<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 30, 1999
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 333-25853
SYCAMORE NETWORKS, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3410558
(State of other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
10 Elizabeth Drive
Chelmsford, MA 01824
(978) 250-2900
(Address Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
NONE
(Former name, former address and former fiscal year,
if changed since last report)
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) Yes X No ___, and (2) has been
subject to such filing requirements for the past 90 days. Yes___ No X .
ALTHOUGH THE REGISTRANT HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS, THE REGISTRANT DID NOT BECOME
SUBJECT TO SUCH FILING REQUIREMENTS UNTIL THE REGISTRATION OF CERTAIN SHARES OF
ITS COMMON STOCK PURSUANT TO A REGISTRATION STATEMENT ON FORM S-1 (THE
"REGISTRATION STATEMENT") WHICH WAS DECLARED EFFECTIVE BY THE SECURITIES AND
EXCHANGE COMMISSION ON OCTOBER 21, 1999.
The number of shares outstanding of the Registrant's Common Stock as of November
30, 1999 was 78,696,484.
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Sycamore Networks, Inc.
Index
Part I. Financial Information
<TABLE>
<CAPTION>
Page No.
<S> <C> <C>
Item 1. Financial Statements and Supplementary Data
Balance Sheets as of October 30, 1999 and July 31, 1999 3
Statements of Operations for the three months
ended October 30, 1999 and October 31, 1998 4
Statements of Cash Flows for the three months ended
October 30, 1999 and October 31, 1998 5
Notes to financial statements 6
Item 2. Management's discussion and analysis of financial
condition and results of operations 8
Item 3. Qualitative and quantitative disclosures about market risk 21
Part II Other Information
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Signature 24
Exhibit Index 25
</TABLE>
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Part I. Financial Information
Item 1.
Sycamore Networks, Inc.
(in thousands, except share data)
<TABLE>
<CAPTION>
October 30, July 31,
1999 1999
---- ----
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 280,634 $ 21,969
Marketable securities 10,196 7,020
Accounts receivable 12,524 11,410
Inventories 7,568 6,608
Prepaids and other current assets 3,015 5,153
---------- ---------
Total current assets 313,937 52,160
Property and equipment, net 7,117 5,288
Other assets 919 464
---------- ---------
Total assets $ 321,973 $ 57,912
========== =========
Liabilities, Redeemable Convertible Preferred Stock
and Stockholders' Equity (Deficit)
Current liabilities:
Current portion of notes payable $ -- $ 1,097
Accounts payable 10,546 5,750
Accrued compensation 813 1,403
Accrued warranty 987 453
Accrued expenses 2,042 1,298
Other current liabilities 961 1,709
---------- ---------
Total current liabilities 15,349 11,710
Notes payable -- 4,054
Commitments and contingencies
Redeemable convertible preferred stock -- 55,771
Stockholders' equity (deficit):
Preferred stock, $.01 par value, 5,000,000
shares authorized; none issued or outstanding -- --
Common stock, $.001 par value; 250,000,000
shares authorized; 78,696,484 and 23,273,112
shares issued and outstanding 79 23
Additional paid-in capital 385,584 30,826
Accumulated deficit (25,900) (20,183)
Notes receivable (460) (360)
Deferred compensation (52,679) (23,929)
---------- ---------
Total stockholders' equity (deficit) 306,624 (13,623)
---------- ---------
Total liabilities, redeemable convertible preferred
stock and stockholders' equity (deficit) $ 321,973 $ 57,912
========== =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
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Sycamore Networks, Inc.
Statements of Operations
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
--------------------
October 30, October 31,
1999 1998
---- ----
<S> <C> <C>
Revenues $ 19,510 $ -
Cost of revenues 10,340 24
----------- ----------
Gross profit (loss) 9,170 (24)
Operating expenses:
Research and development 7,844 873
Sales and marketing 3,445 179
General and administrative 751 93
Amortization of stock compensation 3,289 75
----------- ----------
Total operating expenses 15,329 1,220
Loss from operations (6,159) (1,244)
Interest income, net 442 60
----------- ----------
Net loss $ (5,717) (1,184)
=========== ==========
Basic and diluted net loss per share $ (0.56) $ (0.39)
Weighted average shares used in computing
basic and diluted net loss per share 10,294 3,009
Pro forma basic and diluted net loss per share $ (0.11) $ (0.05)
Weighted average shares used in computing pro
forma basic and diluted net loss per share 53,420 21,750
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
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Sycamore Networks, Inc.
Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Three months ended
------------------
October 30, October 31,
1999 1998
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (5,717) $ (1,184)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 650 75
Amortization of stock compensation 3,289 75
Changes in operating assets and liabilities:
Accounts receivable (1,114) -
Inventories (960) -
Prepaids and other current assets 2,138 (176)
Accounts payable 4,796 (6)
Accrued expenses and other current liabilities (60) (29)
------------ ---------
Net cash provided by (used in) operating activities 3,022 (1,245)
------------ ---------
Cash flows from investing activities:
Purchases of property and equipment (2,479) (417)
Purchases of marketable securities (8,082) -
Maturities of marketable securities 4,906 -
Increase in other assets (455) -
------------ ---------
Net cash used in investing activities (6,110) (417)
------------ ---------
Cash flows from financing activities:
Proceeds from issuance of redeemable convertible preferred stock, net - 2,525
Proceeds from issuance of common stock, net 266,904 147
Proceeds from notes payable - 673
Payments on notes payable (5,151) -
------------ ---------
Net cash provided by financing activities 261,753 3,345
------------ ---------
Net increase in cash and cash equivalents 258,665 1,683
Cash and cash equivalents, beginning of period $ 21,969 $ 1,197
------------ ---------
Cash and cash equivalents, end of period $ 280,634 $ 2,880
============ =========
Supplementary non-cash activity:
Issuance of common stock in exchange for notes receivable $ 100 $ -
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
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Sycamore Networks, Inc.
Notes To Financial Statements
1. Description of Business
Sycamore Networks, Inc. ("Sycamore", or the "Company") was incorporated in
Delaware on February 17, 1998. Sycamore develops and markets products that
transport voice and data traffic over wavelengths of light. Sycamore's products
enable service providers to quickly and cost effectively provide bandwidth and
create new high-speed data services. To date, Sycamore has principally marketed
its products in the United States. Through May 1, 1999, Sycamore was considered
to be in the development stage and was principally engaged in research and
development, raising capital and building its management team. Sycamore shipped
its first product in May 1999. Sycamore operates in one business segment.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited financial statements have been prepared by Sycamore
and reflect all adjustments, consisting only of normal recurring adjustments,
which in the opinion of management are necessary for a fair statement of the
results for the interim periods. The financial statements have been prepared in
accordance with the regulations of the Securities and Exchange Commission
("SEC"), but omit certain information and footnote disclosure necessary to
present the statements in accordance with generally accepted accounting
principles. Results for the interim periods are not necessarily indicative of
results for the entire fiscal year. These statements should be read in
conjunction with the financial statements and related footnotes included in
Sycamore's registration statement Form S-1 filed with the SEC on October 21,
1999 for the year ended July 31, 1999.
3. Net Loss Per Share and Pro Forma Loss Per Share
Basic net loss per share is computed by dividing the net loss for the period by
the weighted average number of common shares outstanding during the period.
Diluted net loss per share is computed by dividing the net loss for the period
by the weighted average number of common and common equivalent shares
outstanding during the period, if dilutive. Common equivalent shares are
composed of unvested shares of restricted common stock and the incremental
common shares issuable upon the exercise of stock options.
Pro forma net loss per share is computed using the weighted average number of
common shares outstanding, including the pro forma effects of the automatic
conversion of Sycamore's Series A, B, C and D redeemable convertible preferred
stock into shares of Sycamore's common stock, effective upon the closing of
Sycamore's initial public offering, as if such conversion had occurred at the
date of original issuance.
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The following table sets forth the computation of basic and diluted net loss per
share:
<TABLE>
<CAPTION>
(in thousands, except per share data) Three Months Three Months
Ended Ended
October 30, 1999 October 31, 1998
---------------- ----------------
<S> <C> <C>
Numerator:
Net loss $ (5,717) $(1,184)
Denominator:
Historical:
Weighted average common shares outstanding 28,545 10,032
Weighted average common shares outstanding
subject to repurchase (18,251) (7,023)
-------- -------
Denominator for basic and diluted calculation 10,294 3,009
======== =======
Basic and diluted net loss per share $ (.56) $ (.39)
======== =======
Pro Forma:
Historical weighted average common shares outstanding 10,294 3,009
Weighted average number of shares assumed
upon conversion of redeemable convertible
preferred stock 43,126 18,741
-------- -------
Shares used in computing pro forma basic and
diluted net loss per share 53,420 21,750
======== =======
Pro forma basic and diluted net loss per share $ (.11) $ (.05)
======== =======
</TABLE>
Options to purchase 4,828,849 and 28,500 shares of common stock at respective
average exercise prices of $11.09 and $.02 per share, have not been included in
the computation of diluted net loss per share for the three months ended October
30, 1999 and October 31, 1998, respectively, as their effect would have been
anti-dilutive.
4. Inventory
Inventory consisted of the following (in thousands):
October 30, July 31,
1999 1999
---- ----
Raw materials $1,826 $2,164
Work in process 2,427 3,026
Finished goods 3,315 1,418
------ ------
$7,568 $6,608
====== ======
5. Other Comprehensive Income
Sycamore reports comprehensive income (loss) in accordance with Statement of
Financial Accounting Standard No. 130, "Reporting Comprehensive Income" (FAS
130). The comprehensive net loss for the three months ended October 30, 1999 and
October 31, 1999 does not differ from the reported net loss.
7
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6. Initial Public Offering
On October 21, 1999, Sycamore completed its initial public offering ("IPO") in
which it sold 7,475,000 shares of Common Stock at a price to the public of
$38.00 per share. The net proceeds of the IPO, after deducting underwriting
discounts and other offering expenses, were approximately $263.0 million. Upon
the closing of the IPO, all redeemable convertible preferred Stock (Series A, B,
C and D) automatically converted to 47,283,225 shares of Common Stock.
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Except for the historical information contained herein, we wish to caution you
that certain matters discussed in this Report on Form 10-Q constitute forward-
looking statements that involve risks 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 "Factors That May Effect Future Results" included
herein and under the caption "Risk Factors" in the Company's Registration
Statement on Form S-1 (No. 333-84635) filed by the Company in connection with
its IPO which became effective October 21, 1999. 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
Sycamore develops and markets products that transport voice and data traffic
over wavelengths of light. Sycamore's products enable service providers to
quickly and cost effectively provide bandwidth and create new high-speed data
services. From Sycamore's inception in February 1998 through May 1, 1999,
Sycamore's operating activities consisted primarily of research and development,
product design, development and testing. During this period, Sycamore also
staffed and trained its administrative, marketing and sales personnel and began
sales and marketing activities. In May 1999, Sycamore began shipping the SN
6000 product and recognized revenues of $11.3 million from shipments of the SN
6000 in the fourth quarter of 1999. Since inception, Sycamore has incurred
significant losses, and as of October 30, 1999, had an accumulated deficit of
$25.9 million. Sycamore has not achieved profitability on a quarterly or annual
basis.
Revenues are currently generated from two products: the SN 6000 and the SN 8000.
While Sycamore is developing and plans to introduce future products, there can
be no assurance that it will be successful in these efforts.
Results of Operations
Revenues
Revenues for the three months ended October 30, 1999 were $19.5 million (none
for the corresponding period in the prior year). Sycamore began shipping the SN
6000 in May 1999. The SN 8000 was first shipped in August 1999. For the three
months ended October 30, 1999, one customer accounted for all revenues.
Cost of Revenues
Cost of revenues were $10.3 million for the three months ended October 30, 1999
compared to $24,000 for the same period in fiscal 1999. Sycamore began shipping
the SN 6000 in May 1999 and the SN 8000 in August 1999. Cost of revenues
includes material costs, costs of manufacturing overhead, the cost of the
customer service organization and other period costs.
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Research and Development Expenses
Research and development expenses increased $6.9 million to $7.8 million for the
three months ended October 30, 1999 compared to $873,000 for the same period in
fiscal 1999. The increase in expenses was primarily due to increased costs
associated with a significant increase in personnel and personnel-related
expenses, an increase in non-recurring engineering costs and an increase in
prototype expenses for the design and development of new products as well as
enhancements to existing products. Research and development is essential to
Sycamore's future success and Sycamore expects that the dollar amounts of
research and development expenses to increase in future periods.
Sales and Marketing Expenses
Sales and marketing expenses increased $3.3 million to $3.4 million for the
three months ended October 30, 1999 compared to $179,000 for the same period in
fiscal 1999. The increase in expenses reflects the hiring of additional sales
and marketing personnel, sales based commissions and marketing program costs,
including web development, trade shows and product launch activities. Sycamore
intends to continue to expand its domestic and international sales force and
marketing efforts, and as a result, expects that the dollar amounts of sales and
marketing expenses will increase in future periods.
General and Administrative Expenses
General and administrative expenses increased $658,000 to $751,000 for the three
months ended October 30, 1999 compared to $93,000 for the same period in fiscal
1999. The increase in expenses reflects the hiring of additional general and
administrative personnel and expenses necessary to support increased levels of
business activities. Sycamore expects that the dollar amounts of general and
administrative expenses will increase in future periods as a result of expansion
of business activity and the reporting and other requirements of being a
publicly traded company.
Amortization of Stock Compensation
Amortization of stock compensation expense was $3.3 million and $75,000 for the
three months ended October 30, 1999 and October 31, 1998, respectively. Amounts
for the three months ended October 30, 1999 include $837,000 of compensation
expense associated with the grant of options to purchase common stock to non-
employees and consultants. For the three months ended October 30, 1999, Sycamore
granted 3,182,196 stock options at exercise prices, ranging from $4.00 to
$17.50, which were deemed to be below fair market value, and recorded additional
deferred compensation expense of approximately $31.2 million related to these
grants. Amortization of stock compensation relating to these grants is expected
to impact Sycamore's reported results of operations through the first quarter of
fiscal 2005.
Interest Income, Net
Interest income, net was $442,000 and $60,000 for the three months ended October
30, 1999 and October 31, 1998, respectively. The increase in interest income
reflects higher invested balances and interest earnings on the IPO proceeds,
offset by interest payments on the notes payable.
