,289  

Prepaid rents and other non-current assets

     533       537  
                

Total assets

   $ 87,711     $ 95,237  
                

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 1,124     $ 1,357  

Accrued payroll and payroll-related costs

     1,608       1,254  

Other accrued expenses

     354       448  
                

Total current liabilities

     3,086       3,059  

Commitments and contingencies

    

Stockholders’ equity:

    

Preferred stock, $0.01 par value: Authorized – 5,000,000 shares Issued and outstanding – none

     —         —    

Common stock, $0.0001 par value: Authorized – 250,000,000 shares Issued– 15,440,267 shares at March 31, 2009 and 15,440,267 shares at December 31, 2008

     2       2  

Additional paid-in capital

     491,713       491,134  

Common stock warrants

     6,321       6,321  

Treasury stock, at cost – 573,397 shares

     (2,870 )     (2,870 )

Accumulated deficit

     (410,541 )     (402,409 )
                

Total stockholders’ equity

     84,625       92,178  
                

Total liabilities and stockholders’ equity

   $ 87,711     $ 95,237  
                

See accompanying notes.

 

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SOAPSTONE NETWORKS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

(unaudited)

 

     Three Months Ended
March 31,
 
     2009     2008  

Total revenue

   $ —       $ —    
                

Total cost of revenue

     —         —    
                

Gross margin

     —         —    
                

Operating expenses:

    

Research and development (1)

     4,233       3,642  

Sales and marketing (1)

     2,230       1,256  

General and administrative (1)

     1,878       1,531  
                

Total operating expenses

     8,341       6,429  
                

Loss from continuing operations before interest

     (8,341 )     (6,429 )

Interest income, net

     209       941  
                

Loss from continuing operations

     (8,132 )     (5,488 )

Income from discontinued operations (1)

     —         1,771  
                

Net loss

   $ (8,132 )   $ (3,717 )
                

Loss per basic and diluted share from continuing operations

   $ (0.55 )   $ (0.37 )
                

Income per basic and diluted share from discontinued operations

   $ —       $ 0.12  
                

Net loss per basic and diluted

   $ (0.55 )   $ (0.25 )
                

Weighted average common shares:

    

Basic and diluted

     14,866,870       14,792,089  
                

 

(1)    Includes non-cash, stock-based compensation associated with stock option grants, as follows:

      

Discontinued operations

   $ —       $ 23  

Research and development

     231       205  

Sales and marketing

     162       114  

General and administrative

     186       161  

See accompanying notes.

 

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SOAPSTONE NETWORKS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(unaudited)

 

     Three Months Ended
March 31,
 
     2009     2008  

Cash Flows from Operating Activities:

    

Net loss

   $ (8,132 )   $ (3,717 )

Adjustments to reconcile net loss to net cash (used in)provided by operating activities –

    

Depreciation and amortization

     478       717  

Stock-based compensation

     579       503  

Gain on sale of fixed assets

     —         (87 )

Changes in current assets and liabilities:

    

Trade accounts receivable

     —         9,007  

Prepaid expenses and other current assets

     327       204  

Prepaid rents and other non-current assets

     4       —    

Accounts payable

     (233 )     (2,340 )

Accrued payroll and payroll related

     354       (2,607 )

Accrued other

     (94 )     (37 )

Deferred revenue

     —         256  
                

Net cash (used in) provided by operating activities

     (6,717 )     1,899  
                

Cash Flows from Investing Activities:

    

Maturity of marketable securities

     14       5,970  

Purchases of property and equipment

     (149 )     (625 )

Proceeds from sale of fixed assets

     —         87  
                

Net cash (used in) provided by investing activities

     (135 )     5,432  
                

Cash Flows from Financing Activities:

    

Proceeds from employee stock plans

     —         183  
                

Cash provided by financing activities

     —         183  
                

Net (decrease) increase in Cash and Cash Equivalents

     (6,852 )     7,514  

Cash and Cash Equivalents, Beginning of Period

     83,124       88,903  
                

Cash and Cash Equivalents, End of Period

   $ 76,272     $ 96,417  
                

See accompanying notes.

 

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SOAPSTONE NETWORKS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(all tabular amounts are in thousands except share and per share data)

NOTE 1. BASIS OF PRESENTATION

The unaudited financial information included herein has been prepared by Soapstone Networks Inc., pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and includes the accounts of Soapstone Networks Inc. and its subsidiaries (“Soapstone” or the “Company”). Certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted in accordance with such rules and regulations. In the opinion of the Company, the accompanying consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the financial position at March 31, 2009 and December 31, 2008 and the operating results and cash flows for the periods ended March 31, 2009 and 2008. These consolidated financial statements and notes should be read in conjunction with the Company’s consolidated audited financial statements and notes thereto for the year ended December 31, 2008, which appear in the Company’s Annual Report on Form 10-K filed with the SEC on March 10, 2009 and as amended by the filing of the Amended Annual Report on Form 10-K/A on April 30, 2009. The consolidated balance sheet at December 31, 2008 has been derived from the audited consolidated financial statements as of that date.

The results of operations for the three months ended March 31, 2009 are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year ending December 31, 2009.

On March 19, 2008 the Company changed its name from Avici Systems Inc. to Soapstone Networks Inc. and changed its NASDAQ ticker symbol from “AVCI” to “SOAP”.

In February 2009, the Company announced that it had engaged an investment banker to assist in exploring strategic alternatives available to the Company for enhancing shareholder value. There can be no assurance that the exploration of strategic alternatives will result in any agreements or transactions, or that, if completed, any agreements or transactions will be successful or on attractive terms. The Company’s strategic review is underway, but no timetable has been set for its completion.