Net Operating Losses and Tax Credit Carryforwards
As of October 30, 1999, Sycamore had approximately $19.0 million of state and
federal net operating loss carryforwards for tax reporting purposes available to
offset future taxable income. Such net operating loss carryforwards begin to
expire in 2004 and 2019, respectively, to the extent that they are not utilized.
Sycamore has not recognized any benefit from the future use of loss
carryforwards for these periods, or for any other periods, since inception.
Management's evaluation of all the available evidence in assessing realizability
of the tax benefits of such loss carryforwards indicates that the underlying
assumptions of future profitable operations contain risks that do not provide
sufficient assurance to recognize the tax benefits currently. The net operating
loss carryforwards could be limited in future years if there is a significant
change in our ownership.
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Liquidity and Capital Resources
Prior to its IPO, Sycamore financed its operations primarily through private
sales of its capital stock and through borrowings on long-term debt agreements
for the purchase of capital equipment. On October 22, 1999, Sycamore completed
its IPO in which it sold 7,475,000 shares of Common Stock at a price to the
public of $38.00 per share. The net proceeds of the IPO, after deducting
underwriting discounts and other offering expenses, were approximately $263.0
million
At October 30, 1999, cash, cash equivalents and marketable securities totaled
$290.8 million. Sycamore invests excess funds in short-term money market funds,
commercial paper and government and non-government debt securities.
Cash provided by operating activities was $3.0 million for the three months
ended October 30, 1999, compared to cash used in operating activities of $1.2
million for the three months ended October 31, 1998. The increase in cash
provided by operating activities is primarily due to increases in non-cash
charges for amortization of stock compensation and depreciation, accounts
payable offset by the increases in net losses, accounts receivables and
inventory purchases.
Cash used in investing activities was $6.1 million for the three months ended
October 30, 1999, compared to $417,000 for the three months ended October 31,
1998. The increase in net cash used in investing activities reflects increased
purchases of property and equipment, primarily for computers and test equipment
for our development and manufacturing activities, and increased net purchases of
marketable securities.
Cash provided by financing activities was $261.8 million for the three months
ended October 30, 1999 and $3.3 million for the three months ended October 31,
1998. The increase in cash provided by financing activities reflects the net
proceeds of $263.0 million from Sycamore's IPO and the issuance of common stock
from the exercise of stock options, offset by payments of debt obligations.
In December 1998, Sycamore issued an irrevocable stand-by letter of credit for
$92,000 for an office facility lease which is collateralized by an U.S. Treasury
Bill. The letter of credit is irrevocable and expires in January 2002. In July
1999, Sycamore issued a guaranteed stand-by letter of credit for $4,000,000 for
inventory purchases made by a third party manufacturer on behalf of Sycamore
which is collateralized by a U.S. Government security. The letter of credit was
irrevocable and expired in October 1999.
Sycamore believes that the net proceeds from the IPO, together with Sycamore's
current cash, cash equivalents and marketable securities will be sufficient to
meet anticipated cash needs for working capital and capital expenditures for at
least the next twelve months.
Year 2000 Readiness Disclosure
State of Readiness of Sycamore's Products.
Sycamore has designed its products for use in the year 2000 and beyond and
Sycamore believes its products are year 2000 complaint. However, Sycamore's
products are generally integrated into larger networks involving sophisticated
hardware and software products supplied by other vendors. Each of Sycamore's
customers' networks involves different combinations of third party products.
Sycamore cannot evaluate whether all of these third-party vendor products are
year 2000 compliant. Sycamore may face warranty and other claims based on year
2000 problems in other companies' products or based on issues arising from the
integration of multiple products within the customer's overall network. Although
no such claims have been made against Sycamore, Sycamore may in the future be
required to defend its products in legal proceedings which could be expensive
regardless of the merits of such claims. In addition, some customers may wait to
purchase Sycamore's products until after the year 2000, which may negatively
impact Sycamore's revenue.
10
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State of Readiness of Sycamore's Internal Systems.
Sycamore's business may be affected by year 2000 issues related to non-complaint
internal systems developed by Sycamore or by third-party vendors. The failure of
Sycamore's internal systems to be year 2000 compliant could temporarily prevent
Sycamore from processing orders, issuing invoices and developing products and
could require Sycamore to devote significant resources to correct such problems.
Sycamore has substantially completed the year 2000 testing and conversion of its
material internal systems and is not currently aware of any year 2000 problem
relating to any of such systems. Sycamore's material third-party vendors have
stated that they are, or expect to be, year 2000 complaint in a timely manner.
Sycamore cannot independently verify the Year 2000 compliance of its third party
vendors. Sycamore's internal operations and business are also dependent upon the
computer-controlled systems of third parties such as Sycamore's manufacturers,
suppliers, customers and other service providers. Sycamore believes that absent
a systemic failure outside Sycamore's control, such as a prolonged loss of
electrical or telephone service, year 2000 problems of third parties such as
manufacturers, suppliers, customers and service providers will not have a
material impact on Sycamore's operations. However, due to the uncertainty as to
the year 2000 readiness of Sycamore's manufacturer's, suppliers, customers and
other service providers, Sycamore is unable to determine at this time whether
the consequences of year 2000 failures will have a material impact on Sycamore's
business, results of operations or financial condition.
Risks
If Sycamore's manufacturers, suppliers, vendors, partners, customers and service
providers fail to correct their year 2000 problems, these failures could result
in an interruption in, or a failure of, Sycamore's normal business activities or
operations. If a year 2000 problem occurs, it may be difficult to determine
which party's products have caused the problem. These failures could interrupt
Sycamore's operations and damage Sycamore's relationships with Sycamore's
customers. Due to the general uncertainty inherent in the year 2000 problem
resulting from the readiness of third-party manufacturers, suppliers and
vendors, Sycamore is unable to determine at this time whether year 2000 failures
could harm Sycamore's business, results of operations or financial condition.
Sycamore's customers' purchasing plans could be affected by year 2000 issues if
they need to expend significant resources to fix their existing internal systems
to become year 2000 compliant. This situation may reduce funds available to
purchase Sycamore's products.
In addition, in the event that a significant number of Sycamore's customers
experience year 2000-related problems, whether or not due to Sycamore's
products, demand for technical support and assistance may increase
substantially. In such case, Sycamore's cost for providing technical support may
rise and the quality of such technical support and Sycamore's ability to manage
incoming requests may be impaired.
To date, Sycamore has not incurred material expense associated with its efforts
to become year 2000 compliant and does not anticipate that any future costs in
connection with Sycamore's year 2000 remediation efforts will be material.
Sycamore has developed contingency plans to be implemented if its efforts to
identify and correct Year 2000 problems affecting our internal systems are not
effective. Sycamore's implementation of any contingency plan could have an
adverse effect on its business, results of operations or financial condition.
Factors That May Effect Future Results
Sycamore Expects That Substantially All Of its Revenues Will Be Generated From A
Limited Number Of Customers And Sycamore's Revenues Will Not Grow If It Does Not
Successfully Sell Products To These Customers
Sycamore currently has a limited number of customers, one of whom, Williams
Communications, is significant. Williams is not contractually committed to
purchase any minimum quantities of products from us. Sycamore expects that in
the foreseeable future substantially all of our revenues will continue to depend
on sales of intelligent optical networking products to Williams and a limited
number of potential new customers. The rate at which Sycamore's current and
prospective customers purchase products from us will depend, in part, on their
success in selling communications services based on these products to their own
customers. Any failure of current or prospective customers to purchase products
from Sycamore for any reason, including any determination not to install our
products in their networks or a downturn in their business, would seriously harm
Sycamore's financial condition or results of its operations.
11
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Sycamore Has Been In Business For A Short Period Of Time And The Basis For
Evaluating Sycamore Is Limited
Sycamore was founded in February 1998 and shipped its first intelligent optical
networking product in May 1999. Sycamore has limited meaningful historical
financial data upon which to base projected revenues and planned operating
expenses and upon which investors may evaluate Sycamore and its prospects. In
addition, Sycamore's operating expenses are largely based on anticipated revenue
trends and a high percentage of Sycamore's expenses are and will continue to be
fixed. Investors should consider the risks and difficulties frequently
encountered by companies like Sycamore in a new and rapidly evolving market.
Sycamore's ability to sell products, and the level of success, if any, Sycamore
achieves, depends, among other things, on the level of demand for intelligent
optical networking products, which is a new and rapidly evolving market.
Any Failure Of Sycamore To Increase Revenues Would Prevent Sycamore From
Achieving And Maintaining Profitability
Sycamore has incurred significant losses since inception and expects to continue
to incur losses in the future. As of October 30, 1999, Sycamore had an
accumulated deficit of $25.9 million. Sycamore has not achieved profitability on
a quarterly or annual basis, and Sycamore anticipates that it will continue to
incur net losses. There can be no assurances that Sycamore's revenues will grow
or that Sycamore will generate sufficient revenues to achieve or sustain
profitability. Sycamore has large fixed expenses and expects to continue to
incur significant and increasing sales and marketing, product development,
administrative and other expenses. As a result, Sycamore will need to generate
significantly higher revenues to achieve and maintain profitability.
Sycamore Is Entirely Dependent On Its Line Of Intelligent Optical Networking
Products And Sycamore's Future Revenue Depends On Their Commercial Success
Sycamore's future growth depends on the commercial success of its line of
intelligent optical networking products. To date, Sycamore's SN 6000 Intelligent
Optical Transport product and SN 8000 Optical Add/Drop product are the only
products that have been shipped to customers. Sycamore intends to develop and
introduce new products and enhancements to existing products in the future.
There can be no assurances that Sycamore will be successful in completing the
development or introduction of these products. Failure of current or planned
products to operate as expected could delay or prevent their adoption. If
Sycamore's target customers do not adopt, purchase and successfully deploy
Sycamore's current and planned products, Sycamore's revenues will not grow
significantly.
Because Sycamore's Products Are Complex And Are Deployed In Complex
Environments, They May Have Errors Or Defects That Are Found Only After Full
Deployment, Which Could Seriously Harm Sycamore's Business
Sycamore's intelligent optical networking products are complex and are designed
to be deployed in large and complex networks. Because of the nature of the
products, they can only be fully tested when completely deployed in very large
networks with high amounts of traffic. Sycamore's customers may discover errors
or defects in the hardware or the software, or the product may not operate as
expected, after it has been fully deployed. If Sycamore is unable to fix errors
or other problems that may be identified in full deployment, Sycamore could
experience:
. loss of or delay in revenues and loss of market share;
. loss of customers;
. failure to attract new customers or achieve market acceptance;
. diversion of development resources;
. increased service and warranty costs;
. legal actions by our customers; and
. increased insurance costs.
12
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The Long And Variable Sales Cycles For Sycamore's Products May Cause Revenues
And Operating Results To Vary Significantly From Quarter To Quarter
A customer's decision to purchase Sycamore's intelligent optical networking
products involves a significant commitment of its resources and a lengthy
evaluation, testing and product qualification process. As a result, Sycamore's
sales cycle is likely to be lengthy. Throughout the sales cycle, Sycamore spends
considerable time and expense educating and providing information to prospective
customers about the use and features of our products. Even after making a
decision to purchase, Sycamore believes that its customers will deploy the
products slowly and deliberately. Timing of deployment can vary widely and
depends on the skills of the customer, the size of the network deployment, the
complexity of the customer's network environment and the degree of hardware and
software configuration necessary. Customers with significant or complex networks
usually expand their networks in large increments on a periodic basis.
Accordingly, Sycamore may receive purchase orders for significant dollar amounts
on an irregular and unpredictable basis. Because of Sycamore's limited operating
history and the nature of its business, Sycamore cannot predict these sales and
deployment cycles. The long sales cycles, as well as Sycamore's expectation that
customers will tend to sporadically place large orders with short lead times,
may cause Sycamore's revenues and results of operations to vary significantly
and unexpectedly from quarter to quarter.
Sycamore May Not Be Successful If Its Customer Base Does Not Grow
Sycamore's future success will depend on attracting additional customers. The
growth of Sycamore's customer base could be adversely affected by:
. customer unwillingness to implement Sycamore's new optical networking
architecture;
. any delays or difficulties that Sycamore may incur in completing the
development and introduction of our planned products or products
enhancements;
. new product introductions by our competitors;
. any failure of Sycamore's products to perform as expected; or
. any difficulty Sycamore may incur in meeting customers' delivery
requirements.
The Intelligent Optical Networking Market Is New And Sycamore's Business Will
Suffer If It Does Not Develop As Expected
The market for intelligent optical networking products is new. There can be no
assurances that a viable market for our products will develop or be sustainable.
If this market does not develop, or develops more slowly than Sycamore expects,
Sycamore's business, results of operations and financial condition would be
seriously harmed.
If Sycamore Does Not Respond Rapidly To Technological Changes, Sycamore's
Products Could Become Obsolete
The market for intelligent optical networking products is likely to be
characterized by rapid technological change, frequent new product introductions
and changes in customer requirements. Sycamore may be unable to respond quickly
or effectively to these developments. Sycamore may experience design,
manufacturing, marketing and other difficulties that could delay or prevent
Sycamore's development, introduction or marketing of new products and
enhancements. The introduction of new products by competitors, market acceptance
of products based on new or alternative technologies or the emergence of new
industry standards, could render Sycamore's existing or future products
obsolete. In developing Sycamore's products, Sycamore has made, and will
continue to make, assumptions about the standards that may be adopted by its
customers and competitors. If the standards adopted are different from those
which Sycamore have chosen to support, market acceptance of our products may be
significantly reduced or delayed and our business will be seriously harmed. In
addition, the introduction of products incorporating new technologies and the
emergence of new industry standards could render Sycamore's existing products
obsolete. In addition, in order to introduce products incorporating new
technologies and new industry standards, Sycamore must be able to gain access to
the latest technologies of its customers, its suppliers and other network
vendors. Any failure to gain access to the latest technologies could impair the
competitiveness of Sycamore's products.
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Customer Requirements Are Likely To Evolve, And Sycamore Will Not Retain
Customers or Attract New Customers If Sycamore Does Not Anticipate And Meet
Specific Customer Requirements
Sycamore's current and prospective customers may require product features and
capabilities that its current products do not have. To achieve market acceptance
for Sycamore's products, Sycamore must effectively and timely anticipate and
adapt to customer requirements and offer products and services that meet
customer demands. Any failure of Sycamore to develop products or offer services
that satisfy customer requirements would seriously harm Sycamore's ability to
increase demand for its products. Sycamore intends to continue to invest in
product and technology development. The development of new or enhanced products
is a complex and uncertain process that requires the accurate anticipation of
technological and market trends. Sycamore may experience design, manufacturing,
marketing and other difficulties that could delay or prevent the development,
introduction or marketing of new products and enhancements. The introduction of
new or enhanced products also requires that Sycamore manage the transition from
older products in order to minimize disruption in customer ordering patterns and
ensure that adequate supplies of new products can be delivered to meet
anticipated customer demand. Sycamore's inability to effectively manage this
transition would cause Sycamore to lose current and prospective customers.
Sycamore's Market Is Highly Competitive, And Sycamore's Failure To Compete
Successfully Would Limit Its Ability to Increase Market Share
Competition in the public network infrastructure market is intense. This market
has historically been dominated by large companies, such as Lucent Technologies,
Nortel Networks, Cisco Systems and Ciena Corporation, and. Sycamore may face
competition from other large telecommunications companies who may enter its
market. In addition, a number of private companies have announced plans for new
products to address the same network problems which our products address. Many
of Sycamore's current and potential competitors have significantly greater
selling and marketing, technical, manufacturing, financial, and other resources,
including vendor-sponsored financing programs. Moreover, Sycamore's competitors
may foresee the course of market developments more accurately and could in the
future develop new technologies that compete with Sycamore's products or even
render those products obsolete. Due to the rapidly evolving markets in which
Sycamore competes, additional competitors with significant market presence and
financial resources may enter those markets, thereby further intensifying
competition.
In order to compete effectively, Sycamore must deliver products that:
. provide extremely high network reliability;
. scale easily and efficiently with minimum disruption to the network;
. interoperate with existing network designs and equipment vendors;
. reduce the complexity of the network by decreasing the need for
overlapping equipment;
. provide effective network management; and
. provide a cost-effective solution for service providers.
In addition, Sycamore believes that a knowledge of the infrastructure
requirements applicable to service providers, experience in working with service
providers to develop new services for their customers, and an ability to provide
vendor-sponsored financing are important competitive factors in our market.
Sycamore has limited ability to provide vendor-sponsored financing and this may
influence the purchasing decision of prospective customers, who may decide to
purchase products from one of our competitors who are better equipped to provide
such financing. If Sycamore is unable to compete successfully against its
current and future competitors, Sycamore could experience price reductions,
order cancellations and reduced gross margins, any one of which could materially
and adversely affect Sycamore's business, results of operations and financial
condition.
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Sycamore Is Likely To Face Difficulties In Obtaining And Retaining Customers If
Sycamore Does Not Expand Its Sales Organization And Its Customer Service And
Support Operations
Sycamore's products and services require a sophisticated sales effort targeted
at a limited number of key individuals within its prospective customers'
organizations. This effort requires specialized sales personnel and consulting
engineers. Sycamore is in the process of building its direct sales force and
plans to hire additional qualified sales personnel and consulting engineers.
Competition for these individuals is intense, and Sycamore might not be able to
hire the kind and number of sales personnel and consulting engineers required to
be successful. In addition, Sycamore believes that its future success is
dependent upon Sycamore's ability to establish successful relationships with a
variety of distribution partners. If Sycamore is unable to expand its direct
sales operations, or establish and expand an indirect sales channel, Sycamore
may not be able to increase market awareness or sales of its products, which may
prevent Sycamore from achieving and maintaining profitability. Sycamore
currently has a small customer service and support organization and will need to
increase staff to support new customers. The support of Sycamore's products
requires highly trained customer service and support personnel. Hiring customer
service and support personnel is very competitive in Sycamore's industry because
there are a limited number of people available with the necessary technical
skills and understanding of Sycamore's market. Once Sycamore hires such
personnel, they may require extensive training in Sycamore's intelligent optical
networking products. If Sycamore is unable to expand its customer service and
support organization and train them rapidly, Sycamore may not be able to
increase sales of its products.
Sycamore Depends Upon Contract Manufacturers And Any Disruption In These
Relationships May Cause Sycamore To Fail To Meet The Demands Of Its Customers
And Damage Its Customer Relationships
Sycamore relies on a small number of contract manufacturers to manufacture its
products in accordance with Sycamore's specifications, and to fill orders on a
timely basis. Celestica, Inc. provides comprehensive manufacturing services,
including assembly, test, control and shipment to our customers, and procures
material on Sycamore's behalf. Sycamore may not be able to effectively manage
its relationship with Celestica, and Celestica may not meet Sycamore's future
requirements for timely delivery. Each of Sycamore's contract manufacturers also
builds products for other companies, and there can be no assurances that they
will always have sufficient quantities of inventory available to fill orders
placed by Sycamore's customers, or that they will allocate their internal
resources to fill these orders on a timely basis. Sycamore does not have long-
term supply contracts with these manufacturers. Sycamore does not have internal
manufacturing capabilities. Qualifying a new contract manufacturer and
commencing volume production is expensive and time consuming and could result in
a significant interruption in the supply of Sycamore's products. If Sycamore is
required or chooses to change contract manufacturers, this could result in a
loss of revenue and damage to customer relationships.
Sycamore Relies On Single Sources For Supply Of Certain Components And
Sycamore's Business May Be Seriously Harmed If Its Supply Of Any Of These and
Other Components Is Disrupted
Sycamore currently purchases several key components, including commercial
digital signal processors, RISC processors, field programmable gate arrays,
SONET transceivers and erbium doped fiber amplifiers, from single or limited
sources. Sycamore purchases each of these components on a purchase order basis
and has no long-term contracts for these components. Although Sycamore believes
that there are alternative sources for each of these components, in the event of
a disruption in supply, Sycamore may not be able to develop an alternate source
in a timely manner or at favorable prices. Such a failure could hurt Sycamore's
ability to deliver its products to its customers and negatively affect
Sycamore's operating margins. In addition, Sycamore's reliance on its suppliers
exposes Sycamore to potential supplier production difficulties or quality
variations. Any such disruption in supply would seriously impact future sales
and revenue. Further, the optical component industry is expanding rapidly and
manufacturers of optical components may be unable to meet the unpredictable and
growing demand for components. Because optical components are integrated into
Sycamore's products, a shortage or decrease in supply would seriously impact
future sales and revenue.
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The Unpredictability Of Sycamore's Quarterly Results May Adversely Affect The
Trading Price Of Sycamore's Common Stock
Sycamore's revenues and operating results will vary significantly from quarter
to quarter due to a number of factors, many of which are outside of Sycamore's
control and any of which may cause Sycamore's stock price to fluctuate. The
primary factors that may affect Sycamore include the following:
. fluctuation in demand for intelligent optical networking products;
. the timing and size of sales of Sycamore's products;
. the length and variability of the sales cycle for Sycamore's products;
. the timing of recognizing revenue and deferred revenue;
. new product introductions and enhancements by Sycamore's competitors and
ourselves;
. changes in Sycamore's pricing policies or the pricing policies of
Sycamore's competitors;
. Sycamore's ability to develop, introduce and ship new products and
product enhancements that meet customer requirements in a timely manner;
. Sycamore's ability to obtain sufficient supplies of sole or limited
source components;
. increases in the prices of the components Sycamore purchases;
. Sycamore's ability to attain and maintain production volumes and quality
levels for Sycamore's products;
. the timing and level of prototype expenses;
. costs related to acquisitions of technology or businesses; and
. general economic conditions as well as those specific to the
telecommunications, Internet and related industries.
Sycamore plans to increase significantly its operating expenses to fund greater
levels of research and development, expand its sales and marketing operations,
broaden its customer support capabilities and develop new distribution channels.
Sycamore also plans to expand its general and administrative capabilities to
address the increased reporting and other administrative demands which will
result from the increasing size of Sycamore's business. Sycamore's operating
expenses are largely based on anticipated organizational growth and revenue
trends and a high percentage of Sycamore's expenses are, and will continue to
be, fixed. As a result, a delay in generating or recognizing revenue for the
reasons set forth above, or for any other reason, could cause significant
variations in Sycamore's operating results from quarter to quarter and could
result in substantial operating losses. Due to the foregoing factors, Sycamore
believes that quarter-to-quarter comparisons of our operating results are not a
good indication of Sycamore's future performance. Readers should not rely on our
results or growth for one quarter as any indication of our future performance.
It is likely that in some future quarters, our operating results may be below
the expectations of public market analysts, investors and stockholders. In this
event, the price of our common stock could decrease.
If Sycamore's Products Do Not Interoperate With Customers' Networks,
Installations Will Be Delayed Or Cancelled And Could Result In Substantial
Product Returns, Which Could Seriously Harm Sycamore's Business
Many of Sycamore's customers will require that its products be designed to
interface with their existing networks, each of which may have different
specifications and utilize multiple protocol standards. Sycamore's customers'
networks contain multiple generations of products that have been added over time
as these networks have grown and evolved. Sycamore's products must interoperate
with all of the products within these networks as well as future products in
order to meet customers' requirements. The requirement that Sycamore modify
product design in order to achieve a sale may result in a longer sales cycle,
increased research and development expense, and reduced margins on Sycamore's
products. If Sycamore finds errors in the existing software used in customers'
networks, Sycamore would have to modify its products to fix or overcome these
errors so that Sycamore's products will interoperate and scale with the existing
software and hardware. If Sycamore's products do not interoperate with those of
its customers' networks, installations could be delayed, orders for products
could be cancelled or products could be returned. This would also seriously harm
Sycamore's reputation, all of which could seriously harm Sycamore's business and
prospects.
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Undetected Software Or Hardware Errors And Problems Arising From Use Of
Sycamore's Products In Conjunction With Other Vendors' Products Could Result In
Delays or Loss of Market Acceptance of Sycamore's Products
Networking products frequently contain undetected software or hardware errors
when first introduced or as new versions are released. Sycamore expects that
errors will be found from time to time in new or enhanced products after
Sycamore begins commercial shipments. In addition, service providers typically
use Sycamore's products in conjunction with products from other vendors. As a
result, when problems occur, it may be difficult to identify the source of the
problem. These problems may cause Sycamore to incur significant warranty,
support and repair costs, divert the attention of Sycamore's engineering
personnel from product development efforts and cause significant customer
relations problems. The occurrence of these problems could result in the delay
or loss of market acceptance of Sycamore's products and would likely have a
material adverse effect on Sycamore's business, results of operations and
financial condition. Defects, integration issues or other performance problems
in our products could result in financial or other damages to Sycamore's
customers or could damage market acceptance for Sycamore's products. Sycamore's
customers could also seek damages for losses from Sycamore. A product liability
claim brought against Sycamore, even if unsuccessful, would likely be time
consuming and costly.
Sycamore's Failure To Establish And Maintain Key Customer Relationships May
Result In Delays In Introducing New Products Or Cause Customers To Forego
Purchasing Its Products
Sycamore's future success will also depend upon Sycamore's ability to develop
and manage key customer relationships in order to introduce a variety of new
products and product enhancements that address the increasingly sophisticated
needs of Sycamore's customers. Sycamore's failure to establish and maintain
these customer relationships may adversely affect Sycamore's ability to develop
new products and product enhancements. In addition, Sycamore may experience
delays in releasing new products and product enhancements in the future.
Material delays in introducing new products and enhancements or Sycamore's
inability to introduce competitive new products may cause customers to forego
purchases of Sycamore's products and purchase those of Sycamore's competitors,
which could seriously harm Sycamore's business.
Sycamore's Failure To Continually Improve Its Internal Controls And Systems, And
Hire Needed Personnel, Could Impair Future Growth
Sycamore has expanded its operations rapidly since inception. Sycamore continues
to increase the scope of its operations and have grown headcount substantially.
For example, at January 31, 1999, Sycamore had a total of 48 employees and at
October 30, 1999 had a total of 228 employees. In addition, Sycamore plans to
continue to hire a significant number of employees this fiscal year. Sycamore's
growth has placed, and anticipated growth will continue to place, a significant
strain on Sycamore's management systems and resources. Sycamore's ability to
successfully offer its products and implement its business plan in a rapidly
evolving market requires an effective planning and management process. Sycamore
expects that it will need to continue to improve financial, managerial and
manufacturing controls and reporting systems, and will need to continue to
expand, train and manage its work force worldwide. Sycamore may not be able to
implement adequate control systems in an efficient and timely manner.
Competition for highly skilled personnel is intense, especially in the New
England area. Any failure to attract, assimilate or retain qualified personnel
to fulfill our current or future needs could impair Sycamore's growth.
Sycamore Depends On Its Key Personnel To Manage Its Business Effectively In A
Rapidly Changing Market And If Sycamore Is Unable To Retain Its Key Employees,
Sycamore's Ability To Compete Could Be Harmed
Sycamore's future success depends upon the continued services of Sycamore's
executive officers and other key engineering, sales, marketing and support
personnel, who have critical industry experience and relationships that Sycamore
relies on to implement its business plan. None of Sycamore's officers or key
employees is bound by an employment agreement for any specific term. We do not
have "key person" life insurance policies covering any of our employees. The
loss of the services of any of Sycamore's key employees could delay the
development and introduction of, and negatively impact Sycamore's ability to
sell, Sycamore's products.
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If Sycamore Becomes Subject To Unfair Hiring Claims Sycamore Could Incur
Substantial Defense Costs
Companies in our industry whose employees accept positions with competitors
frequently claim that their competitors have engaged in unfair hiring practices.
There can be no assurances that Sycamore will not receive claims of this kind or
other claims relating to Sycamore's employees in the future as it seeks to hire
qualified personnel or that those claims will not result in material litigation.
Sycamore could incur substantial costs in defending itself or its employees
against such claims, regardless of their merits. In addition, defending itself
from such claims could divert the attention of Sycamore's management away from
Sycamore's operations. One of Sycamore's non-officer sales employees has been
sued by a former employer which has alleged, among other things, that the
employee improperly disclosed confidential information of the former employer
regarding its business dealings with Sycamore's customer. Although Sycamore is
not a party to the lawsuit, Sycamore has chosen to assume the costs of defending
this lawsuit.
Sycamore's Ability To Compete Could Be Jeopardized If Sycamore Is Unable To
Protect Its Intellectual Property Rights From Third-Party Challenges
Sycamore relies on a combination of patent, copyright, trademark and trade
secret laws and restrictions on disclosure to protect our intellectual property
rights. Sycamore also enters into confidentiality or license agreements with our
employees, consultants and corporate partners, and controls access to and
distribution of our software, documentation and other proprietary information.