The Company also announced in February 2009 that it had reduced its permanent headcount by 10% and its contractor workforce by approximately 75% in an initiative to realign its cost structure and reduce its labor and labor related costs. The Company recorded approximately $0.3 million of charges associated with this initiative in the first quarter of 2009.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Revenue Recognition

Soapstone has recorded revenue in accordance with Statement of Position No. 97-2, “Software Revenue Recognition,” (SOP 97-2) and all related interpretations. The Company recognized revenue from product sales upon shipment or delivery to customers, including resellers, provided that a purchase order has been received or a contract has been executed, there are no uncertainties regarding customer acceptance, the sales price is fixed or determinable and collectability is deemed probable. If uncertainties regarding customer acceptance existed, the Company recognized revenue when those uncertainties were resolved. For arrangements that included the delivery of multiple elements, revenue was allocated to the various elements based on vendor-specific objective evidence of fair value (“VSOE”). The Company used the residual method when VSOE did not exist for one of the delivered elements in an arrangement. Revenue from support and maintenance contracts was recognized ratably over the period of the related agreements. Revenue from installation and other services was recognized as the work was performed. Amounts collected or billed prior to satisfying the above revenue recognition criteria were recorded as deferred revenue in the past. All revenue recognized has been from the Company’s legacy router operation which is reflected as discontinued operations. The Company has not recognized any revenue from its continuing operations.

 

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(b) Guarantees and Product Warranties

In the normal course of business, the Company may agree to indemnify other parties, including customers, lessors and parties to other transactions with the Company, with respect to certain matters. The Company may agree to hold these other parties harmless against losses arising from a breach of representations or covenants, or other claims made against certain parties. Historically, payments made by the Company, if any, under these agreements have not had a material impact on the Company’s operating results or financial position.

(c) Cash and Cash Equivalents and Marketable Securities

The Company has classified its marketable securities as held-to-maturity and recorded them at amortized cost, which approximates market value. Funds from marketable securities designated as held-to-maturity are not available for immediate use. The Company considers all highly liquid investments with original maturities of three months or less at the date of acquisition to be cash equivalents. Cash and cash equivalents include money market funds and certificates of deposit.

Cash, cash equivalents and marketable securities consist of the following:

 

     March 31
2009
   December 31
2008

Cash and cash equivalents

   $ 76,272    $ 83,124

Marketable securities

     6,028      6,042
             

Total

   $ 82,300    $ 89,166
             

(d) Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 revenue and expenses during the reporting period. Actual results could differ from those estimates.

(e) Net Income per Share

Basic net income (loss) per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is computed using the weighted-average number of common shares and dilutive potential common shares outstanding during the period. Dilutive potential common shares primarily consist of employee stock options, common stock warrants and restricted common stock. The dilutive effect of in-the-money options and warrants is calculated based on the average share price for each fiscal period using the treasury stock method. Basic and diluted net loss per share is the same for the periods with net loss and all outstanding employee stock options, common stock warrants and unvested restricted stock have been excluded, as they are considered anti-dilutive. In situations where a company reports continuing operations, as well as discontinued operations, the shares used to determine basic or diluted earnings per share is based on earnings or loss associated with continuing operations. Since the Company’s continuing operations generated a loss, the diluted shares are the same as basic shares.

 

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Statement of Financial Accounting Standards No. 128, “Earnings per Share,” requires that employee equity share options, non-vested shares and similar equity instruments granted by the Company be treated as potential common shares outstanding in computing diluted earnings per common share.

(f) Comprehensive Income

SFAS No. 130, “Reporting Comprehensive Income,” requires disclosure of all components of comprehensive income (loss) on an annual and interim basis. Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances involving non-owner sources. During all periods presented, the Company did not have any items of comprehensive income other than its reported net income (loss).

(g) Discontinued Operations

As previously announced, the Company has exited the manufacture, sale and support of router products, making its last shipments in December 2007 and providing related support only through the end of December 2008. Accordingly, the Company has disclosed its historical activities associated with its legacy router products and services as discontinued operations in the Consolidated Statements of Operations. Prior period operating results associated with such legacy products and services include adjustments to reflect its presentation as discontinued operations. Income from discontinued operations include revenue, cost of revenue and other income.

The Company’s assets in the balance sheets presented relate to continuing operations. Property, plant and equipment associated with discontinued operations have zero net book value since the end of 2008 and will be written off once such assets are abandoned later in 2009. Substantially all of the liabilities and accrued expenses in the balance sheets presented relate to continuing operations.

(h) Disclosures about Segments of an Enterprise

SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, establishes standards for reporting information regarding operating segments and establishes standards for related disclosures about products and services and geographic areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision making group, in making decisions regarding resource allocation and assessing performance. During the Company’s transition from its legacy business the chief operating decision maker or decision making group commenced assessing performance and allocation of resources between its legacy core router product and service and its Soapstone product development. Accordingly, commencing in 2007, Soapstone operated in two operating segments – core router and Soapstone. However, since the Company has begun disclosing its legacy router operations as discontinued operations, the Company has concluded that it has reverted to operating in only one segment, the Soapstone segment. The discontinued operations for the three months ended March 31, 2008 included router related revenue, nearly all of which was derived from one customer, namely AT&T.

(i) Stock-Based Compensation

The Company records its share-based compensation in accordance with the provisions of Statement of Financial Accounting Standards No. 123R, (“SFAS 123R”) “Share-Based Payment,” which establishes accounting for equity instruments exchanged for employee services. Under the provisions of SFAS No. 123R, share-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity grant) under the accelerated attribution method.

The Company estimates the fair value of stock options using the Black-Scholes valuation model. Key input assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, the expected volatility of the Company’s stock over the option’s expected term, the risk-free interest rate over the option’s expected term, and the Company’s expected annual dividend yield. Expected volatilities are based on a blend of historical and implied volatilities of our common stock. The expected term represents the weighted average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and our historical exercise patterns. Risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected term of the option.

 

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In the three months ended March 31, 2009, the Company granted options to purchase 69,500 shares of common stock at a weighted average exercise price of $2.80 per share. The weighted average fair value of these grants was $1.59 per share estimated using the Black-Scholes valuation model with the following key assumptions: Risk-free interest rate: 1.84%, Volatility: 77.51%, Expected term: 3.82 year and Expected Dividend: 0%.

(j) Recent Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business Combinations” (“SFAS 141R”) . SFAS 141R retains the fundamental requirements in FASB Statement 141 that the acquisition method of accounting (which Statement 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. SFAS 141R requires an acquirer to recognize the assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in SFAS 141R. That replaces FASB Statement 141’s cost-allocation process, which required the cost of an acquisition to be allocated to the individual assets acquired and liabilities assumed based on their estimated fair values. SFAS 141R will now require acquisition costs to be expensed as incurred; restructuring costs associated with a business combination must generally be expensed prior to the acquisition date and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. SFAS 141R applies prospectively to business combinations for which the acquisition date is in fiscal years beginning after December 15, 2008. Earlier adoption is prohibited. The Company adopted this pronouncement in the first quarter of 2009. The adoption of the provisions of SFAS 141R did not have a material impact on the Company’s financial position or results of operations.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS 160”). SFAS 160 clarifies that a noncontrolling or minority interest in a subsidiary is considered an ownership interest and, accordingly, requires all entities to report such interests in subsidiaries as equity in the consolidated financial statements. SFAS 160 is effective for fiscal years beginning after December 15, 2008. The Company adopted this pronouncement in the first quarter of 2009. The adoption of the provisions of SFAS 160 did not have a material impact on the Company’s financial position and results of operations.

NOTE 3. FAIR VALUE MEASUREMENTS

In September 2006, the FASB issued SFAS 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy and is effective for the Company’s fiscal year beginning January 1, 2008 and for interim periods within that year. In February 2008, the FASB issued FASB Staff Position (FSP) No. 157-2, “Effective Date of FASB Statement No. 157”, which delayed for one year the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). As required, the Company adopted SFAS No. 157 for its financial assets on January 1, 2008 and its non financial assets on January 1, 2009. Adoption did not have a material impact on the Company’s financial position or results of operations.

SFAS No. 157 establishes a fair value hierarchy that requires the use of observable market data, when available, and prioritizes the inputs to valuation techniques used to measure fair value in the following categories.

Level 1—Quoted unadjusted prices for identical instruments in active markets.

Level 2—Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations in which all observable inputs and significant value drivers are observable in active markets.

 

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Level 3—Model derived valuations in which one or more significant inputs or significant value drivers are unobservable, including assumptions developed by the Company.

All of the fair values of the Company’s investment instruments presented in Note 2(c) were based on level 1 inputs as described above, to determine their fair values as of March 31, 2009.

NOTE 4. LITIGATION

Twelve purported securities class action lawsuits were filed against the Company and one or more of the Company’s underwriters in its initial public offering, and certain officers and directors of the Company. The lawsuits alleged violations of the federal securities laws and were docketed in the U.S. District Court for the Southern District of New York (the “Court”) as: Felzen, et al. v. Avici Systems, Inc., et al., C.A. No. 01-CV-3363; Lefkowitz, et al. v. Avici Systems, Inc., et al., C.A. No. 01-CV-3541; Lewis, et al. v. Avici Systems, Inc., et al., C.A. No. 01-CV-3698; Mandel, et. al v. Avici Systems, Inc., et al., C.A. No. 01-CV-3713; Minai, et al. v. Avici Systems, Inc., et al., C.A. No. 01-CV-3870; Steinberg, et al. v. Avici Systems Inc., et al., C.A. No. 01-CV-3983; Pelissier, et al. v. Avici Systems, Inc., et al., C.A. No. 01-CV-4204; Esther, et al. v. Avici Systems, Inc., et al., C.A. No. 01-CV-4352; Zhous, et al. v. Avici Systems, Inc. et al., C.A. No. 01-CV-4494; Mammen, et al. v. Avici Systems, Inc., et. al., C.A. No. 01-CV-5722; Lin, et al. v. Avici Systems, Inc., et al., C.A. No. 01-CV-5674; and Shives, et al. v. Banc of America Securities, et al., C.A. No. 01-CV-4956. On April 19, 2002, a consolidated amended class action complaint (the “Complaint”), which superseded these twelve purported securities class action lawsuits, was filed in the Court. The Complaint is captioned “In re Avici Systems, Inc. Initial Public Offering Securities Litigation” (21 MC 92, 01 Civ. 3363 (SAS)) and names as defendants the Company, certain of the underwriters of the Company’s initial public offering, and certain of the Company’s officers and directors. The Complaint, which seeks unspecified damages, alleges violations of the federal securities laws, including among other things, that the underwriters of the Company’s initial public offering (“IPO”) improperly required their customers to pay the underwriters excessive commissions and to agree to buy additional shares of stock in the aftermarket as conditions of receiving shares in the Company’s IPO. The Complaint further claims that these supposed practices of the underwriters should have been disclosed in the Company’s IPO prospectus and registration statement. In addition to the Complaint against the Company, various other plaintiffs have filed other substantially similar class action cases against approximately 300 other publicly traded companies and their IPO underwriters in New York City, which along with the case against the Company have all been transferred to a single federal district judge for purposes of case management. The Company and its officers and directors believe that the claims against the Company lack merit, and have defended the litigation vigorously. In that regard, on July 15, 2002, the Company, together with the other issuers named as defendants in these coordinated proceedings, filed a collective motion to dismiss the consolidated amended complaints against them on various legal grounds common to all or most of the issuer defendants.

On October 9, 2002, the Court dismissed without prejudice all claims against the individual current and former officers and directors who were named as defendants in our litigation, and they are no longer parties to the lawsuit. On February 19, 2003, the Court issued its ruling on the motions to dismiss filed by the issuer defendants and separate motions to dismiss filed by the underwriter defendants. In that ruling, the Court granted in part and denied in part those motions. As to the claims brought against the Company under the antifraud provisions of the securities laws, the Court dismissed all of these claims with prejudice, and refused to allow the plaintiffs an opportunity to re-plead these claims against the Company. As to the claims brought under the registration provisions of the securities laws, which do not require that intent to defraud be pleaded, the Court denied the motion to dismiss these claims as to the Company and as to substantially all of the other issuer defendants as well. The Court also denied the underwriter defendants’ motion to dismiss in all respects.

In June 2003, the Company elected to participate in a proposed settlement agreement with the plaintiffs in this litigation. If the proposed settlement had been approved by the Court, it would have resulted in the dismissal, with prejudice, of all claims in the litigation against the Company and against any of the other issuer defendants who elected to participate in the proposed settlement, together with the current or former officers and directors of participating issuers who were named as individual defendants. This proposed settlement was conditioned on, among other things, a ruling by the District Court that the claims against the Company and against the other issuers

 

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who had agreed to the settlement would be certified for class action treatment for purposes of the proposed settlement, such that all investors included in the proposed classes in these cases would be bound by the terms of the settlement unless an investor opted to be excluded from the settlement.