Despite Sycamore's efforts to protect its proprietary rights, unauthorized
parties may attempt to copy or otherwise obtain and use Sycamore's products or
technology. Monitoring unauthorized use of Sycamore's products is difficult and
Sycamore cannot be certain that the steps Sycamore has taken will prevent
unauthorized use of Sycamore's technology, particularly in foreign countries
where the laws may not protect proprietary rights as fully as in the United
States. If competitors are able to use Sycamore's technology, Sycamore's ability
to compete effectively could be harmed.
If Necessary Licenses Of Third-Party Technology Are Not Available To Sycamore Or
Are Very Expensive, Sycamore's Products Could Become Obsolete
From time to time Sycamore may be required to license technology from third
parties to develop new products or product enhancements. There can be no
assurances that third party licenses will be available to Sycamore on
commercially reasonable terms, if at all. The inability to obtain any third-
party license required to develop new products and product enhancements could
require Sycamore to obtain substitute technology of lower quality or performance
standards or at greater cost, either of which could seriously harm the
competitiveness of Sycamore's products.
Sycamore Could Become Subject To Litigation Regarding Intellectual Property
Rights, Which Could Seriously Harm Sycamore's Business And Require Sycamore To
Incur Significant Costs
In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. Although Sycamore has
not been involved in any intellectual property litigation, Sycamore may be a
party to litigation in the future to protect Sycamore's intellectual property or
as a result of an allegation that Sycamore infringes others' intellectual
property. Any parties asserting that Sycamore's products infringe upon their
proprietary rights would force Sycamore to defend itself and possibly Sycamore's
customers or manufacturers against the alleged infringement. These claims and
any resulting lawsuit, if successful, could subject Sycamore to significant
liability for damages and invalidation of Sycamore's proprietary rights. These
lawsuits, regardless of their success, would likely be time-consuming and
expensive to resolve and would divert management time and attention. Any
potential intellectual property litigation also could force Sycamore to do one
or more of the following:
. stop selling, incorporating or using Sycamore's products that use the
challenged intellectual property;
. obtain from the owner of the infringed intellectual property right a
license to sell or use the relevant technology, which license may not be
available on reasonable terms, or at all; or
. redesign those products that use such technology.
If Sycamore is forced to take any of the foregoing actions, Sycamore's business
may be seriously harmed.
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Sycamore May Face Risks Associated With Its International Expansion That Could
Impair Sycamore's Ability To Grow Revenues Abroad
Sycamore intends to expand into international markets. This expansion will
require significant management attention and financial resources to develop
successfully direct and indirect international sales and support channels.
Sycamore may not be able to develop international market demand for its
products. Sycamore has limited experience in marketing and distributing its
products internationally and to do so, Sycamore expects that it will need to
develop versions of Sycamore's products that comply with local standards. In
addition, international operations are subject to other inherent risks,
including:
. greater difficulty in accounts receivable collection and longer
collection periods;
. difficulties and costs of staffing and managing foreign operations;
. the impact of recessions in economies outside the United States;
. unexpected changes in regulatory requirements;
. certification requirements;
. currency fluctuations;
. reduced protection for intellectual property rights in some countries;
. potentially adverse tax consequences; and
. political and economic instability.
Sycamore Faces A Number Of Unknown Risks Associated With Year 2000 Problems That
Could Result In Claims Against Sycamore Or Impair The Use Of Sycamore's Products
By Customers
The year 2000 computer issue creates a variety of risks for Sycamore. The year
2000 computer problem refers to the potential for system and processing failures
of date-related data as a result of computer-controlled systems using two digits
rather than four to define the applicable year. For example, computer programs
that have time-sensitive software may recognize a date represented as "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities. The risks involve:
. potential warranty or other claims by Sycamore's customers;
. errors in systems Sycamore uses to run its business;
. errors in systems used by Sycamore's suppliers;
. errors in systems used by Sycamore's customers; and
. potential reduced spending by other companies on intelligent optical
network products as a result of significant spending on year 2000
remediation.
Sycamore has designed its products for use in the year 2000 and beyond and
believes they are year 2000 compliant. However, Sycamore's products are
generally integrated into larger networks involving sophisticated hardware and
software products supplied by other vendors. Each of Sycamore's customers'
networks involves different combinations of third party products. Sycamore
cannot evaluate whether all of their products are year 2000 compliant. Sycamore
may face claims based on year 2000 problems in other companies' products or
based on issues arising from the integration of multiple products within the
overall network. Although no year 2000 claims have been made against Sycamore,
Sycamore may in the future be required to defend its products in legal
proceedings which could be expensive regardless of the merits of these claims.
If Sycamore's suppliers, vendors, major distributors, partners, customers and
service providers fail to correct their year 2000 problems, these failures could
result in an interruption in, or a failure of, Sycamore's normal business
activities or operations. If a year 2000 problem occurs, it may be difficult to
determine which party's products have caused the problem. These failures could
interrupt Sycamore's operations and damage Sycamore's relationships with
customers. Due to the general uncertainty inherent in the year 2000 problem
resulting from the readiness of third-party suppliers and vendors, Sycamore is
unable to determine at this time whether third party year 2000 failures could
harm Sycamore's business and our financial results. Sycamore's current and
prospective customers' purchasing plans could be affected by year 2000 issues if
they need to expend significant resources to fix their existing systems to
become year 2000 compliant. This situation may reduce funds available to
purchase Sycamore's products. In addition, customers may wait to purchase
Sycamore's products until after the year 2000, which may reduce our revenue.
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Any Acquisitions Sycamore Makes Could Disrupt Its Business And Seriously Harm
Sycamore's Financial Condition
Sycamore intends to consider investments in complementary companies, products or
technologies. While we have no current agreements to do so, we may buy
businesses, products or technologies in the future. In the event of any future
purchases, Sycamore could:
. issue stock that would dilute Sycamore's current stockholders' percentage
ownership;
. incur debt;
. assume liabilities;
. incur amortization expenses related to goodwill and other intangible
assets; or
. incur large and immediate write-offs.
Sycamore's operation of any acquired business will also involve numerous risks,
including:
. problems combining the purchased operations, technologies or products;
. unanticipated costs;
. diversion of management's attention from Sycamore's core business;
adverse effects on existing business relationships with suppliers and
customers;
. risks associated with entering markets in which Sycamore has no or
limited prior experience; and
. potential loss of key employees, particularly those of the purchased
organizations.
There can be no assurances that Sycamore will be able to successfully integrate
any businesses, products, technologies or personnel that it might acquire in the
future and any failure to do so could disrupt Sycamore's business and seriously
harm Sycamore's financial condition.
Sycamore's Stock Price May Be Volatile
An active public market for Sycamore's common stock may not be sustained. The
market for technology stocks has been extremely volatile. The following factors
could cause the market price of Sycamore's common stock to fluctuate
significantly:
. Sycamore's loss of a major customer;
. the addition or departure of key personnel;
. variations in Sycamore's quarterly operating results;
. announcements by Sycamore or its competitors of significant contracts,
new products or product enhancements,
. acquisitions, distribution partnerships, joint ventures or capital
commitments;
. changes in financial estimates by securities analysts;
. Sycamore's sales of common stock or other securities in the future;
. changes in market valuations of broadband access technology companies;
. changes in market valuations of networking and telecommunications
companies; and
. fluctuations in stock market prices and volumes.
In addition, the stock market in general, and the Nasdaq National Market and
technology companies in particular, have experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating
performance of such companies. The trading prices of many technology companies'
stocks are at or near historical highs and these trading prices and multiples
are substantially above historical levels. These trading prices and multiples
may not be sustained. These broad market and industry factors may materially
adversely affect the market price of our common stock, regardless of our actual
operating performance. In the past, following periods of volatility in the
market price of a company's securities, securities class-action litigation has
often been instituted against such companies. Such litigation, if instituted,
could result in substantial costs and a diversion of management's attention and
resources.
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Insiders Have Substantial Control Over Sycamore And Could Limit The Ability Of
Other Stockholders To Influence The Outcome Of Key Transactions, Including
Changes of Control
The executive officers, directors and entities affiliated with them, in the
aggregate, beneficially own approximately 64% of Sycamore's outstanding common
stock. These stockholders, if acting together, would be able to influence
significantly all matters requiring approval by Sycamore's stockholders,
including the election of directors and the approval of mergers or other
business combination transactions.
Provisions Of Sycamore's Charter Documents And Delaware Law May Have Anti-
Takeover Effects That Could Prevent A Change Of Control
Provisions of Sycamore's amended and restated certificate of incorporation,
bylaws, and Delaware law could make it more difficult for a third party to
acquire Sycamore, even if doing so would be beneficial to Sycamore's
stockholders.
There May Be Sales Of A Substantial Amount Of Sycamore's Common Stock That Could
Cause Sycamore's Stock Price To Fall
Certain of Sycamore's current stockholders hold a substantial number of shares
which are currently subject to lock up agreements or other restrictions limiting
such stockholders ability to sell such shares. These stockholders may be able to
sell such shares in the public market in the near future. Sales of a substantial
number of shares of Sycamore's common stock within a short period of time could
cause Sycamore's stock price to fall. In addition, the sale of these shares
could impair Sycamore's ability to raise capital through the sale of additional
stock.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Sycamore does not use derivative financial instruments. Sycamore generally
places its marketable security investments in high credit quality instruments,
primarily U.S. Government obligations and corporate obligations with contractual
maturities of less than one year. Sycamore does not expect any material loss
from its marketable security investments and therefore believes that the
potential interest rate exposure is not material.
Sycamore operates primarily in the United States, and all sales to date have
been made in US dollars. Accordingly, there has not been any material exposure
to foreign currency rate fluctuations.
Part II Other Information
Item 1. Legal Proceedings
In the ordinary course of business, the Company becomes involved in various
lawsuits and claims. While the outcome of these matters is not currently
determinable, management believes, after consultation with legal counsel, that
the outcome will not have a material adverse effect on the Company's results of
operations or its financial position.
Item 2. Changes in Securities and Use of Proceeds
(a) Initial Public Offering
On October 21, 1999, in connection with Sycamore's initial public offering, a
Registration Statement on Form S-1 (No. 333-84635) was declared effective by the
Securities and Exchange Commission, pursuant to which 7,475,000 shares of common
stock were offered and sold at a price to the public of $38.00 per share,
generating gross offering proceeds of $284.0 million. The managing underwriters
were Morgan Stanley Dean Witter, Lehman Brothers, J.P. Morgan Securities Inc,
and Dain Rauscher Wessels. After deducting approximately $19.9 million in
underwriting discounts and approximately $1.1 million in other related expenses,
the net proceeds of the offering were approximately $263.0 million.
(b) Certain Grants and Exercises of Stock Options
During the quarterly period ended October 30, 1999, the Registrant granted stock
options to purchase 3,903,696 shares of common stock at exercise prices ranging
from $4.00 to $177.06 per share to employees, consultants and directors pursuant
to its 1998 Stock Incentive Plan, as amended and its 1999 Stock Incentive Plan
and 1999 Non Employee Director Plan.
During the quarterly period ended October 30, 1999, the Registrant issued and
sold an aggregate of 725,147 shares of its common stock to employees,
consultants and directors for aggregate consideration of $4,067,241 pursuant to
exercises of options pursuant to its 1998 Stock Incentive Plan, as amended and
its 1999 Stock Incentive Plan and 1999 Non Employee Director Plan. Such sales
were made in reliance upon an exemption from the registration provisions of the
Securities Act set forth in Rule 701 of the Securities Act of 1933.
21
<PAGE>
To date, Sycamore has utilized approximately $5.1 million of the proceeds from
the initial public offering to repay borrowings under its outstanding equipment
lines of credit. Sycamore expects to use the remaining net proceeds of the
offering for working capital and general corporate purposes, including increased
spending on sales and marketing, customer support, research and development,
expansion of its operational and administrative infrastructure, Specific amounts
for these purposes have not been determined. In addition, Sycamore may use a
portion of the net proceeds to acquire or invest in complementary businesses,
technologies, product lines or products. Pending these uses, Sycamore intends to
invest the net proceeds in investment grade, interest-bearing securities.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
On August 17, 1999 the stockholders of the Company approved by written consent a
Certificate of Amendment to the Company's Certificate of Incorporation. The
affirmative vote of 43,626,921 shares was received by written consent.
On September 20, 1999 the stockholders of the Company approved by written
consent the following matters: (i) the Company's Amended and Restated
Certificate of Incorporation, to be filed upon the closing of the Company's IPO;
(ii) the Company's Amended and Restated By-laws, to be effective upon the
closing of the Company's IPO; (iii) the Company's 1999 Stock Incentive Plan;
(iv) the Company's 1999 Employee Stock Purchase Plan; and (v) the Company's 1999
Non-Employee Director Stock Option Plan. The affirmative vote of 43,626,921
shares was received by written consent.
The Annual Meeting of Stockholders of Sycamore Networks, Inc. was held on
October 8, 1999 at 9:00 a.m. in Boston, Massachusetts. Of the 71,141,447 shares
outstanding as of September 30, 1999, the record date, 54,632,938 shares (77%)
were present or represented by proxy at the meeting.
1. The table below presents the results of the election to Sycamore's board of
directors.
Nominee Votes For Witheld Against
- ------- --------- ------- -------
Gururaj Deshpande 54,632,938 - -
Daniel E. Smith 54,632,938 - -
Paul J. Ferri 54,632,938 - -
Timothy Barrows 54,632,938 - -
John W. Gerdelman 54,632,938 - -
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits
Number Exhibit Description
------ -------------------
*3.1 Amended and Restated Certificate of Incorporation of the
Company
*3.2 By-Laws of the Company
22
<PAGE>
*4.1 Specimen common stock certificate
*4.2 See Exhibits 3.1 and 3.2, for provisions of the Certificate of
Incorporation and By-Laws of the Registrant defining the rights
of holders of common stock of the Company
10.1 Form of Indemnification Agreement between the Company, the
Directors of the Company and certain officers of the Company
10.2 Form of Change in Control Agreement between the Company and
certain officers of the Company
+10.3 Addendum to Purchase and License Agreement between the Company
and Williams Communications, Inc. dated November 21, 1999
10.4 Promissory Note and Pledge Agreement between the Company and
Kevin Oye, Vice President of Business Development
27.1 Financial Data Schedule (Filed Electronically)
* Filed with the Company's Registration Statement on Form S-1 (No. 333-84635)
filed with the Securities and Exchange Commission by the Company in connection
with its initial public offering which became effective October 21, 1999
+ Confidential treatment requested for certain portions of this Exhibit pursuant
to Rule 406 promulgated under the Securities Act, which portions are omitted and
filed separately with the Securities and Exchange Commission.