On December 5, 2006, the U.S. Court of Appeals for the Second Circuit issued a decision that six purported class action lawsuits containing allegations substantially similar to those asserted against the Company may not be certified as class actions due, in part, to the Appeals Court’s determination that individual issues of reliance and knowledge would predominate over issues common to the proposed classes. On January 8, 2007, the plaintiffs filed a petition seeking rehearing en banc of this ruling. On April 6, 2007 the Court of Appeals denied the plaintiffs’ petition for rehearing of the Court’s December 5, 2006 ruling but noted that the plaintiffs remained free to ask the District Court to certify classes different from the ones originally proposed which might meet the standards for class certification that the Court of Appeals articulated in its December 5, 2006 decision.

In light of the Court of Appeals’ December 5, 2006 decision regarding certification of the plaintiffs’ claims, the District Court entered an order on June 25, 2007 terminating the proposed settlement between the plaintiffs and the issuers, including the Company. On August 14, 2007, the plaintiffs filed amended complaints in the six focus cases. On November 13, 2007, the issuer defendants and the underwriter defendants separately moved to dismiss the claims against them in the amended complaints in the six focus cases. On March 26, 2008, the District Court issued an order in which it denied in substantial part the motions to dismiss the amended complaints in the six focus cases.

On February 25, 2009, the parties advised the District Court that they have reached an agreement-in-principle to settle the litigation in its entirety. A stipulation of settlement was filed with the District Court on April 2, 2009. The proposed global settlement remains subject to preliminary and final approval by the District Court. While we can make no promises or guarantees as to the outcome of these proceedings, the Company does not believe that a loss is probable or reasonably estimable as of the balance sheet date.

In addition, the Company received letters dated July 13, 2007 and July 25, 2007 from a putative shareholder, demanding that the Company investigate and prosecute a claim for alleged short-swing trading in violation of Section 16(b) of the Securities Exchange Act of 1934 by the underwriters of its IPO and certain unidentified directors, officers and shareholders of the Company. The Company evaluated the demand and declined to prosecute the claim. On October 3, 2007, the putative shareholder commenced a civil lawsuit in the U.S. District Court for the Western District of Washington against the lead underwriters of the Company’s IPO, alleging violations of Section 16(b). The complaint alleges that the combined number of shares of the Company’s common stock beneficially owned by the lead underwriters and certain unnamed officers, directors, and principal shareholders exceeded ten percent of its outstanding common stock from the date of the Company’s IPO on July 28, 2000, through at least July 27, 2001. It further alleges that those entities and individuals were thus subject to the reporting requirements of Section 16(a) and the short-swing trading prohibition of Section 16(b), and failed to comply with those provisions. The complaint seeks to recover from the lead underwriters any “short-swing profits” obtained by them in violation of Section 16(b). The Company was named as a nominal defendant in the action, but has no liability for the asserted claims. No directors or officers of the Company are named as defendants in this action. On October 29, 2007, the case was reassigned to Judge James L. Robart along with similar cases involving the IPO’s of 53 other issuers. These 54 actions were consolidated for pre-trial purposes. On February 27, 2008, the putative shareholder filed an Amended Complaint asserting substantially similar claims as those set forth in the initial complaint. On July 25, 2008, the Company joined with 29 other issuers to file with the Court the Issuer Defendants’ Joint Motion to dismiss. The plaintiff filed her opposition to this motion on September 8, 2008, and the Issuer Defendants’ Reply in Support of Their Joint Motion to Dismiss was filed on October 23, 2008.

On March 12, 2009, Judge Robart granted the Issuer Defendants’ Joint Motion to Dismiss, dismissing the complaint without prejudice on the grounds that the plaintiff had failed to make an adequate demand on the Company prior to filing her complaint. In its order, the Court stated it would not permit the plaintiff to amend her demand letters while pursuing her claims in the litigation. Because the Court dismissed the case on the grounds that it lacked subject matter jurisdiction, it did not specifically reach the issue of whether the plaintiff’s claims were barred by the applicable statute of limitations. However, the Court also granted the Underwriters’ Joint Motion to Dismiss with respect to cases involving non-moving issuers, holding that the cases were barred by the applicable statute of limitations because the issuers’ shareholders had notice of the potential claims more than five years prior to filing suit.

 

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The plaintiff filed a Notice of Appeal on April 10, 2009. The plaintiff’s opening brief in the appeal is currently due on July 27, 2009, with the Company and the underwriters’ responses due on August 25, 2009. The plaintiff may file a reply brief on September 8, 2009. The Company believes that the outcome of this litigation will not have a material adverse impact on its consolidated financial position, results of operations or cash flows.

In addition, we are subject to legal proceedings, claims and investigations that arise in the ordinary course of business such as, but not limited to, patent employment, commercial and environmental matters. Although there can be no assurance, there are no such matters pending that we expect to be material with respect to our business, financial position or results of operations.

NOTE 5. SUBSEQUENT EVENT

The Company announced in April 2009 that it has undertaken an initiative to reduce its total headcount by approximately 40%, in order to reduce expenses and conserve cash in the current economic environment without diminishing the overall value of the Company. The Company expects to record a charge of approximately $0.5 million associated with this initiative in the second quarter of 2009.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Except for the historical information contained herein, certain matters discussed in this Report on Form 10-Q constitute forward-looking statements that involve risks, assumptions and uncertainties. The Company’s actual results could differ materially from those stated or implied in forward-looking statements due to a number of factors, including without limitation those discussed under the caption “Risk Factors” included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008 as filed with the Securities and Exchange Commission on March 10, 2009 and as amended by the filing of the Amended Annual Report on Form 10-K/A on April 30, 2009, and elsewhere herein. Forward-looking statements include statements regarding the future or the Company’s expectations, beliefs, intentions or strategies regarding the future and may be identified by the words “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “should,” “will,” and “would” and similar expressions. There may be events in the future that could affect these matters.

Overview

Soapstone Networks Inc. (referred to as Soapstone, Soapstone Networks, we, our, us and the company) is a developer of resource and service control software. On March 19, 2008, the company changed its name from Avici Systems Inc. to Soapstone Networks Inc. The company was founded as a provider of core router products and in 2007 and 2008 transitioned to being a developer of emerging, software-based service and control solutions for service providers’ next generation networks. As of December 31, 2008, the company had completely exited the router business. The company’s operations are now solely focused on developing and marketing its Soapstone Provider Network Controller (PNC™) framework. The Soapstone PNC framework is designed to help service providers and enterprises connect their physical networking infrastructure to Next Generation Network (NGN) software frameworks, and deploy services across their networks, by providing a multi-vendor, software-based service control plane. We are pursuing sales and marketing of the PNC directly through our field organization, as well as indirectly through distribution partners that may include network equipment providers, resellers, system integrators, and Operations Support Systems (OSS) vendors.