(b) Reports on Form 8-K: The Company did not file any reports on Form 8-K
during the quarter ended October 30, 1999.
23
<PAGE>
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Sycamore Networks, Inc.
/s/ Frances M. Jewels
- ---------------------
Chief Financial Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
Dated: December 13, 1999
24
<PAGE>
Exhibit Index
Number Exhibit Description
------ -------------------
*3.1 Amended and Restated Certificate of Incorporation of the Company
*3.2 By-Laws of the Company
*4.1 Specimen common stock certificate
*4.2 See Exhibits 3.1 and 3.2, for provisions of the Certificate of
Incorporation and By-Laws of the Registrant defining the rights
of holders of common stock of the Company
10.1 Form of Indemnification Agreement between the Company, the
Directors of the Company and certain officers of the Company
10.2 Form of Change in Control Agreement between the Company and
certain officers of the Company
+10.3 Addendum to Purchase and License Agreement between the Company
and Williams Communications, Inc. dated November 21, 1999
10.4 Promissory Note and Pledge Agreement between the Company and
Kevin Oye, Vice President of Business Development
27.1 Financial Data Schedule (Filed Electronically)
* Filed with the Company's Registration Statement on Form S-1 (No. 333-84635)
filed with the Securities and Exchange Commission by the Company in connection
with its initial public offering which became effective October 21, 1999
+ Confidential treatment requested for certain portions of this Exhibit
pursuant to Rule 406 promulgated under the Securities Act, which portions are
omitted and filed separately with the Securities and Exchange Commission.
<PAGE>
EXHIBIT 10.1
INDEMNIFICATION AGREEMENT
This Agreement is made as of the ___ day of ____________, by and between
Sycamore Networks, Inc., a Delaware corporation (the "Corporation), and
____________________ ("Indemnitee"), a director or officer of the Corporation.
WHEREAS, it is essential to the Corporation to retain and attract as
directors and officers the most capable persons available, and
WHEREAS, the substantial increase in corporate litigation subjects
directors and officers to expensive litigation risks at the same time that the
availability of directors' and officers' liability insurance has been severely
limited, and
WHEREAS, it is now and has always been the express policy of the
Corporation to indemnify its directors and officers so as to provide them with
the maximum possible protection permitted by law, and
WHEREAS, Indemnitee does not regard the protection available under the
Corporation's Amended and Restated Certificate of Incorporation and insurance as
adequate in the present circumstances, and may not be willing to serve as a
director or officer without adequate protection, and
WHEREAS, the Corporation desires Indemnitee to serve as a director or
officer of the Corporation.
NOW THEREFORE, the Corporation and Indemnitee do hereby agree as follows:
1. Agreement to Serve. Indemnitee agrees to serve or continue to serve as
------------------
a director or officer of the Corporation for so long as he is duly elected or
appointed or until such time as he tenders his resignation in writing
2. Definitions. As used in this Agreement:
-----------
(a) The term "Proceeding" shall include any threatened, pending or
completed action, suit, or proceeding, whether brought by or in the right of the
Corporation or otherwise and whether of a civil, criminal, administrative or
investigative nature, and any appeal therefrom.
(b) The term "Corporate Status" shall mean the status of a person who
is or was a director or officer of the Corporation, or is or was serving, or has
agreed to serve, at the request of the Corporation, as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise.
(c) The term "Expenses" shall include, without limitation, attorneys'
fees, retainers, court costs, transcript costs, fees of experts, travel
expenses, duplicating costs, printing and binding costs, telephone charges,
postage, delivery service fees and other disbursements or expenses of the types
customarily incurred in connection with investigations, judicial or
administrative proceedings or appeals, but shall not include the amount of
judgments, fines or penalties against Indemnitee or amounts paid in settlement
in connection with such matters.
(d) References to "other enterprise" shall include employee benefit
plans; references to "fines" shall include any excise tax assessed with respect
to any employee benefit plan; references to "serving at the request of the
Corporation" shall include any service as a director, officer, employee or agent
of the Corporation which imposes duties on, or involves services by, such
director, officer, employee, or agent with respect to an employee benefit plan,
its participants, or beneficiaries; and a person who acted in good faith and in
a manner he reasonably believed to be in the interests of the participants and
beneficiaries of an employee benefit plan shall be
-1-
<PAGE>
deemed to have acted in a manner "not opposed to the best interests of the
Corporation" as referred to in this Agreement.
3. Indemnification in Third-Party Proceedings. The Corporation shall
------------------------------------------
indemnify Indemnitee in accordance with the provisions of this Paragraph 3 if
Indemnitee was or is a party to or threatened to be made a party to or otherwise
involved in any Proceeding (other than a Proceeding by or in the right of the
Corporation to procure a judgment in its favor) by reason of his Corporate
Status or by reason of any action alleged to have been taken or omitted in
connection therewith, against all Expenses, judgments, fines, penalties and
amounts paid in settlement actually and reasonably incurred by Indemnitee or on
his behalf in connection with such Proceeding, if Indemnitee acted in good faith
and in a manner which he reasonably believed to be in, or not opposed to, the
best interests of the Corporation and, with respect to of any criminal
Proceeding, had no reasonable cause to believe that his conduct was unlawful.
The termination of any Proceeding by judgment, order, settlement, conviction or
upon a plea of nolo contendere, or its equivalent, shall not, of itself, create
---- ----------
a presumption that Indemnitee did not act in good faith and in a manner which he
reasonably believed to be in, or not opposed to, the best interests of the
Corporation, and, with respect to any criminal Proceeding, had reasonable cause
to believe that his conduct was unlawful.
4. Indemnification in Proceedings by or in the Right of the Corporation.
--------------------------------------------------------------------
The Corporation shall indemnify Indemnitee in accordance with the provisions of
this Paragraph 4 if Indemnitee is a party to or threatened to be made a party to
or otherwise involved in any Proceeding by or in the right of the Corporation to
procure a judgment in its favor by reason of his Corporate Status or by reason
of any action alleged to have been taken or omitted in connection therewith,
against all Expenses and, to the extent permitted by law, amounts paid in
settlement actually and reasonably incurred by Indemnitee or on his behalf in
connection with such Proceeding, if he acted in good faith and in a manner which
he reasonably believed to be in, or not opposed to, the best interests of the
Corporation, except that no indemnification shall be made under this Paragraph 4
in respect of any claim, issue, or matter as to which Indemnitee shall have been
adjudged to be liable to the Corporation, unless and only to the extent that the
Court of Chancery of Delaware shall determine upon application that, despite the
adjudication of such liability but in view of all the circumstances of the case,
Indemnitee is fairly and reasonably entitled to indemnity for such Expenses as
the Court of Chancery shall deem proper.
5. Exceptions to Right of Indemnification. Notwithstanding anything to
--------------------------------------
the contrary in this Agreement, except as set forth in Paragraph 10, the
Corporation shall not indemnify the Indemnitee in connection with a Proceeding
(or part thereof) initiated by the Indemnitee unless the initiation thereof was
approved by the Board of Directors of the Corporation. Notwithstanding anything
to the contrary in this Agreement, the Corporation shall not indemnify the
Indemnitee to the extent the Indemnitee is reimbursed from the proceeds of
insurance, and in the event the Corporation makes any indemnification payments
to the Indemnitee and the Indemnitee is subsequently reimbursed from the
proceeds of insurance, the Indemnitee shall promptly refund such indemnification
payments to the Corporation to the extent of such insurance reimbursement.
6. Indemnification of Expenses of Successful Party. Notwithstanding any
-----------------------------------------------
other provision of this Agreement, to the extent that Indemnitee has been
successful, on the merits or otherwise, in defense of any Proceeding or in
defense of any claim, issue or matter therein, Indemnitee shall be indemnified
against all Expenses incurred by him or on his behalf in connection therewith.
Without limiting the foregoing, if any Proceeding or any claim, issue or matter
therein is disposed of, on the merits or otherwise (including a disposition
without prejudice), without (i) the disposition being adverse to the Indemnitee,
(ii) an adjudication that the Indemnitee was liable to the Corporation, (iii) a
plea of guilty or nolo contendere by the Indemnitee, (iv) an adjudication that
the Indemnitee did not act in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the Corporation, and (v) with
respect to any criminal proceeding, an adjudication that the Indemnitee had
reasonable cause to believe his conduct was unlawful, the Indemnitee shall be
considered for the purposes hereof to have been wholly successful with respect
thereto.
7. Notification and Defense of Claim. As a condition precedent to his
---------------------------------
right to be indemnified, the Indemnitee must notify the Corporation in writing
as soon as practicable of any Proceeding for which indemnity will or could be
sought by him and provide the Corporation with a copy of any summons, citation,
subpoena, complaint,
-2-
<PAGE>
indictment, information or other document relating to such Proceeding with which
he is served. With respect to any Proceeding of which the Corporation is so
notified, the Corporation will be entitled to participate therein at its own
expense and/or to assume the defense thereof at its own expense, with legal
counsel reasonably acceptable to the Indemnitee. After notice from the
Corporation to the Indemnitee of its election so to assume such defense, the
Corporation shall not be liable to the Indemnitee for any legal or other
expenses subsequently incurred by the Indemnitee in connection with such claim,
other than as provided below in this Paragraph 7. The Indemnitee shall have the
right to employ his own counsel in connection with such claim, but the fees and
expenses of such counsel incurred after notice from the Corporation of its
assumption of the defense thereof shall be at the expense of the Indemnitee
unless (i) the employment of counsel by the Indemnitee has been authorized by
the Corporation, (ii) counsel to the Indemnitee shall have reasonably concluded
that there may be a conflict of interest or position on any significant issue
between the Corporation and the Indemnitee in the conduct of the defense of such
action or (iii) the Corporation shall not in fact have employed counsel to
assume the defense of such action, in each of which cases the fees and expenses
of counsel for the Indemnitee shall be at the expense of the Corporation, except
as otherwise expressly provided by this Agreement. The Corporation shall not be
entitled, without the consent of the Indemnitee, to assume the defense of any
claim brought by or in the right of the Corporation or as to which counsel for
the Indemnitee shall have reasonably made the conclusion provided for in clause
(ii) above.
8. Advancement of Expenses. Subject to the provisions of Paragraph 9
-----------------------
below, in the event that the Corporation does not assume the defense pursuant to
Paragraph 7 of this Agreement of any Proceeding to which Indemnitee was or is a
party or is threatened to be made a party by reason of his Corporate Status or
by reason of any action alleged to have been taken or omitted in connection
therewith and of which the Corporation receives notice under this Agreement, any
Expenses incurred by the Indemnitee in defending such Proceeding shall be paid
by the Corporation in advance of the final disposition of such matter; provided,
however, that the payment of such Expenses incurred by the Indemnitee in advance
of the final disposition of such matter shall be made only upon receipt of an
undertaking by or on behalf of the Indemnitee to repay all amounts so advanced
in the event that it shall ultimately be determined that the Indemnitee is not
entitled to be indemnified by the Corporation as authorized in this Agreement.
Such undertaking shall be accepted without reference to the financial ability of
the Indemnitee to make repayment.
9. Procedure for Indemnification. In order to obtain indemnification or
-----------------------------
advancement of Expenses pursuant to Paragraphs 3, 4, 6 or 8 of this Agreement,
Indemnitee shall submit to the Corporation a written request, including in such
request such documentation and information as is reasonably available to
Indemnitee and is reasonably necessary to determine whether and to what extent
Indemnitee is entitled to indemnification or advancement of Expenses. Any such
indemnification or advancement of Expenses shall be made promptly, and in any
event within 60 days after receipt by the Corporation of the written request of
the Indemnitee, unless with respect to requests under Paragraphs 3, 4 or 8 the
Corporation determines within such 60-day period that such Indemnitee did not
meet the applicable standard of conduct set forth in Paragraph 3 or 4, as the
case may be. Such determination shall be made in each instance by (a) a
majority vote of the directors of the Corporation consisting of persons who are
not at that time parties to the Proceeding ("disinterested directors"), whether
or not a quorum, (b) a majority vote of a quorum of the outstanding shares of
stock of all classes entitled to vote for directors, voting as a single class,
which quorum shall consist of stockholders who are not at that time parties to
the Proceeding, (c) independent legal counsel (who may, to the extent permitted
by applicable law, be regular legal counsel to the Corporation), or (d) a court
of competent jurisdiction.
10. Remedies. The right to indemnification or advancement of Expenses as
--------
provided by this Agreement shall be enforceable by the Indemnitee in any court
of competent jurisdiction if the Corporation denies such request, in whole or in
part, or if no disposition thereof is made within the 60-day period referred to
above in Paragraph 9. Unless otherwise required by law, the burden of proving
that indemnification is not appropriate shall be on the Corporation. Neither
the failure of the Corporation to have made a determination prior to the
commencement of such action that indemnification is proper in the circumstances
because Indemnitee has met the applicable standard of conduct, nor an actual
determination by the Corporation pursuant to Paragraph 9 that Indemnitee has not
met such applicable standard of conduct, shall be a defense to the action or
create a presumption that Indemnitee has not met the applicable standard of
conduct. Indemnitee's expenses (of the type described in the
-3-
<PAGE>
definition of "Expenses" in Paragraph 2(c)) reasonably incurred in connection
with successfully establishing his right to indemnification, in whole or in
part, in any such Proceeding shall also be indemnified by the Corporation.
11. Partial Indemnification. If Indemnitee is entitled under any
-----------------------
provision of this Agreement to indemnification by the Corporation for some or a
portion of the Expenses, judgments, fines, penalties or amounts paid in
settlement actually and reasonably incurred by him or on his behalf in
connection with any Proceeding but not, however, for the total amount thereof,
the Corporation shall nevertheless indemnify Indemnitee for the portion of such
Expenses, judgments, fines, penalties or amounts paid in settlement to which
Indemnitee is entitled.
12. Subrogation. In the event of any payment under this Agreement, the
-----------
Corporation shall be subrogated to the extent of such payment to all of the
rights of recovery of Indemnitee, who shall execute all papers required and take
all action necessary to secure such rights, including execution of such
documents as are necessary to enable the Corporation to bring suit to enforce
such rights.
13. Term of Agreement. This Agreement shall continue until and terminate
-----------------
upon the later of (a) six years after the date that Indemnitee shall have ceased
to serve as a director or officer of the Corporation or, at the request of the
Corporation, as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise or (b) the final
termination of all Proceedings pending on the date set forth in clause (a) in
respect of which Indemnitee is granted rights of indemnification or advancement
of Expenses hereunder and of any proceeding commenced by Indemnitee pursuant to
Paragraph 10 of this Agreement relating thereto.
14. Indemnification Hereunder Not Exclusive. The indemnification and
---------------------------------------
advancement of Expenses provided by this Agreement shall not be deemed exclusive
of any other rights to which Indemnitee may be entitled under the Certification
of Incorporation, the By-Laws, any agreement, any vote of stockholders or
disinterested directors, the General Corporation Law of Delaware, any other law
(common or statutory), or otherwise, both as to action in his official capacity
and as to action in another capacity while holding office for the Corporation.
Nothing contained in this Agreement shall be deemed to prohibit the Corporation
from purchasing and maintaining insurance, at its expense, to protect itself or
the Indemnitee against any expense, liability or loss incurred by it or him in
any such capacity, or arising out of his status as such, whether or not the
Indemnitee would be indemnified against such expense, liability or loss under
this Agreement; provided that the Corporation shall not be liable under this
Agreement to make any payment of amounts otherwise indemnifiable hereunder if
and to the extent that Indemnitee has otherwise actually received such payment
under any insurance policy, contract, agreement or otherwise.
15. No Special Rights. Nothing herein shall confer upon Indemnitee any
-----------------
right to continue to serve as an officer or director of the Corporation for any
period of time or at any particular rate of compensation.
16. Savings Clause. If this Agreement or any portion thereof shall be
--------------
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify Indemnitee as to Expenses, judgments,
fines, penalties and amounts paid in settlement with respect to any Proceeding
to the full extent permitted by any applicable portion of this Agreement that
shall not have been invalidated and to the fullest extent permitted by
applicable law.
17. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall constitute the original.
18. Successors and Assigns. This Agreement shall be binding upon the
----------------------
Corporation and its successors and assigns and shall inure to the benefit of the
estate, heirs, executors, administrators and personal representatives of
Indemnitee.
19. Headings. The headings of the paragraphs of this Agreement are
--------
inserted for convenience only and shall not be deemed to constitute part of this
Agreement or to affect the construction thereof.
-4-
<PAGE>
20. Modification and Waiver. This Agreement may be amended from time to
-----------------------
time to reflect changes in Delaware law or for other reasons. No supplement,
modification or amendment of this Agreement shall be binding unless executed in
writing by both of the parties hereto. No waiver of any of the provisions of
this Agreement shall be deemed or shall constitute a waiver of any other
provision hereof nor shall any such waiver constitute a continuing waiver.
21. Notices. All notices, requests, demands and other communications
-------
hereunder shall be in writing and shall be deemed to have been given (i) when
delivered by hand or (ii) if mailed by certified or registered mail with postage
prepaid, on the third day after the date on which it is so mailed:
(a) if to the Indemnitee, to:
(b) if to the Corporation, to:
Sycamore Networks, Inc.
10 Elizabeth Drive
Chelmsford, MA 01824
Attn: General Counsel
or to such other address as may have been furnished to Indemnitee by the
Corporation or to the Corporation by Indemnitee, as the case may be.
22. Applicable Law. This Agreement shall be governed by and construed in
--------------
accordance with the laws of the State of Delaware.
-5-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
SYCAMORE NETWORKS, INC.
Attest: By: ____________________________
By: __________________________ Name: ____________________________
Title: ___________________________
INDEMNITEE:
__________________________________
-6-
<PAGE>
EXHIBIT 10.2
CHANGE IN CONTROL AGREEMENT
This Change In Control Agreement (the "Agreement") is made and entered into as
of ______________ (the "Effective Date"), by and between Sycamore Networks,
Inc., a Delaware corporation (the "Company") and ___________________________
("Executive").
RECITALS
--------
The Company recognizes that the possibility of a change of control or other
event which may change the nature and structure of the Company and that
uncertainty regarding the consequences of such events may adversely affect the
Company's ability to retain its key employees. The Company also recognizes that
Executive possesses an intimate and essential knowledge of the Company upon
which the Company may need to draw for objective advice and continued services
in connection with any acquisition of the Company or other change of control
that is potentially advantageous to the Company's stockholders. The Company
believes that the existence of this Agreement will serve as an incentive to
Executive to remain in the employ of the Company and will enhance its ability to
call on and rely upon Executive in connection with a change of control.
The Company and Executive desire to enter into this Agreement in order to
provide additional compensation and benefits to Executive and to encourage
Executive to continue to devote his full attention and dedication to the Company
and to continue his employment with the Company.
1. Definitions. As used in this Agreement, unless the context requires a
-----------
different meaning, the following terms shall have the meanings set forth herein:
1.1. "Cause" means:
-----
1.1.1. The willful engaging by the Executive in illegal conduct or
gross misconduct which is materially injurious to the Company.
1.2. "Change of Control" means the occurrence, as the result of a single
-----------------
transaction or through a series of transactions, of any of the following events:
1.2.1. any Person becomes the beneficial owner, directly or
indirectly, of securities of the Company representing 30% or more of the
combined voting power of the Company's then outstanding voting securities.
"Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as
amended, as modified and used in Sections 13(d) and 14(d) thereof, except that
such term shall not include (i) the Company or any of its subsidiaries, (ii) a
trustee or other fiduciary holding securities under an employee benefit
<PAGE>
plan of the Company or any of its subsidiaries, (iii) an underwriter temporarily
holding securities pursuant to an offering of such securities or (iv) a
corporation owned, directly or indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the Company;
or
1.2.2. Incumbent Directors cease at any time and for any reason to
constitute a majority of the number of directors then serving on the Board.
"Incumbent Directors" shall mean directors who either (A) are directors of the
Company as of date hereof or (B) are elected, or nominated for election, to the
Board with the affirmative votes of at least a majority of the Incumbent
Directors at the time of such election or nomination (but shall not include an
individual whose election or nomination is in connection with an actual or
threatened election contest, including but not limited to a consent
solicitation, relating to the election of directors to the Board); or
1.2.3. there is consummated a merger or consolidation of the Company
or any direct or indirect subsidiary of the Company with any other corporation,
other than (i) a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior to such merger or
consolidation continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity or any parent
thereof (the "Acquiror")) at least a majority of the combined voting power of
the securities of the Company or the Acquiror outstanding immediately after such
merger or consolidation as appropriate, or (ii) a merger or consolidation
effected to implement a recapitalization of the Company (or similar transaction)
in which no Person becomes the Beneficial Owner, directly or indirectly, of
securities of the Company representing 30% or more of the combined voting power
of the Company's then outstanding voting securities; or
1.2.4. the stockholders of the Company approve a plan of liquidation
or dissolution of the Company or an agreement for the sale or disposition by the
Company of all or a substantial portion of the Company's assets, other than a
sale or disposition by the Company of all or a substantial portion of the
Company's assets to an entity, at least a majority of the combined voting power
of the voting securities of which are owned by stockholders of the Company in
substantially the same proportions as their ownership of the Company immediately
prior to such sale.
1.3. "Constructive Termination" means the occurrence of any of the
------------------------
following conditions, without Executive's written consent:
1.3.1. Any diminution in the Executive's position, title or
responsibilities; or
1.3.2. Any required relocation of the Executive; or
1.3.3. Any diminution in the Executive annual salary or bonus
potential from that in effect immediately prior to the Change in Control.
<PAGE>
1.4 "Subsequent Acquisition" means:
----------------------
1.4.1. A merger or consolidation which results in the voting securities
of the Acquiror (as defined in Section 1.2 of this Agreement) outstanding
immediately prior thereto representing immediately thereafter (either by
remaining outstanding or by being converted into voting securities of the
surviving or acquiring entity (the "Subsequent Acquiror") less than a majority
of the combined voting power of the voting securities of the Acquiror or such
Subsequent Acquiror, as the case may be, outstanding immediately after such
merger or consolidation;
1.4.2. The sale of all or substantially all of the assets of the
Acquiror or of the subsidiary or unit of the Acquiror formed by or to effect the
Change of Control; or
1.4.3. The sale of shares of capital stock of the Acquiror, or of the
subsidiary or unit of the Acquiror formed by or to effect the Change of Control,
in a single transaction or series of related transactions, representing at least
80% of the voting power of the voting securities of the Acquiror or of the
subsidiary or unit of the Acquiror formed by or to effect the Change of Control.
1.5. "Termination Upon a Change of Control" means:
--------------------------------------
1.5.1. Any termination of the employment of Executive by the Company
without Cause during the period commencing thirty (30) days prior to the date of
the Company's first public announcement that the Company has entered into a
definitive agreement that would result in a Change of Control (even though still
subject to approval by the Company's stockholders and other conditions and
contingencies);
1.5.2. Any termination of the employment of Executive by the Company
without Cause following a Change of Control;
1.5.3. Any resignation by Executive upon the occurrence of a
Constructive Termination after the date of any Change of Control.
1.5.4. "Termination Upon Change of Control" shall not include any
termination of Executive's employment (a) by the Company for Cause; or (b) as a
result of the voluntary termination of employment by Executive for a reason
other than Constructive Termination.
2. Position and Duties. Executive shall continue to be an at-will
-------------------
employee of the Company employed in his/her current position at his/her then
current salary rate. Executive shall also be entitled to continue to participate
in and to receive benefits on the same basis as other executive or senior staff
members under any of the Company's employee benefit plans as in effect from time
to time. In addition, Executive shall be entitled to the benefits afforded to
other employees similarly situated under the Company's vacation, holiday and
business expense reimbursement policies. Executive
<PAGE>
agrees to devote his/her full business time, energy and skill to his/her duties
at the Company. These duties shall include, but not be limited to, any duties
consistent with Executive's position which may be assigned to Executive from
time to time.
3. Option and Restricted Stock Vesting Upon Change of Control
----------------------------------------------------------
3.1. All options or restricted stock granted by the Company to the
Executive and held by the Executive shall, immediately prior to the
effectiveness of the Change of Control, become vested and exercisable (and no
longer subject to repurchase by the Company) as to an additional number of
shares or options equal to the number of shares or options as to which would
have become vested and exercisable (and no longer subject to repurchase by the
Company) on the date twelve months after the effectiveness of the Change of
Control.
4. Termination Upon Change of Control
----------------------------------
4.1. In the event of Executive's Termination Upon Change of Control,
Executive shall be entitled to the following severance benefits:
4.1.1. Executive shall be entitled to receive all salary, accrued
vacation earned through the date of Executive's termination and Executive's
annual incentive bonus for the year in which termination occurs, pro rated
through the date of Executive's termination, all less applicable withholding;
4.1.2. Executive shall be entitled to receive an additional eighteen
months' of Executive's base salary as in effect on the date of such termination,
plus an additional amount equal to 150% of Executive's annual incentive bonus
for the year in which the termination occurs, all less applicable withholding,
paid in a lump sum within thirty (30) days of termination of employment;
4.1.3. Executive shall be entitled to receive reimbursement for all
expenses that Executive reasonably and necessarily incurred by Executive in
connection with the business of the Company prior to Executive's termination of
employment, within ten (10) days of submission of proper expense reports by
Executive;
4.1.4. Executive and/or Executive's dependents shall be entitled to
elect continued group health plan coverage in accordance with the applicable
provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985
("COBRA") and the Health Insurance Portability and Accountability Act of 1996
("HIPAA"). The Company will pay the full premium for continuation coverage for
Executive and/or Executive's dependents for a period of 18 months following the
date of Executive's Termination Upon Change of Control. Notwithstanding the
above, Company shall cease providing continued group health plan coverage for
Executive and/or Executive's dependents in the event that, at any juncture
during the period of continuation coverage provided for herein, Executive and/or
Executive's dependents become(s) covered under another employer's group health
plan that (i) has no preexisting condition exclusions or (ii) has a preexisting
<PAGE>
condition exclusion that does not apply to Executive and/or Executive's
dependents or is satisfied by the creditable coverage of Executive and/or
Executive's dependents in accordance with HIPAA;
4.1.5. Executive payments received under this Section 4 shall be
entitled to receive the benefits, if any, under the Company's 401(k) Plan,
qualified deferred compensation plan, employee stock purchase plan and other
Company benefit plans to which he may be entitled pursuant to the terms of such
plans; and
4.1.6. Executive shall be entitled to receive outplacement services
and Career Counseling at the Company's expense for a period of 12 months after
the date of the Termination Upon Change of Control.
4.1.7. All options or restricted stock granted by the Company to the
Executive and held by the Executive shall become vested and exercisable (and no
longer subject to repurchase by the Company) in full, effective upon the
Executive's Termination Upon Change of Control.
5. Subsequent Acquisition
----------------------
5.1. In the event of a Subsequent Acquisition, Executive shall be entitled
to the following benefits:
5.1.1 All options or restricted stock granted by the Company to the
Executive and held by the Executive shall, immediately prior to the
effectiveness of the Subsequent Acquisition, become vested and exercisable (and
no longer subject to repurchase by the Company) in full.
6. 280G. If, due to the benefits provided under this Agreement, Executive
----
is subject to any excise tax due to characterization of any amounts payable or
benefits provided hereunder as excess parachute payments pursuant to Section
4999 of the Internal Revenue Code, the Company agrees to reimburse Executive in
an amount up to $1,000,000 (one million dollars) of such excise tax; provided,
however, that, no reimbursement shall be made for any excise tax payable with
respect to the reimbursement made pursuant to this section 6. The excise tax
reimbursement made pursuant to this section 6 shall be subject to all applicable
withholding. The foregoing shall be conditioned upon Executive cooperating with
the Company in such manner as may be reasonably requested (other than reducing
amounts payable hereunder) so as to minimize the amount of such excise tax.
Unless the Company and Executive otherwise agree in writing, any determination
required under this Section 6 shall be made in writing by independent public
accountants agreed to by the Company and Executive (the "Accountants"), whose
determination shall be conclusive and binding upon Executive and the Company for
all purposes. For purposes of making the calculations required by this Section
6, the Accountants may rely on reasonable, good faith interpretations concerning
the application of Sections 280G and 4999 of the Code. The Company and
Executive shall furnish to the Accountants such information and documents as the
<PAGE>
Accountants may reasonably request in order to make a determination under this
Section 6. The Company shall bear all costs the Accountants may reasonably
incur in connection with any calculations contemplated by this Section 6.