During 2008, we completed the transition from our historical Avici router product business to our Soapstone business, including the change of name, the change of NASDAQ ticker symbol from “AVCI” to “SOAP” and the expiration of all support services for our historical core router products. Although all of the company’s revenue to date has come from the router business, the company has now exited the manufacture, sale and support of its core router products and expects no further revenue from this business, which is disclosed as discontinued operations.

In February 2009, we announced that we have engaged an investment banker to assist the Company in exploring strategic alternatives available to the Company for enhancing shareholder value. There can be no assurance that the exploration of strategic alternatives will result in any agreements or transactions, or that, if completed, any agreements or transactions will be successful or on attractive terms. The Company’s strategic review is underway, but no timetable has been set for its completion.

The Company announced in February 2009 that it had reduced its permanent headcount by 10% and its contractor workforce by approximately 75% in an initiative to realign its cost structure and reduce its labor and labor related costs. In furtherance of this initiative and in order to reduce expenses and conserve cash in the current economic environment without diminishing the overall value of the Company, a further reduction in its total headcount by approximately 40% was announced by the Company in April 2009.

Since our inception, we have incurred significant losses. As of March 31, 2009, we had an accumulated deficit of $410.5 million. Historically, we derived all of our revenue from sales and servicing of our legacy core router products. On April 18, 2007, we announced that we were transitioning away from the manufacture, sales, and development of core router products. We do not expect any revenue from core router product sales and service in 2009 and beyond. We have not recorded any revenue from our Soapstone products and we anticipate that any future revenue for the Company will be derived from the sales and support of our Soapstone products, which are currently under development and have not been fully tested in customer networks. To date, we have invested significant amounts in the development of our Soapstone products, and we anticipate that our development efforts will continue

 

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to require significant expenditures, a substantial portion of which we will make long before any significant revenue related to these expenditures will be realized. We do not expect to reach profitability in 2009 and may not achieve profitability going forward unless our Soapstone products achieve commercial success.

Research and Development

Research and development expenses consist primarily of salaries and related employee costs, contractor costs, depreciation expense on laboratory equipment, software maintenance and certain project costs. In 2009 we expect research and development expenses to decline, as a result of the Company’s decision to realign its cost structure and reduce its labor and labor related costs, including through the Company’s February and April 2009 reductions in workforce.

Sales and Marketing

Sales and marketing expenses have consisted primarily of salaries and related employee costs, tradeshows, travel, public relations and costs associated with other marketing events. During the remainder of 2009, we expect to decrease our spending, primarily in marketing as a result of the Company’s decision to realign its cost structure and reduce its labor and labor related costs and other discretionary spending, including through the Company’s February and April 2009 reductions in workforce.

General and Administrative

General and administrative expenses consist primarily of salaries and related costs for executive, finance, legal, facilities, human resources and information technology personnel as well as professional and compliance related fees. During the remainder of 2009, we expect general and administrative expenses to decline from the current levels primarily as a result of the Company’s reduction in its labor and labor related costs, including through the Company’s February and April 2009 reductions in workforce.

Stock-based Compensation

The Company records share-based compensation expense under the provisions of Statement of Financial Accounting Standards No. 123R, (“SFAS 123R”) “Share-Based Payment,” which establishes accounting for equity instruments exchanged for employee services.

Critical Accounting Policies

Soapstone considers the following accounting policies related to revenue recognition, long-lived assets and stock-based compensation to be critical accounting policies due to the estimation processes and judgments involved in each. The Company bases its estimates on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

Revenue Recognition

Consistent with Statement of Position No. 97-2, Soapstone recognized revenue from legacy router product sales upon shipment or delivery to customers, including resellers, provided that a purchase order has been received or a contract has been executed, there were no uncertainties regarding customer acceptance, the sales price was fixed or determinable and collectability was deemed probable. If uncertainties regarding customer acceptance existed, the Company recognized revenue when those uncertainties were resolved. For arrangements that included the delivery of multiple elements, revenue was allocated to the various elements based on vendor-specific objective evidence of fair value (“VSOE”). The Company used the residual method when VSOE did not exist for one of the delivered elements in an arrangement. We generated revenue from support and maintenance as well as installation and service.

 

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We deferred revenue from support and maintenance contracts and recognized it ratably over the period of the related agreements. We recognized revenue from installation and other services as the work was performed. Amounts collected or billed prior to satisfying the above revenue recognition criteria were recorded as deferred revenue. All revenue recognized has been from the Company’s legacy router operation which is reflected as discontinued operations. In the future when the Company commences commercial shipment of its new software products, if the Company is unable to meet one or all of the above criteria on a timely basis, revenue recognized for any reporting period could be adversely affected.

Long-lived Assets

We review property, plant, and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of such an asset may not be recoverable. Recoverability of these assets is measured by comparison of their carrying amount to future undiscounted cash flows the assets are expected to generate over the remaining economic life. If such assets are considered to be impaired, the impairment to be recognized in earnings equals the amount by which the carrying value of the assets exceeds their fair market value determined by either a quoted market price, if any, or a value determined by utilizing a discounted cash flow technique. We have recognized no material impairment adjustments related to our property, plant, and equipment. Deterioration in our business in the future could lead to impairment adjustments in future periods. Evaluation of impairment of long-lived assets requires estimates of future operating results that are used in the preparation of the expected future undiscounted cash flows. Actual future operating results and the remaining economic lives of our long-lived assets could differ from the estimates used in assessing the recoverability of these assets. These differences could result in impairment charges, which could have a material adverse impact on our results of operations.

Stock-Based Compensation Expense

In 2006 we commenced accounting for employee stock-based compensation costs in accordance with Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (“SFAS 123R”). We utilize the Black-Scholes option pricing model to estimate the fair value of employee stock based compensation at the date of grant, which requires the input of highly subjective assumptions, including expected volatility and expected life. Further, as required under SFAS 123R, we estimate forfeitures for options granted which are not expected to vest. Changes in these inputs and assumptions can materially affect the measure of estimated fair value of our stock-based compensation.