7. Exclusive Remedy. Under any claim for breach of this Agreement or
----------------
wrongful termination, the payments and benefits provided for in Sections 3, 4, 5
and 6 shall constitute Executive's sole and exclusive remedy for any alleged
injury or other damages arising out of the cessation of the employment
relationship between Executive and the Company in the event of Executive's
termination. Except as expressly set forth herein, Executive shall be entitled
to no other compensation, benefits, or other payments from the Company as a
result of any termination of employment with respect to which the payments
and/or benefits described in Sections 3, 4, 5 and 6 have been provided to
Executive.
8. Proprietary and Confidential Information. Executive agrees to continue
----------------------------------------
to abide by the terms and conditions of the Company's confidentiality and/or
proprietary rights agreement between Executive and the Company.
9. Conflict of Interest. Executive agrees that for a period of one (1)
--------------------
year after termination of his/her employment with the Company, he/she will not,
directly or indirectly, solicit the services of or in any other manner persuade
employee or customers of the Company to discontinue that person's or entity's
relationship with or to the Company as an employee or customer, as the case may
be.
10. Arbitration. Any claim, dispute or controversy arising out of this
-----------
Agreement, the interpretation, validity or enforceability of this Agreement or
the alleged breach thereof shall be submitted by the parties to binding
arbitration by the American Arbitration Association in Middlesex County in
Massachusetts; provided, however, that this arbitration provision shall not
preclude the Company from seeking injunctive relief from any court having
jurisdiction with respect to any disputes or claims relating to or arising out
of the misuse or misappropriation of the Company's trade secrets or confidential
and proprietary information. Both parties hereby waive any right to a jury
trial to resolve such claims, disputes, or controversies. All costs and
expenses of arbitration or litigation, including but not limited to attorneys
fees and other costs reasonably incurred by Executive, shall be paid by the
Company. Judgment may be entered on the award of the arbitration in any court
having jurisdiction.
11. Interpretation. Executive and the Company agree that this Change in
--------------
Control Agreement shall be interpreted in accordance with and governed by the
laws of the State of Massachusetts.
12. Conflict in Benefits. This Agreement shall supersede all prior
--------------------
arrangements, whether written or oral, and understandings regarding the subject
matter of this Agreement and shall be the exclusive agreement for the
determination of any payments and accelerated option vesting due upon
Executive's termination of employment upon a Change of Control; provided,
however, that this Agreement is not intended to and shall
<PAGE>
not affect, limit or terminate (i) any plans, programs, or arrangements of the
Company that are regularly made available to a significant number of employees
of the Company, (ii) any agreement or arrangement with Executive that has been
reduced to writing and which does not relate to the subject matter hereof, or
(iii) any agreements or arrangements hereafter entered into by the parties in
writing, except as otherwise expressly provided herein.
13. Release of Claims. No severance benefits shall be paid to Executive
-----------------
under this Agreement unless and until Executive shall, in consideration of the
payment of such severance benefit, execute a release of claims in a form
satisfactory to the Company; provided however that such release shall not apply
to any right of Executive to be indemnified by the Company.
14. Successors and Assigns.
-----------------------
14.1. Successors of the Company. The Company will require any successor
-------------------------
or assign (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company, expressly, absolutely and unconditionally to assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession or assignment had
taken place. Failure of the Company to obtain such agreement prior to the
effectiveness of any such succession transaction shall be a breach of this
Agreement and shall entitle Executive to terminate his or her employment with
the Company within three months thereafter and to receive the benefits provided
under of this Agreement in the event of Termination Upon Change of Control. As
used in this Agreement, "Company" shall mean the Company as defined above and
any successor or assign to its business and/or assets as aforesaid which
executes and delivers the agreement provided for in this Section 14 or which
otherwise becomes bound by all the terms and provisions of this Agreement by
operation of law.
14.2. Heirs of Executive. This Agreement shall inure to the benefit of
------------------
and be enforceable by Executive's personal and legal representatives, executors,
administrators, successors, heirs, distributees, devises and legatees.
15. Notices. For purposes of this Agreement, notices and all other
-------
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, as follows:
if to the Company: Sycamore Networks, Inc.
10 Elizabeth Drive
Chelmsford, MA 01824
Attn: General Counsel
<PAGE>
and if to Executive at the address specified at the end of this Agreement.
Notice may also be given at such other address as either party may have
furnished to the other in writing in accordance herewith, except that notices of
change of address shall be effective only upon receipt.
16. No Representations. Executive acknowledges that he/she is not relying
------------------
and has not relied on any promise, representation or statement made by or on
behalf of the Company which is not set forth in this Agreement.
17. Validity. If any one or more of the provisions (or any part thereof) of
--------
this Agreement shall be held invalid, illegal or unenforceable in any respect,
the validity, legality and enforceability of the remaining provisions (or any
part thereof) shall not in any way be affected or impaired thereby.
18. Modification. This Agreement may only be modified or amended by a
------------
supplemental written agreement signed by Executive and the Company.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
and year written below.
"Company"
SYCAMORE NETWORKS, INC.
Date: By:
-------------------- -----------------------
Title:
--------------------
"Executive"
Print Name:
-----------------------
Date:
------------------------ ------------------------
Executive's Signature
Address for Notice:
- -----------------------
- -----------------------
- -----------------------
<PAGE>
EXHIBIT 10.3
------------
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.
ASTERISKS (*) DENOTE SUCH OMISSIONS.
ADDENDUM TO PURCHASE AND LICENSE AGREEMENT
------------------------------------------
THIS ADDENDUM (THE "ADDENDUM") is made effective as of the date written
below by and between SYCAMORE NETWORKS, INC. ("SYCAMORE"), a Delaware
corporation having a principal place of business at 10 Elizabeth Drive,
Chelmsford, MA 01824, and WILLIAMS COMMUNICATIONS, INC. ("WILLIAMS") a Delaware
corporation having a principal place of business at One Williams Center, Tulsa,
OK 74172. This Addendum modifies the Purchase and License Agreement by and
between Sycamore and Williams dated March 5, 1999 (THE "AGREEMENT"). Except as
specifically hereinafter modified by this Addendum, the terms and conditions of
the Agreement shall continue in full force and effect. In the event of a
conflict, this Addendum shall control over the Agreement. Unless otherwise
defined herein, capitalized terms shall have the meaning ascribed to them in the
Agreement.
1. Exhibits A and B to the Agreement are deleted in their entirety and
replaced with the revised Exhibit A which is attached hereto and
incorporated by reference.
2. Section 1 of the Agreement shall be amended to extend the Term of the
Agreement to 4 (four) years from the date of this Addendum, after which it
shall renew automatically for successive twelve (12) month additional
terms, unless otherwise terminated pursuant to the terms thereof. In the
event of any automatic renewal, the purchase commitment contained in
Exhibit A, as amended, shall not be renewed or applicable to Williams.
3. The last sentence of Section 2.1 of the Agreement shall be deleted in its
entirety and replaced with the following: "The parties hereby agree that
additional terms and conditions of the Williams purchase of Sycamore's
Products (including pricing and discounts) shall be those set forth in
Exhibit A, as amended."
4. Section 3.3 of the Agreement shall be deleted in its entirety and replaced
with the following: "Sycamore shall use reasonable efforts to ship the
Products on the shipment date reasonably requested in Williams' purchase
order. Sycamore shall not be liable for any loss, expense or damage
incurred by Williams if Sycamore fails to meet the shipment date requested
in Williams' purchase order. Sycamore reserves the right to allocate
shipment of Products among its purchasers and to make partial shipments.
Notwithstanding the foregoing, partial shipments shall only be made with
previous written approval by Williams. Sycamore shall not submit an invoice
for a partial shipment unless such partial shipment has been approved by
Williams in writing. Sycamore shall be obligated to ship Products hereunder
no later than: (i) (**) past the date of Sycamore's acceptance of the
purchase order for such Product and (ii)(**) past the date of Sycamore's
---
acknowledgment of the related EWR (defined in Exhibit A, as
<PAGE>
amended) (such date being no sooner that (**) past the date of Sycamore's
acknowledgment of the related EWR) or such other date as the parties agree
upon in writing (the "Shipment Date"). If shipment is delayed more than
(**) past the Shipment Date due to Sycamore's delay only, Williams may
cancel the order upon prior written notice to Sycamore. For the purposes of
computing the Purchase Hurdle Amount (defined in Exhibit A), shipments
cancelled pursuant to the previous sentence of this sub-paragraph 3.3,
shall be deemed to have shipped. (**) If Williams purchase order(s)
exceed(s) its corresponding EWR by greater than (**) in Product quantity,
order dollar amount or Product type including specifications (the "EWR Plus
(**)") and Sycamore accepts the purchase order, then Sycamore will be
required to meet the Shipment Date as set forth above for the Products
ordered which are within the related EWR Plus (**). Notwithstanding the
preceding sentence, Sycamore shall be obligated to ship all Products in
excess of the related EWR Plus (**) (the "Excess Products") within (**) of
Sycamore's acceptance of the purchase order(s) for the Excess Products
which shall be considered the Shipment Date for the Excess Products."
5. The Agreement, and all terms and conditions contained therein, shall
continue in full force and effect, as amended hereby.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Addendum to be executed in
duplicate by their duly authorized representatives as of the effective date
written below.
SYCAMORE NETWORKS, INC. WILLIAMS COMMUNICATIONS, INC.
By: /s/ Ryker Young By: /s/ Joseph C. Turcotte
--------------- ----------------------
Name: Ryker Young Name: Joseph C. Turcotte
Title: Vice President Title: Chief Operations Officer
Date: November 21, 1999 Date: November 21, 1999
<PAGE>
EXHIBIT A
ADDITIONAL TERMS AND CONDITIONS
-------------------------------
1) PURCHASE COMMITMENT - Williams agrees to a minimum purchase commitment of
400 million dollars, net invoice value (which invoice value shall reflect
list price minus any discounts to which Williams is then entitled) of
Sycamore Products, over the 48 month period following the execution of this
Addendum. Williams liability for failure to make this purchase commitment
shall be as set forth in Section 7 below and Williams shall have no other
liability for failure to make this purchase commitment. Nothing in this
Addendum shall be construed to be a 'take or pay' obligation.
2) ROLLING FORECAST - Beginning (**) and on at least a quarterly basis,
Williams shall deliver to Sycamore a rolling forecast of all of Williams'
anticipated Sycamore Product orders for the next (**) (the "Forecast"). Each
Forecast shall contain reasonable detail regarding such Product orders,
including, but not limited to, general Product specifications and the
'wavelength plan' for the Products forecasted. The Forecast may be in
Microsoft Excel format for ease of use. The Forecast shall be prepared by
Williams using good faith.
3) ENGINEERING WORK REQUESTS - Williams shall submit to Sycamore when available
the final Williams 'Engineering Work Requests' which are generated by the
Engineering Planning department of Williams and submitted to the
Transmission Engineering department of Williams (the "EWRs"). In reliance on
the EWRs, Sycamore may commence manufacturing of the Sycamore Products
described in the EWRs. Williams agrees to submit purchase orders for the
Sycamore Products contained within the respective EWRs within (**) of the
date each EWR is submitted to and accepted by Sycamore. Sycamore agrees to
accept such purchase orders that do not deviate more than (**) in product
quantity, order dollar amount or product type (including specifications)
from the related EWR. Sycamore shall accept such purchase orders in
accordance with Section 2.3 of the Agreement. Sycamore shall acknowledge and
accept each EWR in writing, which writing shall include the date of
Sycamore's acceptance.
4) TRAINING - Sycamore shall provide, at no cost to Williams, (**) training
credit for every (**) of Sycamore accepted purchase orders issued by
Williams. A single training credit shall entitle one person to attend one
product training class at Sycamore's Chelmsford facility. This training
benefit shall be in addition to those other options available to Williams
contained in Exhibit F of the Agreement.
5) JOINT MARKETING - Sycamore and Williams shall engage in mutually agreed upon
joint marketing activities during the term of the Agreement. The parties
shall initially target joint marketing spending of an amount not to exceed
(**) per year per party (with no carry-forward) toward mutually agreed upon
joint marketing efforts. If, ten months after the execution of the Addendum,
Williams has not achieved its Purchase Hurdle Amount, the targeted amount
referred to in the previous sentence shall be eliminated until such time as
Williams is entitled to the additional provisions of 7(a) through 7(c) of
Section 7, below.
<PAGE>
6) QUALITY ASSURANCE - Sycamore is scheduled to have an ISO 9001 registered
quality system by the end of calendar year 2000. In addition to product
quality, this quality system will monitor product development, product
verification and support after installation. The quality system will track
(on a quarterly basis) released product measurements such as: (i) Out of
Box Acceptance; (ii) On Time Deliveries vs. Customer Request Date; and
(iii) Demonstrated Mean Time Between Failures ("MTBF") vs. Calculated MTBF.
Each product measurement will be managed against quarterly objectives
relating to such measurements. Performance levels below quarterly
objectives will require an automatic review by Sycamore management and
Williams management. Further, Sycamore will have an online call handling
and bug reporting system by the end of calendar year 1999. Williams will be
given the ability to report problems and track resolution through its
online account.
7) ADDITIONAL TERMS AND CONDITIONS - For so long as Williams issues and
Sycamore accepts purchase orders in accordance with this Addendum for at
least (**) dollars, net invoice value, of Sycamore Products during each of
the first (**) period following the execution of this Addendum, (the
"Purchase Hurdle Amount") the additional provisions 7(a) through 7(c) of
this Section 7 shall apply. The Purchase Hurdle Amount shall be
appropriately adjusted to reflect any cancellations or permissible returns
as set forth in the Agreement and the Addendum. Should Williams fail to
achieve the Purchase Hurdle Amount during any such period, the additional
provisions 7(a) through 7(c) of this Section 7 shall not apply and Williams
shall be entitled only to a (**) Product discount (on Sycamore's then-
current end-user pricing) until such time as Williams issues purchase orders
totaling the difference between (A) the Purchase Hurdle Amount and (B) the
amount actually ordered by Williams. By way of example, if during the first
purchase hurdle period Williams issues, and Sycamore accepts, purchase
orders totaling (**) dollars, then the applicable discount on subsequent
purchase orders shall be reset to (**) during the second purchase hurdle
period until such time as Williams' issues, and Sycamore accepts, purchase
orders totaling (**) dollars. After such purchase orders have been accepted,
the additional provision 7(a) through 7(c) of this Section 7 shall apply
during the remaining term of the second purchase hurdle period and the
measurement of the Purchase Hurdle Amount for such period shall commence. If
Williams purchases (**) dollars in the remaining term of the second hurdle
period so that its total purchases for that period are (**) dollars, the
additional provisions of 7(a) through 7(c) shall not apply to purchases made
during the third hurdle period until such time as Williams issues and
Sycamore accepts purchase orders totaling (**) dollars. After such purchase
orders have been accepted, the additional provision 7(a) through 7(c) of
this Section 7 shall apply for the remaining term of the third purchase
hurdle period and the measurement of the Purchase Hurdle Amount for such
period shall commence. If during the relevant period Williams issues, and
Sycamore accepts, purchase orders totaling more than (**) dollars, net
invoice value, of Sycamore Products, then the Purchase Hurdle Amount for the
next (**) period shall be reduced by the dollar amount over (**) dollars so
ordered and accepted. By way of example, if Williams were to issue, and
Sycamore were to accept, purchase orders totaling (**) dollars, net invoice
value, of Sycamore Products during the (**) period following the execution
of this Addendum, then Williams shall be deemed to have achieved the
Purchase Hurdle Amount for such period and for each of the next (**) periods
and the additional provisions of 7(a) through 7(c) would apply during the
entire four year term.