Results of Operations

Research and Development

Research and development expenses increased $0.6 million to $4.2 million for the first quarter of 2009 from $3.6 million for the first quarter of 2008. The increase in the 2009 period compared to the 2008 period was due to higher labor and labor related, facility related and depreciation expenses primarily associated with increases in our cost structure made over the course of 2008, partially offset by a decrease in costs resulting from our reduction in workforce in February 2009.

Sales and Marketing

Sales and marketing expenses increased $1.0 million to $2.2 million for the first quarter of 2009 from $1.2 million for the first quarter of 2008. The increase in the 2009 period compared to the 2008 period was primarily due to an increase in labor and labor related expenses associated with increased investment in our sales and marketing efforts made over the course of 2008, partially offset by a decrease in costs resulting from our reduction in workforce in February 2009.

 

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General and Administrative

General and administrative expenses increased $0.4 million to $1.9 million for the first quarter of 2009 from $1.5 million for the first quarter of 2008. The increase in the 2009 period compared to the 2008 period was primarily due to higher labor and labor related expenses and depreciation expenses, partially offset by a decrease in costs resulting from our reduction in workforce in February 2009.

Interest Income, Net

Interest income decreased $0.7 million to $0.2 million for the first quarter of 2009 from $0.9 million for the first quarter of 2008. Interest income decreased due to lower average interest rates in 2009 as well as a lower invested balance in the 2009 period.

Discontinued Operations

The Company has exited the manufacture, sale, and support of router products, making its last shipment in December 2007 and providing related support only through the end of December 2008. Accordingly, income from discontinued operations decreased $1.8 million to $0.0 million for the first quarter of 2009 from $1.8 million for the first quarter of 2008.

Liquidity and Capital Resources

Since our inception, we have financed our operations through private sales of equity securities, an initial public offering in July 2000, and, to a lesser extent, from the exercise of stock options by employees. From inception through March 31, 2009, we raised approximately $427.7 million from these equity offerings. During the first three months of 2009, we used $6.7 million in cash from operating activities, compared to generating $1.9 million in the 2008 period. The decrease in cash from operations in the 2009 period as compared to the comparable 2008 period is primarily associated with transitioning away from all core router related activities after 2008. We expect that in the future, working capital requirements will fluctuate based on the timing and magnitude of payments associated with our operating costs and future customer payment terms. We have undertaken initiatives to realign our cost structure and reduce our labor and labor related costs. In furtherance of this initiative and in order to reduce expenses and conserve cash in the current economic environment without diminishing the overall value of the Company, we announced reductions in our total headcount in February and April 2009.

Purchases of capital equipment decreased $0.5 million to $0.1 million for the first three months of 2009 compared to $0.6 million for the same period in 2008. The timing and amount of future capital expenditures will depend primarily on our requirements in the Soapstone business including related infrastructure costs. We expect that capital expenditures will be between $0.3 million to $0.5 million for the remainder of 2009.

At March 31, 2009, we had cash and cash equivalents of $76.3 million and short-term marketable securities of $6.0 million, totaling $82.3 million. We believe that our existing cash, cash equivalents and marketable securities will meet our normal operating and capital expenditure needs beyond the next twelve months. However, we could be required, or could elect, to raise additional funds during that period and we may need to raise additional capital in the future. We may not be able to obtain additional capital on terms favorable to us or at all due to economic conditions and the early stage of the Soapstone products. The issuance of additional equity or equity-related securities would be dilutive to our stockholders. If we cannot raise funds on acceptable terms, or at all, we may not be able to develop or enhance our Soapstone products or respond appropriately to competitive pressures, which would seriously limit our ability to increase our revenue and grow our business.

 

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Contractual Obligations

At March 31, 2009, our contractual obligations, which consist entirely of operating leases, were as follows (in thousands):

 

Fiscal Year

   Operating
Leases

2009 (remainder of year)

   $ 551

2010

     635

2011

     663

2012

     692

2013

     720

2014

     680
      

Total future contractual commitments

   $ 3,941
      

Payments made under operating leases will be treated as rent expense for the facilities. In addition, associated with the lease, the Company is obligated to pay common area maintenance charges and real estate taxes which could vary each year.

Off-Balance Sheet Arrangements

As of March 31, 2009, we did not have any off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Factors That May Affect Future Results

This Form 10-Q contains “forward-looking statements” that are subject to the safe harbors created under the Private Securities Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Any statements in this Form 10-Q that are not statements of historical fact are forward-looking statements that are subject to a number of important risks, assumptions and uncertainties that could cause actual results to differ materially from those expressed in our forward-looking statements. The Company may experience difficulties identifying, analyzing and consummating strategic alternatives, and such alternatives may not lead to the achievement of desired results. In addition, the Soapstone Networks business and market opportunity are at an early stage of development and accordingly estimates, projections and statements regarding our business, products, plans, objectives and expected operating results, and the assumptions upon which those statements are based, are forward-looking statements. Specifically, this Quarterly Report contains forward-looking statements relating to: our engagement of an investment banker to assist in our exploration of strategic alternatives; the impact of our reductions in workforce announced in February 2009 and April 2009; technology trends and the development, size, characteristics, and growth of our markets; the Company’s position in our markets; the development, introduction and market acceptance of new products, enhancements and services; the development of a direct sales force, indirect sales channels and technology partnerships; the expansion of customer relationships; the addition of Soapstone customers; the expected operating results from our Soapstone business; our ability to manage the transition of our core router business; and our expectations regarding competition and technological change. For a more detailed description of the risk factors associated with the Company, please refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 as filed with the Securities and Exchange Commission on March 10, 2009 and as amended by the filing of the Amended Annual Report on Form 10-K/A on April 30, 2009. We do not undertake to update our forward-looking statements.

 

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Recent Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business Combinations” (“SFAS 141R”). SFAS 141R retains the fundamental requirements in FASB Statement 141 that the acquisition method of accounting (which Statement 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. SFAS 141R requires an acquirer to recognize the assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in SFAS 141R. That replaces FASB Statement 141’s cost-allocation process, which required the cost of an acquisition to be allocated to the individual assets acquired and liabilities assumed based on their estimated fair values. SFAS 141R will now require acquisition costs to be expensed as incurred; restructuring costs associated with a business combination must generally be expensed prior to the acquisition date and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. SFAS 141R applies prospectively to business combinations for which the acquisition date is in fiscal years beginning after December 15, 2008. Earlier adoption is prohibited. The Company adopted this pronouncement in the first quarter of 2009. The adoption of the provisions of SFAS 141R did not have a material impact on the Company’s financial position or results of operations.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS 160”). SFAS 160 clarifies that a noncontrolling or minority interest in a subsidiary is considered an ownership interest and, accordingly, requires all entities to report such interests in subsidiaries as equity in the consolidated financial statements. SFAS 160 is effective for fiscal years beginning after December 15, 2008. The Company adopted this pronouncement in the first quarter of 2009. The adoption of the provisions of SFAS 160 did not have a material impact on the Company’s financial position and results of operations.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk related to changes in interest rates and foreign currency exchange rates. We do not use derivative financial instruments for speculative or trading purposes.

Interest Rate Sensitivity

We maintain an investment portfolio consisting mainly of investment grade money market funds, corporate obligations and federal agency obligations with a weighted-average maturity of less than one year. These held-to-maturity securities are subject to interest rate risk and will fall in value if market interest rates increase. If market interest rates were to increase immediately and uniformly by 10% from the levels at March 31, 2009, the fair market value of these investments would decline by an immaterial amount. We have the ability to hold our fixed income investments until maturity. Therefore, we would not expect our operating results or cash flows to be affected to any significant degree by a sudden change in market interest rates on our securities portfolio.

Exchange Rate Sensitivity

We operate primarily in the United States, and international sales historically have been in U.S. dollars and are expected to continue in U.S. dollars. Accordingly, there has not been any material exposure to foreign currency rate fluctuations. If we expand our presence in foreign markets and consummate sales denominated in foreign currencies, our exposure to foreign currency rate fluctuations could be material in the future.

The Company has no off balance sheet concentrations such as foreign exchange contracts, option contracts or other foreign hedging arrangements.

 

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

The Company, under the supervision and with the participation of the Company’s management, including the principal executive officer and principal financial officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this quarterly report (the “Evaluation Date”) pursuant to Rule 13a-15(b) and 15d-15(b) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, the Company’s principal executive officer and principal financial officer have concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures effectively ensure that information required to be disclosed in our filings and submissions under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

Changes in internal control over financial reporting

There were no changes in the Company’s internal control over financial reporting during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

ITEM 1: LEGAL PROCEEDINGS

Twelve purported securities class action lawsuits were filed against the Company and one or more of the Company’s underwriters in its initial public offering, and certain officers and directors of the Company. The lawsuits alleged violations of the federal securities laws and were docketed in the U.S. District Court for the Southern District of New York (the “Court”) as: Felzen, et al. v. Avici Systems, Inc., et al., C.A. No. 01-CV-3363; Lefkowitz, et al. v. Avici Systems, Inc., et al., C.A. No. 01-CV-3541; Lewis, et al. v. Avici Systems, Inc., et al., C.A. No. 01-CV-3698; Mandel, et. al v. Avici Systems, Inc., et al., C.A. No. 01-CV-3713; Minai, et al. v. Avici Systems, Inc., et al., C.A. No. 01-CV-3870; Steinberg, et al. v. Avici Systems Inc., et al., C.A. No. 01-CV-3983; Pelissier, et al. v. Avici Systems, Inc., et al., C.A. No. 01-CV-4204; Esther, et al. v. Avici Systems, Inc., et al., C.A. No. 01-CV-4352; Zhous, et al. v. Avici Systems, Inc. et al., C.A. No. 01-CV-4494; Mammen, et al. v. Avici Systems, Inc., et. al., C.A. No. 01-CV-5722; Lin, et al. v. Avici Systems, Inc., et al., C.A. No. 01-CV-5674; and Shives, et al. v. Banc of America Securities, et al., C.A. No. 01-CV-4956. On April 19, 2002, a consolidated amended class action complaint (the “Complaint”), which superseded these twelve purported securities class action lawsuits, was filed in the Court. The Complaint is captioned “In re Avici Systems, Inc. Initial Public Offering Securities Litigation” (21 MC 92, 01 Civ. 3363 (SAS)) and names as defendants the Company, certain of the underwriters of the Company’s initial public offering, and certain of the Company’s officers and directors. The Complaint, which seeks unspecified damages, alleges violations of the federal securities laws, including among other things, that the underwriters of the Company’s initial public offering (“IPO”) improperly required their customers to pay the underwriters excessive commissions and to agree to buy additional shares of stock in the aftermarket as conditions of receiving shares in the Company’s IPO. The Complaint further claims that these supposed practices of the underwriters should have been disclosed in the Company’s IPO prospectus and registration statement. In addition to the Complaint against the Company, various other plaintiffs have filed other substantially similar class action cases against approximately 300 other publicly traded companies and their IPO underwriters in New York City, which along with the case against the Company have all been transferred to a single federal district judge for purposes of case management. The Company and its officers and directors believe that the claims against the Company lack merit, and have defended the litigation vigorously. In that regard, on July 15, 2002, the Company, together with the other issuers named as defendants in these coordinated proceedings, filed a collective motion to dismiss the consolidated amended complaints against them on various legal grounds common to all or most of the issuer defendants.

On October 9, 2002, the Court dismissed without prejudice all claims against the individual current and former officers and directors who were named as defendants in our litigation, and they are no longer parties to the lawsuit. On February 19, 2003, the Court issued its ruling on the motions to dismiss filed by the issuer defendants and separate motions to dismiss filed by the underwriter defendants. In that ruling, the Court granted in part and denied in part those motions. As to the claims brought against the Company under the antifraud provisions of the securities laws, the Court dismissed all of these claims with prejudice, and refused to allow the plaintiffs an opportunity to re-plead these claims against the Company. As to the claims brought under the registration provisions of the securities laws, which do not require that intent to defraud be pleaded, the Court denied the motion to dismiss these claims as to the Company and as to substantially all of the other issuer defendants as well. The Court also denied the underwriter defendants’ motion to dismiss in all respects.