<PAGE>
A) (**).
B) INITIAL SOFTWARE COSTS - Sycamore agrees that total Sycamore software costs
to Williams relating to Sycamore Products purchased over the term of the
amended Agreement will be no more than (**) of total costs of all Sycamore
Products purchased. No other discount shall apply to Sycamore software.
C) DISCOUNTS/LIST PRICE REDUCTIONS - Sycamore grants Williams a Product
discount of (**) from current end-user list price and agrees to extend to
Williams a Product discount of (**) from the then-current end-user list
price and a Product discount of (**) from any list price made available to
Williams pursuant to this Section 7(c). Williams shall use its best efforts
to make prompt payment (**) for all purchases. Further discounts shall be
as follows:
i) With regard to the current generation of Sycamore Products ("Gen1
Products"), Sycamore shall reduce (**) from the Gen1 Products list
price on each of (**) and (**).
ii) Upon commercial availability of Sycamore's next generation Products of
like functionality ("Gen2 Products"), the list price available to
Williams of the Gen2 Products shall be equal to (i) the Gen1 Product
list price as of the date of the execution of this Addendum, less (ii)
----
a reduction of (**). Sycamore shall further reduce the list price
available to Williams of the Gen2 Products by (**) on each of (**) and
(**). Prices shall be expressed per (**).
iii) Following the introduction of the Gen2 Products and upon commercial
availability of Sycamore's next generation Products of like
functionality ("Gen3 Products"), the list price available to Williams
of the Gen3 Products shall be equal to (i) the Gen2 Product list price
made available to Williams as of the date the Gen2 Products became
commercially available, less (ii) a reduction of (**). Sycamore shall
----
further reduce the list price available to Williams of the Gen3
Products by (**) on each of (**) and (**). Prices shall be expressed
per (**).
iv) With regard to the introduction of next generation (**), on (**) the
list price available to Williams of such next generation (**) shall be
equal to (i) the list price of current (**) as of the date the
Addendum is executed, less (ii) a reduction of (**). On (**), Sycamore
----
shall further reduce the list price available to Williams of the next
generation (**) by (**). Prices shall be expressed per (**).
<PAGE>
EXHIBIT 10.4
Dated: October 20, 1999
SECURED PROMISSORY NOTE
-----------------------
FOR VALUE RECEIVED, the undersigned hereby promises to pay to Sycamore
Networks, Inc., a Delaware corporation with its principal offices in Chelmsford,
Massachusetts ("Sycamore"), or order, the principal sum of ninety-nine thousand
nine hundred and seventy eight ($99,978) Dollars on or prior to December 1,
2000, (the "Maturity Date") or on such earlier date on which the undersigned's
employment with Sycamore terminates for any reason.
The outstanding principal balance hereunder shall, commencing on the date
hereof, bear interest at the rate of eight and one quarter percent (8.25%) per
annum. In the event this Note is paid in full prior to the Maturity Date, the
undersigned shall also on the date of such prepayment pay an amount equal to all
accrued but unpaid interest, plus all interest which would have accrued and been
payable through the Maturity Date had the principal sum of this Note been paid
in accordance with the terms of this Note as set forth in the first paragraph of
this Note, or such lesser amount as may be required by law. This Note is a full
recourse obligation. Further, the obligation to pay the interest and principal
on account of this Note is secured by a pledge of 2,631 shares of Common Stock
of Sycamore, pursuant to a Security and Pledge Agreement of even date hereof
which Security and Pledge Agreement sets forth the rights and obligations of the
parties in the event of default as defined in said Pledge Agreement. Further,
this Note shall become immediately due and payable without notice or demand upon
the occurrence at any time of any event of default under the Security and Pledge
Agreement.
Payment of principal and interest hereunder shall be made in lawful money
of the United States at the offices of Sycamore, 10 Elizabeth Drive, Chelmsford,
Massachusetts.
Maker of this Note hereby waives notice, presentation, and demand and shall
be liable for all reasonable expenses of collection in the event of default
including counsel fees of the Payee. All rights and obligations hereunder shall
be governed by the laws of the Commonwealth of Massachusetts.
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed the within Note under seal
as of the date first above-mentioned.
______________________________ ______________________________
Witness [signature of maker]
______________________________
Print Name
<PAGE>
SECURITY AND PLEDGE AGREEMENT
----------------------------
This is a Pledge Agreement made as of the 20th day of October, 1999
between Kevin Oye, an individual residing at 14 Upper Warren Way Warren NJ,
07059 ("Pledgor") and Sycamore Networks, Inc., a Delaware corporation with its
principal office at 10 Elizabeth Drive, Chelmsford, Massachusetts ("Pledgee").
1. Pledge of Collateral. Pledgor hereby grants Pledgee a security
--------------------
interest in the shares of Sycamore Networks, Inc. Common Stock ("Shares")
identified in Exhibit A, annexed hereto, which Pledgor has delivered to Pledgee,
as well as such other instruments, documents, stock certificates, money and
goods as may come into Pledgee's possession from time to time, whether through
delivery by Pledgor or otherwise (the "Collateral").
2. Obligations Secured. The security interest in the Collateral granted
-------------------
hereby secures payment and performance of all debts, loans and liabilities of
Pledgor to Pledgee arising out of a promissory note from Pledgor to Pledgee of
even date herewith in the principal amount of ninety-nine thousand nine hundred
and seventy-eight thousand ($99,978) Dollars (the "Note"), together with all
interests, fees, charges and expenses with respect to such debt, loan or
liability (the "Obligations").
3. Pledgee's Rights and Duties with Respect to the Collateral. Pledgee's
----------------------------------------------------------
only duty with respect to the Collateral shall be to exercise reasonable care to
secure the safe custody thereof. Pledgee shall have the right but not the
obligation to (a) demand, sue for, receive and collect all money or money
damages payable on account of any Collateral, (b) protect, preserve or assert
any other rights of Pledgor or take any other action with respect to the
Collateral, (c) pay any taxes, liens, assessments, insurance premiums or other
charges pertaining to Collateral. Any expenses incurred by Pledgee under the
preceding sentence shall be paid by Pledgor upon demand, become part of the
Obligations secured by the Collateral and bear interest at the rate provided in
the Note until paid. Pledgee shall be relieved of all responsibility for the
Collateral upon surrendering it to Pledgor.
4. Pledgor's Warranties and Indemnity. Pledgor represents, warrants and
----------------------------------
covenants (a) that he is and will be the lawful owner of the Collateral, (b)
that the Collateral is and will remain free and clear of all liens, encumbrances
and security interests other than the security interest granted by Pledgor
hereunder, and (c) that Pledgor has the sole right and lawful authority to
pledge the Collateral and otherwise to comply with the provisions hereof. In
the event that any adverse claim is asserted in respect of the Collateral or any
portion thereof, except such as may result from an act of Pledgee not authorized
hereunder, Pledgor promises and agrees to indemnify Pledgee and hold Pledgee
harmless from and against any losses, liabilities, damages, expenses, costs and
reasonable counsel fees incurred by Pledgee in exercising any right, power or
remedy of Pledgee hereunder or defending, protecting or enforcing the security
interests created hereunder. Any such loss, liability or expense so incurred
shall be paid by
-1-
<PAGE>
Pledgor upon demand, become part of the Obligations secured by the Collateral
and bear interest at the rate provided in the Note until paid.
5. Voting of Collateral. While Pledgor is not in default hereunder,
--------------------
Pledgor may vote shares pledged as Collateral.
6. Dividends and Other Distributions. While Pledgor is not in default
---------------------------------
hereunder, Pledgor may receive cash dividends and other cash distributions
payable with respect to Collateral. Pledgor shall cause all non-cash dividends
and distributions with respect to Collateral to be distributed directly to
Pledgee, to be held by Pledgee as additional Collateral, and if any such
distribution is made to Pledgor he shall receive such distribution in trust for
Pledgee and shall immediately transfer it to Pledgee.
7. Pledgor's Default. Pledgor shall be in default hereunder upon the
-----------------
occurrence of any of the following events:
(a) If Pledgor is not paying his debts as they become due, becomes
insolvent, files or has filed against him a petition under any chapter of the
United States Bankruptcy Code, 11 U.S.C. (S)101 et seq. (or any similar
-- ---
petition under any insolvency law of any jurisdiction), proposes any
liquidation, composition or financial reorganization with his creditors, makes
an assignment or trust mortgage for the benefit of creditors, or if a receiver,
trustee, custodian or similar agent is appointed or takes possession with
respect to any property or business of Pledgor;
(b) If Pledgor dies;
(c) If any lien, encumbrance or adverse claim of any nature whatsoever is
asserted with respect to any Collateral;
(d) If any warranty of Pledgor hereunder is or shall become false;
(e) If Pledgor fails to fulfill any obligation hereunder;
(f) If Pledgor fails to pay or perform any of the Obligations when such
payment of performance is due.
8. Pledgee's Rights Upon Default. Upon the occurrence of any default as
-----------------------------
defined in the preceding section, Pledgee may, if Pledgee so elects in its sole
option, subject at times to compliance with the securities law and regulations
of the United States:
(a) at any time and from time to time sell, assign and deliver the whole
or any part of the Collateral at a sale through a broker in a public market
where securities of the type constituting such Collateral are usually traded,
without any advertisement, presentment, demand for performance, protest, nature
of protest, notice of dishonor or any other notice;
-2-
<PAGE>
(b) at any time and from time to time sell, assign and deliver all or any
part of the Collateral, or any interest therein, at any other public or private
sale, for cash, on credit or for other property, for immediate or future
delivery without any assumption of credit risk, and for such price or prices and
on such terms as Pledgee in its absolute discretion may determine, provided that
--------
(i) at least ten days' notice of the time and place of any such sale shall be
given to Pledgor, and (ii) in the case of any private sale, such notice shall
also contain the terms of the proposed sale and Pledgee shall sell the
Collateral proposed to be sold to any purchaser procured by Pledgor who is
ready, willing and able to purchase, and who prior to the time of such sale
tenders the purchase price of, such Collateral on terms more favorable to
Pledgee than the terms contained in such notice;
(c) exercise the right to vote, the right to receive cash dividends and
other distributions, and all other rights with respect to the Collateral as
though Pledgee were the absolute owner thereof, whether or not such rights were
retained by Pledgor as against Pledgee before default; and
(d) exercise all other rights available to a secured party under the
Uniform Commercial Code and other applicable law.
9. Application of Sale Proceeds. In the event of a sale of Collateral,
----------------------------
the proceeds shall first be applied to the payment of the expenses of the sale,
including brokers' commissions, counsel fees, any taxes or other charges imposed
by law upon the Collateral or the transfer thereof and all other charges paid or
incurred by Pledgee pertaining to the sale; and, second, to satisfy outstanding
Obligations, in the order in which Pledgee elects in its sole discretion; and,
third, the surplus (if any) shall be paid to Pledgor.
10. Notices. All notices made or required to be made hereunder shall be
-------
sent by United States first class or certified or registered mail, with postage
prepaid, by prepaid Federal Express, next day delivery, or delivered by hand to
Pledgee or to Pledgor at the addresses first above written. Notice by mail or
Federal Express shall be deemed to have been made on the date when the notice is
deposited in the mail.
11. Heirs, Successors, Etc.. This Pledge Agreement and all of its terms
-----------------------
and provisions shall benefit and bind the heirs, successors, assigns,
transferees, executors and administrators of each of the parties hereto. If
this Pledge Agreement is executed by more than one Pledgor, then (a)
"Obligations" shall include the Obligations of either or both of the Pledgors,
(b) Pledgors shall be in default if any of the events described in Section 7
above takes place with respect to either Pledgor, (c) any notice required of
Pledgee shall be given to both Pledgors and (d) all Pledgors' covenants,
warranties and representations hereunder shall be joint and several.
12. Pledgee's Forbearance. Any forbearance, failure or delay by Pledgee
---------------------
in exercising any right, power or remedy hereunder shall not be deemed a waiver
of such right,
-3-
<PAGE>
power or remedy. Any single or partial exercise of any right, power or remedy of
Pledgee shall continue in full force and effect until such right, power or
remedy is specifically waived in writing by Pledgee.
EXECUTED under seal at Chelmsford, Massachusetts, as of the date first
above written.
_________________________
[signature]
_________________________
[print name]
Agreed:
Sycamore Networks, Inc.
By:____________________
-4-
<PAGE>
Exhibit A to Security and Pledge Agreement
------------------------------------------
2,631 Shares of Sycamore Networks, Inc. Common Stock
-5-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF OCTOBER 30, 1999 AND THE STATEMENT OF INCOME FOR THE THREE MONTHS
ENDED OCTOBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-2000
<PERIOD-START> AUG-01-1999
<PERIOD-END> OCT-30-1999
<CASH> 280,634
<SECURITIES> 10,196
<RECEIVABLES> 12,524
<ALLOWANCES> 0
<INVENTORY> 7,568
<CURRENT-ASSETS> 313,937
<PP&E> 8,742
<DEPRECIATION> 1,625
<TOTAL-ASSETS> 321,973
<CURRENT-LIABILITIES> 15,349
<BONDS> 0
0
0
<COMMON> 79
<OTHER-SE> 306,545
<TOTAL-LIABILITY-AND-EQUITY> 321,973
<SALES> 19,510
<TOTAL-REVENUES> 19,510
<CGS> 10,340
<TOTAL-COSTS> 15,329
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 442
<INCOME-PRETAX> (5,717)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,717)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,717)
<EPS-BASIC> (0.56)
<EPS-DILUTED> (0.56)
</TABLE>