In June 2003, the Company elected to participate in a proposed settlement agreement with the plaintiffs in this litigation. If the proposed settlement had been approved by the Court, it would have resulted in the dismissal, with prejudice, of all claims in the litigation against the Company and against any of the other issuer defendants who elected to participate in the proposed settlement, together with the current or former officers and directors of participating issuers who were named as individual defendants. This proposed settlement was conditioned on, among other things, a ruling by the District Court that the claims against the Company and against the other issuers who had agreed to the settlement would be certified for class action treatment for purposes of the proposed settlement, such that all investors included in the proposed classes in these cases would be bound by the terms of the settlement unless an investor opted to be excluded from the settlement.

 

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On December 5, 2006, the U.S. Court of Appeals for the Second Circuit issued a decision that six purported class action lawsuits containing allegations substantially similar to those asserted against the Company may not be certified as class actions due, in part, to the Appeals Court’s determination that individual issues of reliance and knowledge would predominate over issues common to the proposed classes. On January 8, 2007, the plaintiffs filed a petition seeking rehearing en banc of this ruling. On April 6, 2007 the Court of Appeals denied the plaintiffs’ petition for rehearing of the Court’s December 5, 2006 ruling but noted that the plaintiffs remained free to ask the District Court to certify classes different from the ones originally proposed which might meet the standards for class certification that the Court of Appeals articulated in its December 5, 2006 decision.

In light of the Court of Appeals’ December 5, 2006 decision regarding certification of the plaintiffs’ claims, the District Court entered an order on June 25, 2007 terminating the proposed settlement between the plaintiffs and the issuers, including the Company. On August 14, 2007, the plaintiffs filed amended complaints in the six focus cases. On November 13, 2007, the issuer defendants and the underwriter defendants separately moved to dismiss the claims against them in the amended complaints in the six focus cases. On March 26, 2008, the District Court issued an order in which it denied in substantial part the motions to dismiss the amended complaints in the six focus cases.

On February 25, 2009, the parties advised the District Court that they have reached an agreement-in-principle to settle the litigation in its entirety. A stipulation of settlement was filed with the District Court on April 2, 2009. The proposed global settlement remains subject to preliminary and final approval by the District Court. While we can make no promises or guarantees as to the outcome of these proceedings, the Company does not believe that a loss is probable or reasonably estimable as of the balance sheet date.

In addition, the Company received letters dated July 13, 2007 and July 25, 2007 from a putative shareholder, demanding that the Company investigate and prosecute a claim for alleged short-swing trading in violation of Section 16(b) of the Securities Exchange Act of 1934 by the underwriters of its IPO and certain unidentified directors, officers and shareholders of the Company. The Company evaluated the demand and declined to prosecute the claim. On October 3, 2007, the putative shareholder commenced a civil lawsuit in the U.S. District Court for the Western District of Washington against the lead underwriters of the Company’s IPO, alleging violations of Section 16(b). The complaint alleges that the combined number of shares of the Company’s common stock beneficially owned by the lead underwriters and certain unnamed officers, directors, and principal shareholders exceeded ten percent of its outstanding common stock from the date of the Company’s IPO on July 28, 2000, through at least July 27, 2001. It further alleges that those entities and individuals were thus subject to the reporting requirements of Section 16(a) and the short-swing trading prohibition of Section 16(b), and failed to comply with those provisions. The complaint seeks to recover from the lead underwriters any “short-swing profits” obtained by them in violation of Section 16(b). The Company was named as a nominal defendant in the action, but has no liability for the asserted claims. No directors or officers of the Company are named as defendants in this action. On October 29, 2007, the case was reassigned to Judge James L. Robart along with similar cases involving the IPO’s of 53 other issuers. These 54 actions were consolidated for pre-trial purposes. On February 27, 2008, the putative shareholder filed an Amended Complaint asserting substantially similar claims as those set forth in the initial complaint. On July 25, 2008, the Company joined with 29 other issuers to file with the Court the Issuer Defendants’ Joint Motion to dismiss. The plaintiff filed her opposition to this motion on September 8, 2008, and the Issuer Defendants’ Reply in Support of Their Joint Motion to Dismiss was filed on October 23, 2008.

On March 12, 2009, Judge Robart granted the Issuer Defendants’ Joint Motion to Dismiss, dismissing the complaint without prejudice on the grounds that the plaintiff had failed to make an adequate demand on the Company prior to filing her complaint. In its order, the Court stated it would not permit the plaintiff to amend her demand letters while pursuing her claims in the litigation. Because the Court dismissed the case on the grounds that it lacked subject matter jurisdiction, it did not specifically reach the issue of whether the plaintiff’s claims were barred by the applicable statute of limitations. However, the Court also granted the Underwriters’ Joint Motion to Dismiss with respect to cases involving non-moving issuers, holding that the cases were barred by the applicable statute of limitations because the issuers’ shareholders had notice of the potential claims more than five years prior to filing suit.

The plaintiff filed a Notice of Appeal on April 10, 2009. The plaintiff’s opening brief in the appeal is currently due on July 27, 2009, with the Company and the underwriters’ responses due on August 25, 2009. The plaintiff may file

 

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a reply brief on September 8, 2009. The Company believes that the outcome of this litigation will not have a material adverse impact on its consolidated financial position, results of operations or cash flows.

In addition, we are subject to legal proceedings, claims and investigations that arise in the ordinary course of business such as, but not limited to, patent employment, commercial and environmental matters. Although there can be no assurance, there are no such matters pending that we expect to be material with respect to our business, financial position or results of operations.

 

ITEM 1A: RISK FACTORS

There are no material changes to the risk factors described in the “Risk Factors” section in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 filed with the SEC on March 10, 2009 and as amended by the filing of the Amended Annual Report on Form 10-K/A on April 30, 2009.

 

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ITEM 6. EXHIBITS

 

(a) List of Exhibits

 

Exhibit No.

 

Exhibit Description

31.1       Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2       Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1       Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2       Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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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.

 

      SOAPSTONE NETWORKS INC.
Date  

April 30, 2009

    By:  

/s/ William J. Stuart

       

William J. Stuart

Chief Financial Officer

(Duly Authorized Officer and Principal Financial Officer)

 

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EXHIBIT INDEX

 

Exhibit No.

 

Exhibit Description

31.1       Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2       Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1       Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2       Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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